Manulife Financial Corporation stated in their 2Q10 Earnings Release:
The Office of the Superintendent of Financial Institutions (“OSFI”) has been conducting a fundamental review of segregated fund/variable annuity capital requirements. As announced by OSFI on July 28, 2010, it is expected that existing capital requirements in respect of new (but not in-force) segregated fund/variable annuity business written starting in 2011 will change (e.g. post 2010 contracts). Our new products will be developed taking into account these new rules.
OSFI is also expected to continue its consultative review of its capital rules for more general application, likely in 2013. OSFI notes that it is premature to draw conclusions about the cumulative impact this process will have. OSFI has stated that increases in capital may be offset by other changes, such as hedge recognition. The Company will continue to monitor developments.
They lost a big whack of money on the quarter:
The Company reported a net loss attributed to shareholders of $2,378 million for the second quarter of 2010, compared to net income of $1,774 million for the second quarter of 2009.
The net loss for the second quarter was driven by non-cash mark-to-market charges of $1.7 billion related to equity market declines and by non-cash mark-to-market charges of $1.5 billion related to the decline in interest rates.
…but nobody should be surprised by this:
During the quarter, the S&P 500 declined 12 per cent, the TSX six per cent, and the Japan TOPIX 14 per cent. We previously reported that, at the end of the first quarter of 2010, our net income sensitivity to a ten per cent market decline was $1.1 billion. Because of the decline in markets in the second quarter, this has increased to $1.3 billion. By market index, our greatest sensitivity is to the S&P 500, followed by the TOPIX, and thirdly the TSX.
Numbers for interest rate sensitivities are similarly high:
We previously reported our interest rate sensitivities as at December 31, 2009 and they did not change materially in the first quarter of 2010. Since March 31, 2010 however, as a direct result of the decrease in interest rates, our sensitivity to a one per cent decrease in government, swap and corporate bond rates across all maturities with no change in spreads has increased to $2.7 billion as at June 30, 2010.
Estimated continuing profitability is also under pressure:
Adjusted earnings from operations for the second quarter of 2010 were $658 million, which is below the estimate in our 2009 Annual Report of between $700 million and $800 million for each of the quarters of 2010. The shortfall was due to the historically low interest rate environment which increased the strain (loss) we report on new business of long duration guaranteed products (primarily in JH Life); a lack of realized gains on our AFS equity portfolio; and the costs associated with the hedging of additional in-force variable annuity guaranteed value in the last 12 months.
Adjusted earnings from operations is a non-GAAP financial measure. Because adjusted earnings from operations excludes the impact of market conditions, it is not an indicator of our actual results which continue to be affected materially by the volatile equity markets, interest rates and current economic conditions.
As might be expected, they are not very supportive of the IFRS Exposure Draft on Insurance Contracts:
As indicated above, the IFRS standard for insurance contracts is currently being developed and is not expected to be effective until at least 2013. The insurance contracts accounting policy proposals being considered by the IASB do not connect the measurement of insurance liabilities with the assets that support the payment of those liabilities and, therefore, the proposals may lead to a large initial increase in insurance liabilities and required regulatory capital upon adoption, as well as significant ongoing volatility in our reported results and regulatory capital particularly for long duration guaranteed products. This in turn could have significant negative consequences to our customers, shareholders and the capital markets. We believe the accounting and related regulatory rules under discussion could put the Canadian insurance industry at a significant disadvantage relative to our U.S. and global peers and also to the banking sector in Canada. The IASB recently released an exposure draft of its proposals on insurance contracts with a four month comment period. We are currently reviewing the proposals and along with the Canadian insurance industry expect to provide comments and input to the IASB.
The insurance industry in Canada is currently working with OSFI and the federal government on these matters and the industry is urging policymakers to ensure that any future accounting and capital proposals appropriately consider the business model of a life insurance company and in particular, the implications for long duration guaranteed products.
It is unfortunate that they did not see fit to make any remarks of substance on this issue!
The next issue coming up (as alluded to by S&P) is the annual actuarial review:
The Company expects to complete its annual review of all actuarial methods and assumptions in the third quarter. In that regard, we expect that the methods and assumptions relating to our Long Term Care (“LTC”) business may be updated for the results of a comprehensive long-term care morbidity experience study, including the timing and amount of potential in-force rate increases. The study has not been finalized but is scheduled to be completed in the third quarter. We cannot reasonably estimate the results, and although the potential charges would not be included in the calculation of Adjusted Earnings from Operations, they could exceed Adjusted Earnings from Operations for the third quarter. There is a risk that potential charges arising as a result of the study may not be fully tax effected for accounting and reporting purposes. In addition, the non-cash interest related charges in the second quarter have created a future tax asset position in one of our U.S. subsidiary companies, and any increase in this position in the third quarter would be subject to further evaluation to determine recoverability of the related future tax asset for accounting and reporting purposes.
Update, 2010-8-9: According to DBRS:
The Company has indicated that during the third quarter of 2010, it is expecting to complete its annual actuarial review of the morbidity assumptions embedded in the reserves held against its Long-Term Care policy liabilities. The Company expects to incur a charge of between $700 million and $800 million related to this change in assumptions, although this could be offset somewhat by in-force price adjustments.