IFRS requires insurers to account for changes in interest rates and the market value of their investments more quickly than they would under U.S. GAAP. Manulife has large U.S. operations, and it reports separate results under the two regimes. For the third quarter of 2011, the differences were absurd: Under U.S. GAAP, Manulife earned a $2.2-billion profit; under IFRS, it lost $1.3 billion. In a conference call with analysts, Guloien was clearly frustrated. In response to a question, he noted that some competing U.S. companies were increasing dividends and buying back stock to boost shareholder value, but IFRS still required him to bolster his capital. “It is what it is. We don’t have roller skates,” he said.
Dickson is unapologetic. IFRS, after all, adopted the Canadian approach. “I think investors looking at all companies except U.S. companies are getting a more consistent picture, and one that is more accurate,” she says. There could be a silver lining, too: Canadian insurers might get a quicker earnings pop if interest rates and equity markets recover.
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Many of the problems within individual companies are their own, particularly for Manulife and Sun Life. They expanded rapidly in the United States in the 1990s and early 2000s. In addition to writing lots of traditional life insurance policies, the firms pushed newer products such as variable-rate annuities, which in some cases tied payouts to market returns but also promised buyers a minimum guaranteed income. The guarantees are now a burden. Last December, when Connor succeeded Donald Stewart as Sun Life CEO, he announced that the company would no longer sell individual policies and variable-rate annuities in the U.S.
In Canada, one product that has given Manulife a lot of grief is segregated funds. They are an investment similar to mutual funds, but are only offered by life insurers. They typically guarantee investors 75% or 100% of their money back at maturity, or in the event of death. Many “seg” funds also have a reset option allowing investors to lock in gains if markets go up. During the rising but often volatile stock markets of the 1990s and early 2000s, those promises were very attractive to risk-averse investors. From the insurers’ point of view, the guarantees didn’t look like much of a burden—in those days, it was hard to find a Canadian equity fund that had lost money over 10 years.
In the early 2000s, D’Alessandro convinced Manulife’s board and executives that it was no longer necessary to take out costly hedges to backstop the guarantees in its variable-rate annuities and segregated funds. Then stock markets around the world crashed by 50% in 2008-09, and Manulife’s capital levels sank. As of today, Manulife and Sun Life are still setting aside large amounts to bolster their reserves, and often taking quarterly hits of several hundred million dollars to account for revised actuarial assumptions.
So is there any upside for life insurers? Are their shares now a bargain? And even if the sector is a minefield, how is it that Great-West still posts such steady earnings?
First, don’t be tempted by fat-looking dividend yields on the life insurers’ shares. Their stock prices have been beaten up so badly that, as of early June, even Manulife’s halved annual dividend was about 4.9% relative to its recent share price of less than $11 (down from a pre-crash peak of $44 in late 2007). “You take a lot of risk for that dividend yield,” says National Bank Financial’s Routledge. The only thing that would give the entire sector a dramatic lift is a sudden gust of inflation and higher interest rates.
That said, the Big Three still have some formidable competitive strengths. One is sheer size: The three are among the 15 largest life insurers in the world. Since each has about $500 billion in total assets under management, they’re also huge asset managers, big enough to compete in that arena with the five biggest banks. Life insurers are also a major Canadian export success—about half of their premium revenues now come from abroad.
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