Concerns About Manulife's Variable Annuity Business Are Misguided - Scotia Capital

The concerns about the health of Manulife Financial Corp.'s (MFC) segregated fund and variable annuity business appears to be misguided based on the latest number crunching from Scotia Capital analyst Tom McKinnon.

In a new report that combs over Manulife's variable annuity guaranteed cash flows, reserve, required capital and related sensitivities, Mr. McKinnon says the lifeco is in solid shape.

He told clients that the minimum continuiing capital and surplus requirements for Manufacturers Life Insurance Company, the Manulife subsidiary from which all equity related business flows through, was 218% at the end of the first quarter and likely around 228% currently.

"We believe the company has more than an adequate cushion, and estimate that a 25% drop in equity markets from Mar. 31, 2009 levels (an S&P 500 below 600) would put the ratio at the bottom of its 180% - 200% target range," he wrote.

If markets fall by more than 25%, Mr. McKinnon still believes Manulife has options at its disposal to maintain its ratio at an adequate level, including a subsidiary reorganization, "whereby John Hancock Life Insurance Company, with no variable annuity exposure is consolidated into Manufacturers, thus reducing equity market sensitivity by one-third."

The analyst added that Manulife could also issue more debt or preferreds and possibly reinsurance.

He maintained his "sector outperform" rating and left his C$30 one-year price target unchanged.

Comments

[abcde_98:]

Mr. McKinnon,

For the Vairable Annuity business, please tell us Manulife's assumptions for:

(a) S&P 500 index in 2009 (many insurers have assumed S&P index would AVERAGE 900 to 950 in 2009... we are 3+ months into 2009, do you really foresee this assumption occuring?) S&P index = E x 'p/e' E is expected from $40-60, 'p/e' was recently 8.03

(b) use of financial hedges? cost of hedges?

(c) implied volatility ?

(d) degree to which OSFI softened / relaxed the (i) reserving (ii) capital requirements


(by the way, what if Manulife at its highest level was a USA company and therefore was regulated by the USA, would reserves and cepital requirements be more, less, or the same? Why are the stock prices of the VA writers in the USA getting hit hard and yet, MFC, SLF, AXA are not hit so hard?)

Apr 07 10:40 PM