Irony of all ironies

Now we learn that Canada’s life insurers want Ottawa’s help to deal with their portfolio losses? This is the irony of all ironies. Manulife and Power Financial successfully lobbied Stephen Harper to kill income trusts so that they could sell more of their products, like Income Plus and principal protected notes. They successfully lobbied Ottawa to kill a real investment vehicle, to enable more sales of their derivative investment vehicles. Huh? Ottawa complied.

Having played a central role in destroying a defensive investment vehicle that was perfectly suited for down markets, these insurers are now looking to be bailed out by Ottawa in terms of their commitments under their derivative products. Where is the justice? Where is Flaherty’s proof of tax leakage? Income trust investors want our losses ($35 billion) to be fully compensated or the income trust tax rescinded.

We haven’t gone away.


Battered insurers look to Ottawa for help

Eoin Callan, Financial Post Published: Monday, October 27, 2008

Canada's top insurers are being hammered by one of the worst financial crises in history.

As the Canadian stock market saw its worst fall in more than two decades Monday, the country's top insurers looked to Ottawa for relief from the unrelenting damage being inflicted by one of the worst financial crises in history.

Leading industry executives said federal authorities had a key role to play in mitigating the impact of investment losses at insurers like Manulife Financial, which has lost half its value following a record fall in its share price Monday.

After escaping much of the first-round effects of the U.S. mortgage meltdown, Canada's insurers are being hammered by knock-on effects that are putting pressure on their capital reserves.

As insurance companies' own in-house portfolios of stocks and bonds lose value, executives are warning Ottawa that many of the guaranteed investment products they sold to Canadians will be pulled from shelves unless the government acts to backstop future losses.

After getting carried away in recent years making pledges to customers of guaranteed retirement income that seemed too good to be true, insurers are now losing money on the investments they made to back up these promises. This is forcing insurers to set aside cash to meet these commitments, pushing their backs against the wall and triggering a loss of investor confidence.

Manulife was under growing pressure Monday to reveal more about its capital position after its shares fell 15% and rival Sun Life slid 13%, amid a broad market sell-off that saw the S&P/TSX composite index drop more than 8%. It was the worst fall since Black Monday 21 years ago.

Many of the stocks that have been leading the decline since the beginning September continued their march downward Monday -- Canadian Natural Resources Ltd. and Petro-Canada have now lost almost half of their value since the end of August while Suncor has lost 61% and Teck-Cominco has dumped 75% over the same period of time -- but is has been the insurers that have suddenly seen the more staggering losses over the past few weeks. Manulife was once the most valuable company in Canada and coasted through September unscathed but has now lost 45% of its value in October alone.

And while there was significant resistance to any suggestion Ottawa should allow Manulife to buy one of its smaller rivals, there were increasingly strident warnings from executives about the consequences for Canadians of the downward spiral in the sector.

"We have never seen anything quite like this," said a senior industry figure.

The most radical proposal being advanced by executives is for a new form of government guarantee to backstop losses on high-return investment products known as variable annuities and segregated funds.

Executives and industry lobbyists argue these types of private retirement plans have become vital to meet the needs of an ageing population at a time when companies and governments have curbed pension schemes.

These industry officials see scope for an emergency scheme that would function like the state-backed insurance Ottawa provides on mortgages, and evolve to give government an expanded role in guaranteeing investment products sold by insurance companies.

This is seen as one indirect route for easing pressure on the capital reserves of insurers by reducing the need for reserves to be set aside, and is viewed as more politically feasible than tinkering directly with sensitive federal regulations in the midst of a crisis.

But the industry is not unanimous in its support of this proposal, with a stronger consensus behind much more modest steps to ensure the sector shares some of the benefits of liquidity provisions targeted primarily at banks.

A former official in the Department of Finance said that while government staff were developing contingencies to meet the needs of the insurance sector, the recent focus has been on widening schemes targeted at other sectors.

There is also an alternate more long-range proposal being developed that would include government incentives for Canadians to make investments with insurance companies to cover extra health care costs in old age.

An insurance industry executive said Monday that for many Canadians, stock market-related losses meant they would struggle to pay for health costs associated with old age.

"If an individual has lost half of their retirement savings, the issue is not: how am I going to pay for that second vacation. The issue is: how am I going to pay for the long-term care of me or my relative," said the executive.

This proposal reflects a growing acceptance that the sun is setting on the all-in-one investment products pushed in recent years by insurance companies as a way to provide both retirement income and life insurance.

But this was not seen as a way to provide immediate relief for insurers like Manulife, which will likely consider ways to strengthen its capital base, according to Andre-Philippe Hardy at RBC Capital Markets.

"The short term moves in equity markets have been nothing short of stunning this year and the direction of equity markets will determine whether Manulife needs to take action to bolster its capital ratios," according to the analyst.

Industry leaders say the Canadian insurance sector was not as exposed as U.S. rivals to risky products like subprime mortgages because of more prudent investment practices, but is now unable to escape the worldwide downturn in markets that continued to wreak havoc across the financial system Monday.

Financial Post with files from Jonathan Ratner