(Adds RBC research, paragraph 9; updates share price in second and last paragraphs)
TORONTO, Oct 13 (Reuters) - Manulife Financial Corp, Canada’s largest insurer, said on Monday it expects credit losses related to the global financial crisis to reduce earnings by about C$250 million in the third quarter.
Manulife’s shares, trading in New York on a market holiday in Canada, jumped about 10 percent, as government efforts to pump funds into banks triggered a rally on Wall Street after the global stock markets suffered their biggest weekly decline ever.
The decline in equity markets since the end of the third quarter has hurt Manulife’s capital ratios, the company said in a statement issued after the week of unprecedented volatility in global markets. Even so, it ruled out an increase in common equity if any adjustments to those ratios were required.
The company said it expects its regulatory capital ratio to have been within its targeted operating range of 180 percent to 200 percent for the third quarter.
“Manulife remains conservatively reserved, has a high quality balance sheet and strong and leading business franchises around the world,” Dominic D‘Alessandro, the company’s chief executive, said in a statement issued on Monday, the Thanksgiving national holiday in Canada.
Manulife last month outlined its exposure to American International Group Inc, the troubled U.S. insurer, and bankrupt Lehman Brothers Holdings Inc, but it did not quantify how the exposures would affect its own earnings.
The C$250 million impact announced on Monday includes about C$50 million for strengthening reserves after downgrades of investments owned by the company, North America’s largest insurer by market value.
The company also said it had a reserve of C$1.4 billion to protect against any shortfall in its variable annuity and segregated funds businesses. At the end of third quarter, the reserve is expected to be at a level exceeding 90 percent, but it warned that earnings for any period would shrink if it had to build up the reserve.
RBC Dominion Securities, in a research note issued on Monday, said Canadian life insurers had less exposure to credit risk than their U.S. counterparts, but it was more difficult to assess their relative exposure to movements in equities.
That said, RBC wrote, Manulife has the most exposure among its domestic peers to stock fluctuations given Manulife’s strong sales of variable annuities in the U.S. and Japan. It also said Manulife until recently did not hedge against those exposures.
Despite the third-quarter charges, Manulife said the quality of its assets remains very high. Gross unrealized losses on fixed-income securities have expanded to about $6 billion, which it described as relatively modest compared with total invested assets of C$165 billion at Sept. 30.
It said it expects no significant earnings impact related to the gross unrealized losses.
Manulife has about C$200 million of exposure to fixed income securities trading down 20 percent or more for at least six months, a modest amount given the large size of its overall portfolio, it said.
Manulife said its businesses are generating enough cash flow to keep its operations running without the company relying on commercial paper or other short-term funding.
In late afternoon trade on the New York Stock Exchange, Manulife was up US$2.33 at US$25.67. The stock was trading as high as $38 in late July. (Reporting by Frank McGurty, editing by Gerald E. McCormick)