Enter core earnings. Manulife said two weeks ago it will begin using that measure to better reflect the strength of its business, and bring the company more in line with its international peers. “We’ve listened to the analysts and investors and what they want to understand is the underlying earnings capacity of the organization,” said Manulife chief executive officer Donald Guloien. Manulife chief financial officer Steve Roder said, “I wouldn’t be surprised if others follow us, but we were prepared to take the leap.”MARK BLINCH/Reuters
Amid all the numbers a company reports each quarter, one matters most to investors – how much money was made or lost. So when Manulife Financial Corp. introduced a new profit measure called "core earnings" in its most recent third-quarter results, analysts and investors paid close attention.
Manulife was once noted for remarkably stable earnings. Investors could count on steady profits and few surprises from Canada's largest insurance company. That changed in the financial crisis of 2008, when stock markets and interest plummeted, hurting Manulife's ability to generate investment returns to pay for promises it made to customers. Manulife began posting wild swings in net income from quarter to quarter – from massive profits to deep losses. Shell-shocked investors started looking elsewhere for safe returns.
Enter core earnings. Manulife said two weeks ago it will begin using that measure to better reflect the strength of its business, and bring the company more in line with its international peers. The core earnings metric aims to show investors the value of Manulife's business by stripping out the direct impact of interest rates and unsteady equity markets, as well as some other material and one-time items.
"We've listened to the analysts and investors and what they want to understand is the underlying earnings capacity of the organization," said Manulife chief executive officer Donald Guloien.
Manulife chief financial officer Steve Roder said, "I wouldn't be surprised if others follow us, but we were prepared to take the leap."
But while some believe reporting alternative measures of profit is more informative than a comparable generally accepted accounting principle measure (GAAP) such as net income, many experts urge caution, saying these figures can be easily misunderstood.
Ramy Elitzur, a professor at the University of Toronto's Rotman School of Management, said there have been many alternative metrics that have become popular over the years and a critical eye is necessary no matter what kind of numbers a firm reports. "Always be skeptical. Management teams will manipulate financial statements in a way that fits them the best," he said.
Ratings agency Standard & Poor's (S&P) first introduced core earnings in 2002 in an attempt to focus on a company's principal business and improve financial reporting. But it was hardly the first "pro forma" alternative earnings measure to appeal to the Street's desire for better analysis tools. Another commonly used non-GAAP measure is EBITDA (or Earnings Before Interest, Taxes, Depreciation and Amortization), which aims to put companies on equal playing field for comparison.
According to several research studies, analysts and investors see these profit gauges as having more value than the regulated accounting alternatives and pay more attention to them.
In the case of Manulife, Mario Mendonca, an analyst at Canaccord Genuity, approves of the new measure, which was similar to the one he had been using to cover the company.
"We were all over the place – all the analysts had their own definition and I was spending time justifying my definition to investors rather than talking about the merits of the quarter," he said.
Management teams sometimes introduce pro forma figures to link a business to competitors they want to be associated with. Manulife has pointed to international competitors as their source of research in making this move. And for Canada's insurance and banking analysts, Mr. Mendonca says the core earnings metric is already well-established at the banks and reviewed in quarterly results.
Now that the country's largest life insurer by assets has made the switch, will others follow suit? Great-West Life Assurance Co., which has more stable earnings, said through its parent company Great-West Lifeco that it has "no plans to alter [its] approach, for example to publish a core earnings estimate."
Mr. Mendonca said Sun Life already comes close in its reporting. "They're not quite as explicit, but they give you enough information to calculate your own," he said, noting it would be better if the company offered a "nice, tidy definition."