23 June 2009

Analysts Cut Manulife's Q2 2009 Earnings Estimates

Scotia Capital, 23 June 2009

Three Separate Unrelated Events

• As expected, Peter Rubenovitch will step down as CFO, and will be replaced by Michael Bell, former CFO at CIGNA. We believe Bell, 45 and an actuary, is keen and very capable, and will fit in well with the MFC culture.

• Completely unrelated is an announcement from MFC that it received a notice from the OSC saying it failed to meet its disclosure obligations with respect to segregated fund VA risks prior to March 2009. The company has the opportunity to respond to the notice before OSC staff makes a decision whether to commence proceedings. This comes as a surprise to us and the company, as we believe MFC has continuously had the best disclosure with respect to these risks (the only North American lifeco to disclose the net amount at risk). Receipt of such notice is not a disclosable event, and it could very well be that other companies have received such notices. It's hard to speculate where this issue might go, but an immaterial fine could be construed to be a worse case scenario.

• MFC announced it expects a significant portion of the QOQ gains it'll make from the equity market rebound in Q2/09 (we had anticipated the gains would amount to $1.50-$1.60 in EPS) would be offset by increase in reserves for various items, namely due to declines in corporate long-term interest rates, increases in reserves for fewer-than-expected lapses on products, and smaller private equity gains. As such, we are taking down our Q2/09 estimate to $0.45 (in line with our Q3/09 and Q4/09 estimates of $0.48 and $0.54, respectively, which on average are a good proxy for an underlying EPS run-rate) from $1.75, essentially removing about 85% of the QOQ gain from equity markets. We suspect MFC will continue to strengthen its balance sheet in these uncertain times, and will continue to bolster its capital position. We estimate the company's MCCSR could be in the 250%+ range at Q2/09, the highest we've seen it.
Financial Post, John Greenwood, 22 June 2009

Shares in Manulife Financial Corp. fell the most in about seven months Monday in the wake of the company's announcement Friday that recent capital markets gains may be offset by increases in reserves that it expects to make against bonds and other investment products.

Manulife shares fell $2.83, or 12.17%, from Friday to close at $20.42, their lowest level since the start of May.

In a note to clients, Credit Suisse analyst Jim Bantis said the sharp drop may be "excessive," adding it has created a buying opportunity for investors.

But Mr. Bantis cautioned that Manulife is facing possible structural changes as it works to boost capital levels that may impact return on equity.

Meanwhile, Scotia Capital analyst Tom MacKinnon slashed his second-quarter earnings estimates for the company to 45¢ a share down from $1.75 following Manulife's announcement that recent capital market gains will be offset by its efforts to bulk up on reserves.

Andre Philippe Hardy, an analyst at RBC Capital Markets, also cut his second quarter forecast following the company's announcements.

The matter with the OSC will likely take some time to be resolved, he said in a note, adding he would be "surprised" if the outcome is detrimental to Manulife's financial condition.

Mr. Hardy lowered his earnings estimate for second quarter of 2009 by more than 40% to $1 a share from $1.83 over concerns that investment gains from rising stock markets would likely be gobbled up by reserve adjustments.

Toronto-based Manulife was hurt by turmoil on equity markets this year as investment values plummeted. With the recent market recovery the company's position improved, but on Friday afternoon it warned investors not to get carried away.

"Manulife has enjoyed great benefit from strengthening equity markets but, at this time, expects a significant portion of this could be offset by actuarial reserve increases," it said in a statement.

Manulife also announced it had received an enforcement notice from the Ontario Securities Commission regarding disclosure of risks the company faced with respect to various guaranteed investment products that it sells.

Manulife, which believes it did nothing wrong, said the enforcement notice reflects a "preliminary" conclusion on the part of OSC staff and that it will have an opportunity to respond before the regulator decides whether to launch proceedings.

Manulife had limited hedging on its guaranteed variable annuity and segregated fund products to protect against market downturns. At issue is the level of information about its hedging strategy the company disclosed to investors.

There is a wide range of opinion on Bay Street, but according to Scotia Capital's Mr. MacKinnon Manulife has "disclosed more than most lifecos on these risks."

Indeed, "receipt of such notice is not a disclosable event, and it could very well be that other companies have received such notices," the analyst said in a note to clients.