Wednesday, October 01, 2008

Manulife Investor Day

  
BMO Capital Markets, 30 September 2008

Balance Sheet

In the context of the current market environment, credit quality remains strong at MFC, with below investment grade bonds amounting to 4.8% of the total invested bond portfolio at Q2/08, down from 6.9% at the close of the JHF acquisition in Q2/04. The company did disclose its exposure to Wachovia Bank at US$600 million (most of which is debt). In acquiring Wachovia, Citigroup has agreed to honour some portion, but not all, of Wachovia’s outstanding debt. Total pre-tax exposure to Lehman Brothers and Washington Mutual is US$395 million and US$41 million, respectively. We would expect very high loss rates on these exposures when Q3/08 results are released in early November. The company also disclosed its AIG exposure at US$374 million; however, it indicated that it has since reduced its derivatives exposure with AIG by approximately US$90 million.

There was no change in exposures to the securitized portion of the market (i.e., subprime RMBS, SIVs, CDOs, monolines, etc.).

The company also maintains tight controls on its securities lending practices and ensures that coverage ratios are adequate at 102–105% of collateral. In addition, the collateral is invested in low-risk, highly liquid securities (like treasuries).

As a life insurer with long-dated liabilities, its main source of funding comes from premiums and deposits embedded in the long-dated contracts. With $8 billion in cash, the company has no liquidity concerns or short-term funding needs.

With respect to policyholder liabilities, the company reviewed its reserving process and tried to convey the conservatism embedded in its actuarial reserves. In general, we do believe that MFC carries a very healthy level of reserves as evidenced by the fact that PfADs continue to grow, up to 18.4% of general account liabilities at year-end 2007, up from 15.2% at the end of 2004.

Past earnings have been supported by strong investment gains; not to be repeated this year. In an interesting discussion on the sources of earnings, it does appear that experience gains over the last few years have all come from investments, while insurance-related items (mortality, morbidity, and lapses as a group) were marginal contributors to experience gains. Given the volatility of investment returns and equity markets, experience gains are unlikely to be significant drivers of earnings in the near term.

We believe that given the strength embedded in MFC’s balance sheet and its operational discipline, the company is very well positioned to capitalize on any weaknesses in its competitors.

United States

We believe the company’s sales success over the last few years has been due to its ability to gain access to new distribution channels and new products. MFC has launched 15 new life products since the beginning of 2007 and 78% of new life sales in H1/08 have come from these new products. New relationships, particularly Ameriprise and Edward Jones, have helped keep new deposits in VAs at healthy levels in 2008. We believe there may be additional new distribution partners in the VA business but not in individual life since MFC is already in every major distribution channel. MFC’s U.S. life business is generating roughly US$1 billion in sales and we believe this is a healthy level of new sales.

Asia

Asia remains the long-term growth engine for MFC. We continue to believe that the company has the best growth platform in Asia relative to other Western insurers.

Canada

While mature, the Canadian operations continue to generate reasonable growth prospects and attractive levels of excess capital that can be used to invest in the company’s U.S. and Asian businesses. While MFC continues to dominate the high-end of the Canadian life insurance market, particularly through the IDA and independent advisor channels, we expect most of the growth in Canada to come from three areas: segregated funds, group and Manulife Bank.

Recommendation

MFC remains rated Outperform. Results from the company’s investor day support our underlying thesis at Manulife: a strong balance sheet supporting a strong distribution culture throughout the organization. The “tone” of this conference was more subdued than historical investor conferences, a reflection of the uncertainty surrounding equity markets and the economy. MFC reiterated its 15% medium-term annual EPS growth target and 16% ROE target; however, 2008 (and perhaps 2009) is going to be a challenge from an EPS growth perspective. We do expect sales growth to moderate over the next few quarters but the level of sales should remain healthy as MFC continues to expand its distribution capabilities in all geographic segments. A combination of a strong balance sheet and exceptional distribution capabilities positions Manulife to weather the current volatility and make acquisitions (i.e., the strong get stronger and Manulife is among the strong). The company provided no update on acquisition opportunities.
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Financial Post, Zena Olijnyk, 1 October 2008

RBC Capital Markets attended Manulife Financial's investor day on Monday and took the opportunity to re-evaluate the insurance company, deciding to maintain its sector outperform rating despite reduced earnings per share estimates in both the second half of 2008 and in 2009.

“Our current bias is toward lower estimates given the sharp late-quarter drop in equity markets,” RBC analyst Andre-Philippe Hardy said in a note released Tuesday. However, RBC expects to reduce its EPS estimates across all the life insurance companies it covers.

At the meeting, Manulife reiterated its EPS growth objective of 15% per year and an ROE target of 16%, but Mr. Hardy predicts a negative EPS growth of only 10% and an ROE of 15.6%.

Still, he has maintained Manulife's current $40 target price (calculated on a forward multiple of 11.5 times earnings) noting the company will need to make a large acquisition to nudge that number north. And he expects Manulife to target embattled insurer AIG.

“We believe that Manulife is well positioned to acquire assets from AIG,” he said. At the meetings, Manulife did not provide any specific plans, but said it would consider its options. Mr. Hardy points out the company's complementary businesses in Asia and the U.S. and its potential $1.8-billion in excess capital if assuming a 25% debt to equity ratio all put Manulife in an attractive position.

