Manulife Posts Record Loss of $2.4 Billion on Equity Markets Decline
Manulife Financial Corp. shares fell the most in a year after Canada’s largest insurer posted a record quarterly loss, following a decline in equity markets and falling interest rates.
Manulife plunged C$1.80, or 11 percent, to C$14.20 in 4:10 p.m. trading on the Toronto Stock Exchange, the biggest decline since Aug. 6 last year. The shares have dropped 27 percent this year, the worst performer on the 41-member S&P/TSX Financials Index.
“We’ve seen this movie over the past year or so,” said Craig Fehr, an analyst at Edward Jones & Co. in St. Louis. “Whenever markets do decline, it’s extremely punitive for Manulife.”
Manulife’s second-quarter loss was C$2.4 billion ($2.37 billion), or C$1.36 a share, compared with net income of C$1.78 billion, or C$1.09, a year earlier, the Toronto-based insurer said today in a statement.
The owner of Boston-based John Hancock Financial said falling equity markets led to charges of C$1.7 billion in the quarter after it boosted reserves. Insurers need to increase reserves when stocks decline to cover guarantees on products such as annuities.
“Our results for the second quarter were disappointing,” Chief Executive Officer Donald Guloien said today in the statement. “We are taking the right actions to improve earnings to highly satisfactory levels over the coming years, even assuming today’s low interest rates and no more than normal equity market returns.”
Worse Than Expected
Guloien, 53, said Manulife is in the process of “repositioning” its business mix, and has been focusing on operations in Asia and wealth management. The company plans to hedge or reinsure at least 70 percent of its variable annuity guaranteed value by the end of 2012.
“We’ve been at this for a while,” Guloien said in a telephone interview. “This is a work in progress.”
Guloien, who took over the top spot in May 2009, said investors should expect a return on equity of 14 percent over the “long term”. Further details of the measures will be announced later this year, he said.
“Ultimately, we would expect to have higher earnings, higher ROE and a better risk profile through this repositioning,” Chief Financial Officer Michael Bell said in an interview.
Hedging Business
Guloien told investors in May that Manulife can sustain a 30 percent drop in equity prices after taking measures such as hedging new business, selling stock and cutting the dividend in half. The S&P/TSX Composite Index fell 6.2 percent in the second quarter.
“While equity markets have improved since quarter end the substantial exposure to the volatility of the financial markets will remain a credit overhang,” Altaf Nanji, a senior credit analyst at RBC Capital Markets, wrote in a note today. He called the results “much worse than expected.”
Manulife was expected to report a loss of 62 cents a share before one-time items, according to the average estimate of 11 analysts surveyed by Bloomberg News. The second-quarter loss topped the C$1.87 billion loss in the fourth quarter of 2008, the first for Manulife since it went public in 1999.
Magnitude a Surprise
“While many of these negatives were anticipated by the market, we believe that the magnitude will be a surprise, particularly the decline in its capital ratios,” Barclays Capital analyst John Aiken wrote in a note today.
In addition to charges for equity markets, the insurer posted C$1.5 billion in costs to reflect falling interest rates, as U.S. Treasury yields declined. Each percentage point decline in rates reduces earnings by C$2.7 billion, Manulife said.
Moody’s Investors Service placed on review for possible downgrade Manulife’s Aa3 financial strength rating for its life insurance subsidiaries. Standard & Poor’s lowered its counterparty credit rating on Manulife to A from A+.
The loss at Manulife’s U.S. insurance arm widened to C$720 million from C$631 million a year ago, as a result of equity and interest rate movements. The company posted a C$504 million loss in its U.S. asset-management division, compared with year- earlier profit of C$1.55 billion.
Manulife’s Canadian unit had a loss of C$344 million, compared with profit of C$336 million a year ago. The loss at its Asia and Japan unit was C$710 million, compared with C$885 in profit a year earlier.
Lindsay
Separately, the company said Donald Lindsay, CEO of Canadian miner Teck Resources Ltd. and the former president of CIBC World Markets, joined the board of directors.
Sun Life Financial Inc., the country’s third-largest insurer, reported yesterday that second-quarter earnings dropped 64 percent to C$213 million, or 37 cents a share, as market declines lowered profit by C$187 million.
“We’re going through some very volatile economic times, and they’re always difficult,” Sun Life CEO Donald Stewart said today in a telephone interview. “When more stables times return, as we hope they do over the longer haul, the bottom line numbers will settle down.”
Before one-time items, Sun Life was expected to earn 27 cents a share, according to the average estimate of 11 analysts surveyed by Bloomberg News.
Sun Life said it expects to record a writedown of about C$1.7 billion after it adopts International Financial Reporting Standards in January, reflecting acquisitions it made in 2001 and 2002.
Great-West Lifeco Inc. of Winnipeg, Manitoba, said yesterday that profit climbed 4.8 percent to C$433 million, or 46 cents a share.
Great-West fell 32 cents to C$24.88, while Sun Life fell C$1.33, or 4.7 percent, to C$27.27, the biggest drop since November.
To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.
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