10 July 2009

Scotia Capital's Analyst Meeting with Manulife CEO

Scotia Capital, 10 July 2009

• Following yesterday's MFC lunch, we met with CEO Don Guloien.

• In our opinion, the lunch did a good job of clearing the air. Guloien mentioned to us in our subsequent meeting he was amazed that a sell-side only meeting held June 25 "produced" everything from a dividend cut to an equity raise when nothing suggesting anything of the sort was ever mentioned (in our opinion, broad market dissemination of a message is a much better way to go).

• What he did say in our meeting yesterday is that nothing has essentially changed over the last couple of months in terms of the company's capital plan, even though the market has rebounded. Priorities remain to build capital through, in order of preference, preferreds, innovative tier 1, medium term notes, reinsurance, and lastly dividend cuts/common equity. In effect, everything is on the table, just as it was a couple of months ago. They're looking at more debt/prefs/innovatives, and with a debt+prefs+innovatives/total capital ratio of 27%, vs. SLF at 29% and GWO at 41%, they still have ample room, possibly another $1.5B to reach 30%. Housing the recent $1B in innovative Tier 1 at the holdco provides lots of flexibility as well.

• With respect to all this dividend talk, Guloien said essentially said nothing has changed. It's a Board decision, it remains the last item in the pecking order in the capital plan, he's very cognisant of investor sentiment (acknowledging though that lifecos are different than banks), and it's not his job to say it will never happen. The payout ratio is a function of "core earnings" (which will be elaborated on when the company reports Q2/09 Aug 6) over the long run and he has suggested growing into the target payout ratio could be a more likely scenario. The target payout ratio is 25%-35%, our 2010 estimate puts them at 38%, and consensus puts them at 41%, which is lower than consensus for SLF of 44% (above their 30%-40% target) and consensus for GWO of 50% (above their 30%-40% target).

• Unlike other CEOs Guloien is very open. He's blatantly honest and will explain both sides of any idea freely and openly with the Street. His style will likely take a bit of getting used to.

• MFC sees plenty of acquisition opportunities down the road and believes that these volatile markets will separate the strong from the weak.

• At 7x 2010E EPS, we believe MFC is good value for an excellent franchise.
Financial Post, David Pett, 3 July 2009

Manulife Financial Corp. was one of the biggest gainers on markets over the past three months, but thanks to a late June slump, the life insurance giant still remains one of the better buying opportunities heading into the third quarter, says Desjardins Securities analyst Michael Goldberg.

"We believe that the recent decline in Manulife's stock price has been an overreaction by investors, Mr. Goldberg said in a note to clients.

For the second quarter, Manulife shares were up 42%, compared to 19% for the broader TSX benchmark. However, since June 19, the stock has dropped 14%.

The sell off followed news that the OSC is investigating the company's disclosure to investors regarding its segregated funds and annuity business, but Mr. Goldberg believes the real culprit behind the drop was a Manulife statement saying it may need to strengthen its reserves .

"As we have said in the past, we expect any reserve strengthening next quarter to be minimal on a net basis and any expectation of a net reserve release following the buildup of those reserves at a cost of $7-billlion over the past few quarters, would be naive," he said.

He said Manulife is now trading at 7.6x his projected 2010 EPS forecast of $2.80, which compares favourably to his $26.50 price target based on 9.5x 2010 EPS.

"It is time to lessen exposure to Canadian bank positions and start accumulating Canadian lifecos," Mr. Goldberg added.