When Manulife posted a $2.4-billion second-quarter loss a year ago, management promised investors that the company would come roaring back once equity markets and interest rates changed direction.
"I think as investors come to analyze the results, they will realize that they're largely mark-to-market [accounting], having to do with interest rates and equity markets that could easily reverse in the future," chief executive officer Don Guloien said in an interview in the Globe.
A year later, Manulife, and other Canadian insurers, aren't bleeding nearly as badly, but the realization is setting in that the turnaround is actually a drawn out process, rather than a quick reversal.
Case in point: predictions for 2011's second quarter are starting to trickle out, and analysts expect weak earnings because both equity markets and Canadian bond yields took a hit last quarter. Those two occurrences have the biggest effect on Manulife and Sun Life , noted analyst Andre-Philippe Hardy at RBC Dominion Sercurities.
Manulife has previously disclosed that a 1-per-cent drop in government interest rates would translate a $1.5-billion hit on its earnings, while a 50 basis point decrease in corporate spreads would hurt earnings by $500-million. Last quarter U.S. 30-year treasury yields fell 14 basis points.
To top it all off, the Canadian dollar is down about 6 per cent versus the U.S. dollar year over year. RBC calculated that a 10 per cent change impacts Great-West's earnings by 5 per cent, Manulife's by 7 per cent and Sun Life's by 5 per cent.
Of course, no one expects Manulife to post another jaw-dropping loss, so things aren't horrifically bad in the industry. But they're not as strong as people had hoped they would be at this point in the recovery. Mr. Hardy predicts earnings of 30 cents per share for Manulife.
As for dividends, forget about them for now. "We expect a strong recovery in earnings in 2011 and 2012 relative to 2008/2009, but we do not expect the recovery to be strong enough for boards to decide to raise dividends this quarter," Mr. Hardy noted. Currently, payout ratios based on estimated 2011 earnings range from 30 per cent at Industrial Alliance to 61 per cent at Great-West
"If a company were to surprise us with a dividend increase, it would be Industrial Alliance," he noted, but that's largely because its payout ratio is so low.
Tim Kiladze