Manulife: Still at Risk

Includes: MFC, SLF
by: Streetwise Blog

By Andrew Willis

For all its talk of fortress capital, Manulife Financial (NYSE:MFC) remains weak compared with rivals, in the event markets underperform over the coming year.

In the wake of last month’s $2.5 billion stock sale, a financing that inflicted new pain on long-term shareholders who had already seen the dividend cut in half and massive dilution last year, analysts are stress-testing Manulife’s balance sheet.

The good news is that Canada’s largest life insurer can now weather severe storms. CIBC World Markets ran various nasty scenarios on Manulife and analyst Darko Mihelic said the company is “reasonably well prepared to withstand another 'perfect storm' of declining equity markets, weaker interest rates, credit losses and higher regulatory capital requirements.”

However, Mr. Mihelic said a 30% drop in equities - Manulife is exposed due to the savings products it has sold - combined with headwinds in other areas would leave the company’s all-important capital ratios well behind rivals, but above what regulators require. After all its financing activity, CIBC World Markets calculates that after another “perfect storm,” Manulife’s MCCSR (it stands for Minimum Continuing Capital and Surplus Requirement) would drop to 194%, well above the OSFI-mandated level of 150%, but below Sun Life’s (NYSE:SLF) 216%.

At the moment, Manulife’s MCCSR is at an industry-leading 242%, while Sun Life is at 240%.

“While the capital concerns are largely behind Manulife, we believe the stock might trade sideways for some time,” concluded Mr. Mihelic. “Not only has the lifeco’s earnings power been diminished but the equity issue and the dividend cut are also likely to dampen valuation in the shorter-term.”