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It's not easy to get out of the stock market doghouse, as Manulife can appreciate.

The insurer posted decent and improving numbers last week, yet the stock is still quoted at around eight times forward earnings, which is unusually low. Sure, there are some headwinds and caveats to the earnings (unusual gains and a low tax rate among them). But for a buy-and-hold investor this seems like a good price for such a franchise.

Manulife's business is slowly turning around. But the doubts persist, and understandably so. There were lots of little doubts but I think the single most important issue, the most exasperating for us shareholders, is the company's high sensitivity to the stock market.

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As of March 31, a 10-per-cent decline in stock prices knocks $1.1-billion off Manulife's bottom line - not quite two quarters worth of profits. What's frustrating is that this figure isn't improving. It was $1.2-billion at the end of December. Meanwhile, the sensitivity to rising stock markets - which added $350-million to first-quarter earnings - is a lot lower and is falling.

Compounding things is that the sensitivity equation isn't getting better despite the fact that Manulife has been hedging the risk of its variable annuity business. VA's are what got Manulife in trouble to begin with. They're basically investments that guarantee a certain return years down the road, much like a defined-benefit pension. Underlying those promises were assumed returns from stocks. When they imploded, Manulife was on the hook for big potential losses. I say potential because it doesn't have to make good on these promises today; it won't have to pay the money for years.

Newish CEO Don Guloien's strategy to deal with this has been pretty simple: fortify and wait. To fortify the balance sheet, he cut the dividend and raised money by selling new shares. That diluted investors forever but it gave the company room to breathe. His plan seems to be, in part, to buy time to allow the markets to recover and repair some of the damage.

Some investors are not overjoyed with this approach. Some complain of the cost - $30-million per quarter as things stand. Others say it deprives the company of compounding market returns, which would reduce the liability (assuming stocks rise). Yet others say Manulife should bite the bullet and settle everything now by, for example, buying a put on stock indices.

Mr. Guloien says he's looked at every option and decided that this middle road is the best for shareholders, which means he can't win. But there's something else that rankles investors: while over the past year Manulife has cut the amount of its money at risk from these guarantees by almost 75 per cent, that hasn't trimmed the sensitivity of its earnings to the stock markets' performance much.

Why? Because not all hedges are equal. The relationship between hedging and sensitivity isn't linear. Manulife isn't hedging the biggest liabilities. I presume this is because to do so would be to lock in losses, depriving the company from the benefit of rising stock markets over the long haul, which will "organically" lower the liabilities, or perhaps skate them on-side.

As I mentioned, Manulife has lots of critics and skeptics, but for what it's worth I think this makes sense. If you think the stock market will gradually continue to improve, and if you think the insurer has enough of a cushion to ride out turmoil, the question of equity sensitivity shouldn't concern you too much.

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In fact, if this turns out to be the right analysis, now is an interesting time to be an owner of Manulife because clearly lots of big investors don't share the view. If and when they do wade into the market to start buying the stock again, existing investors will benefit from improving earnings and a rising stock multiple, just as bank investors have over the past year.

That should make for a good ride.

Fabrice Taylor, Chartered Financial Analyst, is a principal in Capital Ideas Research and writes the blog fabricetaylor.com

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