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Manulife Financial Corporation has released its 3Q10 Financials. The Press Release states:

The net loss attributed to shareholders of $947 million included the following notable items:

• Net gains of $1,041 million related to higher equity markets and lower interest rates.
• Charges of $2,031 million related to basis changes resulting from the annual review of all
  actuarial methods and assumptions.

• A $1,039 million (US$1,000 million) goodwill impairment charge on our U.S. Insurance business related to the economic outlook and the repositioning of that business.
• Other notable items netted to a $303 million gain and are described in more detail below.

After adjusting for these notable items, adjusted earnings from operations was $779 million.

They made a lot of Long-Term Care sales in the States … but was it profitable and can it be sustained?

John Hancock Long-Term Care (“JH LTC”) sales increased 20 per cent in the third quarter compared to the prior year, driven by sales of retail products which increased in advance of June new business price increases taking effect. As a result of the recently completed claims experience study and the continuing low interest rate environment, JH LTC has temporarily suspended new group sales and is planning other retail product changes. JH LTC sales are expected to decline in the fourth quarter of 2010. In addition, JH LTC will be raising premiums on in-force business and is actively working with regulators to implement increases that are on average 40 per cent and affect the majority of the in-force business.

There are not enough details given to form a firm opinion … but a 40% increase in rates? on average? That has all the hallmarks of a major fuck-up. Do these guys know what they’re doing?

They do provide a clearer warning of the effect of OSFI’s new risk requirements:

The Office of the Superintendent of Financial Institutions (“OSFI”) has been conducting a review of segregated fund/variable annuity capital requirements. On October 29, 2010, OSFI issued a draft advisory containing new minimum calibration criteria for determining capital requirements for segregated fund business written after January 1, 2011. It is expected that the new calibration criteria will increase capital requirements on these products and our 2011 product offerings will be developed and priced taking into account these new rules. As drafted the new capital requirements will also apply to subsequent deposits to existing contracts and to contracts that reset their guarantee levels after January 1, 2011.

… and the capital requirements for seg funds will be getting even stricter:

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, but the general direction has been one of increased capital requirements. OSFI has stated that increases in capital may be offset by other changes, such as hedge recognition. The Company will continue to monitor developments. However, at this time, it appears that it is more likely than not that the capital requirements for in-force business will increase and this increase could be material.

They are worried by the IFRS Exposure Draft on Insurance Contracts (see also commentary on SLF 3Q10) and are busily sleazing around the regulators and politicians to get an exemption:

This mismatch between the underlying economics of our business and reported results and potentially our capital requirements could have significant unintended negative consequences on our business model which would potentially affect our customers, shareholders and the capital markets. We believe the accounting rules under discussion could put Canadian insurers at a significant disadvantage relative to their U.S. and global peers, and also to the banking sector in Canada. We are currently reviewing the proposals contained in the Exposure Draft, and, along with other companies in the Canadian insurance industry, expect to provide comments and input to the IASB. The insurance industry in Canada is also currently working with OSFI and the federal government with respect to the potential impact of these proposals on Canadian insurance companies, and the industry is urging policymakers to ensure that any future accounting and capital proposals appropriately consider the underlying business model of a life insurance company and in particular, the implications for long duration guaranteed products which are much more prevalent in North America than elsewhere.

Sadly, Prentice has already been bought hired by CIBC, but there are probably many other politicians for sale eager to devote their expertise to the private sector.

DBRS comments:

DBRS has reviewed the Q3 2010 results of Manulife Financial Corporation (Manulife or the Company) released today and believes that, notwithstanding the negative net earnings figure, the Company is on the right track to restoring sustainable profitability. The ratings of Manulife and its affiliates remain unchanged, including the Issuer Rating of its major operating subsidiary, The Manufacturers Life Insurance Company (MLI), at AA (low). The ratings were recently downgraded on August 9, 2010.
…
The Company has been actively repositioning its product offering by selectively increasing prices and emphasizing products that are less capital intensive. Integrated risk management and control is leading to a systematic reduction in equity and interest rate risk through portfolio shifts. As part of its risk management framework, the Company has now hedged 54% of its variable annuity exposures to equity markets and has plans to use actions based on time schedules and market triggers to reach its risk reduction goals. The Company expects to reduce its equity sensitivity by approximately 60% by 2012 and approximately 75% by 2014. It also expects to take actions to further reduce its interest rate exposures, as measured by the impact on shareholders’ net income, by approximately 25% by the end of 2012 and approximately 50% by the end of 2014. While this could ultimately be expensive for the Company, DBRS believes that ridding itself of this equity market and interest rate risk hangover is fundamental to restoring market confidence in the Company’s longer-term outlook.

