TORONTO – Energy exposure hit the bottom line of Manulife Financial Corp. in the fourth quarter, causing the shares to slip by as much as 12 percent in Thursday trading despite a nine percent hike in 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 gas and oil holdings.
“For the third amount of time in 2015, Manulife incurred significant investment losses associated with its energy investments,” Barclays Capital analyst John Aiken wrote inside a note to clients.
“The ongoing uncertainty in oil and the broader macro outlook has management concerned,” he wrote, adding that leader Don Guloien and the management team are “backing away” from a $4 billion core earnings target for 2016.
Guloien told analysts on the conference call that “this was a disappointing year in terms of net income, largely because of sharp mark-to-market declines in oil and gas prices, diminishing an otherwise great year.”
However, he established 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 increase 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 similar period, including unusual items like the write-downs on the energy portfolio, fell by 62 per cent from the year earlier to $246 million (11 cents a share).
Core earnings for the full year reached $3.4 billion in 2015, in contrast to $2.9 billion last year.
But Guloien said it would be difficult 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 on that number that we’re going to do anything whatsoever stupid to get there,” he told analysts.
As for the steep decline within the cost of oil, it’s not prompted Manulife to jettison existing investments exposed to the oil and gas sector.
“On the contrary, it is now time to perhaps load up the18 wheeler,” Guloien told analysts.
Dean Connor, the chief executive of rival insurer Sun Life Financial, said his firm began “de-risking” contact with energy-related investments about a last year.
“Our exposure is lower than the majority 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 property in Alberta.
Both Connor and Guloien said they expect merely a small effect on their businesses from a 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 similar 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 oil and gas holdings could ultimately reverse themselves over time.
The requirement to “absorb the losses today” originates from the accounting rules that govern the life span insurer, Beattie said.