Manulife, Sun Life blame volatile markets and low interest rates for big losses

Manulife, Sun Life blame volatile markets and low interest rates for big losses


The bad times keep coming for Canada’s insurance industry.

As expected, industry giants, Manulife Financial Corp. and Sun Life Financial Inc. both reported big losses in the second quarter.

Both blamed volatile stock markets and low interest rates – factors that are unlikely to change any time soon.

They also warned that more losses are likely to come as accounting adjustments separately take big bites out of their bottom lines.

But industry observers say that it’s also important for investors to understand the companies’ core operations and take a long-term view.

Investors shrugged off the losses. Shares of Manulife gained 6 cents to close at $10.89 on the Toronto Stock Exchange Thursday. Sun Life stock dropped 14 cents to end the day at $21.63 per share.

“It was pretty much what was expected. We knew the second quarter wasn’t good for equity markets or interest rates. Both companies are affected by that,” said John Kinsey, portfolio manager at Caldwell Securities Ltd.

“That seems to be what the market is saying.”

Manulife, Canada’s biggest insurer, said Thursday that the direct impact of equity markets and interest rates cost the company $727 million.

It posted a second-quarter loss of $300 million for the April to June period, compared with a year-earlier profit of $490 million. That’s its third loss in four quarters.

The company also said that it could take a charge of as much as $1 billion in the third quarter as part of its annual review of actuarial assumptions.

In late 2010, Manulife said it was aiming for a nearly threefold increase in net profit to $4 billion by 2015.

The company said it is now reviewing those targets.

“We would like to remind investors that due to the unfavourable economic conditions we increasingly view our goal…as a stretch target,” Steve Roder, Manulife’s chief financial officer, said.

That goal assumed that financial markets would rebound from the global crisis. Instead, the European debt crisis and uncertainty over global growth have hurt equities and sent bond yields lower as investors flee to safe havens.

“It’s not a fault of management. I view it more than they were more optimistic on the outlook for markets than what has actually occurred,” said John Aiken, an analyst at Barclays Capital.

The losses come the day after Sun Life reported second-quarter profit of $51 million, down from $408 million a year earlier.

Exposure to the stock market cost Sun Life $131 million in the quarter, and interest rates cost it another $196 million, the company said. It also warned that persistently low interest rates could cause a further $600 million hit to its earnings by 2015.

On the plus side, Manulife’s Canadian division reported higher profits. The company also had record insurance sales in Asia during the second quarter.

Overall, insurance sales jumped 61 per cent to $1 billion, while insurance premiums and deposits climbed 16 per cent to $6.3 billion.

Still, analysts expected a difficult quarter because under International Financial Reporting Standards, life insurers must use mark-to-market reporting, which values assets at today’s prices, regardless of liabilities that may not come due for decades.

“When you have liabilities that are out 30 years and you have to adjust them on a quarterly basis, that’s just insane,” Kinsey said.

“I think for these companies, you have to use some common sense and look at their main business and how it did. How are they doing in Asia and with their core business? Is it competitive? Have costs gone up? Eventually the equity and interest rate factors will just settle out.”