Manulife Posts Record Loss on Equity Market Decline, Falling Interest Rate
Manulife Financial Corp., Canada’s largest insurer, posted a record quarterly loss after equity markets declined and interest rates fell. The stock had its biggest drop in a year.
The 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 its boosted reserves. Insurers need to increase reserves when stocks decline to cover guarantees on products such as annuities. Equity declines in the U.S. and Canada led to a 64 percent profit drop yesterday at rival Sun Life Financial Inc.
“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.”
Manulife plunged C$1.81, or 11 percent, to C$14.19 in 10:27 a.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.
Hedging Business
Guloien, 53, 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.”
Guloien, who took over the top spot in May 2009, said today that Manulife is in the process of “repositioning” its business mix. Further details of the measures will be announced later this year, he said. The company plans to hedge or reinsure at least 70 percent of its variable annuity guaranteed value by the end of 2012.
Magnitude a Surprise
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.
“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 1 percent decline in rates reduces earnings by C$2.7 billion, Manulife said.
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.
Canadian Loss
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.
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, the country’s third-largest insurer, reported second-quarter earnings dropped to C$213 million, or 37 cents a share, as market declines lowered profit by C$187 million.
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
Canada’s second-biggest insurer, controlled by Montreal’s billionaire Desmarais family, said fees climbed for its individual life insurance and retirement products in Canada, while sales of Putnam funds rose in the U.S.
Results matched the 46-cent-a-share average estimate of four analysts surveyed by Bloomberg News.
Great-West fell 8 cents to C$25.12, while Sun Life fell C$1.06, or 3.7 percent, to C$27.54, the biggest drop in five weeks.
(Manulife will hold a conference call at 2 p.m. Toronto time. To listen, dial +1-416-340-2216 or +1-866-898-9626 at least 10 minutes in advance.)
To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.
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