Previous WeekAugust 5 - August 11, 2010 Week 32Next Week
../Morning Post
Posted August 11 , 2010
____________________
Quarterly Results

Manulife Financial Corporation Reports Second Quarter Results

- Net loss of $2.4 billion driven by mark-to-market impact of lower
equity markets and lower interest rates in the quarter - reserves for
non-cash losses expected to mostly reverse in the future, if interest
rates increase and markets recover faster than the long-term growth
rates used in the valuation of policy liabilities
- Underlying business performed well:
- Continued to re-balance the business mix with strong growth in
high-return businesses
- Asia insurance sales increased 30 per cent, mutual fund sales in
Canada and the U.S. increased 175 per cent and 51 per cent,
respectively
- New business embedded value on insurance products increased ten per
cent; wealth, excluding variable annuity and U.S. book value fixed
deferred annuities, increased six per cent
- Credit experience remained strong
- Strong capital levels - The Manufacturers Life Insurance Company
("MLI") MCCSR ratio was 221 per cent at quarter end
- Will set out in the next few months our plans to further reduce risk
and improve earnings as we re-balance and grow our business for the
long-term benefit of our shareholders


TORONTO - Manulife Financial Corporation ("MFC") reported a net loss attributed to shareholders of $2.4 billion for the second quarter ended June 30, 2010, equating to a fully diluted loss per share of $1.36. For the second quarter of 2009, MFC reported net income of $1.8 billion or $1.09 per share.

During the quarter, net results were impacted as equity markets retreated globally and interest rates declined materially, particularly in the U.S. Non-cash charges related to equity market declines in the quarter amounted to $1.7 billion. Non-cash charges related to lower interest rates amounted to $1.5 billion in the quarter.

Chief Executive Officer Donald A. Guloien stated, "Our results for the second quarter were disappointing. Lower equity markets and historically low interest rates resulted, on a Canadian GAAP basis, in large non-cash charges in the form of mark-to-market increases to our reserves for policyholder liabilities. We would expect to see most of these charges reverse into earnings in the future if interest rates rise and if equity markets grow faster than the long-term growth rates used in the valuation of policy liabilities. In fact, the turnaround in equity markets in July alone, if sustained, should reverse a substantial portion of these losses. As a point of comparison, under U.S. GAAP we expect to report a small profit for the second quarter and our Shareholders' Equity under U.S. GAAP is expected to be $7 billion higher than under the Canadian GAAP equivalent."

"Repositioning of the business is underway. Over several quarters we have been making progress on rebalancing our business mix, re-pricing and re-designing some products to reduce risk, and dramatically accelerating the growth of others. We are building positive sales momentum, particularly in Asia and Canada and in the Retirement Plan Services and Mutual Fund businesses in the United States," he said.

"We are taking difficult decisions over the course of this year to better position the Company for the future. I believe we are taking the right actions to improve earnings to highly satisfactory levels over the coming years, even assuming today's low interest rates and no more than normal equity market returns. We expect to share more details on our progress and our plan with investors in the fall," he added.

Chief Financial Officer Michael Bell said, "With the capital actions taken over the past year, we were well prepared to withstand the mark-to-market impacts of economic conditions in the second quarter. Although persistent low interest rates are a concern across our industry, in accordance with Canadian accounting and actuarial standards, our balance sheet and capital position already reflect most of the potential long-term impact of current interest rates on our in-force business."

He added, "This quarter, our new business and in-force variable annuity hedging program produced a pre tax benefit of $1.2 billion in hedge gains, offsetting approximately 75 per cent of the $1.6 billion movement in the underlying hedged liabilities. The low level of equity markets and interest rates in the quarter did not allow us any further progress in in-force hedging, and our amount of guaranteed value hedged or reinsured remains at 51 per cent. If markets increase to levels that will allow us to hedge more of the in-force at appropriate margins we intend to do so, and our target is to have at least 70 per cent of our variable annuity guaranteed value hedged or reinsured by the end of 2012."

Bell said, "We are also addressing the interest rate risk on our future long-term guaranteed product sales through additional pricing actions and changes to product design and when market conditions are more attractive, we expect to consider hedging appropriate amounts of this risk."

He added, "We had a strong capital position, with an MLI MCCSR of 221 per cent at June 30, and our credit experience in the quarter continued to be excellent relative to market conditions. Our focus has been, and continues to be, to shift sales towards high return businesses and we are seeing positive trends in Asia and other key areas of our business."

