Manulife Financial Corporation (TSX:MFC) said it could book up to a $700 million charge in the coming quarter following a reassessment of its U.S. insurance operations.
If global stock markets do not rebound from recent plunges, it could take another charge of up to $500 million or more, the company said after reporting second quarter results that handily beat analysts' expectations.
The Toronto-based insurer will make changes to actuarial assumptions in the third quarter, part of which includes assessing how estimated death rates will impact its liabilities and future insurance payments.
Early indications suggest that changes to its U.S. mortality rates may result in up to a $700 million after-tax hit.
However, it said that other assumption changes will be both positive and negative and the actual impact could vary dramatically from preliminary forecasts.
"While we've generally experienced mortality gains in our recent earnings in the U.S., including this quarter, some of the emerging trends are subtle, as we are seeing different experiences depending on the block of business," Manulife's chief financial officer Michael Bell told a conference call with analysts.
A large portion of the money that will potentially be set aside would go toward strengthening reserves of its John Hancock permanent life insurance business, where losses are starting to emerge as people live longer and the policies pay out for longer periods, Bell explained.
Other aspects of its U.S. insurance business are undergoing different experiences, largely depending on the duration of policies, he said, adding that he doesn't expect the assumption changes to affect premiums charged to customers.
In addition to the warning on assumption changes, Manulife estimated that a 10 per cent drop in equity markets — as the Toronto Stock Exchange has experienced over the last three weeks — would eat into earnings by about $490 million to $590 million.
On Thursday, The Dow Jones industrial average shot up 423 points, or 3.9 per cent, but the key American market has swung wildly in recent weeks over fears the U.S. economy could dip into another recession.
The index on the main Canadian market, the TSX, rose nearly 341 points.
Even if Manulife is forced to take an earnings hit because of slumping markets, the impact could be milder than expected. The company said it moved quickly to hedge between 60 to 66 per cent of its business against exposure to volatile stock markets and fluctuating interest rates.
It had originally aimed to complete that goal by the end of next year.
"Obviously, a considerable amount of financial market volatility has occurred since the end of the second quarter, the lower equity markets and interest rates will obviously have an impact if they remain at those levels through Sept. 30th," Bell said.
"But due to our considerable hedging process during the past year we are much better positioned. Nevertheless, without additional hedging actions, a decline in equity markets and interest rates would likely increase our earnings sensitivities in the third quarter."
The warnings came as Manulife reported its net profits attributed to shareholders rose to $490 million, reversing a net loss of more than $2.4 billion a year ago.
The insurer earned 26 cents a share, surpassing analyst expectations, against a loss of $1.39 a share in the 2010 second quarter.
The company said Thursday its improved financial performance in the second quarter reflected risk reduction efforts undertaken in the past year.
Total revenue in the quarter fell to $10.8 billion from just under $11.8 billion.
Analysts had expected $9.2 billion in revenues and profits of 19 cents per share, according to estimates compiled by Thomson One Analytics.
The company said the quarter was not without its challenges as insurance sales were down in China, while competition in the U.S. 401(k) retirement investment business increased.
Looking ahead, Manulife said it expects to see a slowing in Japan insurance sales due to price increases.
Canada's largest insurer has been working to reduce its exposure to volatile stock markets and interest rates.
The company came under fire from shareholders to turn around its finances following losses of more than $3.3 billion in the second and third quarters of 2010 due to declining stock markets and interest rates. Its stock price has steadily improved since announcing it would embark on the aggressive hedging program to reduce its earnings sensitivities.
Manulife operates around the world and had nearly 24,000 employees in 22 countries at the end of 2009.
In Thursday trading on the Toronto Stock Exchange, Manulife shares gained 4.6 per cent or 58 cents each to close at $13.08.
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