January 6, 2011
Manulife Financial provides update on Q4 2010 hedging activities
TORONTO--Manulife Financial Corporation is announcing significant progress on its goal of reducing its underlying earnings sensitivity to equity market and interest rate movements in the fourth quarter of 2010.
As previously disclosed, the Company has a goal of executing additional hedges so that approximately 60 per cent of its underlying earnings sensitivity to equity market movements(1) is hedged by the end of 2012 and approximately 75 per cent of its underlying earnings sensitivity to equity market movements is hedged by the end of 2014. The Company expects to undertake this hedging through a combination of time and market based actions. As at September 30, 2010, approximately 25 per cent of the underlying earnings sensitivity to equity market movements was hedged and a 10 per cent decline in the market value of equity funds was estimated to reduce shareholders' net income by approximately $1.3 billion.
Between October 1, 2010 and December 31, 2010, the Company:
- Shorted approximately $5 billion of equity futures contracts as part of the Company's macro hedging program.
- Modestly increased its dynamic variable annuity hedging program by adding $800 million of in-force variable annuity guaranteed value to the program.
- Sold $200 million of on-balance sheet public equities backing insurance liabilities.
Sensitivity of earnings reduced due to interest rate changes and management actions
As previously disclosed, the Company expects to take actions which would further reduce its interest rate exposures, as measured by the impact on shareholders' net income of a one per cent parallel decline in interest rates, by approximately 25 per cent by the end of 2012 and by approximately 50 per cent by the end of 2014. The Company expects to undertake this hedging through a combination of time and market based actions. The sensitivity of shareholders' net income to a one per cent decline in interest rates as at September 30, 2010 was $2.2 billion.
Progress on the Company's risk reduction goal was made throughout the fourth quarter by lengthening the duration of the Company's fixed income investments in its liability segments, both by investing cash and by trading out of shorter bonds into longer bonds.
Favourable interest rate and equity market movements in the fourth quarter enabled the Company to accelerate progress towards the Company's risk reduction goals. Updated equity market and interest rate sensitivities based on the Company's positions at December 31, 2010 will be provided with the fourth quarter 2010 results, which are scheduled to be released on February 10, 2011.
Caution related to risk exposures
The risk exposure measures expressed above include the sensitivity of net income attributed to shareholders. These risk exposures include the sensitivity due to specific changes in market prices and interest rate levels projected using internal models as at a specific date, and are measured relative to a starting level reflecting our assets and liabilities at that date and the actuarial factors, investment returns and investment activity we assume in the future.
The risk exposures measure the impact of changing one factor at a time and assume that all other factors remain unchanged. For these reasons, these sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions outlined under "Risk Management" in the Management's Discussion and Analysis in our 2010 Third Quarter Report to Shareholders. Actual results can differ materially from these estimates for a variety of reasons including: the interaction among these factors when more than one factor changes; changes in actuarial and investment return and future investment activity assumptions; actual experience differs from the assumptions, changes in business mix, effective tax rates and other market factors; and the general limitations of our internal models. Given the nature of these calculations, we cannot provide assurance that the actual impact on net income attributed to shareholders will be as indicated. For more details on the Company's exposure to changes in equity markets and interest rates see "Risk Management" in the Management's Discussion and Analysis in our 2010 Third Quarter Report to Shareholders.
About Manulife Financial
Manulife Financial is a leading Canadian-based financial services group operating in 22 countries and territories worldwide. For more than 120 years, clients worldwide have looked to Manulife for strong, reliable, trustworthy and forward-thinking solutions for their most significant financial decisions. Our international network of employees, agents and distribution partners offers financial protection and wealth management products and services to millions of clients around the world. We provide asset management services to institutional customers worldwide as well as reinsurance solutions, specializing in life and property and casualty retrocession. Funds under management by Manulife Financial and its subsidiaries were $474 billion (US$460 billion) as at September 30, 2010. The Company operates as Manulife Financial in Canada and Asia and primarily as John Hancock in the United States.