One of the Manulife offices on Bloor Street in Toronto.Glenn Lowson/The Globe and Mail
Manulife Financial Corp. suffered a steep drop in quarterly and annual profits as falling energy prices weighed on the company's investments and cast doubt on its ability to hit growth targets in the coming year.
The country's largest insurer posted a profit of $246-million in its fourth-quarter results, down more than 60 per cent from a year earlier. Full-year profit declined 37 per cent to $2.19-billion. Manulife said falling commodity prices were largely to blame, as the company took $876-million in charges related to oil and gas investments throughout 2015.
"We expect some of the macroeconomic headwinds and energy price volatility will persist … and that unless oil and gas prices strengthen, it will be difficult for us to achieve the $4-billion core earnings objective that we have set for 2016," said Donald Guloien, chief executive officer at Manulife.
Still, the insurer isn't changing tack. Mr. Guloien said he's committed to the asset class, even with the volatility it brings.
"I'm sure somebody is going to ask the question, 'Are you planning to get rid of oil and gas?'" he said on a conference call with analysts. "On the contrary, this is a time to perhaps load up the truck."
With just $1.74-billion invested in the sector through direct holdings and private equity, oil and gas investments account for less than 1 per cent of Manulife's $309.3-billion investment portfolio. To put that in perspective, timberland and farmland make up 2 per cent of the portfolio; real estate accounts for 5 per cent.
But big swings in corners of the market can have a speedy impact on insurers because of the way they account for their investments. Manulife's profit is based in part on expectations made about the returns it can earn from its investments – the energy sector would fall into this category.
Each quarter, insurers must determine the "fair value" of an asset or liability, based on current market prices. These valuations can move up or down with swings in equity markets, interest rates and other insurance guarantees. The company then reports those measurements as gains or losses, which can be accompanied by writedowns.
In 2015, Manulife's $876-million in investment-related charges from the plunge of oil and gas were only partly counterbalanced by $346-million worth of gains in other asset classes. If prices stay where they are, the company expects to take another loss in the first quarter of 2016.
But Mr. Guloien says he isn't panicking, and Manulife's view is that its oil and gas holdings are in good shape to recover their value in the future when prices rise again. Prices must go up in order for producers to meet demand, said Scott Hartz, executive vice-president of general account investments for Manulife.
Investors are showing less optimism so far. The company's stock slid more than 9 per cent to close at $15.84.
But if oil and gas prices stay at low levels through the rest of the year, Manulife may not be able to meet its growth targets of $4-billion in core earnings in 2016, because it won't be able to achieve the $400-million of investment-related gains it needs to get there. The company said the energy sector could also have "negative impacts on our other investments (including our debt and real estate portfolio), which are difficult to estimate."
Amid this uncertain landscape, Manulife's board of directors increased the quarterly dividend by 9 per cent, or 1.5 cents a share, to 18.5 cents a common share. This is the company's third dividend increase in less than two years, and Mr. Guloien said it represents the board's confidence in the amount of capital Manulife has on hand.