Manulife Financial Corp profit slides 62% as energy investments take a hit: ‘A disappointing year’

TORONTO – Energy exposure hit the bottom line of Manulife Financial Corp. within the fourth quarter, resulting in the shares to slide by as much as 12 percent in Thursday trading despite a nine per cent hike within the dividend.

Quarterly net earnings missed analyst estimates and included a $361 million charge on “investment-related experience” – with the majority of that because of oil and gas holdings.

“For the 3rd time in 2015, Manulife incurred significant investment losses related to its energy investments,” Barclays Capital analyst John Aiken wrote inside a note to clients.

“The ongoing uncertainty in oil and also the broader macro outlook has management concerned,” he wrote, adding that chief executive Don Guloien and the management team are “backing away” from the $4 billion core earnings target for 2016.

Guloien told analysts on the business call that “it was a disappointing year when it comes to net gain, largely because of sharp mark-to-market declines in oil and gas prices, diminishing a normally great year.”

However, he indicated that confidence within the insurance giant’s capital levels and earnings growth momentum, besides the investment-related issues, caused Manulife to boost its quarterly dividend to 18.5 cents from 17 cents.

Guloien noted that insurance sales were up 24 percent in fiscal 2015, with Asia adding to an even larger rise in new business value.

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The insurance giant reported core earnings of 42 cents a share in the fourth quarter, below analyst estimates of 45 cents. Net gain for the same period, which includes unusual items such as the write-downs around the energy portfolio, fell by 62 per cent from the year earlier to $246 million (11 cents a share).

Core earnings for that full year reached $3.4 billion in 2015, compared with $2.9 billion last year.

But Guloien said it would be tough to hit the earlier core earnings target of $4 billion in 2016, which assumed a $400-million contribution from investment gains.



“We’re not going to be so fixated with that number that we’re going to do anything stupid to obtain there,” he told analysts.

As for that steep decline in the cost of oil, it has not prompted Manulife to jettison existing investments exposed to the gas and oil sector.

“On the contrary, this is the time to perhaps bunch the truck,” Guloien told analysts.

Dean Connor, the main executive of rival insurer Sun Life Financial, said his firm began “de-risking” contact with energy-related investments in regards to a year ago.

“Our exposure is gloomier than most of our United states peers,” he explained within an interview, adding that Sun Every day life is exposed through bonds, most which are investment grade, and real estate in Alberta.

Both Connor and Guloien said they expect only a small effect on their businesses from a regulatory change in China this month affecting the sale of insurance in Hong Kong.

Manulife’s energy-related investment issues have the symptoms of spooked investors, who drove the shares down $1.47, or 8.5 percent, to a 52-week low of $15.84.

Still, the situation isn’t comparable to a crisis in the firm in the past involving market hedging, said David Beattie, a senior vice-president at Moody’s Investors Service.

“Both give rise to earnings volatility and therefore uncertainty around future net income,” he explained. However, the fair value losses on gas and oil holdings could ultimately reverse themselves with time.

The requirement to “absorb the losses today” originates from the accounting rules that govern the life insurer, Beattie said.

Financial Post

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