Manulife Financial Corp. MFC-T shareholders want profit growth to trump caution now that the financial crisis has passed.
They showed their disappointment on Thursday even as Manulife reported a record quarterly profit of $1.79-billion, a stark contrast to the $3.3-billion in losses it had accumulated in the previous two quarters.
The fourth-quarter results fell short of many analysts’ expectations, and shareholders were frustrated -- the stock fell five per cent on Thursday -- because of costly programs the insurer is putting in place to reduce its stock market and interest rate risks.
Falling stock markets and low interest rates dealt Manulife a severe bruising over the past two years, causing regulators and shareholders to fret about its capital levels. The insurer has been ramping up a hedging program designed to protect it from future dips in stock markets, but that is eating into what it would otherwise be receiving from the markets’ rise.
Chief executive officer Donald Guloien said the insurer has taken the right steps and, with markets strong, at the right time.
The company posted $441-million in gains from rising markets and $604-million from higher interest rates this quarter. But it estimates the stock hedges it put in place in the quarter will cut 2011 profits by about $450-million, RBC Dominion Securities analyst Andre-Philippe Hardy pointed out in a note to clients.
A number of investors have bought or held the company’s shares in hopes of profiting from gains that rebounding markets could bring. The fast progress that Manulife has made in hedging its exposures over the last six months is causing those shareholders to second-guess that strategy, said Peter Routledge, an analyst at National Bank Financial.
Investors have realized Manulife is less geared to the upside, and “instead of getting a huge windfall from rising equity markets and interest rates, they get only a big windfall,” he said.
The disappointment was compounded by the company’s decision not to boost its earnings objectives that it disclosed last year, namely making $4-billion in profits in 2015.
“Either there are some big issues we are not aware of, or management is sandbagging,” said Canaccord Genuity analyst Mario Mendonca.
The reaction illustrates a major shift in investor sentiment. Shareholders’ focus over the last two years has been on the firm’s capital levels and its ability to demonstrate that it was fortifying itself, and those were the key determinants of its stock price. Now the market wants growth.
Indeed, with executives saying they are now more comfortable with the company’s capital position that at any point in recent history, analysts are even questioning whether a dividend hike is on the horizon - less than 18 months after Manulife slashed its dividend in half in a dramatic effort to preserve its capital.
Mr. Guloien signalled the company’s caution when he told an analyst on a conference call that the insurer will wait until its earnings are growing and sustainable, and there’s more certainty surrounding the new capital regulations, before ratcheting up its dividend.
He defended Manulife’s decisions, emphasizing it’s cheaper for the insurer to put in place hedges when markets are strong.
“It was an extremely positive quarter for Manulife, and an extremely positive year in fact, because it allowed us to strategically redirect our businesses and take advantage of rising equity markets and interest rates to put a substantial amount of our equity risk and our interest rate risk behind us,” Mr. Guloien said in an interview.
The company posted a $391-million loss for the full year. The Asian division that it will rely on heavily for future growth earned $623-million in 2010, down from $1.7-billion the prior year.
It appears the company will be looking to grow organically in the coming years, rather than through takeovers.
Mr. Guloien said he regrets not having done more acquisitions in the last two years, as it appears that the opportunity to do them at a good price is evaporating. The rebound in global economies and markets is improving the fortunes of all financial services firms, making them more expensive.
“It’s not the buying opportunity it was two years ago,” Mr. Guloien said. “It would have been nice to take advantage of more opportunities.”
The big one that got away was American International Group Inc.’s major Asian life insurance unit, American International Assurance Ltd., although there were others.