FINANCIAL RESULTS

As stated above, 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. Most of these charges should eventually reverse if interest rates rise and returns on equity markets recover faster than the long-term growth rates used in the valuation of our policy liabilities.

In our 2009 Annual Report, as a result of the impact of the highly volatile equity market and interest rate environment on our earnings, we introduced "Adjusted Earnings from Operations"(1) as a non-GAAP measure and estimated that they would be between $700 million and $800 million per quarter. Adjusted Earnings from Operations in the second quarter were $658 million. 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 John Hancock Life); a lack of realized gains on our available-for-sale ("AFS") equity portfolio; and the costs associated with the hedging of additional in-force variable annuity guaranteed value in the last 12 months.

------------------------
(1) Adjusted Earnings from Operations is a non-GAAP measure. See "Second
Quarter Actual Adjusted Earnings from Operations and Reconciliation
with GAAP measure" below.


Impact of equity markets and results of the variable annuity hedging program

The $1.7 billion charge related to equity market declines and the results of the variable annuity hedging program was composed of a $1.3 billion non-cash charge related to the un-hedged block of variable annuity business, a $0.3 billion charge, a portion of which is considered non-cash, related to the hedged block of variable annuity business, and a $0.1 billion non-cash charge for other equity related items.

The $1.3 billion charge on the un-hedged block of variable annuity business was calculated by comparing the impact on our results of the actual equity market returns during the quarter to the results we would have experienced if equity returns had been consistent with the long-term assumed market growth of approximately two per cent per quarter used in the valuation of policy liabilities. 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.

During the second quarter, pre tax charges related to the guarantee liabilities hedged were $1.6 billion and exceeded the pre tax gains of $1.2 billion on the hedge instruments, resulting in a post tax loss of $0.3 billion on the hedged block. Of this amount, $0.1 billion related to the decline in interest rates.

Consistent with our hedging policy, we continued to hedge new business written in the quarter, but with the pullback in equity markets this quarter, we did not hedge any additional in-force business. Over the last 12 months, the Company has reduced the equity market and interest rate risk from new variable annuity sales. We also increased the amount of in-force business hedged or reinsured from 26 per cent as at June 30, 2009 to 51 per cent as at June 30, 2010, with 12 per cent reinsured and 39 per cent hedged using capital market instruments. As business was hedged, our earnings sensitivity to equity market declines did not reduce in proportion to the decline in the amount of unhedged business. This is because the earnings sensitivity contribution of the hedged business is comparatively lower than that of the unhedged variable annuity guarantee business and because our sensitivity analysis assumes that any changes in policy liabilities for the hedged business are not fully offset by changes in the hedge instruments.

Impact of declines in interest rates

As a result of lower prevailing interest rates, the re-investment interest rates assumed in the valuation of policy liabilities declined, resulting in a non-cash, mark-to-market charge of $1.5 billion. Under Canadian GAAP, the measurement of policy liabilities assumes that rates of return on investments expected to be made in the future are based on the actual market rates at quarter-end, adjusted for items outlined below. The investments expected to be made in the future are based on the cash flows from both premiums expected to be received on in-force business and on maturities of current assets. If, in the future, interest rates increase to the levels at or above those at March 31, 2010, most of this quarter's mark-to-market charge related to interest rates should reverse at that time.

The Company previously reported that the sensitivity of net income attributed to shareholders as a result of a one per cent decrease in government, swap and corporate bond rates across all maturities with no change in spreads was a charge of $2.2 billion. Of this amount, $0.1 billion related to the hedged block of variable annuity business.

During the second quarter, both treasury and corporate bond rates declined to levels that are considered historically low. The largest decline was in the U.S., the geography which drives the majority of our sensitivity. U.S. 10 and 30 year government rates declined by approximately 90 and 82 basis points, respectively, and published benchmark A-rated U.S. corporate bond rates declined by 63 and 54 basis points, respectively, for the same period. The approximately 28 basis point wider spreads between treasuries and A-rated U.S. corporate bonds had a limited impact for the reasons outlined below.

