TORONTO, Oct 27 (Reuters) - Shares of life insurer Manulife Financial Corp MFC.TO continued to slide on Monday as analysts weighed in with thoughts on how the company might increase its capital ratios to offset falling stock markets.
Part of Manulife’s business is selling products linked to equity-market performance, so when stocks fall sharply, the company must set aside more money to cover guaranteed payments when those products mature.
The negative effects of declining equity markets are most evident in its business segments that contain segregated funds and variable annuities, and one option is for Manulife to wait and hope that equity markets recover, Genuity Capital Markets analyst Mario Mendonca said in a research note on Monday.
But if management takes this route then the company, which has been widely expected to pursue life insurance acquisitions, will probably not take part in the industry’s consolidation, Mendonca said.
If Manulife is faced with a large U.S. acquisition, it would be “most desirable” for the company to issue enough debt, preferred shares and common equity to make the acquisition and boost capital levels, Mendonca said.
Shares of Manulife were down 6.2 percent at C$23.44 on the Toronto Stock Exchange on Monday afternoon, after falling as low as C$23.25.
The stock fell 10 percent last week and has been bumping along at 52-week lows in recent sessions as analysts cut their earnings estimates and muse about how the company might bolster its capital ratios.
Options could include reinsuring some risks, reviewing actuarial liabilities for reserves that might be too conservative, selling non-core businesses, or issuing debt, “hybrid capital” or shares, RBC Capital Markets analyst Andre-Philippe Hardy said in a note on Monday.
A meaningful rally in equity markets would remove much of the pressure from Manulife’s capital ratios, Hardy said.
Mendonca said that the company has other options for shoring up capital ratios. These include asking regulators for relief from segregated fund capital standards; issuing debt or preferred shares at the holding company level; or releasing reserves and capital associated with things like interest rates, credit, mortality and other risk factors.
Manulife Chief Executive Dominic D‘Alessandro said on an Oct. 14 conference call that the company had no intention of issuing equity or reducing its dividend.
It is due to report third quarter results on Nov. 6.
Mendonca cut his Manulife target price to C$30 a share, from C$35 previously. He expects earnings to drop 70 percent from a year earlier to 21 Canadian cents a share on credit-related charges, reserve strengthening for segregated funds, as well as other charges tied to falling stock markets. He expects those to be partly offset by reserve releases. ($1=$1.30 Canadian) (Reporting by Lynne Olver; Editing by Peter Galloway)