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Manulife lowers sights as sting of rock-bottom rates lingers

A man walks by the Manulife Centre in Toronto the day of the Manulife Financial Annual General Meeting on Thursday May 3, 2012.

Aaron Vincent Elkaim/THE CANADIAN PRESS

Low interest rates are forcing a rewrite of Manulife Financial Corp.'s best-laid plans.

The life insurer, which has been trying to rebuild after taking a major hit during the financial crisis, had set a goal of earning $4-billion a year by 2015. But chief executive officer Don Guloien is now admitting that he will likely have to change that target, as super-low rates linger and stocks remain highly volatile.

"Since we set those targets in 2010 the macro[economic] headwinds have become greater and we can't overcome them, but the progress that we're making is enormous," Mr. Guloien said in an interview after Manulife unveiled a second-quarter loss of $300-million – its fifth loss in the past 10 quarters.

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"What's important for people to focus on is how we're repositioning the company going forward to produce sustainable, consistent, repeatable earnings."

The second-quarter result was actually a positive surprise for shareholders, because analysts had feared it would be larger. But Manulife also warned it expects to take a hit of around $1-billion in the coming quarter as it updates its actuarial methods and assumptions.

Falling interest rates have numerous impacts on life insurers. Canadian accounting rules essentially require the companies to assume they will earn today's low returns for decades to come, in turn requiring them to set aside higher reserves to ensure they can pay life insurance policies well into the future.

The company is in the midst of reviewing its target, but it intends to either set a new one, or push the date at which it plans to earn $4-billion further into the future, he said.

With Manulife's stock price languishing below $11 – it traded around $40 before the financial crisis – the company sought to quell the rumour that the insurer might be doing a splashy deal for all of ING Group's Asian business, which is up for sale.

"We will not pursue a transaction for ego or size," CFO Steve Roder said. "While we continue to see Asia as a very attractive area to invest in, any deal must be positive for shareholders. And we don't need to do a transaction, as we are growing organically in Asia and elsewhere."

The comments did not rule out a deal for parts of ING's operations in countries that are most appealing to Manulife.

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The losses came a day after Sun Life Financial Inc. reported second-quarter profits of $51-million, down from $408-million a year earlier. Sun Life CEO Dean Connor said his company still plans to boost its operating income to $2-billion in the next three years. "We're committed to our 2015 targets," Mr. Connor said.

Mr. Guloien highlighted the impact that Canada's accounting regime is having on the company compared to its U.S. rivals. Manulife's $300-million loss becomes a $2.2-billion profit under American accounting rules. That's largely because the International Financial Reporting Standards that Canadian firms are required to follow rely more heavily on "mark-to-market" accounting, which is conservative and essentially assumes that tough market conditions such as low interest rates or stock markets will persist well into the future.

The company has made progress in the last couple of years hedging its exposure to stock markets and interest rates, he said. "We've dramatically reduced the risk exposure for shareholders," he said. "It will take some time before that is reflected in our stock price and in our multiple, but people will some day wake up and realize that that has happened."

Factoring out the impact of stock markets and interest rates, Manulife's earnings (under Canadian rules) would have been $427-million.

The company's performance in Asia and Japan stood out this quarter, said National Bank analyst Peter Routledge. "We agree with management's argument that Manulife is a long-term play on the growth of the Asian middle class," he wrote in a note to clients. "But we think the prospect of further increases to the company's actuarial reserves backing policies and contracts in North America will weigh the stock down for the foreseeable future."

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