Uncategorized
Manulife subs offer good relative value in tight market
admin | November 8, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The top performing sector in the investment grade index during the most recent tightening trend has been the insurance industry, with an excess return of +1.20% through the first week of October. Industry financials for insurers appear solid coming out of the 3Q19 reporting season; assuming equity markets maintain momentum, insurers could continue to outperform the broader IG market. Value opportunities in outperforming sectors are hard to find, but given investors’ persistently strong appetite for additional credit risk and spread, subordinated issues in names such as Manulife (MFCCN: senior rating A/A-) are poised to perform well in the near-term.
Insurance outperforms as investment grade spreads rip tighter
Despite a slight pause and a brief whiff of trepidation in the IG primary market, secondary corporate spreads tightened rapidly throughout the first week of November. IG spreads tightened about 14 bp from the wides in first week of October, on mostly positive sentiment coming out of 3Q19 earnings throughout the month.
Outperformance among insurance credits is not an uncommon byproduct during bull equity markets that are reaching record levels. The recent pop has edged the sector among the top five performers in the IG Index year-to-date on both an excess return (+4.52%), and total return (+15.17%) basis. It is also not uncommon for longer-duration segments to outperform on a spread basis when long US Treasuries are selling off. October performance in insurance was led by long-dated issues of mostly bellwether names (MET, PRU, LNC, AON, etc); while year-to-date leaders have skewed more into higher-beta territory, and include the long-dated issues of AIG, AXASA, XL and BHF.
The MFCCN 4.061% 02/24/32 (callable 2027) subordinated notes appear poised for further compression relative to the broader sector at a g-spread of +170 bp, which equates to roughly a 3.5% yield-to-call. Insurance issuers do not typically have much subordinated debt outstanding at the holding company level; therefore, the bonds seem to comp closer to the surplus note segment, despite being structurally senior and not part of that hybrid class. Relative to the senior life segment, the MFCCN bonds continue to trade materially wide of some of the comparably split-rated A/BBB senior notes of other issuers – such as: UNM 29s (Baa2/BBB), PL ‘28s (Baa1/A-), PFG 28s and 29s (Baa1/A-), RGA ‘29s (Baa1/A/BBB), TMK ‘28s (Baa1/A/BBB+), LNC 28s (Baa1/A-) (Exhibit 1).
Exhibit 1: IG life insurance long-dated senior and surplus notes

Source: Bloomberg Barclays US Corp Index, Amherst Pierpont Securities
Earnings update
Manulife reported 3Q19 results on Thursday (11/06) with EPS of C$0.76 beating the consensus estimate by three cents. Shares were up the following day by the most in nearly a year on the initial announcement, but flattened out as market enthusiasm tapered off in the second half of the session. Although flatter rate assumptions requires non-cash adjustments, core results were lifted by strong performance in Asia; and most importantly the comprehensive long-term care (LTC) review had no impact on reserves or net income.
MFCCN bonds saw a fast recovery in the first half of the year, in large part due to the favorable court ruling in March that alleviated concerns about potential legal liabilities. The legal uncertainty that dogged MFCCN credit and equity performance from late 2018 through 1Q19 was fully resolved 3/18/19, when a judge dismissed the claims by a hedge fund that Manulife, and other Canadian life insurers, should not be able to cap investments in life insurance policies with guaranteed rates of return.
The hedge fund saga began back in October of last year when short seller Muddy Waters revealed a position in MFCCN, stoking fears that the legal battle with hedge fund Mosten could result in billions in legal liabilities. When the case was settled, it fueled a sharp recovery in the name. Spreads subsequently gapped out with the broader market from April through May, but are now trading closer in-line with pre-lawsuit levels. The drama that drove negative valuation throughout much of last year is off the table.
MFCCN is well diversified with a fairly even split between operations in the US, Canada, and Asia in most years. Last fiscal year was an anomaly, due to a special one-time charge against revenues in the US, which is typically the largest area of operation by sales. The US operations include the John Hancock Life and Health insurance operating subsidiaries, along with the Manufacturers Life Insurance operations in its home domicile of Canada, and Manulife International subsidiaries in Singapore and Japan.
In 2018, the company booked a $9.97 billion charge against revenue in its US operations to enter into a coinsurance agreement with RGA, which will help neutralize its variable annuity risk exposure going forward. This is a very favorable development for credit going forward, as variable annuity exposure and long-term care (LTC) represent two of the most visible operating risks for the life insurance industry.
MFCCN’s LTC exposure appears manageable. The company stopped underwriting this business back in 2016 and currently has more than C$10 billion in reserves over statutory requirements as of year-end 2018. The company maintains solid near-term liquidity with nearly $13 billion in cash on the balance sheet, plus an additional $500 million in revolvers available through 2021, versus less than $3 billion in total debt maturities over the next 5 years.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.