We determine interest rates used in the valuation of policy liabilities based on a number of factors, as follows:

(a) we make assumptions as to the type, term and credit quality of the
future fixed income investments;
(b) to reflect our expected investable universe, we adjust the publicly
available benchmarks to remove the issues trading extremely tight or
wide (i.e., the outliers);
(c) we assume reinvestment rates are graded down to average long-term
fixed risk free rates at 20 years; and
(d) consistent with emerging best practices we limit the impact of
spreads that are in excess of the long-term historical averages.


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. Conversely, a one per cent increase in rates would increase earnings by $2.3 billion. These amounts include the estimated impact on the hedged variable annuity business ($0.3 billion for a one per cent decrease and $0.1 billion for a one per cent increase). Note, we group all of the components of the variable annuity hedging program together when reporting our actual results.

Impact of credit and change in fixed income ratings

The Company's fixed income portfolio continued to perform very well relative to overall market conditions. Net credit impairments were limited to $35 million, while actuarial charges related to credit downgrades were $2 million. These amounts were only slightly higher than the expected credit losses assumed in the valuation of policy liabilities.

Adjusted Earnings from Operations

This quarter's total Adjusted Earnings from Operations were lower than in prior quarters, but compared to the first quarter of 2010 and the second quarter of 2009, Adjusted Earnings from Operations increased in Asia, Canadian and Reinsurance Divisions. The decrease in the U.S. Division over both comparative periods was driven by lower interest rates and higher hedging costs. Unlike the first quarter, we did not report any gains on our AFS equity portfolio in the Corporate and Other Division in the second quarter of 2010.

Capital update

Manulife's balance sheet and capital position remain strong. The actions taken over the last 12 months to both fortify capital and to reduce equity exposure have provided the financial strength and flexibility to manage the Company's affairs during these economic times.

The Manufacturers Life Insurance Company reported a Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio of 221 per cent as at June 30, 2010, down from 250 per cent as at March 31, 2010. The decline is primarily related to the loss in the quarter as well as growth in required capital.

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.

Third quarter 2010 - annual review of all actuarial methods and assumptions

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.

Updates are also expected with respect to increased variable annuity guarantee volatility assumptions and potentially lower ultimate reinvestment rates resulting from the current low interest rate environment. These updates also have not been finalized, but could result in a material charge to third quarter results.

SALES AND BUSINESS GROWTH

Donald Guloien stated, "Despite the impacts of equity markets and interest rates on this quarter's earnings, our underlying sales and business performance remains strong. We are raising prices, reducing risk, selling less of the higher-risk high-capital consuming products and more of the products with better margins and returns."

He added, "In Asia we have achieved 30 per cent sales growth in our insurance products. Mutual fund sales grew 51 per cent in the U.S. and over 170 per cent in Canada over the prior year(2) while our JH Retirement Plan Services group achieved record sales, up 24 per cent. New business embedded value increased ten per cent on insurance products and six per cent on wealth products excluding variable annuity and U.S. book value fixed deferred annuities."

Asia Division

Robert Cook, Senior Executive Vice President and General Manager, Asia said, "We have strong momentum across Asia, and I see excellent opportunity to benefit from the continuing wave of economic growth across the region. Manulife has well established and highly diversified distribution networks across 10 Asian countries and territories. We continue to develop significant new product niches, as evidenced by the growth in our insurance sales this quarter and significant momentum in our sales of mutual funds and other wealth products."

Asia Division total insurance sales(3) in the second quarter were US$228 million, an increase of 30 per cent over the prior year, on a constant currency basis(4).

- Japan achieved record insurance sales, as multi-channel acceptance of
a new product launch and continued growth in the managing general
agent (MGA) channel resulted in a 41 per cent increase versus the
prior year.

- In Hong Kong, the continued agency channel expansion helped to fuel a
36 per cent increase in insurance sales over the prior year.

- Combined insurance sales in China and Taiwan were up by 41 per cent
over the prior year attributable to strong growth in whole life
product sales which drove a 39 per cent increase in Taiwan and on-
going marketing and expansion efforts in China which generated a 42
per cent increase.

- Record insurance sales were achieved in Indonesia, Vietnam and the
Philippines with double digit growth in agent count in all businesses
over the prior year. Due to the loss of a distribution relationship
in Singapore, sales declined significantly from the prior year, and
offset the increases in the other ASEAN countries.

- In May, Manulife-Sinochem received a license to operate in the city
of Xiamen and, in July, received a license to operate in Quanzhou.
These licenses expand Manulife-Sinochem's presence in China to 43
cities across 11 provinces and consolidate its leadership position
among all foreign-invested life insurers in China.

