For Manulife Financial Corp. , the sharp decline of its stock amid the current market turmoil is reminiscent of the hit it took after the financial crisis of 2008.
But this time, investors are wrong, says the insurer’s chief executive, who insists that the country’s largest life insurer is now much better positioned to survive an economic crisis because it has reduced its exposure to both interest rates and stock markets.
“Given the volatility in some of [Manulife’s recent financial]results, I think a lot of investors have probably been skittish and make the assumption that if interest rates go down or equity markets go down, that we’re going to be especially exposed to that,” said chief executive Don Guloien in an interview after the company announced a second-quarter profit of $490-million. “While we are exposed to that, we have dramatically reduced that exposure, and have had very strong underlying growth.”
The insurer took more of a beating than any other Canadian financial institution in the wake of the 2008 crisis because of its outsized exposure to stock markets, which forced it to raise billions of dollars of capital in emergency manoeuvres. Then, while it undertook a massive project to hedge its stock exposure, low interest rates began to inflict new pain.
As a result, investors fled Manulife shares amid the latest turmoil, driving the stock down more than 25 per cent in the span of a month as it became evident that interest rates will be depressed for some time and markets will remain volatile.
On Thursday, Manulife’s shares rose 4.64 per cent to $13.08 after it reported its second-quarter earnings and displayed progress in its hedging efforts. The company estimates that a 1-per-cent drop in interest rates would lop $1.2-billion off its profits, down from $1.5-billion at the end of the prior quarter. It has previously said that it wants to reduce that figure to $1.1-billion in the next few years.
Meanwhile, at the end of June, about 60 to 66 per cent of its stock portfolio was hedged against a 10-per-cent drop in the markets. The company wants to bring that up to 75 per cent by the end of 2014.
While Manulife also announced that it could take a hit of as much as $700-million next quarter as it revises its assumptions for the U.S., that had been expected by many analysts. And investors appeared to take comfort in Manulife’s profits of $490-million, compared to a year-ago loss of more than $2.4-billion. The fully diluted earnings per share of 26 cents easily topped the Street’s estimate of about 19 cents.
A number of analysts also suggested the selloff in Manulife’s stock might have been overdone. The company is trading below its book value, noted National Bank analyst Peter Routledge. “We believe that the risk premium that the market currently applies to Manulife’s stock has not adjusted to the company’s reduced risk position and improved fundamentals,” he wrote in a note to clients.
“Manulife’s improved regulatory capital position and reduced sensitivity to interest rates and equities should help put a floor in its share price, as the company is significantly better positioned than it was the last time both interest rates and equities were declining,” wrote RBC Capital Markets analyst Andre-Philippe Hardy.
Mr. Guloien sought to fuel the stock’s momentum yesterday by suggesting that, far from being overcome by worry about the company’s future, he still has his eye on potential takeovers. While he doesn’t plan any major deals in the short term, he said that the troubles in Europe could ultimately force some European insurers to sell off parts of their global operations.
“We are aware of a number of opportunities,” he told analysts on a conference call, adding that he is waiting to see if they will be cheaper down the road. “In some cases they will be, and Manulife will be progressively stronger. So I am feeling pretty good,” he said.
Mr. Guloien also suggested that the markets have overreacted generally to the global events of the past few weeks, especially when it comes to the potential impact on the United States.
“The market reaction to what is going on in the United States is a gross overreaction,” he said. “The challenges in Europe are real. But the budgetary crisis and the debt ceiling in the United States are overblown for political reality TV. It’s going to resolve itself one way or another.”
Despite that, he remains sufficiently cautious when it comes to positioning Manulife to withstand further economic blows. “I know that other things can happen that are totally unpredictable,” he said during the interview. “I could be wrong, the U.S. economy could go into the dumper. So we’re going to err on the side of conservatism.”
That’s something he’s been trying to do for some time, he said. In fact, he couldn’t resist a bit of “I told you so,” pointing out that many investors and analysts had criticized him for installing expensive equity and interest rate hedging programs at a time when it looked as if the economy was on the upswing.