BUSINESS

Insurers could lose hundreds of millions if low interest rates persist

08/09/2012 07:44 EDT | Updated 10/09/2012 05:12 EDT
TORONTO - Some of Canada's biggest insurance companies are turning their focus to Asia and the lucrative wealth management business as they work to offset losses in their traditional markets due to persistently low interest rates.

Manulife Financial Corp. (TSX:MFC) and rival Sun Life Financial (TSX:SLF) reported second-quarter earnings that were battered by the impact of volatile equity markets and weak interest rates on their investments.

Each forecasted low interest rates could cost them hundreds of millions of dollars in the next few years if rates they stay where they are.

And each noted they would focus on expanding footprints in Asia and growing asset management businesses in attempts to reposition themselves in the low-interest rate economy.

Manulife, which reported a $300-million loss in its second quarter on Thursday, said it expects to book additional charges of $400 million in 2013 if interest rates stay at current low levels.

"We need to remind investors of the third quarter basis changes and that the impact of the continued macro-economic headwinds makes the achievement of our 2015 objectives more of a stretch," said chief executive Donald Guloien, referring to a previously-announced goal of hitting an earnings target of $4 billion in that year.

Sun Life Financial Inc. (TSX:SLF) warned Wednesday that persistently low interest rates could cause a further $600 million hit to its earnings by 2015 after reporting second-quarter profit slid 88 per cent to $51 million.

The Canadian insurance giants have blamed challenging equity markets and interest rates, which have been hitting insurers who invest much of the money they make from policyholders.

Falling stocks and bond yields — battered by fears of a slowing global economy — reduce projected future returns on investment portfolios, which are used to guarantee future policy payouts.

Meanwhile, wealth management has been an increasingly attractive niche for financial services firms as baby boomers age and younger generations see employee-sponsored pension plans erode — phenomena that have led individuals to focus on retirement savings plans and investment portfolios.

And Asian markets, with expanding middle classes, are seeing steady increases in demand for insurance policies and investment plans.

Sun Life chief executive Dean Connor said he has been positioning the company to succeed assuming interest rates stay low.

"We're not basing a strategy on hope; we're basing it on the reality of where we are today, expecting interest rates to stay the same."

Manulife, which booked a second-quarter $727-million charge relating to the direct impact of equity markets and interest rates, said it will focus on growing its "less-guarantee dependent" wealth management business and "developing our Asian opportunity to the fullest."

"While the volatility of equity markets and lower interest rates took their toll, I am pleased that we made substantive progress against our strategic priorities," Guloien told analysts during a conference call.

"We delivered record insurance sales in Asia."

During the quarter, Manulife began its partnership with Bank Danamon in Indonesia and started up operations in Cambodia.

The expansion of the middle class in emerging Asian markets creates long-term opportunities for insurance companies, Sun Life's Connor said.

"As millions and millions of people are moving out of poverty and into middle class in countries like India, China, Indonesia and other places, they save," he said. "They're prodigious savers, and they need protection as well."

Other insurers such as Industrial Alliance (TSX:IAG) Great-West Life (TSX:GWL) and others have been affected by the same financial market forces.

Last week, Great-West Life reported that net earnings attributable to common shareholders fell to $491 million from a profit of $526 million during the same quarter of 2011.

Meanwhile, Manulife's $300-million second-quarter loss equalled 18 cents per share and compared with a profit of $490 million or 26 cents per share in the second quarter of 2011.

Overall revenue from insurance premiums, investments and other sources increased to $11.3 billion, up from $10.8 billion a year earlier.

Excluding the impact of equity markets and interest rates, Manulife said it would have had a profit of $427 million.

Sun Life reported late Wednesday a second-quarter profit of $51 million, or nine cents per diluted share, down sharply from $408 million, or 68 cents per diluted share, in the 2011 period.

Connor said the company's strategy includes taking "bold actions," such as its decision to stop selling variable annuities and life insurance in the United States last January.

He said Sun Life's asset management business, which is not as sensitive to interest rates, saw strong sales growth during the quarter.

Sun Life also recently announced an agreement to create a joint life insurance company in Vietnam called PVI Sun Life Insurance Co., adding a sixth country to its Asian portfolio.

However, Connor noted that insurance sales in Asia were inconsistent during the quarter.

While sales shot up by 74 per cent in the Philippines and grew by 35 per cent in China, declines in India lead to an overall drop of three per cent in Asian sales.

"In India in particular, there was some regulatory change going back two years ago that affected the whole industry and reduced sales of life insurance products," said Connor.

"There is, in these immature markets, still some regulatory change going on that creates, in some years, very rapid growth in sales, and in other years declines in sales."

Shares in Manulife were up six cents to $10.89, while Sun Life shares dropped 17 cents to $21.60.