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Manulife Financial headquarters in Toronto in August, 2012. (Galit Rodan/The Globe and Mail)
Manulife Financial headquarters in Toronto in August, 2012. (Galit Rodan/The Globe and Mail)

Manulife surprises with dividend hike as profit more than triples Add to ...

In the surest sign yet the financial crisis has been vanquished, Manulife Financial Corp. increased its dividend for the first time in five years.

The country’s largest life insurer by market capitalization surprised the market by boosting its quarterly dividend by 19 per cent, or 2.5 cents, to 15.5 cents a share on Thursday as it released its second-quarter earnings report.

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The hike represents a big comeback by Manulife from the stress of the recession, and highlights some of the key market changes that have benefited the industry in recent months.

On August 6, 2009, Manulife made waves when it cut its dividend in half in a move intended to save $800-million per year, buttressing capital levels as the financial crisis battered the market.

During the downturn Manulife endured steep losses on variable annuities, a financial product that guarantees customers a minimum payment and is tied to the performance of equity markets. Manulife left this portfolio unhedged, and when stock values plummeted during the recession, the company suddenly had to put aside billions in additional capital to back the business.

At the time, Manulife’s chief executive officer Donald Guloien was brand new to his role, and he has since described cutting the dividend “a very difficult decision.”

Over the past few years, market conditions have steadily improved by way of rising equity markets and some modest increases in long-term interest rates. This has allowed insurers the flexibility to consider capital returns such as buying back shares, making acquisitions or raising their dividends.

Now Manulife says it is delivering on its earnings plan, with volatile markets in check and a positive outlook for growth.

“Today is a great day for Manulife,” Mr. Guloien said on a conference call to analysts. “ There is a great deal of confidence on the part of management and the board in the vitality and momentum of our company.”

Manulife reported second-quarter earnings of $943-million or 49 cents a share, more than triple the $259-million, or 12 cents a share, reported at this time last year. Mr. Guloien attributed the strong results in part to strong sales in the North American mutual fund businesses and “improved momentum in Asia.”

There were an number of factors that that allowed for the quarterly dividend increase, the company said.

“The key metric that was kind of bothering us was the leverage ratio, and you’ll see this quarter we have the leverage ratio down to 28 per cent,” Manulife’s chief financial officer Steve Roder said, adding that he hadn’t expected to reach that level for another six months. The leverage ratio, which is a measure of a company’s debt profile and ability to meet financial expectations, benefited from stronger than expected net income performance in the last two quarters, as well as a move to pay down debt in June this year.

Stability in the regulatory environment in Canada, the U.S. and globally provided another level of comfort. “Generally we’re feeling better about the outside world,” Mr. Roder said.

The improvement in market conditions is also allowing other insurers to put capital to work in recent months. Industrial Alliance Insurance and Financial Services Inc. increased its dividend in late 2013, while Sun Life Financial Inc. restructured internal reinsurance arrangements and paid down debt.

Manulife is working toward an ambitious target of $4-billion in annual core earnings – which strip out the impact of interest rates and other material and one-time items – by 2016. Core profit was $701-million in the first half of 2014, and fell short of analyst expectations. Still, Manulife said it is meeting its internal targets. “Core earnings were very much inline with my expectations … the street is bullish on core earnings,” Mr. Roder said.

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