------------------------
(2) References to the "prior year" are to the second quarter of 2009
unless the context otherwise requires.

(3) Sales is a non-GAAP measure. See "Performance and Non-GAAP measures"
below.

(4) Constant currency basis is a non-GAAP measure. See "Performance and
Non-GAAP measures" below.


Asia Division total wealth sales excluding variable annuities in the second quarter increased 38 per cent over the prior year, on a constant currency basis, to US$734 million and also increased new business embedded value.

- In China, Manulife TEDA (our new 49% joint venture) contributed US
$225 million in wealth management sales.

- During the quarter, Manulife TEDA announced that it received a US$500
million Qualified Domestic Institutional Investor ("QDII") quota from
China's State Administration of Foreign Exchange ("SAFE"). A QDII
quota allows China-based companies to invest domestic funds in
specific overseas markets including Canada.

- MFC Global Investment Management announced that it was awarded a US
$200 million Qualified Foreign Institutional Investor ("QFII") quota
from SAFE which it intends to fulfill by launching two QFII funds
targeting the China equity and bond markets, to be made available to
institutional investors globally.

- Advances were achieved in Japan due to new products launched earlier
in the year, in Indonesia where growth was fueled by the launch of a
new equity focused unit linked fund and the establishment of a new
bancassurance partner and in Taiwan, where new funds were launched.

- Sales in Hong Kong Pensions increased 31 per cent over the prior year
to US$114 million.


The number of agents across Asia grew 15 per cent over June 30, 2009 levels. Vietnam, China, the Philippines, Indonesia and Malaysia all experienced double-digit growth in the number of agents.

Canadian Division

Paul Rooney, President & CEO, Manulife Canada said, "We maintained strong sales momentum across our balanced and growing business in Canada. Today, one out of every five Canadians is a Manulife customer and we believe that demographic trends and our strength and ability to offer a valuable range of financial solutions bodes very well for our future growth. Standouts this quarter included Manulife Mutual Funds which almost tripled sales over last year and Manulife Bank which improved loan volumes to over $1 billion as we continued to attract strong volumes of new customers with our unique Manulife One account and other offerings."

In Canada, individual insurance sales in the second quarter were $73 million, an increase of 12 per cent over the prior year.

- Sales of recurring premium products increased 11 per cent from the
first quarter and the prior year. This included a 17 per cent rise in
sales of life insurance products where strong sales in permanent
insurance products and a return of the larger estate planning cases
signaled increasing consumer confidence in an improving economy.

- Single premium sales increased 16 per cent over the prior year driven
by growth in our travel business which reported a 32 per cent
increase in volumes.


Canadian Division Individual Wealth Management sales excluding variable annuities increased by seven per cent over the prior year to $1.6 billion.

- Mutual fund deposits of $297 million were almost triple the levels of
the prior year with strong volumes in funds focused on yield and
safety. As expected, sales of fixed products were down, decreasing 37
per cent from the prior year. This 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.

- Manulife Bank loan volumes exceeded $1.1 billion, rebounding 25 per
cent from the first quarter and were six per cent above the prior
year. The increase reflects the impacts of a renewed consumer
advertising campaign, traction developing from our new distribution
partnership with Edward Jones, as well as normal seasonality in the
Canadian housing market.


Sales in the Canadian group businesses were down from the same period last year when sales results were bolstered by large corporate account sales.

- Group Benefits sales were boosted in the prior year by the transfer
of a block of business from a new distribution partner. Sales in the
second quarter of 2010 were $70 million, a decrease of 27 per cent
from the prior year. Sales in the higher margin, small case segment
improved over the first quarter as we continued to focus on growth in
this end of the market.

- Group Retirement Solutions sales were solid in the second quarter at
$175 million. Sales in the prior year were higher due to the exit of
a competitor from the industry, resulting in a reported decline of 51
per cent in the second quarter of 2010 relative to the prior year.


U.S. Division

Jim Boyle, President, John Hancock Financial Services said, "Our U.S. Division performed well and in line with our plans and strategies in the face of significant continuing economic headwinds. We reported a very positive 51 per cent increase in John Hancock Mutual Funds and record sales in Retirement Plan Services which recorded a 24 per cent sales increase over the prior year. The John Hancock brand along with our outstanding people and investment experience are tremendous advantages as we adjust our business balance toward strong return, fee based products and services."

