Source: The Canadian Press

Stung by volatile capital markets in the past, Manulife Financial Corp. (TSX:MFC) says strong stock markets helped push it toward a record profit of $1.79 billion in the most recent period even as it ramped up a program to distance itself from investment risks.

“We’re seeing solid progress on all fronts,” CEO Donald Guloien said on a conference call Thursday to discuss Manulife’s fourth- quarter results, adding that the company is ahead of schedule in its plan to reduce exposure to market volatility.

“We took advantage of rising equity markets and interest rates to increase our hedging of both equity and interest rate risks,” he said.

“Through hedging of all types, we have now hedged 50% of our equity sensitivity, up from 25% at the end of the third quarter 2010.”

Canada’s largest insurer plans to have 60% of its earnings sensitivity to equity market movements hedged by the end of 2012 and about 75% by the end of 2014.

The company has come under fire from shareholders to turn around its finances since the recession pummelled stock markets, which drove down the present value of Manulife’s investments and required it to strengthen reserves.

Declining stock markets and interest rates resulted in losses of more than $3.3 billion in the last two quarters.

But reducing sensitivity to those markets is a double-edged sword because when times are good, such as in the most recent quarter, exposure to equity markets can vastly improve profits.

The push to record quarterly profits was driven largely by improvements in the very markets from which the insurer is working to distance itself.

Higher equity markets boosted the company’s earnings in the quarter by $441 million, while improved interest rates contributed $604 million to the bottom line.

In the past year, the company has increased the percentage of the risky variable annuity business hedged or reinsured against equity markets and interest rate movements by 20%. At the end of fiscal 2009, Manulife had 35% hedged, and now has 55% hedged.

“Since the end of the quarter we have witnessed improving markets and interest rates in 2011,” Guloien said. “We have taken further advantage of this opportunity to return to dynamic hedging.

“In the past few weeks we have added approximately 8.5 billion towards our dynamic hedging program and now have 63% of variable annuities value hedged or reinsured.”

Manulife said Thursday that its earnings amounted to $1 per share, compared with a profit of $868 million or 51 cents per share in the prior-year period.

Analysts polled by Thomson Reuters had on average predicted earnings of 94 cents per share in the fourth quarter, but their expectations ranged widely from as low as 38 cents to as much as $1.27.

Stripping out the effect of equity markets and interest rates and other items, the company earned $692 million — which was below its own projection for earnings of between $700 million and $800 million for the quarter.

“Manulife appears well on its way to achieving its targets within its allotted timeline,” Barclays Capital analyst John Aiken wrote in a note to clients.

Aiken said that a strong run-up in Manulife stock — which has risen more than 40% since it last reported earnings — came alongside an improvement in market conditions, the very thing to which Manulife is striving to reduce its exposure.

“Investors that desire a more stable earnings base from Manulife should continue to receive it, but with smaller incremental earnings growth when the markets move in its favour,” Aiken wrote.

“With this further limited, and core earnings stuck in a holding pattern, we believe that near-term upside is limited.”

Shares in Manulife were down 97 cents or 5.7% at $17.95 in heavy trading Thursday on the Toronto Stock Exchange.

For the full year, Manulife posted a net loss of $391 million after taking more than $3 billion in charges for goodwill impairment and changes to actuarial assumptions. Stripping out those charges, it would have recorded adjusted earnings from operations of $2.87 million.

The company operates around the world providing insurance and wealth management services as well as pension products, annuities, mutual funds and property and casualty reinsurance.

In the United States, Manulife operates through John Hancock Financial Services, Inc., a major American life insurance company headquartered in Boston that the Canadian company bought in 2004.