Canada's Manulife Financial is exposed to stock market volatility on nearly half of its variable annuity business, the firm has revealed.
The firm's annuity products, which are sold under the John Hancock brand in the US, offer capital or income guarantees in spite of downturns in investors' underlying portfolios.
According to Manulife's first half results, which last week reported a loss of $2.4bn, around 51% of its variable annuity liabilities are hedged. The firm has been downgraded by credit rating agency Standard & Poor's to AA with a negative outlook from AA-plus.
Over the second quarter of 2010 new business and the in-force variable annuity hedging program produced a pre tax benefit of $1.2bn in hedging gains, offsetting approximately 75% of the $1.6bn movement in the underlying hedged liabilities.
"If markets increase to levels that will allow us to hedge more of the in-force at appropriate margins we intend to do so, and our target is to have at least 70% of our variable annuity guaranteed value hedged or reinsured by the end of 2012," said the firm's CFO Michael Bell.
He said the firm is also addressing the interest rate risk on future long-term guaranteed product sales through additional pricing actions and changes to product design and when market conditions are more attractive, he expects Manulife to consider hedging appropriate amounts of this risk.