TORONTO (Reuters) - Manulife Financial (MFC.TO) shares fell 5 percent and touched a 2-1/2 year low on Thursday as plunging stock markets and the U.S. Federal Reserve's debt purchase plan raised expectations that Canada's biggest insurer could post a heavy third-quarter loss.
Rival Sun Life Financial's (SLF.TO) shares fell roughly in line with the loss on the Toronto Stock Exchange's main index, but the company's chief financial officer suggested Sun Life's third-quarter results could also take a markets-related hit.
With Toronto's TSX index down 3.1 percent and U.S. bond yields falling hard, investors feared Manulife will have to set aside heavy reserves to guarantee it can pay future obligations to clients.
"(In) the third quarter, there will be a sizable loss," said National Bank of Canada analyst Peter Routledge. "If the quarter ended today, it would be a lot bigger than our estimates."
Canadian insurers hold stocks and bonds to guarantee they'll be able to pay future investment and insurance policy obligations. When the values of their portfolios fall on a quarterly basis, they use profits to bulk up reserves.
Such charges have wrought havoc with Canadian insurers' results over the past two years, with Manulife suffering the most because of its greater exposure to markets.
Global stocks were hit on Thursday after the U.S. Federal Reserve shook market confidence with a bleak economic outlook the day before.
Bond yields were pummeled by the Fed's planned $400 billion "Operation Twist" bond purchase, designed to bring down bond yields and stimulate the U.S. economy.
"I think Operation Twist is bad news for Manulife and for every life insurer in North America," Routledge said.
Shares of Sun Life Financial - which has less market exposure than Manulife - were down 2.8 percent.
Sun Life surprised the market in the second quarter by recording a gain from its bond portfolio, despite declining yields.
But speaking at an investor conference on Thursday, Sun Life CFO Colm Freyne said the current decline in bond yields will likely have more of a negative impact than in the second quarter because the decline is tilted toward the longer-term debt that insurers hold.
"As long rates come down... there is a more pronounced impact on the earnings," Freyne said.
Shares of Manulife were down 61 Canadian cents at C$11.20 on the Toronto Stock Exchange, touching depths not seen since March 2009. Sun Life was down 69 Canadian cents at C$24.08. Earlier in the session, it touched its lowest level in more than a year.
The expected hit on profits heightens worries that Manulife may have to raise capital. Concerns about capital plagued the stock in 2010, when the insurer racked up heavy losses on weak markets.
Routledge, however, said he thinks it's unlikely Manulife will need to raise capital under current market conditions.
Reporting by Cameron French; editing by Peter Galloway