Manulife Financial Posts Third-Quarter Net Loss on Lower Bond Rates, Higher Reserves

Manulife Financial Corp. posted a third-quarter net loss, driven by lower corporate bond rates and after increasing reserves on segregated fund guarantee products, including variable annuities.

The net loss amounted to C$172 million (US$161.6 million), compared with net income of C$510 million in last-year's third quarter.

Manulife recorded a noncash charge of C$1.2 billion on lower interest rates and corporate spreads, as changes in interest rates hurt the actuarial valuation of policies that are in-force, it said.

In the second quarter, Manulife (TSX/NYSE/PSE: MFC), which also operates in the United States through its Boston-based John Hancock subsidiary, as well as in Asia, posted a profit, after two straight quarters of net losses (BestWire, Aug. 7, 2009).

Donald A. Guloien, chief executive officer, however, said underlying performance in the third quarter was solid. "We took actions to improve margins, increased our sales of products other than variable annuities, further improved our equity risk profile and continued to build toward fortress capital levels," Guloien said in a statement.

Manulife took a C$783 million charge, which included C$469 million for changes in assumptions concerning policyholders of its segregated fund guarantee products, including stock-market linked variable annuities.

"We also increased reserves for changes in actuarial assumptions including those related to policyholder behavior for variable annuity products," said Michael W. Bell, chief financial officer, in a statement. As a result of changes in lapse assumptions, "our interest rate sensitivity has increased."

In the United States, wealth sales, excluding variable annuities, improved by 21% over the prior quarter, and were in line with prior-year levels, Manulife said.

The company also said progress has been made in the reorganization of the company's U.S. subsidiaries, with a planned merger of the main U.S. operating companies, under Manufacturers Life Insurance Co., on track to be completed by the end of the year. After the reorganization, Manufacturer's Life will benefit from more stable capital ratios and a more diversified risk profile, Manulife said.

In September, the Massachusetts Division of Insurance approved the proposed merger of three John Hancock insurance companies (BestWire, Sept. 4, 2009).

In June, the Ontario Securities Commission said it reached the "preliminary conclusion" that Manulife Financial failed to meet its continuous disclosure obligations related to its exposure to market price risk in its segregated funds and variable annuity guaranteed products.

Manufacturer's Life Insurance Co. currently has a Best's Financial Strength Rating of A+ (Superior).