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Manulife shares slide after Q1 profit drops on steepening yield curve

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By Nichola Saminather

TORONTO (Reuters) -Manulife Financial Corp shares dropped by the most since June on Thursday after Canada's biggest life insurer posted a large drop in reported net income the previous day driven by the negative impact of a steepening yield curve.

The 80-basis-point steepening in the yield curve was "unusual," and the most since the company instituted its hedging program in 2012, Chief Financial Officer Phil Witherington said on an analyst call. But this could be reversed if interest rates rise, he said.

"If the steepening of the yield curve reverses, and rates at shorter end increase, giving rise to a flattening, the direct market impact charges we’ve seen in the first quarter would reverse," he said.

Manulife shares dropped 3.8% to C$26.15 in morning trading in Toronto, versus a 0.3% decline in the stock benchmark.

On Wednesday, the company said net income attributable to shareholders declined to C$783 million ($642 million) from C$1.3 billion a year earlier. Core earnings beat estimates, though.

Sun Life Financial Inc reported net profit that more than doubled to C$937 million, or C$1.59 a share, although it slightly missed expectations.

Sun Life paid C$150 million in COVID-19-related death claims in the first quarter, a spokeswoman said.

Sun Life shares fell 2% to C$65.81.

"The insurance business of Manulife is way more sensitive to interest rates than Sun Life" due to a sizeable annuities business, Marcos Alvarez, head of insurance at DBRS Morningstar said. "They've done a lot of improvement in terms of hedging the volatility and exposure... but it's not perfect."

A 50 basis-point rise in rates would lead to an increase of C$1.8 billion in the current value of future earnings, Witherington said.

However, a continued steepening of the curve would prove challenging, he said.

Manulife, which took a C$150 million restructuring charge in the first quarter, said this will result in savings of C$150 million in 2021 and C$200 million in 2022.

The company also said it is concerned about achieving its assumed near-term returns in its office portfolio, amid uncertainties about employees' return to workplaces, but is nevertheless confident about its long-term prospects, Chief Investment Officer Scott Hartz said on an analyst call.

With most employees set to work at least some days in company locations under return-to-office plans, it may limit reductions in space needs, giving Manulife confidence it can achieve its long-term return assumptions, Hartz said.

Sun Life is seeing higher-than-expected numbers of employees returning to work in its office portfolio, but expects a broad decline in occupancies for some time, Steve Peacher, president of its investment subsidiary SLC Management, said in its analyst call on Thursday.

($1 = 1.2205 Canadian dollars)

(Reporting By Nichola SaminatherEditing by Chizu Nomiyama, Steve Orlofsky and Marguerita Choy)