We are reiterating our Neutral recommendation on the shares of Canadian life insurer, Manulife Financial Corp. (MFC), following the fourth quarter earnings release, which reflected the company’s success in achieving three-year product mix repositioning in all three of its geographies. We are also impressed with the company’s hedging strategy related to its equity and interest rate exposure.
Manulife reported a net loss of 5 cents per share in the fourth quarter, in contrast to the Zacks Consensus Estimate of a gain of 3 cents per share. The earnings loss was due to goodwill impairment in John Hancock segment.
Manulife’s earnings have been affected over the past three years owing to declining interest rates and volatile equity markets. To make it immune to the macroeconomic vagaries, the company is gradually aligning its product offerings to concentrate more on higher margin, low-risk products as opposed to higher-risk capital intensive products.
Currently, 88% of its total premiums and deposits are in lower-risk products. While this will result in subdued growth when compared to its historical pace, we believe it will deliver more sustainable growth targets and improve product margins and earnings consistency over time.
Also, the company is effectively building its hedging program to decrease both interest rate and equity market exposure. During 2011, Manulife decreased its earnings sensitivity to both the variables. It has already achieved its 2014 goal of offsetting interest rate sensitivity let alone its 2012 goal.
The company has also accomplished 93% of its 2014 goal for equity market sensitivity. We believe that these steps will help it to emerge as a stronger company, shielding it from market variables it cannot control.
Manulife’s has a diverse global presence, with 75% of its earnings coming from outside Canada. Its presence in the Asian market, for over a century, gives it a competitive edge. Changing demographics have consequently increased the demand for insurance and wealth management products in the region and Manulife is poised to benefit from its longstanding presence.
Manulife retains a high quality investment portfolio. Its invested assets are highly diversified by sector and geography and have limited exposure to the high-risk areas. We continue to view the company’s investment management strategy favorably.
However, volatile global equity markets coupled with low bond yields exert pressure on the company’s capital position. Manulife has been forced to raise its reserves to guarantee future liabilities, thus stripping more than C$1 billion ($992 million) from its bottom line.
We expect the global equity markets to remain weak and volatile in the near future. As a result, we anticipate higher reserve charges for its equity-linked products, which will weigh on its earnings per share.
Manulife closely competes with China Life Insurance Co. Ltd. (LFC) and Sun Life Financial Inc. (SLF). The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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