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Investors hammer Manulife stock on huge loss

TORONTO - Investors drained over $3 billion from Manulife Financial Corp. in heavy trading Thursday, sinking the stock to its lowest level in more than a year after Canada's largest insurer reported an "extremely disappointing" second-quarter loss.

TORONTO - Investors drained over $3 billion from Manulife Financial Corp. in heavy trading Thursday, sinking the stock to its lowest level in more than a year after Canada's largest insurer reported an "extremely disappointing" second-quarter loss.

Shares in the Toronto-based insurance giant plummeted to their lowest level since March 2009, after the company reported a $2.4-billion quarterly loss.

Manulife (TSX:MFC) stock closed down 11 per cent, or $1.80 at $14.20, after 28.3 million shares traded on the Toronto Stock Exchange. With 1.76 billion shares outstanding, Thursday's share decline wiped out more than $3 billion of Manulife's $25 billion stock market value.

The Standard & Poor's rating agency also announced Thursday it had reduced Manulife's AA-plus rating to a double AA rating with a negative outlook, placing it closer to many of its competitors.

But Donald Guloien, Manulife's president and chief executive, insisted the company has a number of contingency plans to offset risks from its heavy exposure to volatile equity markets and lower interest rates that have squeezed its bond investments.

"We are making difficult decisions over the course of this year to better position the company for the future," Guloien said on a conference call with analysts as the value of his company plunged more than $3.17 billion in one day on the market.

The company is eyeing better hedging strategies and new financial products that have less interest rate sensitivity, as well as looking to reinsure different blocks of products, raising the price of new products, changing its product mix, or selling off parts of the business.

"We're being very straight up with people that the equity sensitivity and the interest rate sensitivity is going to continue for some time but what we're focusing on is growing the core business earnings ... and hoping to hedge more of the equity risk as time goes on," Guloien said in an interview.

Details of the plan will be released in the fall.

The company took a big hit in the second quarter from the mark-to-market impact of lower equity markets and historically low interest rates that resulted in non-cash charges against the company's reserve requirements.

The non-cash charges from a decline in stock markets adding up to $1.7 billion and similar charges related for lower long-term interest rates — particularly among the corporate and government bonds in which Manulife invests — of $1.5 billion during the period.

The loss — which amounted to $1.36 per share — contrasted sharply with year-earlier earnings of $1.8 billion or $1.09 per share.

Adjusted earnings from operations, an internal measure of business performance, were $658 million, Manulife said.

Andrew Kligerman, an analyst at UBS Investment Research said Manulife's results were "far worse" than the loss of between 54 cents and 69 cents per share he expected.

Its adjusted earnings of $658 million also fell short of estimates of between $700 million and $800 million, "in part because low interest rates increased new business strain on long-duration insurance policies," he wrote in a note.

Nevertheless, Manulife said its "underlying business performed well," with higher insurance sales in Asia, Canada and the United States and it vowed to "set out in the next few months our plans to further reduce risk and improve earnings."

Manulife's stock has fallen steadily since the recession hit in 2008 and now sits at about half of where it was in October of that year.

In November 2009, the stock was pummelled by investors reacting to Manulife's move to raise $2.5 billion in a major stock issue, which the company admitted would be dilutive to shares, but said was necessary to help buffer itself against "more conservative economic scenarios."

But the company's multi-year plan isn't likely to pacify investors in the coming quarters, Michael Bell, Manulife's chief financial officer, said in an interview.

"It's really going to take the cumulative impact of continuing to make progress over several quarters before investors are fully satisfied."

Guloien pointed out that the company took measures with its capital during the past year that allowed it to withstand the shock of the one-time charges.

Manulife began to discontinue some of the highest risk products in offered starting in 2009.

About 51 per cent of its variable annuity business—which sells plans that guarantee a minimum return similar to private pensions — is hedged or reinsured, he added.

"There is, however, more to be done to get Manulife back on a consistent track that shareholders expect and deserve," he said.

"We intend to have hedged or reinsured at least 70 per cent of our variable annuity fund guaranteed values business by the end of 2012."

Manulife, with 24,000 employees at the end of 2008, has operations in Canada, the United States, Europe and Asia, where it is rapidly growing its business, especially in China.

Late Wednesday, Manulife's rival Sun Life (TSX:SLF) reported its net profits fell sharply to $213 million for the three months ended June 30, compared with earnings of $591 million for the same period last year, when the company benefited from reserve-related and other gains on its books.

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