Lower Profits at Manulife Financial - Analyst Blog

Manulife Financial Corporation (MFC) reported its third-quarter 2010 adjusted operating earnings of 44 cents per share, lower than 50 cents per share reported in the prior-year quarter. Adjusted operating earnings were $750 (C$779) million, compared with $731 (C$803) million in third-quarter 2009.

Adjusted operating earnings in the reported quarter were within management's guidance of $674–$770 (C$700–C$800) million.

Manulife incurred a net loss of 55 cents per share in the reported quarter compared with a net loss of 12 cents per share in third-quarter 2009. Net loss reported in the quarter was $911 (C$947) million compared with a net loss of $157 (C$172) million in the prior-year quarter.

The quarter under review was impacted by several one-time items: net gains of $1 (C$1.04) billion related to higher equity markets and lower interest rates, charges of $1.95 (C$2.03) billion related to basis changes resulting from the annual review of all actuarial methods and assumptions, goodwill impairment of $1 (C$1.04) billion due to repositioning of the U.S. Insurance business and a gain of $292 (C$303) million.

The company's earnings were more than offset by $2 billion reserve and $1 billion in goodwill impairment.

Manulife continued to improve its equity risk profile by hedging in-force variable annuity guarantee value. The percentage of guarantee value hedged or reinsured increased to 54% as of September 30, 2010, from 30% as of September 30, 2009.

Insurance sales in the quarter totaled C$540 million, up 24% year over year, on a constant currency basis. The increase was largely driven by increase in new business embedded value for the insurance businesses.

Excluding variable annuities, wealth sales were $6.3 (C$6.5) billion, up 11% year over year, on a constant currency basis.

Insurance premiums and deposits in the quarter were $4.4 (C$4.6) billion, up 5% on a constant currency basis.

Wealth businesses, premiums and deposits, excluding variable annuities were $7.8 (C$8.1) billion, compared with $7.5 (C$8.2) billion in the prior-year quarter. On a constant currency basis, it increased 4% year over year. Lower fixed product sales in both the U.S. and Canada and lower sales in Group Retirement Solutions largely offset the growth in mutual funds.

Total funds under management as of September 30, 2010, were $456 (C$473.9) billion, an increase of $18.2 (C$20) billion over June 30, 2010, and $35.9 (C$37.3) billion over September 30, 2009. The year-over-year increase was driven by positive policyholder cash flows, positive investment returns, capital issuances and 49% of Manulife TEDA's assets under management. However, the stronger Canadian dollar, higher expenses, commissions and taxes and credit facility repayment were partial offsets.

The Manufacturers Life Insurance Company's consolidated regulatory capital ratio, Minimum Continuing Capital and Surplus Requirements was 234% as of September 30, 2010, an increase of 13 percentage points from 221% as of June 30, 2010. The increase is primarily related to debt issued, investment related gains and solid earnings, which more than offset the policy reserve strengthening.

Dividend Update

The board of directors of the company authorized a quarterly dividend of 13 cents per share payable on December 20, 2010, to shareholders of record at the close of business on November 16, 2010.

Manulife's strong franchise in Asian markets, solid wealth management, pension, and other products offered in the United States and Canada and repositioning of business will help the company to post improved results in the upcoming quarters.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.