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Volatility shakes life insurers’ second quarter results

By Hubert Roy | September 25 2010 08:37PM

Volatility in the stock and currency markets, as well as historically low interest rates, had varying effects on Canadian life insurers in the second quarter of 2010.

Manulife posted a net loss of $2.4 billion in the second quarter of 2010. At the same time last year, it had posted a net profit of $1.8 billion. Return on shareholder’s equity was down to -36.4%, compared to the 26.9% reported in the second quarter of 2009.

Manulife attributes its poor performance to volatility on worldwide stock markets and interest rates. The market decline cost Manulife $1.7 billion, and recent drops in interest rates set it back another $1.5 billion. Losses in Manulife’s Canadian operation amounted to $344 million in the second quarter of 2010, compared to the $336 million dollar profit it had reported for the same period in 2009.

Donald Guloien, Manulife’s CEO, had one word to describe these results: “disappointing.” Nevertheless, the insurer has been working for several months at repositioning its affairs. Mr. Guloien stated that a plan would be presented to investors this autumn.

Sales increasing

Despite these poor financial results, sales at Manulife are up. The insurer says that it experienced a 170% increase in segregated fund sales in the second quarter of 2010 compared to the second quarter of 2009. The insurer reports sales totalling $297 million, which is three times the amount reported in the second quarter of 2009. However, sales of fixed income products have decreased by 37%.

Manulife’s second quarter financial statement says that the shift in product mix “reflects improved consumer confidence in investment markets, as well as early successes from our focused strategy to grow our mutual fund franchise.”

In an investor conference call on August 5, Mr. Guloien said that the insurer has been working on rebalancing its business mix, repricing and redesigning some products to reduce risk. “As I’ve said many times before, we are emphasizing margins over market share. We are cutting back significantly on products that give rise to the interest and equity exposure,” he commented, and concluded by saying that repricing could give the insurer substantially more downside protection.

For its part, Sun Life posted a net profit of $213 million in the second quarter of 2010. However, this is still a decrease of 64% compared to the second quarter of 2009, when the insurer reported a $591 million profit.

The drop in the stock markets cost the insurer $187 million, while declining interest rates cost it $99 million. The insurer says that the strength of the Canadian dollar against other currencies resulted in an additional $14 million dollar loss.

Like Manulife, Sun Life is also modifying its products. “Sun Life continues to take action to mitigate the impact of volatile economic and market factors, including changing product design and mix to reduce risk,” said CEO Donald Stewart.

Sun Life’s Canadian operation contributed $146 million to the company’s profits in the second quarter of 2010, compared to $210 million in the second quarter of 2009. Sales of individual fixed interest products, including accumulation annuities, GICs and payout annuities, increased by 19% to $296 million during the quarter, while sales individual life and health insurance increased by 24%.

In its quarterly shareholders report, Sun Life noted that 90% of its segregated fund and variable annuity contracts were covered by an equity hedging program.

Great-West Lifeco is the only one of the “Big Three” insurers to have improved its net profits in the second quarter of 2010 compared to the same period last year. The group of companies posted a net profit of $433 million in the second quarter of 2010, with a return on shareholder’s equity of 15.2%. In the second quarter of 2009, it had reported a net profit of $413 million, with a return on shareholder’s equity of 2.3%.

Great-West Lifeco reported that one area of its operation was affected by volatility, namely the strength of the Canadian dollar against other currencies, which cost the group of companies $33 million in losses.

At Industrial Alliance, net profits in the second quarter of 2010 were $57.7 million, up from $32.1 million for the same period last year. The return on shareholder’s equity also increased to 11.5% in the second quarter of 2010, up from 7.6% in the second quarter of 2009.

The insurer attributes this increase to an improvement in domestic economic conditions, and to the turnaround experienced in the stock markets over the last year. However, Industrial Alliance points out that its profits would have been $4.1 million higher if it the markets had not been so volatile during the second quarter.

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