Manulife Financial Corp., the Canadian financial institution most bruised by the financial crisis, is again seeing its share price take a beating as the outlook for stock markets and favourable interest rates diminishes.
Government bond yields have been hard hit in recent weeks, with 30-year rates in the U.S. dipping toward 3.5 per cent and in Canada below 3 per cent. When the insurer reports its second-quarter results on Thursday, shareholders will be interested to see what progress it has made insulating itself from those lower rates, as well as volatile stock markets.
Manulife has been trying to reduce its outsized exposure to rates and markets since the financial crisis forced it to bolster its capital levels and slash its dividend in half. A 1-per-cent drop in government interest rates would translate into a $1.5-billion hit to Manulife’s earnings, the company said as of the end of March. Its goal is to reduce that to $1.1-billion by the end of 2014.
That effort remains a work in progress. In recent quarters, Manulife’s fortunes had seemed to be improving as stock markets chugged along and earnings picked up. In fact, chief executive officer Don Guloien was musing in May about how he might spend “some serious amounts of excess capital” the insurer had accumulated.
Now the company’s fortunes appear to be reversing again, as events of the past few weeks increase the likelihood that both stock markets and interest rates will be weak for some time to come. The developments drive home the fact that Manulife shareholders can expect a roller coaster ride until the insurer tackles its exposures to both.
“Despite the progress that the company has made in reducing its earnings and capital sensitivity to changes in macroeconomic factors, the significant retrenchment in both global equity markets and bond yields since the end of June has – as usual – resulted in an even more material pullback in shares of Manulife,” Macquarie Equities Research analyst Sumit Malhotra wrote in a note to clients.
The company’s stock fell as low as $12.21 Wednesday, its lowest intraday price since Sept. 1, according to Bloomberg. It closed the day at $12.50, a one-day drop of 5.23 per cent. The stock had been trading in the $40 range prior to the financial crisis of 2007.
The U.S. central bank’s decision to keep its benchmark interest rate exceptionally low until at least mid-2013 is weighing on the company’s shares. U.S. 30-year government bond rates fell 13 basis points to 4.38 per cent in the second quarter, while the Canadian 30-year government bond rate dropped 21 basis points to 3.55 per cent, notes National Bank analyst Peter Routledge. (A basis point is 1/100th of a percentage point.)
Stock market volatility is also a factor for Manulife. At the end of the first quarter, the insurer said as much as 65 per cent of its stock market exposure was hedged, up from about 50 per cent at the end of 2010. The company boosted its equity hedges more quickly than planned, but that momentum may have been derailed during the second quarter. Manulife likes to add to its hedges during favourable markets, when it’s cheapest. But the S&P/TSX Index lost 5.8 per cent during the second quarter, and the S&P 500 Index declined 0.4 per cent.
Meanwhile, Sun Life Financial and Great-West Lifeco reported their second-quarter results last week, and both insurers topped expectations.
Sun Life posted profits of $408-million, up from $72-million a year earlier. The results amounted to 71 cents per share, well above analysts’ expected earnings of 54 cents per share. Sun Life threw the market a curveball by reporting that it actually benefited from the current interest-rate environment due to some of its hedging and other financial strategies.
Analysts are expecting Manulife to report second-quarter profits of about 19 cents per share, according to Thompson Reuters.
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