Thursday, January 24, 2008

Manulife Could Profit from Bond Insurance Turmoil: Desjardins

Financial Post, Duncan Mavin, 24 January 2008

As monoline bond insurers suffer their fifteen minutes of infamy, opportunities may arise for other organizations including Manulife Financial to profit from the bond insurance industry instead.

The bond insurers — which operated for years in blissful obscurity as financial guarantors to U.S. municipalities and other government agencies — have lately stepped into the blinding spotlight of the global financial crisis.

“What we now understand is that these guarantors got into trouble as they 'diversified' their business from the relatively pedestrian business of guaranteeing local government and agency debt issues into more exotic debt securities,” with exposure to the “highly toxic” subprime mortgage market, says Desjardins Seurities analyst Michael Goldberg.

The monolines’ traditional customers — government agencies and the like — “appear to be the innocent bystanders in these developments, watching the protection for their debt issues potentially evaporating and their borrowing costs potentially rising,” Mr. Goldberg says.

Now, those traditional customers may be looking for other financial guarantors “without the taint of toxic subprime mortgage insurance,” he says. “Does this represent an opportunity for a company like AAA-rated Manulife? We think it does.”

Desjardins has a $48.50 target for Manulife’s stock price, and rates the shares a “top pick.”