Stronger equity markets allow segregated fund reserve releases in second quarter

By Donna Glasgow | September 26 2003 07:28PM

On Aug. 6, both Manulife Financial and Sun Life Financial announced that improved equity markets enabled them to release significant amounts of segregated fund reserves and boost earnings results.Manulife reported shareholders' net income of $1,774 million for the second quarter ended June 30, 2009, compared to $1,008 million in the second quarter of 2008.

The company stated that these earnings were mainly driven by increases in equity markets that resulted in non-cash gains of $2,622 million. Of this, $2,379 million was linked to segregated fund guarantees.

Other developments were less positive however. "While the increase in equity markets in the quarter resulted in a release of a large amount of segregated fund guarantee reserves, lower corporate bond rates had a significant adverse impact on the quarter's results," noted Michael Bell, Manulife's Senior Executive Vice President and Chief Financial Officer.

In the same announcement, Donald A. Guloien, President and Chief Executive Officer of Manulife, said that while the insurer's capital position was satisfactory, the company remains focused on "achieving fortress levels of capital..."

The company's board of directors announced its decision to reduce Manulife's quarterly common dividend by 50% effective Sept. 21, 2009. This move is aimed at retaining more earnings to build capital.

In other second quarter news from Manulife, wealth sales declined 11% during the second quarter compared to the same period the year before "as continued strong growth in fixed products in the U.S. and Canada was more than offset by declines in variable products across all geographies. Variable annuity sales declined by 30% compared to the second quarter of 2008 as a result of the Company's risk management initiatives and weaker economic conditions."

Meanwhile, Sun Life reported net income of $591 million for the quarter ended June 30, 2009, compared with net income of $519 million in the second quarter of 2008.

"Net income in the second quarter of 2009 was impacted by reserve releases of $432 million as a result of favourable equity markets, $104 million from increased interest rates and $117 million from the favourable impact of narrowing credit spreads," stated the company in its announcement.

These positive developments were partially offset "by $217 million in reserve increases for downgrades on the Company's investment portfolio, $97 million in reserve increases related to changes in asset default assumptions in anticipation of future credit-related losses and $121 million in net credit impairments incurred during the quarter," added the company.

For its part, Great-West Lifeco reported net income of $413 for the quarter ended June 30, 2009 compared to $564 in 2008. In its second quarter announcement, Lifeco stated that "A decline in the value of publicly traded and other investment securities through June 30, 2009, compared to 2008 has lowered the market value of assets invested in the Company's segregated and mutual funds." This has resulted in lower investment management fee income, negatively impacting net income by $64 million and by another $12 million due to actuarial liabilities.

Lifeco underlined, however, that Great-West Life "did not need to establish actuarial reserves with respect to segregated fund guarantees at June 30, 2009." This was also the case at the end of the first quarter.

At June 30, 2009 the company did increase provisions "for future credit losses in actuarial liabilities" by $506 million. This is related to credit rating downgrade activity during the quarter, as well as changes linked to the methodology used for calculating provisions.

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