Manulife Financial's Profit Dips - Analyst Blog

Manulife Financial Corporation (MFC) reported second-quarter 2010 adjusted operating earnings of 37 cents, lower than 48 cents reported in the prior-year quarter. Adjusted operating earnings were $643 (C$658) million, lower than $759 (C$776) million in second-quarter 2009.

Adjusted operating earnings in the reported quarter also lagged management’s guidance of $684–$782 (C$700–C$800) million. A low interest rate environment, lack of realized gains on available for sale (AFS) equity portfolio, and costs associated with the hedging of additional in-force variable annuity guaranteed value in the last 12 months, primarily accounted for the shortfall.

Net loss of Manulife in the quarter was $1.36 per share compared with net income of $1.09 per share in second-quarter 2009. Net loss reported in the quarter was $2.3 (C$2.4) billion compared with a net income of $1.7 (C$1.8) billion in the prior-year quarter. The quarter under review was impacted by several one-time items: equity market declines, primarily related to variable annuity guarantee policy liabilities of $1.6 (C$1.7) billion, interest rate declines of $1.4 (C$1.5) billion, actual credit experience of $30 (C$31) million, expected credit experience assumed in the valuation of policy liabilities of $26 (C$27) million, net policyholder experience gains of $10 (C$11) million, corporate and other segment net impairment of $11 (C$12) million, tax items related to closed tax years of $36 (C$37) million, changes in actuarial methods and assumptions of $12 (C$13) million and currency rates of $46 (C$48) million.

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 51% as of June 30, 2010, from 26% as of June 30, 2009.

Insurance sales in the quarter totaled C$0.6 billion, up 9% 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 12% year over year, on a constant currency basis, over the second quarter of 2009.

Insurance premiums and deposits in the quarter increased to $5.2 (C$5.3) billion in the quarter, down from $5.4 (C$5.5) billion in the prior-year quarter. However, on a constant currency basis, it increased 3% year over year, driven by growth in in-force business.

Wealth businesses, premiums and deposits, excluding variable annuities were $9.1 (C$9.3) billion, down from $10 (C$10.2) billion in the prior-year quarter. On a constant currency basis, it increased 2% year over year. Lower fixed product sales in both the U.S. and Canada largely offset the growth in mutual funds and retirement savings.

Total funds under management as of June 30, 2010, were $444 (C$453.9) billion, an increase of $7.3 (C$7.5) billion over March 31, 2010, and $32 (C$33) billion over June 30, 2009. The year-over-year increase was driven by positive policyholder cash flows, positive investment returns, the acquisition of AIC Limited’s retail investment fund business, capital issuances and 49% of Manulife TEDA’s assets under management. However, the stronger Canadian dollar and credit facility repayment were partial offsets.

The Manufacturers Life Insurance Company’s consolidated regulatory capital ratio, Minimum Continuing Capital and Surplus Requirements was 221% as of June 30, 2010, a decrease of 29 points from 250% as of March 31, 2010. The decline is primarily related to the loss in the quarter as well as growth in required capital.

Dividend Update

The board of directors of Manulife declared a quarterly dividend of 13 cents per common share. The dividend will be paid on September 20, 2010 to shareholders of record at the close of business on August 17, 2010.

Given weak equity market conditions and a lower interest rate environment, we maintain our “Neutral” recommendation on Manulife Financial. The quantitative Zacks #3 Rank (Hold) for the company indicates no clear directional pressure on the shares over the near term.