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How a Canadian address turned Manulife's $2.2-billion profit into a $1.28-billion loss

Manulife Financial Corp. headquarters is seen in Toronto.

KEVIN FRAYER/Canadian Press

If Canada's major life insurers were headquartered in New York, they would be reporting billions in profits right now.

Instead, Manulife Financial Corp. , Sun Life Financial Inc. and Industrial Alliance Insurance and Financial Services Inc. have each posted ugly financial results this week, with the ugliest being Manulife's $1.28-billion third-quarter loss, disclosed Thursday.

Low interest rates and falling stock markets continue to eat away at the industry's profits, and life insurers here are raising prices and shrinking some businesses as a result. But there is another issue at play in the industry's red ink: accounting rules that Canadian insurers say are unfair and put them at a competitive disadvantage.

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Manulife said that had it reported under U.S. accounting rules, it would have posted a profit of $2.2-billion in this latest quarter - a $3.4-billion swing. Manulife's shareholders' equity is $16-billion higher when measured under U.S. rules.

Canada's life insurers have been complaining since the financial crisis began that the Canadian rules hinder them in competition against their U.S. peers – especially since the federal regulator uses this country's accounting rules to determine how much capital insurers must sock away.

Accounting rules for insurers around the world are widely viewed as so complex and murky that many professional analysts don't even understand them, so the grumbling from Canadian insurers has largely fallen on deaf ears. But their views got some high-profile backing this week when Moody's and Standard & Poor's issued reports highlighting how tough Canadian accounting rules are on insurers when stock markets and interest rates are depressed.

Beyond the company's balance sheets, the issue is having a real impact on their operations. Manulife sold a reinsurance business to U.S. insurer Pacific Life Insurance Co. this summer, in large part because the U.S. firm will face looser accounting and capital rules for that unit.

Proponents of the Canadian regime argue that it's more conservative, forcing insurers to be extra safe when markets are tough, and then letting them relax when conditions are good again. If the economy is entering a period such as the Great Depression, where interest rates and stock markets are low for a long period of time, then there will be a reckoning for U.S. insurers, while Canadian insurers will have already taken the hit.

On the other hand, if interest rates and markets rebound, Canadian insurers will be able to boost their profits by releasing some of the reserves they've socked away.

In the meantime, investors looking at U.S. and Canadian insurers are comparing apples to oranges, Manulife executives suggested Thursday.

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"You look at companies in a much more fragile position than us in the United States that are increasing dividends and buying back stock…" Manulife chief executive Don Guloien said on a conference call. But, aside from lobbying accounting authorities and regulators, there's little Canadian firms can do. "It is what it is. We don't have roller skates," Mr. Guloien said.

Under Canadian accounting rules, Manulife posted a $312-million loss last year. Under U.S. rules, it would have earned $1.7-billion.

Sun Life has stopped disclosing what its earnings would be under U.S. rules – it used to give both sets of numbers – but outgoing CEO Don Stewart said the insurer's results would have been better this quarter under U.S. rules. Sun Life reported a loss of $621-million.

Dean Connor, Sun Life's CEO-in-waiting, says the accounting rules penalize Canadian insurers by requiring them to "mark to market" more of their assets and liabilities at the end of each quarter – that is, to base them on the market conditions at that moment.

"It can have a significant effect as you [make present-value calculations for]30 or 40 years of future experience into one moment of time," he said in an interview. "That creates enormous volatility ... mark-to-market is of dubious value to users of financial statements."

Mr. Guloien stressed yesterday that investors need to keep the accounting differences in mind when evaluating Manulife. Between the company's reserves and capital levels and the hedging programs it's put in place to protect against its risks, "this has to be one of the most secure institutions on the face of the earth," he said.

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