Analysis: Manulife pays the price under Canada insurer rules

Mon Nov 7, 2011 3:33pm EST
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By Cameron French

TORONTO (Reuters) - The easy way for Canada's Manulife Financial (MFC.TO: Quote) to reverse its third-quarter loss would be to move a few hundred miles south to the United States, where accounting rules are less onerous.

Even though pulling up stakes probably isn't feasible, the company's C$1.3 billion shortfall, as calculated under Canadian accounting rules, would turn into a record C$2.2 billion profit under U.S. principles, according to company disclosures.

This gap - which also applies to a lesser degree at rivals such as Sun Life Financial (SLF.TO: Quote) - suggests the heavy quarterly losses that Canadian life insurers have taken over the past three years don't tell the whole story about their financial health.

"It certainly adds to lumpiness," said Edward Jones analyst Craig Fehr, referring to the up-and-down nature of recent quarterly results posted by the big insurers.

John Aiken of Barclays Capital said results such as Manulife's loss don't accurately reflect the true economic prospects of the companies.

"You truly need to take a longer-term approach for the insurers," he said.

The gap between the results is due to the Canadian accounting requirement that life insurers revalue their assets and liabilities quarterly and take either losses or gains to make up the difference.

For instance, when bond yields fall, the projected return on the insurer's long-term holdings retreat, forcing it to take millions from the profit line to ensure they can cover future policy or investment payouts.   Continued...