(Bloomberg) — Manulife Financial Corp. posted a 43 percent decline in third-quarter profit as Canada’s largest insurer said its oil and gas investments hurt results.
Net income was C$622 million ($470 million), or 30 cents a share, down from C$1.1 billion, or 57 cents, a year earlier, the Toronto-based firm said Thursday in a statement. Profit excluding some items was 43 cents a share, missing the 45-cent average estimate of 14 analysts surveyed by Bloomberg.
The shares fell 2.3 percent to C$21.66 at 11:52 a.m. in Toronto and have lost 2.4 percent this year.
“We delivered strong operating results in the third quarter,” Chief Executive Officer Donald Guloien, 58, said in the statement. “Net income was negatively impacted by investment experience, principally oil and gas valuation changes, as well as the charges associated with our annual actuarial review.”
The insurer took a C$220 million charge in the quarter for its oil and gas investments as prices slid, compared with gains of C$370 million a year earlier. Earnings from insurance and wealth management rose 12 percent and 82 percent respectively over the prior year, helped by record insurance sales in Asia and several acquisitions, including Standard Chartered Plc’s Hong Kong pension business.
The company has lost C$626 million this year on energy assets, offset by C$457 million in gains from other assets including real estate. Manulife has C$13.4 billion in energy debt securities and private placement debt, up 15 percent from C$11.7 billion last year.
The bet on oil will pay off, according to company executives.
“We like to think at some stage prices will increase and then the benefit of that will flow straight back through the income statement,” Steve Roder, chief financial officer at the Toronto-based firm, said by phone Thursday after the results were out. He said energy prices are currently undervalued.
Manulife invests in some of Canada’s largest energy companies and service providers. It has about 2.9 million shares of Encana Corp. worth about C$38 million, or 0.3 percent of the shares outstanding, data compiled by Bloomberg show. The oil and natural gas explorer’s shares have tumbled 39 percent in the last year, below the 20 percent slide in the Standard & Poor’s/ TSX Composite energy sector index.
The insurer is one of the top 10 investors in Precision Drilling Corp., an oil and gas services provider with 2.7 percent of the outstanding shares. That stock is down 25 percent this year. The insurer also invests in Canadian Natural Resources Ltd., Suncor Energy Inc., and Baytex Energy Corp., according to the data.
Chief Investment Officer Warren Thomson said in Thursday’s results that Manulife remains “committed to this sector and it is our view that oil prices are currently below the economic level required to meet demand on a long-term basis.” He said it’s likely that the company will post a C$400 million charge annually from maintaining those energy investments.
Wealth management profit rose 31 percent to C$169 million boosted by the 60 percent growth at the Canadian unit, with increased group retirement demand and mutual fund sales. Insurance earnings rallied 20 percent to C$590 million as sales in Asia rose 19 percent to a record $379 million. CEO Guloien said in an interview last month the insurer will rely more on Asia growth than Canada in the near future.
Some of the fastest growing Asian regions are Mainland China, Singapore, Vietnam, and the Philippines, Roder said, where the expanding middle class is hungry to invest assets and can start to afford insurance products. Manulife has operated in the Asian region for more than a century, starting in Hong Kong.
Core earnings, which strips out the impact of interest rates and investments, were up 15 percent to C$870 million from last year as the company added several deals, increased sales in Asia, and benefited from the strength of the U.S. dollar over the Canadian currency. Assets the company oversees jumped 19 percent to C$888 billion, reflecting acquisitions and sales to third party-clients including pension funds.
“The reaction to the quarter should focus less on the earnings miss and more on the underlying trends,” Robert Sedran, analyst at Canadian Imperial Bank of Commerce, said in a research note. “Asia showed well — and so did Canada, for that matter — sales were good and higher quality sources of earnings lines were also positive.”
The company’s review of its actuarial assumptions resulted in a C$285 million charge, below the C$400 million cited in a preliminary forecast last quarter. The annual review determines whether Manulife had losses or gains from the investing assumptions it made at the start of the year.