Third quarter loss of $1,277 million reported
TORONTO - Manulife Financial Corporation reported a net loss attributed to shareholders of $1,277 million for the third quarter ended September 30, 2011, with strong operational results and continued progress on hedging being more than offset by reserve strengthening associated with annual actuarial basis changes and the substantial declines in equity markets and interest rate levels.
The markets experienced exceptional equity market volatility and were impacted by monetary policy actions that lowered long-term treasury rates in the U.S. and elsewhere. Under the Canadian insurance accounting and regulatory capital regimes, the direct impact of these changes is reflected in our current period results and capital ratios, whereas the same does not occur under U.S. accounting or U.S. statutory capital regimes. The impact of the market conditions in the third quarter was significantly moderated by the strategic actions we took over the last few years to reduce our risk profile and strengthen our balance sheet.
* Dynamic and macro hedging performed as expected, even during the highly volatile markets of the third quarter; and generated over $3.3 billion in after-tax gains, which offset approximately 70 per cent of the $4.8 billion earnings impact of variable annuity risk and non variable annuity equity-related losses in the third quarter. The remaining 30 per cent includes market elements that we are not able to hedge or consciously decide not to hedge, including the impacts of higher realized volatility, unfavourable fund tracking and items not hedged such as provisions for adverse deviation and policyholder behaviour.
* We have exceeded our 2014 risk reduction goal for interest rate earnings sensitivity with actions in the third quarter, reducing our sensitivity to $1.0 billion after-tax for a 100 basis point decline in interest rates excluding the impact on ultimate reinvestment rates. We remain ahead of our 2012 risk reduction goal for equity markets and are at 88 per cent of our 2014 goal for earnings sensitivity for a 10 per cent drop in equity markets. We are considering extending our hedging programs beyond our 2014 goals at the right opportunity.
* MLI's MCCSR ratio stood at 219 per cent as of September 30, 2011. This ratio does not reflect the benefits of our de-risking activities over the last few years, including our equity and interest rate hedging progress, which reduced the downside risk to our capital position but receives no explicit credit in the capital formula.
* Net income in accordance with U.S. GAAP1 for the third quarter of 2011 was $2.2 billion, or $3.4 billion higher than our results under IFRS. The difference is primarily attributable to the greater use of "mark-to-market" accounting under IFRS which more directly recognizes the current low interest rate and equity market volatility on policyholder liabilities sooner than under U.S. GAAP. Total equity in accordance with U.S.GAAP2 was approximately $15.8 billion higher than under IFRS, due primarily to higher cumulative net income on a U.S. GAAP basis
* General account asset performance continues to be a strength of our Company reflecting our strategy of avoiding risk concentration with a diversified, high-quality portfolio and our continuing excellent credit experience despite the difficult markets of the last few years.
* Sales3 of insurance products targeted for growth increased 21 per cent, excluding the impact of New Whole Life (NWL) in Japan and certain individual insurance products with less preferred risk profiles in Canada, where deliberate price increases were implemented with the intention of protecting margins to the detriment of sales volume. Including these products, sales increased by 5 per cent.
* Targeted wealth products sales grew by 12 per cent, which was led by 20 per cent growth in Asia and continued strong growth in mutual fund sales in Canada and the U.S.
* The dramatic decline in interest rates in the third quarter once again reduced our margins and was the main factor behind the 37 per cent decline in new business embedded value (NBEV)4 relative to the second quarter of 2011. We continue to be committed to protecting our margins and have taken a number of re-pricing actions in the U.S., Canada and Japan to achieve this. Planned re-pricing actions in Canada and the U.S. would ameliorate some of the margin decline in the future. However if interest rates remain at current levels, more action may be required.
* In Asia, we continued to grow our agency force, add important new Bancassurance relationships and, excluding Japan NWL, increased sales of both insurance and wealth management products. Post quarter end, we completed a strategic partnership with PT Bank Danamon Indonesia Tbk making our products available in its over 2,300 branches.
* In Canada, growth of targeted insurance and wealth products were up three and two per cent, despite the continued implementation of price increases and product changes. Manulife Mutual Funds sales were up 32 per cent and Group Retirement Solutions sales increased 61 per cent. Manulife Bank's assets reached record levels, exceeding $20 billion as of September 30, 2011.
* Momentum in the U.S. continued with John Hancock Mutual Funds sales up 27 per cent and Retirement Plan Services sales up 10 per cent. The transition of our life insurance product portfolio has been successful with targeted products up 42 per cent and representing 89 per cent of total life insurance sales.