* Says cuts sensitivity of earnings through hedging
* Says to continue to cut interest rate exposures (Adds details)
TORONTO Jan 5 Manulife Financial Corp (MFC.TO) (MFC.N), Canada's largest insurer, said on Wednesday it shorted C$5 billion ($5 billion) of equity futures contracts in the fourth quarter of 2010 to protect itself against market swings.
Manulife, which has struggled since the 2008 market crash, said it also sold C$200 million of on-balance sheet public equities that were backing insurance liabilities.
The company is hedging its exposure to stock markets and interest rates aggressively to produce more predictable results and reduce the risk of big market-related hits to earnings.
The Toronto-based financial services group said it also raised its dynamic variable annuity hedging program - which hedges on a product-by-product basis - by C$800 million.
Insurance companies normally depend on gains from rising stock markets and interest-rate differentials to fund annuity and other guaranteed payments to clients, but the unstable stock markets and low interest rates since the start of the financial crisis have undermined this strategy.
"Manulife Financial Corp has made significant progress on its goal of reducing its underlying earnings sensitivity to equity market and interest rate movements in the fourth quarter of 2010," the company said in a statement.
The company, which is the biggest life insurer in North America and one of the largest in the world, aims to hedge 75 percent of its earnings sensitivity to equity markets movement by 2014.
"Manulife has aggressively moved forward with its programs and appears to be well on its way to achieving its 2012 targets," Barclays Capital analyst John Aiken wrote in a report.
"We estimate that this has reduced MFC's exposure to a 10 percent decline in equities from the C$1.3 billion reported at the end of the third quarter to roughly at or slightly below C$1.0 billion," Aiken said.
The measures, however, also reduce Manulife's ability to make back its previous losses as they cut its exposure to rebounding markets. Aiken said this could cause some dissatisfaction among investors who had been hoping to take advantage of recovering markets to the same degree that the company was affected during the downturn.
Manulife said it will continue to take actions to further reduce its interest rate exposure -- by about 25 percent by the end of 2012 and by about 50 percent by the end of 2014.
Manulife shares, which have gained 34 percent in value since the company posted third-quarter results in November, rose 2.84 percent in late morning trade in Toronto to C$17.78 per share.
($1=$1.00 Canadian) (Reporting by Isheeta Sanghi in Bangalore and Pav Jordan in Toronto; editing by Peter Galloway)