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Manulife on the hot seat on investor day

Thursday, November 15, 2012

JACQUELINE NELSON

The market has questions about how Manulife Financial Corp. plans to meet its new profit goal. And Manulife's chief executive officer, Don Guloien, will be on the hot seat at the company's annual investor day Thursday to show skeptical investors and analysts his new earnings targets are realistic.

The country's largest life insurer has pushed back its goal of making $4-billion in profit to 2016 from 2015, and also changed the way it will measure those earnings. While many analysts had expected changes, they are looking for clues to how it will meet those targets.

In the third quarter, the insurer reported a loss of $227-million after absorbing a $1-billion charge. Manulife sees the turbulent markets encouraging more customers to cling to variable annuities than expected, and the company is on the hook for the guarantees.

Analyst Peter Routledge of National Bank Financial said that one of the big musts for Manulife to achieve its new profit is that they take no more charges to increase reserves, whether for interest rates or policy holder behaviour.

Management is confident that its growth story in Asia will continue (outside of Japanese variable annuities), and the region is expected to be a key topic of discussion. Mario Mendonca, an analyst at Canaccord Genuity, said in a recent note that he will be looking for "conviction that, and a good argument why, Asia's impressive top line growth will lead to significant bottom line growth in the next 3 years."

Mr. Routledge says he's concerned about universal life insurance in the United States, which (along with some term insurance business from Japan) made up roughly $200-million of the recent $1-billion in charges. The trouble is that few people stop paying their premiums and Manulife, along with other major life insurers who made the same moves, was overly optimistic on lapse rates a decade ago.

No matter what answers Mr. Guloien offers shareholders, though, there are some things he can't be expected to change. "Sensitivities have declined significantly from peak levels but remain high compared to other sectors and pre-2008 years," writes André-Philippe Hardy, an analyst with RBC Dominion Securities Inc.

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