Tags: Manulife | Financial | rates | MFC

Manulife Financial Risks Rise on Low Rates

By    |   Friday, 30 Dec 2011 03:59 PM

After declining for most of 2011, shares of Manulife Financial (MFC) may attract value investors looking for a large financial services company trading below its intrinsic value. Investors may have trouble, however, looking into the company's somewhat murky future due to the risk inherent in an environment of low interest rates.

Canada's Manulife Financial primarily sells life insurance, annuity, retirement planning, long-term care and mutual fund products. The major market areas for the company are Canada, Asia and the United States.

In the United States, Manulife sells its products under the John Hancock brand. Sources of revenue include management fees on non-guaranteed products such as mutual funds and excess investment results on guaranteed products such as life insurance and annuities.

Manulife Financial reports its financial results according to the International Financial Reporting Standards (IFRS) rules. These rules require more stringent mark-to-market results, resulting in a higher level of earnings volatility.

For example, in the 2011 third quarter, the company reported a $1.28 billion loss. Under U.S. GAAP accounting rules, the company would have posted a $2.23 billion profit. The major difference for the quarter was accounting for the investment results backing variable annuity guarantees.

Risks ahead

The Manulife book of variable annuity business puts the company at risk if the stock market declines. Management has been working to reduce that guarantee risk over the last several years, but the book of business is still large and only about 60 percent of the risk can be hedged. On the flip side, if the market goes up, the company's profits will surge.

The low interest rate environment has the most effect on the life insurance business. Very low rates currently in effect are bad news for all life insurers, and Manulife is no exception. The company is currently selling products with lower levels of financial risk to Manulife, but the existing book of business must still be managed in the low rate environment.

Recently, RBC Capital Markets analyst Andre-Philippe Hardy downgraded MFC to sector perform from outperform, citing the difficulties for life insurance companies in the current investment environment.

The company next reports on Feb. 2.

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After declining for most of 2011, shares of Manulife Financial (MFC) may attract value investors looking for a large financial services company trading below its intrinsic value. Investors may have trouble, however, looking into the company's somewhat murky future due to...
Manulife,Financial,rates,MFC
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2011-59-30
Friday, 30 Dec 2011 03:59 PM
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