DBRS did not comment on the size of the write-down due to changes in actuarial assumptions: they had previously estimated a charge of $700- to $800-million.

Moody’s downgraded the operating subsidiaries:

Moody’s Investors Service downgraded the insurance financial strength (IFS) ratings of Manulife Financial Corporation’s (Manulife; TSX: MFC, unrated) subsidiaries to A1 from Aa3. These subsidiaries include Manufacturers Life Insurance Company (MLI) and John Hancock Life Insurance Company (USA) (JHUSA). Short-term ratings were affirmed. The rating outlook for Manulife’s subsidiaries is stable. These rating actions conclude the reviews for downgrade initiated on August 5, 2010.
…
The rating agency said the downgrades follow MFC’s announcement of a nearly $1 billion net loss in 3q10 and incorporated the following business developments. First, Manulife’s acknowledgement of higher morbidity experience within its US long-term-care block and the resulting need for an average rate increase exceeding 40% in coming months. Also, the company faces the challenge of redesigning products to restore earnings power, combined with the possibility of continued earnings volatility until the firm’s enhanced market-risk hedging program is substantially complete.

Moody’s said the downgrades also reflect Manulife’s diminished financial flexibility because of reduced earnings coverage and increased financial leverage. At the end of the third quarter, Moody’s estimates that Manulife’s adjusted financial leverage is now over 30%, which exceeds Moody’s limit on this rating sub-factor. Furthermore, the company faces further goodwill charges as it adopts IFRS accounting in 2011. Although these goodwill write-downs are non-cash, they will lead to further deterioration on Moody’s leverage metrics. MLI reported a 234% minimum continuing capital and surplus requirements (MCCSR, the Canadian regulatory capital ratio for life insurers) ratio at the end of the third quarter, which Moody’s views as strong; however, this was due in part to the downstreaming of proceeds from debt raised at the parent as capital to MLI. As the firm’s total leverage increases, management’s ability to deploy double leverage to capitalize the operating company decreases.
…
According to Moody’s, upward pressure on the ratings would result from a substantial completion of the company’s equity and interest rate hedging programs, the maintenance of a MCCSR ratio above 220% and an NAIC RBC ratio at JHUSA of at least 325% on a sustained basis, with improved financial flexibility including adjusted leverage below 30% and earnings coverage above 8x on a sustained basis. Downward pressure would result from a failure to complete the hedging programs, a MCCSR ratio that dropped below 200%, and/or an NAIC RBC ratio at JHUSA of less than 275%.

S&P had the grace to admit the actuarial change was larger than expected:

2010–Standard & Poor’s Ratings Services today said it placed its ‘A’ counterparty credit rating on Manulife Financial Corp. (TSX/NYSE:MFC) on CreditWatch with negative implications. At the same time, Standard & Poor’s placed its ‘AA’ counterparty credit and financial
strength ratings on MFC’s core and guaranteed insurance operating subsidiaries on CreditWatch with negative implications.
…
“We placed the ratings on all of the companies in the Manulife group on CreditWatch negative because of Manulife’s continuing earnings volatility and material noncash goodwill impairments that could reach C$3.2 billion,” said Standard & Poor’s credit analyst Robert Hafner. “These goodwill impairments include $2.2 billion under IFRS accounting rules that could follow in the
first quarter of 2011.”

“The earnings volatility is evident in the group’s consolidated third-quarter loss of C$947 million that includes a basis change charge of about C$2 billion arising from its annual review of all actuarial assumptions and methods,” said Mr. Hafner. “These charges somewhat exceed the amount we assumed when we lowered the ratings on the group on Aug. 5 and assigned a negative outlook.”

This entry was posted on Friday, November 5th, 2010 at 1:12 pm and is filed under Issue Comments, Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.