Financial Update

North American stocks rally on bargain hunting

· TSX +614.29pts as investors flocked to commodity and financial stocks that were beaten down in Monday's steep fall, encouraged by strong earnings from several companies and signs that the frozen credit markets are starting to thaw (Reuters)
· Dow +889.35pts up more than 10%, on bargain-hunting and hopes the U.S. Federal Reserve and other central banks will cut rates further.
· Dollar +.37c to $77.96US. The rally in the Canadian dollar was aided largely by a rally in global stock markets and a slightly improved overall market sentiment. But the gain was held in check as investors continued to liquidate riskier assets in favor of the greenback, a practice that has weighed on the Canadian currency in recent weeks.
· Oil -$.49to $62.73US per barrel. as concerns about faltering demand offset OPEC comments suggesting the producer group could throttle back output again to support prices.(FP)
· Gold $-2.40 to $739.30US per ounce

IMF, EU agree to $25.1-billion package for Hungary ELIZABETH PIPER Reuters-Report on Business — The United States is expected to cut interest rates on Wednesday, a measure Japan, the European Central Bank and Britain are forecast to follow by the end of next week to bolster economies facing recession.

While dispensing with a repeat of the coordinated cuts made earlier this month, authorities fear the worst financial crisis in 80 years will usher in a long recession and are looking to individual rate reductions to soften the blow.

Hungary became the latest country to seek finance from global lenders, agreeing a rescue package worth $25.1-billion (U.S.) to shore up its currency and markets. The International Monetary Fund said if the crisis was prolonged and many more countries asked for help, it could need more money.

New rule on funds relieves pinched insurers

TARA PERKINS Globe and Mail Update

Canadian regulators have fast-tracked new rules that will give insurers a reprieve from the beating they've taken as a result of falling stock markets.

The Office of the Superintendent of Financial Institutions, which regulates banks and insurers, changed the rules yesterday that dictate how much money insurers must put aside for their segregated funds businesses.

Falling stock markets have forced insurers to sock away more capital now for payments they'll have to make to customers years down the road, putting added pressure on firms such as Manulife Financial Corp. The revised rules give companies more time to put aside funds for far-off obligations.

The capital requirements for segregated funds are now less onerous if the payments are more than five years away, which should reduce the capital requirements for all of the insurers in the fourth quarter of this year, said Genuity Capital Markets analyst Mario Mendonca, adding that Manulife will be the biggest winner.

Insurers said they welcome the changes.

They believe the revised rules more accurately reflect the actual risk with respect to the future payments that they have promised customers.

Manulife shares, which had fallen $17.83 from the start of the month to $21.17 on Monday, gained 10.96 per cent or $2.32 to close at $23.49 on the Toronto Stock Exchange yesterday after The Globe and Mail reported that OSFI was considering changes to the rules. Shares of Sun Life gained 14.34 per cent to close at $30.06 on what was generally a strong day on the market.

The revisions are a move in the opposite direction to regulators' general desire for financial institutions to preserve as much capital as possible in this economic environment.

One week ago, OSFI issued an advisory saying it wants banks and insurers to consult the regulator before any share buybacks. “OSFI is of the view that the current environment calls for increased conservatism in capital management,” it said at the time.

But insurers believe that the old capital rules for their segregated funds businesses were too strict. Manulife would likely have been required to put aside more than $2-billion in the fourth quarter for payments that mostly come due between seven and 30 years from now.

Segregated funds are products where insurers invest customers' money in a number of funds, and promise them regular payouts at some point in the future. When tumbling stock markets decrease the value of the funds, insurers are forced to put aside more capital to meet their future obligations. If markets rise, they can reverse that.

OSFI's revisions were released late yesterday afternoon and the exact impact on insurers' capital requirements this quarter is not clear.

In a letter to the industry, the regulator said it had planned to update the rules by 2011, but that market developments highlighted the need to move quickly.

When the rules were first developed, segregated fund guarantee contracts generally had a term of 10 years or less. Insurers have been pushing into the retirement planning market, and the contracts now largely have terms of 30 years, or even indefinite terms to the end of the customer's life.

OSFI said the old rules might not have sufficiently distinguished between the lower level of capital that should be required to support distant payment obligations and the higher level for payments that are closer to coming due. In addition, it said the rules made capital requirements “susceptible to dramatic swings that may not reflect changes in risk.”

The changes attempt to reduce the volatility in the requirements.