Ben Bernanke is not going to be in the good books at Manulife Financial Corp., because the Federal Reserve's move to push down rates is only going to fuel questions about whether Manulife needs to raise capital again.
The Federal Reserve's move is going to be tough on all insurers, because it makes it more difficult to fund long-term liabilities. But the perception is that it's going to be harder on Manulife than most, because of Manulife's greater sensitivities to rising and falling rates.
Manulife has been hedging to reduce the effect of falling rates on earnings, but a 100 basis point decline in interest rates still cuts $1.2-billion from the company's earnings, according to its most recent financial report. Over at Sun Life Financial, the hit would be $300-million to $400-million. So Manulife shares took a bigger hit Wednesday than Sun Life stock.
Analysts have already been taking their axes to Manulife earnings estimates, and if the Fed succeeds in driving down rates, look for more cuts in expectations. What's more, Manulife can probably expect to hear questions about whether it needs to raise capital yet again.
The caveat in all this of course is that it's next to impossible to model with any certainty what interest rate movements will do to an insurer's earnings. Sun Life surprised the market with better than expected results last quarter, in part because of the way moves in different parts of the yield curve affected earnings.
But analysts aren't cutting Manulife any slack. According to Bloomberg, the mean estimate for Manulife's adjusted earnings per share in the current quarter has fallen to 18 cents in the last four weeks from 30 cents.
Analyst Peter Routledge of National Bank predicted Wednesday, in a note prior to the Fed's announcement, that lower long-term interest rates will produce a $419-million, or 23-cents-a-share charge against earnings this quarter.
If the Fed's move turns out to not have much impact on rates, Manulife still has to worry about equity markets. Stocks slumped on the Fed's downbeat assessment of the economy, and that too hammers the company's balance sheet and income statement.
Manulife estimates that a 10 per cent decline in equity market funds drops its earnings by $490-million to $590-million.
Mr. Routledge estimates that weak equity markets will cost Manulife $569-million, or 32 cents a share, in the current quarter.
At some point, with the 10-year Treasury yield at 1.94 per cent and falling and equity markets swooning, talk of a capital raise become highly likely. After insurer Industrial Alliance did a private placement earlier this month to shore up its balance sheet, Macquarie Securities analyst Sumit Malhotra said Manulife is sure to face that question.
"Rightly or wrongly, we think the issuance by IAG will result in market participants now ‘officially’ speculating about the capital adequacy of other names in the Canadian life insurance sector, and given the challenges the company has endured in the past few years, MFC is likely to be at the top of the list," Mr. Malhotra wrote. He noted that he hasn't modelled a capital raise for Manulife.
The key number to watch is Manulife's MCCSR ratio at its main operating company. (If you must know, it stands for Minimum Continuing Capital and Surplus Requirements.)
Mr. Malhotra predicts that Manulife's MCCSR ratio will be at 215 per cent as of the end of the third quarter on Sept. 30. Mr. Routledge estimates it will be 224 per cent. That would be down from 246 per cent at the beginning of the year, and from 241 per cent at the end of the last quarter.
"To be clear, the fact that the MCCSR ratio would still be at this strong a level with U.S. 10-year treasury yields at ~1.90 per cent is indicative of the progress that MFC has made in hedging its legacy exposures over the past year," Mr. Malhotra said in his note. "However, the uncertainty of the macro outlook has once again underscored the extreme EPS and capital volatility that remains associated with an investment in MFC."
With a few days left in the quarter, further declines in yields and equities could cut into that MCCSR level even more. Anything approaching 200 on the MCCSR and talk of capital will rapidly intensify. The probability is low, but bears watching.
Manulife's MCCSR dipped to 198 in early 2008, before the bank embarked on some big capital raises.
Industrial Alliance's MCCSR was 194 per cent as of the end of the last quarter, before it decided to raise capital. The bare minimum that Canada's financial regulator allows is 150 per cent, but nobody wants to get close to that, and the regulator would be on an insurer's back to raise capital long before the ratio actually got there.
|MFC-T Manulife Financial||21.45||
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|IAG-T Industrial Alliance Ins & Fin||47.44||
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|SLF-T Sun Life Financial Inc.||39.78||
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