Manulife Financial (MFC.TO)

The whole life insurance sector has been a troubled battleground, and hinges on interest rates being extraordinarily low. Thinks it is still going to be pretty tough to own this name.

In his ranking system, it is in the 2^nd quartile of all the companies he looks at. Technically, it would rank a lot lower. There are 2 aspects that are going to drive the business. One is interest rates and the other is their Asian business, whose economy continues to improve.

Doesn’t own this, except for some of their preferred shares. The dividend hasn’t been growing in a huge way, which is the same situation for many insurance companies because of the low interest rates. He is not a big fan of the insurance companies in general.

It has been difficult for them to get a lot of respect lately. They recently got hit with some problems in the long-term care business in the US. There may be some actuarial revaluations going on in the 3^rd quarter, so there could be a possible hit in terms of a write down. However, we have a company that is one of the best capitalized in the industry. Any more they don’t just depend on interest margins to earn their money. Expanding very rapidly and making progress in Asia. Dividend yield of 4.24%.

Expects interest rates to go lower, which would be a major headwind for financial companies. This has large operations, not only in Canada, but also in Asia and the US.

Great West Life (GWO-T), Sun Life (SLF-T) or Manulife (MFC-T)? As a group, the insurance companies have not done very well. Of these 3, Sun Life has relatively performed the best. A lot of the difficulties they have experienced has been a function of what has happened with energy, as they all have some energy exposure. Also low interest rates are generally negative for lifecos. This one just had its last quarter, and the results were not as strong, and had to take some charges on reviews that they are doing. The valuation on this is very attractive now and is trading below BV.

Generally Canadian insurance companies need higher rates to do well, so he is not looking at these at the moment.

He would buy this one if he had to buy one of them. A lot of their assets are not generating a lot of return on equity. They are planning to sell off some of these assets to improve their ROE. Their wealth management business is doing better than Sun Life’s even though it is not bigger.

This has some significant internal management problems. The stock has really gone nowhere. Every time we get a report, something new pops up. They have far too great an emphasis on building a business in the far east. Feels it is high risk business.

(Market Call Minute) You need rising interest rates.

During ‘08/’09, this was the only stock he owned that cut its dividend. Insurance companies invest your premiums. Traditionally they buy bonds. Bond yields are a real headwind for insurance companies. POW-T is better, or a Canadian bank.

The whole insurance/financial sector is suffering from near zero interest rates. This is incredibly well positioned in Asia and the US. Feels the shares truly have a 50% appreciation over the next 3 years or so. Expects to see dividend increases next year. All the policies written today, are based on very low interest rates. They have cleaned themselves up after the financial crisis, and it is a cheap stock.

3 to 10 Year Hold? Lifecos have long tails. It’s not like car insurance where every year rates are redone. Life insurance policies are for 5-10-20 years, so repricing is very difficult for them. They used to invest in bonds to cover liabilities, but can’t do that as easily anymore because rates are so low, which is pushing them into riskier parts of the investment curve. They missed their numbers by about 13%, although Asia did well for them. Not expensive, but doesn’t see how they make a lot of money going forward. He would rather own a bank for that time horizon.

Lifecos have assets and liabilities. Part of the overhang is the long end of the interest rate curve going down. They are investigating having to hold more cash on the balance sheet. Notwithstanding, they have hedges in place that mitigate short term exposure. The valuation should stay range bound for the short term.

(A Top Pick Oct 2/15. Down 9.85%.) He still likes this. It has visible earnings growth of 12% per annum over the next couple of years. It has 11% annual dividend growth. Operationally they did everything right, but their energy book was a real problem, which knocked down their BV per share. It is doing well in both its US and Asian operations. Thinks they can grow their dividend 11% year-over-year.