Tuesday, June 23, 2009

* Manulife Financial Corp. (MFC) Under Investigation

While suffering through a large market decline, the last thing you want to see is a letter from the government. It is never good news. Either you are being drafted, they want more money from you or you are under investigation. In the case of Manulife Financial Corp. (MFC), Canada's largest insurance company, it was the latter.

On Friday June 19th after the market closed, it was reported that MFC received an enforcement notice from the Ontario Securities Commission (OSC) relating to its disclosure before March 2009 of risks related to its variable annuity guarantee and segregated funds business. The preliminary conclusion of OSC staff is that the Company failed to meet its continuous disclosure obligations related to its exposure to market price risk in its segregated funds and variable annuity guaranteed products. MFC will have the opportunity to respond to the notice before OSC staff makes a final decision about proceeding. The Company believes that its disclosure satisfied applicable disclosure requirements.

Like most insurance companies, MFC has struggled as a result of the declining equity markets. The Company has reported huge losses in excess of one billion Canadian dollars over the last two quarters. Much of which can be attributed to increasing reserves to cover long-term segregated fund and annuity guarantees. Segregated funds are popular investments similar to mutual funds but contain insurance contracts that limit risk for the investors.

MFC's U.S. ADR was down over 14% yesterday - the first full day of trading after the announcement. Other insurance companies shared the pain as shown below:
  • AFLAC Inc. (AFL) - Down 5.95% - [Analysis]
  • MetLife, Inc. (MET) - Down 7.53%
  • Lincoln National Corp. (LNC) - Down 6.88%
  • Prudential Financial, Inc. (PRU) - Down 8.53%
  • Sun Life Financial Inc. (SLF) - Down 7.47%
As with all sympathy declines, some are not warranted based on the circumstances. It could be a good time to invest in certain select insurance stocks.

Full Disclosure: Long AFL, MFC. See a list of all my income holdings here.

Tags: [LNC] [MET] [MFC] [PRU] [SLF]