TORONTO - Volatile stock markets and low interest rates are wreaking havoc on Manulife Financial Corp.'s earnings and long-term objectives.
Toronto-based Manulife on Thursday reported a loss of $1.28 billion in the third quarter as the country's largest insurance firm joined its peers in feeling the pinch of market upheaval.
It also warned it could book a $650-million goodwill-related charge in the fourth quarter, adding pressure to the insurer's bottom line in an already challenging business climate.
"Early indications suggest that the current economic environment, including the persistent low interest rate, will likely put pressure on the recoverable goodwill amounts related to our U.S. life insurance businesses," Manulife chief financial officer Michael Bell said Thursday.
The volatility is also throwing a wrench into the company's longer-term goal to achieve earnings of $4 billion a year by 2015.
Bell acknowledged that there are now "a lot more headwinds and risk factors" than last November, when the company first announced its intentions. Manulife (TSX:MFC) remains committed to the goal for now, he added.
"Nevertheless, additional potential headwinds and risk factors have become evident as a result of higher economic uncertainty and volatility, which may result in a revision to these objectives at some point in the future," Bell said.
Stock and interest rate declines affect insurers because they tend to invest much of the money they make from policyholders into equity and bond markets.
Rival Sun Life Financial (TSX:SLF) reported Wednesday a third-quarter loss of $621 million due to falling stock, bond and interest rates.
It also warned shareholders that it would book a fourth-quarter charge associated with its hedging plan of between $550 million and $650 million, depending on how markets perform.
Manulife, the most sensitive to volatile markets among its peers, warned in August that it could book up to a $700-million charge in the third quarter following a reassessment of its U.S. insurance operations.
Manulife's $1.28-billion third-quarter loss amounted to 73 cents per share and compared with a loss of $2.25 billion or $1.28 per share in the same period a year earlier.
It was much bigger than the 53 cents per share loss analysts had expected, according to estimates compiled by Thomson One Analytics.
Stripping out the effect of equity markets roiled by financial instability in Europe and other global factors as well as the impact of ultra-low interest rates, the company said it would have registered a loss of $388 million, compared with a loss of $2.99 billion in the third quarter of 2010.
The bite from tempestuous markets added up to $1.79 billion for the quarter, Manulife said.
"While we are disappointed with the reported loss for the quarter, we are pleased that our hedging programs worked during these volatile markets, eliminating the majority but not all of the risk," chief executive Donald Guloien said in a statement.
Canada's largest insurer has been working to reduce its exposure to volatile stock markets and interest rates. It came under fire from shareholders following losses of more than $3.3 billion in the second and third quarters of 2010 due to declining stock markets and interest rates.
The company has already surpassed its 2014 target for reducing interest rate sensitivity to $1 billion after tax on a 100 basis point decline.
It is also close to meeting its 2014 goal for reducing exposure to stock markets, and has now hedged about 88 per cent.
"We feel good about the effectiveness of the hedging program to date but recognize that hedging does not completely eliminate all earnings volatility," Bell said.
The company said it will extend its hedging programs further beyond the 2014 goals when the time is right.
Total premiums and deposits rose in the quarter to $15.55 billion from $14.95 billion.
Despite the company's third-quarter loss and the tough business environment, the Standard and Poor's rating agency said Thursday it would hold its credit rating at 'A-'.
"Not withstanding the net losses reported earlier today, Manulife maintains very robust capitalization and we expect the group to maintain strong core earnings even though net income may display ongoing volatility due to the fair-value accounting framework in Canada," said Standard & Poor's credit analyst Robert Hafner.
Manulife had nearly 25,000 employees in 21 countries at the end of 2010.
In Thursday trading on the TSX, Manulife shares rose 56 cents to $13.11, while Sun Life shares lost 4.8 per cent or $1.15 to $22.85.