Manulife Financial Corp. is pushing back the ambitious profit targets that it set in 2010, a signal that the insurer is still struggling to regain its footing four years after the financial crisis began.
The country’s largest life insurer by assets had already hinted that it would not be able to meet its goal of earning $4-billion in profit in 2015. Now, not only is it moving that out by one year to 2016, it is also changing its definition of profit to make the target easier to meet.
Manulife introduced a new measure called “core earnings,” which strips out the impact of certain accounting rules that have caused the company’s results to swing wildly between large profits and losses for the past four years. Steve Roder, Manulife’s chief financial officer, said the new measure will give investors and analysts a more accurate picture of its results. “I wouldn’t be surprised if others follow us, but we were prepared to take the leap,” he said.
Manulife’s woes began in late 2008, when stock markets plunged after the collapse of Lehman Brothers Holdings Inc. led to a crisis of confidence in the global financial system. Manulife suffered losses on variable annuities, a financial product that is linked to equity markets but which guarantees customers a minimum payment. The company was forced to raise equity and set aside billions in additional capital because it had not hedged the large portfolio of stocks that backs its variable annuity business.
Then a new and equally severe issue arose – ultra low interest rates.
Those rates hurt life insurers by lowering their assumptions about the future returns they will earn on their investments to pay for benefits to customers. As a result, Manulife shareholders have found themselves with a troubled investment. The shares, which were above $40 as recently as 2008, closed at $11.82 on Thursday, not much higher than the low reached at the market bottom in March, 2009.
The company has lost money in eight of the past 15 quarters, including this year’s third quarter. The losses amounted to $227-million after the insurer took a $1-billion charge that stemmed largely from a change in behaviour by its customers. With financial markets still volatile, the company now expects that more of those customers will hang on to their variable annuities – forcing Manulife to pay out on the guarantees.
Analysts had actually been expecting a larger loss in the quarter. “We were impressed by Manulife’s ability to absorb almost all of the actuarial and goodwill charges and on a reported basis, it definitely performed better than anticipated,” John Aiken, an analyst at Barclays Capital, wrote in a note.
The company’s insurance sales in Asia were lower this quarter than the record-high levels posted in the prior two quarters, but it had anticipated that decrease, and the sales were roughly in line with the same period a year ago.
Manulife chief executive officer Donald Guloien said the company is focused on selling products to the middle class in Asia, and its target market is growing at roughly double the pace of the country’s economic growth. “So it’s very, very buoyant growth, and that’s going to continue for a long period of time.”
Meanwhile, smaller rival Sun Life Financial Inc. is sticking to its profit targets following its third quarter results – the company is optimistic it can still meet the goals it set back in March.
“We’re still focused on our 2015 targets, in aggregate and across all of our businesses, that continue to be ambitious and achievable,” CEO Dean Connor said.
The insurer rebounded from a loss last year to a third-quarter profit of $383-million, or 64 cents per share, that beat analyst estimates.
Some analysts have expressed concern, however, over whether Sun Life can meet its targets in Asia. BMO Nesbitt Burns analyst Tom MacKinnon called the business unit “challenged” in a note to clients. Flat year-over-year sales are making the firm’s goal of posting a 23-per-cent compound annual growth rate in profits through 2015 “look ambitious,” he wrote.
Mr. Connor, who calls himself optimistic by training, said he’s still focused on the targets for 2015 Sun Life set at its last investor day. “Notwithstanding the de-risking, there’s still a fair bit of our results that depend on how interest rates and equity markets come through,” he said. “We can’t predict those, but what we can do is – for the things we can control–work as hard as we can on really making them hum.”