As insurers report profits, Manulife cuts dividend

Canada’s top insurers reported their earnings for the second quarter of the year, but news that Manulife Financial has chopped its dividend in half is casting a pall over the sector.

The dividend cut, the first such drastic move among the major financials, was announced as an effort to shore up “fortress levels” of capital.

Common shareholders will see their quarterly payout fall from 26 cents per share to 13 cents. As a slight concession to shareholders, the insurance giant also announced that reinvested dividends would qualify to buy shares at a 3% discount.

“While we recognize the importance of the cash dividend to many of our common shareholders, we believe that retaining more of our earnings is the most effective means of building capital while still providing an attractive yield for our shareholders who will benefit as we deploy our capital for growth,” said Donald Guloien, president and CEO of the company.

By halving the dividend, Manulife expects to preserve almost $800 million in capital per year.

“We believe that companies that build fortress levels of capital will benefit their policyholders and shareholders, and be recognized favourably by regulators and ratings agencies,” Guloien added.

Neither the dividend reinvestment discount nor the rationale for the cut has appeased the market, as Manulife dropped nearly 15% by mid afternoon.

“Manulife is now going to be yielding about 2.5% versus Sun Life, which will be yielding about 4%, Industrial Alliance about 3.25%, and Great-West Lifearound 4.75%,” says Juliette John, senior vice-president and portfolio manager for Bissett Investment Management. “Manulife is going to have the least amount of yield support to its share, in addition to, perhaps, a lower earnings growth outlook than it had in the past compared to its peers.”

John suggests that Manulife risks the premium valuation multiple that it had enjoyed in the past over its peers. While the cut itself is not a shock, the size came as something of a surprise.

“The size of the dividend cut is surprising. Prior to the cut, there was a view [that] there might be a cut of 30% to 40%. I don’t think 50% was widely thought of as something they would do,” she says. “I question if this is really going to improve its capital support [over the] longer term.

John does not expect other insurers to follow suit with their own dividend cuts, suggesting that Manulife management likely felt more constrained by its balance sheet than other insurers.

Manulife announced today that it had earned net income of nearly $1.8 billion in the second quarter (Q2), up from $1 billion in Q2 of 2008. The insurer’s minimum continuing capital and surplus requirement (MCCSR) ratio climbed to 242%, up from 200% in 2008.

While Guloien said the capital position was “satisfactory,” the company would take a more conservative approach to capital planning.

Much of the improvement stemmed from equity market gains, which contributed $2.6 billion to the bottom line. The lion’s share of those gains — $2.4 billion — is related to segregated fund guarantees.

“While the increase in equity markets in the quarter resulted in a release of a large amount of segregated fund guarantee reserves, lower corporate bond rates had a significant adverse impact on the quarter’s results,” said Michael W. Bell, senior executive vice-president and chief financial officer. “Canadian actuarial practices require us to reflect the current investment returns on future cash flows in the valuation of our policy liabilities.”

Manulife’s chief Canadian rival also released its Q2 earnings on Thursday, with Sun Life Financial reporting a $591-million profit, up from $519 million in Q2 of 2008. Improved equity market performance again helped the company, allowing it to release reserves set aside to cover off exposure to seg fund guarantees.

Sun Life reported an MCCSR ratio of 231%, characterizing this as a “strong” level of capitalization.

“Equity markets showed substantial improvement in the second quarter resulting in strong earnings gains,” said Sun Life CEO Donald Stewart. “Recent equity market gains are encouraging; however, a full, broad-based economic recovery will take time, and credit conditions remain a headwind in the current environment.”

As a signal to the markets of confidence in its earning potential, Sun Life maintained its common share dividend at 36 cents.

Great-West Lifeco announced its earnings as well, posting net income of $413 million for Q2, down from $564 million in the same quarter a year earlier.

While market conditions have improved in 2009, the company points out that the recovery has been far from complete. The value of publicly traded securities held by Great-West was still lower at June 30 than at the end of Q2 2008, just months before the overall market meltdown.

The value of assets held in the company’s seg fund offerings remain depressed, resulting in lower management fees. This alone wiped out $64 million in net income, compared to Q2 2008.

(08/05/09)