TORONTO – Energy exposure hit the bottom line of Manulife Financial Corp. in the fourth quarter, causing the shares to slip up to 12 percent in Thursday trading despite a nine per cent hike in the dividend.
Quarterly net earnings missed analyst estimates and included a $361 million charge on “investment-related experience” – using the bulk of that because of gas and oil holdings.
“For the 3rd time in 2015, Manulife incurred significant investment losses associated with its energy investments,” Barclays Capital analyst John Aiken wrote in a note to clients.
“The ongoing uncertainty in oil and the broader macro outlook has management concerned,” he wrote, adding that chief executive Don Guloien and his management team are “backing away” from a $4 billion core earnings target for 2016.
Guloien told analysts on the business call that “this was a disappointing year in terms of net income, largely due to sharp mark-to-market declines in gas and oil prices, diminishing a normally great year.”
However, he indicated that confidence in the insurance giant’s capital levels and earnings growth momentum, aside from the investment-related issues, caused Manulife to raise its quarterly dividend to 18.5 cents from 17 cents.
Guloien noted that insurance sales were up 24 per cent in fiscal 2015, with Asia contributing to an even larger increase in new business value.
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The insurance giant reported core earnings of 42 cents a be part of your fourth quarter, below analyst estimates of 45 cents. Net gain for the same period, which includes unusual items such as the write-downs on the energy portfolio, fell by 62 per cent from a year earlier to $246 million (11 cents a share).
Core earnings for that twelve month reached $3.4 billion in 2015, compared with $2.9 billion a year earlier.
But Guloien said hello 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 really so fixated with that number that we’re going to do anything whatsoever stupid to get there,” he told analysts.
As for that steep decline in the price of oil, it has not prompted Manulife to jettison existing investments exposed to the gas and oil sector.
“On the contrary, it is now time to perhaps bunch the18 wheeler,” 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 last year.
“Our exposure is lower than the majority of our North American peers,” he said within an interview, adding that Sun Life is exposed through bonds, most that are investment grade, and property in Alberta.
Both Connor and Guloien said they expect merely a small impact on their businesses from the regulatory alternation in China this month affecting the sale of insurance in Hong Kong.
Manulife’s energy-related investment issues appear to have 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 several years ago involving market hedging, said David Beattie, a senior vice-president at Moody’s Investors Service.
“Both give rise to earnings volatility and for that reason uncertainty around future net gain,” he said. 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 span insurer, Beattie said.
Financial Post
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