U.S. insurance sales in the second quarter of 2010 were US$216 million, an increase of four per cent over the prior year.

- JH Life increased prices over the prior year, which improved margins
but also reduced market share. While second quarter sales declined
nine per cent compared to the prior year, JH Life premiums and
deposits(5) for the first six months of 2010 remained strong and were
in line with the same period last year.

- JH LTC sales in the second quarter increased by 72 per cent compared
to the prior year. This reflected the increased group sales from new
member enrollments and new group clients as well as increased retail
sales in advance of price increases and product re-positioning to
improve margins. The Federal Long Term Care Insurance Program, where
John Hancock is now the sole carrier, also contributed to the
increase in sales from the prior year. As a result of the price
increases, JH LTC retail sales are expected to slow during the second
half of the year.


U.S. wealth sales, excluding variable annuities and book value fixed deferred annuities, in the second quarter of 2010 increased 34 per cent over the prior year to US$3.8 billion.

- John Hancock Mutual Funds ("JH Funds") sales were US$2.4 billion in
the second quarter. The 51 per cent increase in sales over the second
quarter of 2009 was attributable to improved market conditions and a
broad diversified offering of competitive funds. As of June 30, 2010,
JH Funds offered 18 Four or Five Star Morningstar(6) rated mutual
funds, leading to strong diversification of sales with the top three
selling mutual funds in the second quarter accounting for 30 per cent
of sales compared to 38 per cent in the prior year. The second
quarter of 2010 represents the fifth consecutive quarter of positive
net sales, with John Hancock increasing its market ranking to 6th
place(7) in net new flows in the non proprietary market segment year-
to-date through June 30, 2010. This compared to 46th place for the
same period in 2009. Funds under management(8) for JH Funds have
increased to US$28.4 billion as of June 30, 2010, a 30 per cent
increase over the last 12 months.

- John Hancock Retirement Plan Services ("JH RPS") experienced record
sales for the second quarter, increasing by 24 per cent over the
prior year on the strength of distribution relationships, the
acquisition of larger cases as well as improvement in market
performance over the last 12 months. Funds under management increased
to US$53.6 billion as of June 30, 2010, up 19 per cent from the prior
year. Sales through recently established distribution relationships
with Edward Jones, Ameriprise and Morgan Stanley Smith Barney totaled
US$205 million year-to-date 2010, representing a 255 per cent
increase over the same period in 2009, with new plans increasing by
127 per cent over this period.

- The John Hancock Lifestyle Portfolios offered through our mutual fund
and 401(k) products rank in the 11th, 21st, 25th, 29th and 37th
percentiles of their Morningstar peer groups for the one-year period
ending June 30, 2010 for Balanced, Moderate, Growth, Conservative and
Aggressive, respectively(9). Lifestyle funds led JH Funds sales with
over US$669 million in the first six months of 2010, a 92 per cent
increase over the prior year. Lifestyle and Lifecycle Portfolios
offered through the 401(k) products continue to have a strong
presence, comprising 58 per cent of deposits in the first six months
of 2010.

- Sales of John Hancock Fixed Products, excluding book value fixed
deferred annuities, declined by 13 per cent from the prior year which
was partly due to the prevailing low interest rate environment.

Submit press release to pressrelease@exchangemagazine.com - Editor Jon Rohr - Content published on this site represents the opinion of the individual/organization and/or source provider of the Content. ExchangeMagazine.com is non-partisan, online journal. Privacy Policy. Copyright of Exchange produced editorial is the copyright of Exchange Business Communications Inc. 2010/*.*. Additional editorials, comments and releases are copyright of respective source(s) and/or institutions or organizations.

 


Contact an Exchange Representative

Current Issue July/August 2010
Subscribe FREE to Exchange Online today



Subscribe to Exchange News Daily







Submit Press Release
Visitor Centre
Weather
Advertising Inquires
Email
Tel: 519.886.0298

Subscribe to Exchange Magazine Print Edition

Contact Information:

Publisher:
Exchange Business Communication Inc.
Waterloo, Ontario, Canada
Tel: 519.886.0298

Editor-in-Chief
Jon Rohr
editor@exchangemagazine.com

Account Manager
John Hobin
advertise@exchangemagazine.com

<