Manulife Financial President and Chief Executive Officer Donald Guloien speaks at their annual general meeting for shareholders.MARK BLINCH/Reuters
Canada's life insurers are warning top regulatory, government and central bank officials that they believe proposed accounting changes will seriously damage the reliability of their financial results and exacerbate downturns and upswings.
The chief executives of Manulife Financial Corp. and Sun Life Financial Corp. are asking policy makers to take a tough stance in the debate over International Financial Reporting Standards (IFRS), as the International Accounting Standards Board (IASB) prepares to release an initial draft of the rules as soon as next month.
"One direction IFRS could take is to disassociate assets from liabilities and we think that would be a dreadful mistake," Manulife chief executive officer Don Guloien said in an interview Thursday.
The industry has talked to Julie Dickson, the head of Canada's banking and insurance regulator, as well as the federal Finance Department, he said. "We've also made the Bank of Canada aware of the issue because some interpretation of the rules could really increase the procyclical nature of the accounting results and have a knock-on impact."
Banks have become unusually vocal in recent months in their criticisms of proposals from foreign policy makers, and the insurers are now joining the fray. Ottawa's top officials have come out swinging against a new bank tax, and the insurers are hoping that Ms. Dickson and Finance Minister Jim Flaherty will also pick up the fight on their behalf.
"We have a system and a country that have come through the crisis very well, and we're concerned that we're moving in some completely untested direction," Sun Life CEO Don Stewart said in an interview.
It's an unusual day when the Canadian banks, insurers, government and regulators all agree on something, Mr. Guloien quipped at Manulife's annual meeting in Toronto.
The biggest concern that insurers have right now relates to the second phase of IFRS rules, which would not come into force before 2013.
Canadian financial institutions have long ensured that the time horizon of their assets matches their liabilities: For instance, if an insurer sells a 30-year annuity, it will match it with a similar-term bond. As a result, interest rate swings don't create large issues in terms of solvency and capital, Mr. Guloien said. "One of the reasons our industry did so well is that the Canadian regulatory and accounting standards forced companies to match assets and liabilities very effectively," he added.
Insurers say the new rules threaten to separate the two sides of the balance sheet, so that assets and liabilities move independently. The result would be a far less exact system that could produce gains and losses "that are not really real," Mr. Guloien said.
An illustration of the difference that accounting rules can make: Manulife made about $1.4-billion last year according to Canadian Generally Accepted Accounting Principles, and $3.14-billion (Canadian) on a U.S. GAAP basis. That's largely because of the different way the two sets of rules deal with interest rate assumptions.
The Canadian Accounting Standards Board has already decided to adopt IFRS and Peter Martin, director of accounting standards, said the country will not pick and choose rules on a piecemeal basis. That means adopting the whole package, including the rules that would affect the insurers.
"The thing about International Financial Reporting Standards is you really have to take them as a whole, you can't sort of dabble in it," Mr. Martin said. "The purpose is so that everybody in the world is accounting for the same things in the same way, and as soon as one country starts fiddling with something they may not like, you completely lose the overall objective."
But Mr. Martin also pointed out that the insurers still have plenty of time to make their voices heard, as there will be a public comment period after the draft rules are released.
Mr. Guloien told reporters that he thinks most of the input that the IASB is receiving on the potential rules is coming from European companies, who are using a hodge podge of accounting approaches.
But the products that insurers sell in North America are quite different from those in Europe, he said, warning that "the wrong set of rules can induce the wrong kind of behaviour."