Manulife Financial Corp. posted net income of $1.8-billion for the second quarter ended June 30, up from $1-billion a year earlier.

But the Toronto-based insurance giant also announced its board has decided to reduce the quarterly dividend by 50% to 13 cents per share, effective Sept. 21.

"While we recognize the importance of the cash dividend to many of our common shareholders, we believe that retaining more of our earnings is the most effective means of building capital, while still providing an attractive yield for our shareholders who will benefit as we deploy our , said Donald Guloien, Manulife‘s chief executive. "We believe that companies that build fortress levels of capital will benefit their policyholders and shareholders."

He said the capital position at the end of the second quarter was "at satisfactory levels," but added that the firm's capital planning must "anticipate more conservative economic scenarios than we are currently experiencing."

Manulife shares (MFC/TSX) were down $2.21 to $24.04 at 10:56 a.m.

In a note to clients Thursday morning, Dundee Capital Markets analyst John Aiken suggested Canadian banks are likely to be beneficiaries of Manulife's decision to cut its dividend in half.

"It is our strong conviction that none of the banks will cut their dividends in the near term," the analyst wrote, adding that "payout ratios remain sustainable."

While some "chicken littles" may leave the banks on fears they will follow Manulife's lead, Mr. Aiken said he believes bank valuations will rise "as investors exit Manulife (and other insurers) and look to the banks for yield."

Manulife produced diluted earnings per share of $1.09 in the second quarter, up from 66 cents a year earlier.

Mr. Guloien said the firm reported solid performance in almost every area of business, made progress in rebalancing its product mix, and maintained strong asset quality.

The quarter's earnings were primarily driven by the significant increase in global equity markets, which resulted in non-cash gains of $2.6-billion Nearly $2.4-billion of those gains related to segregated fund guarantees.

Partially offsetting the gains was the impact of lower corporate bond rates and, to a lesser extent, continued pressure on credit. The decline in interest rates and other fixed income items resulted in non-cash charges of $1.1-billion, primarily as a result of lower investment returns assumed in the valuation of policy liabilities.

"While the increase in equity markets in the quarter resulted in a release of a large amount of segregated fund guarantee reserves, lower corporate bond rates had a significant adverse impact on the quarter's results," Michael Bell, Manulife's chief financial officer, said in a statement. "Canadian actuarial practices require us to reflect the current investment returns on future cash flows in the valuation of our policy liabilities," said Mr. Bell.

In addition, Manulife is conducting a review of "policyholder experience assumptions," as well as assumptions for economic and investment factors.

The company expects the updated calculations "will result material charge to earnings" that is likely to be recorded in the next fiscal quarter.

"Although we have not completed our assessment nor have we reached any conclusions, the preliminary information indicates that the possible change in assumptions with respect to policyholder behavior for segregated fund guarantee products may result in a charge not to exceed $500-million," the company said in a statement.

Changes to other assumptions "may result in additional charges to earnings," in light of current economic conditions, the company said.

In June, Manulife received an enforcement notice from the Ontario Securities Commission related to its disclosure of risks associated with its variable annuity guarantees and segregated fund products.

The notice indicated a "preliminary conclusion" by OSC staff that Manulife failed to properly disclose before March the potential impact its investment product guarantees would have in the event that equity markets declined.

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