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Manulife Financial Corp. (MFC-T) fell to a second-quarter loss as weak financial markets forced the company to take a $677 million charge to revalue long-term investment assumptions, but the result beat analysts' expectations.
Manulife, Canada's No. 2 insurer by market capitalization and owner of U.S. insurer John Hancock, also warned it could take a charge of as much as $1 billion in the third quarter as part of its annual review of actuarial assumptions.
It said macroeconomic headwinds made achieving its 2015 profit goal "a stretch," the first time the company has acknowledged that it may fall short of the target.
In late 2010 Manulife said it was aiming for a nearly threefold increase in net profit to $4 billion by 2015. That goal was dependent on financial markets rebounding from their post-crisis turmoil.
Instead, factors such as the European debt crisis have hurt equities and have sent bond yields lower, putting more pressure on Manulife's bottom line.
"It's not a fault of management, I view it more that they were more optimistic on the outlook for markets than what has actually occurred," said John Aiken, an analyst at Barclays Capital.
The Toronto-based company said it lost $300 million, or 18 cents a share, compared with a year-before profit of $490 million, or 26 Canadian cents.
The $677 million charge was slightly smaller than expected, as Manulife had warned it would take a hit in the $700-C$800 million range to alter investment assumptions to account for falling bond yields.
The net loss was better than the shortfall of 48 cents a share expected by analysts, according to Thomson Reuters I/B/E/S.
But the admission that the company could take a $1 billion hit in the third quarter as part of its review of actuarial assumptions, or assumptions related to future events that could affect insurance policies and investment products, was worse than anticipated, said Aiken.
"A billion at the high end is above our expectations," he said.
Looking past the markets impact and other charges, quarterly profit was $551 million, driven by gains in Manulife's Canadian and Asian divisions, while its U.S. division was down slightly.
Overall insurance sales jumped 61 percent to $1 billion, while insurance premiums and deposits climbed 16 percent to $6.3 billion.
Wealth management results were weaker, as sales fell 5 percent to $8.5 billion, while premiums and deposits slid 3 percent to $11.2 billion.
WEAK MARKETS, SUN LIFE PROFIT
Volatile markets in the wake of the 2008 financial crisis have wrought havoc with Canadian life insurers' results. Under Canadian accounting rules, they must regularly adjust expectations in view of the ability of their investment portfolios to pay off future policy obligations and make up the difference by taking reserves.
Sun Life Financial Inc. (SLF-T), Canada's No. 3 life insurer, said late on Wednesday its second-quarter profit fell by 87.5 percent due to weak markets.
It also predicted it would take future losses amounting to $600 million between now and 2015 if bond yields do not rebound from current levels.
Canada's benchmark S&P/TSX composite index fell 6.2 percent in the April-June quarter, while the yield on the benchmark U.S. 10-year Treasury fell 57 basis points to 1.64 percent from 2.21 percent.
Manulife's Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio, a key measure of capital strength, was 213 percent, down from 225 percent at the end of the first quarter, and getting close to the 200-210 percent range that analysts view as the limits of the comfort zone for insurers.
If levels fall below that point, Manulife may decide to issue equity to bulk up capital levels, an unpleasant prospect given the company's shares are down 75 percent from their all-time high of $44.23, set in 2007.