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Mail Bag: Manulife (MFC)

Jeff asked in a recent email,

Now that MFC is below $15.00 what are your thoughts? I began investing in MFC when they purchased Hancock and until recently had a beautiful chart. What’s going on with this well run company?

Jeff is referencing the US traded listing for Manulife (MFC) on the NYSE which closed at $14.15 US on Friday and $17.53 CDN on the TSX.

I published a stock analysis on this company, Taking Stock in MFC, in November where I published the following comments,

Segregated funds have been a major concern of the equity markets in recent weeks and put Manulife and other insurers in the spot light. Segregated fund products in recent years have been very attractive to insurance companies and aggressively sold to investors seeking capital preservation of their investments with the potential benefit of upside as markets appreciate. As equity markets have declined significantly in recent months questions have been raised about these products and whether additional capital needs to be raised in order for companies to meet these longer-term obligations. In my situational analysis one significant internal threat for my investments in insurance companies has been the increased affinity for these products. While they offer lucrative fees and an incentive from the issuing company’s perspective the explosive growth of these products has been concerning and likely something that will be appropriately managed in future years. One benefit is that although segregated products have been sold by Manulife in all their major markets many of these products do not require repayment for another 7-30 years and the potential costs of these products are within the stated resources of the company. Manulife continues to operate above any regulatory minimum for their capital ratios and have not yet taken significant losses attributed to these products.

Segregated funds are guaranteed investments that Manulife and other financial services companies have sold to investors over the past decade as an incentive to bypass the risk of investment losses. One example is Manulife’s Guaranteed Investment Funds (GIF) where investors make a deposit over a 10-year period and in return receive at the end of the term a guarantee of 75% of their investment or the market value, whichever is higher.

In recent years these products have been very attractive to investors and lucrative for the companies offering them. With equity markets tumbling more than 40% in some markets Manulife and other financial services companies selling these products have come under pressure because of their future obligations to repay investors back their principal at a potentially higher price than their market price. If equity markets were to stay at current levels Manulife would have to begin paying out more than it received on some of these products in seven years.

The insurance business of Manulife has been improving both in scale and profitability, but the investment side of the business has obliterated the stock over the past six months. Management didn’t adequately hedge their exposure (or hedge at all) to investment products as they should have and are currently paying the price as the market concerns grow over future repayment obligations.

In the past two quarters Manulife has been forced to commit equity to these products to ensure that they maintain a regulatory minimum for asset coverage of them. This has hurt profitability at the company even though the insurance side of the business posted impressive results in fourth quarter operations.

Even the best group of mangers make mistakes, whether small or large, and a company suffers because of that. This illustrates the importance of a company’s management to identify future risks and act appropriately to protect operations and their shareholders. This will be an expensive lesson for the company and many others, but likely one that they will learn from as they look to offset future risk with these segregated products. An investor shouldn’t discount this exposure as it poses real risk to the company now and in the future. A long-term investor needs to weigh the future prospects of this company and evaluate whether the price today offers value for the company’s operations and performance in the future.

For readers interested in more specific details I would advise you to read Manulife’s fourth quarter news release and information package provided on their investors relations website.

Disclosure: I own shares in MFC

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