Equity Market Will Dictate Whether Manulife Bolsters Capital Ratios

The current state of equity markets suggests Manulife Financial Corp. (MFC) will likely consider ways to strengthen its capital ratios, according to Andre-Philippe Hardy at RBC Capital Markets. This could include the reinsurance of some risks on its books, a thorough review of its actuarial liabilities to look for overly conservative reserves, the sale of non-core businesses, or the issue of capital, the analyst told clients. Equity, debt, preferred shares or hybrid capital were listed as options.

Mr. Hardy said:

The short term moves in equity markets have been nothing short of stunning this year and the direction of equity markets will determine whether Manulife needs to take action to bolster its capital ratios. A meaningful rally in equity markets would mitigate a lot of the pressure that the company is facing on its capital ratios.

Pre-released third quarter results from Manulife and Sun Life Financial Inc. (SLF) showed that both had capital ratios – at 183% and 202%, respectively – that exceed the regulatory minimum of 150%. However, since equity markets have declined further since the beginning of the fourth quarter, these capital ratios will face additional pressure “as capital required for equity-linked guarantees is set to rise again.”

While Sun Life’s sale of its stake in CI Financial Income Fund (CIXUF.PK) will provide an estimated 37% boost to its capital ratio, Mr. Hardy said the company still ranks second among Canada’s four lifecos in terms of pressure on its capital ratios. A 10% drop in equity markets is estimated to have a 5% ratio impact on the downside. Meanwhile, the analyst thinks Sun Life’s minimum required capital might have risen by C$500-million, or an 18% hit to its ratio, in the fourth quarter as a result of equity markets, pressure on credit spreads and rating agency downgrades.

That number is C$2-billion for Manulife. But Mr. Hardy said its capital required for equity guarantees worsens on subsequent downward moves for stocks. For example, the second 10% decline in equities should hurt more than the first 10%, so older management commentary is unreliable given the lack of updated figures.

Great-West Lifeco Inc. (GWLOF.PK) and Industrial Alliance Insurance and Financial Services Inc. (IDLLF.PK) have yet to release third quarter results.

Finally, the analyst said dividends are the last capital measure insurers would address and they remain committed to their dividends.

He said:

We suspect many of their shareholders are retail holders, which would be a legacy of their late 1990s IPOs. To those investors, we believe that dividends are a very important reason for holding stocks.

Comments

[Michael D.:]

Great, keep the dividends coming. The risk of the snowball effect tearing through the PPN products is high though.

2008 Oct 28 01:56 PM