November 4, 2010 / 1:42 PM / in 7 years

UPDATE 4-Manulife loss not as big as expected, shares surge

* Q3 net loss C$0.55 vs est loss C$0.73

* Takes C$3 billion in charges

* Stock up 9.4 pct as loss not as bad as expected (Adds details)

By Cameron French

TORONTO, Nov 4 (Reuters) - Manulife Financial (MFC.TO) (MFC.TO) reported a fivefold increase in its third-quarter loss on Thursday due to C$3 billion in charges and a writedown, but the company’s shares rose nearly 10 percent as the loss was not as big as the market had expected.

The Toronto-based insurer lost C$947 million, or 55 Canadian cents a share, compared with a year-before loss of C$172 million, or 12 Canadian cents a share. But that bettered the loss of 73 Canadian cents a share expected by analysts.

The headline loss factored in several large items, including a C$2 billion to strengthen reserves following a review of actuarial assumptions, and a C$1 billion goodwill impairment charge to account for the effect of a grim economic outlook on Manulife’s extensive U.S. business.

But as with rival Sun Life Financial’s SLF.TO results on Wednesday, the impact of financial market movements during the quarter was better than expected. Manulife had a C$1 billion net gain from the positive impact of stronger equity markets versus the negative impact of lower interest rates.

A combination of weak equity markets and low interest rates had sent Manulife to a C$2.4 billion loss in the second quarter, and Manulife has been working to hedge its exposure.

“What this quarter is starting to show is that we’re progressing toward an environment where underlying operating earnings are going to carry a little more weight, and some of the noise that’s coming through on headline side is going to subside,” said Craig Fehr, an analyst at Edward Jones in St. Louis, Missouri.

HEDGING AT A COST

During the quarter, Manulife hedged C$3.3 billion of its variable annuity portfolio, which has been a weight on its results in recent quarters.

Speaking on a conference call, Manulife Chief Executive Donald Guloien said the company had hedged an additional C$800 million of the portfolio on Thursday.

He said the insurer’s results “reflect a quarter in which we made considerable headway repositioning our business.”

Manulife said it had hedged 25 percent of its earnings sensitivity to equity markets. It plans to have 60 percent of the sensitivity hedged by the end of 2012 and 75 percent by the end of 2014.

However, increasing the hedges could strip as much as C$250 million a year from annual earnings by 2014, Guloien said.

SHARES RISE

The company’s shares rose C$1.21, or 9.4 percent, to finish the session at C$14.11. The stock’s high of C$14.33 on Thursday was its highest level since early August.

“We view (the) results as positive relative to our expectations in the following areas: underlying earnings, capital and earnings sensitivities,” RBC Capital Markets analyst Andre-Philippe Hardy said in a note.

Under U.S. accounting rules, which are more lenient on accounting for the impact of market shifts on liabilities, Manulife lost C$212 million, the company said.

Adjusted earnings from operations during the quarter were C$779 million, which is within the company’s forecast range of C$700 million to C$800 million.

The insurer’s minimum continuing capital and surplus requirements, a key measure of balance sheet strength, was 234 percent at the end of the quarter, up 13 percentage points from June 30, Manulife said.

The industry is now bracing for new international accounting rules that are to be implemented in 2011, which will force insurers to hold more capital on their balance sheet.

Manulife has said it will likely take a C$2.2 billion goodwill impairment charge when the rules are implemented.

Debt rating agency Standard & Poor’s said on Thursday it was placing the insurer on ratings watch negative due to the company’s earnings volatility and unhedged market risks.

$1=$1.00 Canadian Reporting by Cameron French; editing by Peter Galloway

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