Manulife Financial Corp. has announced significant progress on its goal of reducing its underlying earnings sensitivity to equity market and interest rate movements in the fourth quarter of 2010.
Manulife has a goal of executing additional hedges so that approximately 60% of its underlying earnings sensitivity to equity market movements is hedged by the end of 2012 and approximately 75% 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 Sept. 30, 2010, approximately 25% the underlying earnings sensitivity to equity market movements was hedged and a 10% decline in the market value of equity funds was estimated to reduce shareholders’ net income by approximately $1.3 billion.
Between Oct.1, 2010 and Dec. 31, 2010, the company shorted approximately $5 billion of equity futures contracts as part of a macro hedging program. Manulife also modestly increased its dynamic variable annuity hedging program by adding $800 million of in-force variable annuity guaranteed value to the program. It also sold $200 million of on-balance sheet public equities backing insurance liabilities.
Manulife expects to further reduce its interest rate exposures, as measured by the impact on shareholders’ net income of a 1% parallel decline in interest rates, by approximately 25% by the end of 2012 and by approximately 50% by the end of 2014.
Progress on the company’s risk reduction goal was made throughout the fourth quarter of 2010 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 Manulife to accelerate progress towards the company’s risk reduction goals.