However, whether Manulife makes this move depends on several factors including the size of the acquisition, how much it will cost, available synergies and how the funding will work.

As well, Mr. Hardy warns low interest rates, deteriorating equity markets, unfavourable political and economic developments in Asia and appreciation of the Canadian dollar may all work against Manulife's target price.
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Dow Jones Newswires, 29 September 2008

Never one to mince words, Manulife Financial CEO Dominic D'Alessandro lashes out at fair-value accounting. "It's absolutely nuts, " he tells Investor Day conference, and "makes no sense" for companies selling products with long life cycles. For those wondering what he'll do after May retirement, D'Alessandro says he plans to launch a crusade "to expose the fallacy" of new accounting rules that emphasize the need for instant gratification, one of the issues he says led to the market mess in the first place.
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Dow Jones Newswires, 29 September 2008

Manulife Financial Corp. can easily absorb the impact of its exposure to U.S. financial names that have failed in recent weeks, Chief Executive Dominic D'Alessandro said Monday.

Other executives at the Canadian insurance giant told investors the company is poised to benefit from the turmoil in the financial-services industry.

Manulife's total exposure to the U.S. financial institutions that have either filed for bankruptcy protection or been taken over is $1 billion, D'Alessandro said at the company's annual Investor Day.

That includes an estimated $600 million in exposure to Wachovia Corp., which reached a bailout deal with Citigroup over the weekend. D'Alessandro said he didn't know what impact the Wachovia exposure would have on the company's earnings, nor the prospects for the bonds held, until details of the deal are released. He said the company could release more information later Monday.

Manulife had earlier said its exposure to Lehman Brothers Holdings Inc., included fixed-income investments with a par value of $383 million and net derivatives exposure of $12 million. Its exposure to American International Group parent holding company included fixed-income investments with a par value of $38 million, and other securities of $9 million. Its exposure to AIG subsidiary American General is $190 million, to Sun America, $15 million, and to other subsidiaries, $7 million. Additional exposure totaled $115 million. It exposure to Washington Mutual Inc., was $41 million.

Still, D'Alessandro said, Manulife is in "an excellent position" compared to the majority of its peers "to weather the storm no matter what happens."

Other company officials said Manulife is benefitting from a flight to quality by distributors, clients and investors, due to its strong financial position.

"We're seeing a level of fear from our clients...that we haven't witnessed in our lifetime really," said Jim Boyle, executive vice-president of U.S. Insurance. "I look at it as an opportunity."

He said people are coming to Manulife "as a safe haven" as there has been "a flight to quality in this marketplace. We're seeing it and feeling it from our customers."

Boyle said Manulife would pick up market share amid the turmoil, and also noted that it is well-positioned to make an opportunistic acquisition in the U.S. He said the company has fully integrated its 2004 buy of John Hancock, and has been ready to buy for the past two years.

"What we've been waiting for is the market," he said, noting there are " obviously a lot of market opportunities today."

Robert Cook, general manager of the company's Asia division, noted that Manulife "will be the recipient" of whatever benefits may come from the troubles of major players in that market, such as AIG. He said many employers looking for group benefits, for example, would see Manulife as a "safer bet", and Manulife is also likely to gain from the disruption that may occur in some distribution channels.

Analysts have speculated that Manulife may bid for U.S. or Asian assets that may become available following the U.S. government intervention in AIG.

BMO Capital Markets noted in a recent report that Manulife is "uniquely positioned" to capitalize on opportunity, suggesting it is most likely to bid on U.S. life and retirement businesses and AIG's Asian operations.

Chief Financial Officer Peter Rubenovich reiterated the company's mid-term goal of 15% annual earnings growth and a return on equity of 16%.
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Reuters, 29 September 2008

Manulife Financial is in "an excellent position" to weather the ongoing financial-market turmoil, compared with industry peers, because it has modest debt levels and a stable deposit base, its chief executive officer said on Monday.

CEO Dominic D'Alessandro told analysts at a company investor event that financial markets have not yet responded to the weekend's U.S. government US$700-billion rescue plan "as favorably as I would have liked," and he noted that the situation is "very fluid."

News reports have suggested that Manulife, North American's largest insurer by market value, is working on a bid for some assets of AIG, the giant U.S. insurer that was bailed out with an US$85-billion U.S. Federal Reserve loan earlier this month.

Manulife has not confirmed or denied the reports.

In brief opening remarks, D'Alessandro said that although Manulife is well positioned in the current environment, it is nevertheless feeling the impact from various bank and insurance company failures.

The company has about US$600-million in exposure to U.S. regional bank Wachovia Corp., which announced bank subsidiary divestitures on Monday to Citigroup.

With details of the Wachovia deal just announced, "I can't tell you at this moment what the impact is or the prospects are for our US$600-million," D'Alessandro said.

Overall, Manulife has roughly US$1-billion in exposure to Wachovia, Washington Mutual, Lehman Brothers and AIG, he said.

"It's well within the ability of Manulife to withstand the cumulative impact of those four failures," D'Alessandro said.

Chief Financial Officer Peter Rubenovitch told the investor event that the company is sticking with its medium-term goal of 15% earnings-per-share growth.

"It is one we continue to pursue," Rubenovitch said.
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