Manulife’s profit slides 34% to $1B amid disruptions from coronavirus
Manulife Financial Corp. reported core earnings of $1 billion for the first quarter, down 34 per cent from the same period a year ago.
During the period, which ended March 31, core return on equity was 8.2 per cent, down from 10.4 per cent last year.
“The COVID-19 pandemic continues to disrupt economies and capital markets worldwide, and our operating conditions during the first quarter were understandably affected,” Roy Gori, Manulife’s chief executive, said in a statement when the results were released after markets closed Wednesday.
“Considering these challenging conditions, we delivered solid results, demonstrating the diversity and resilience of our businesses,” he added.
In an interview with the Financial Post, Gori said uncertainties around the spreading novel coronavirus and the economic impacts of efforts to contain it will mean more challenging quarters ahead.
“Consumer confidence is down, consumption is down, and markets remain very volatile,” he said. “There’s a lot of uncertainty and concern as to how COVID will impact the business and the ultimate ability to navigate.”
During the first quarter, Manulife paid out travel insurance claims related to spread of the virus, and made a decision to recognize a reduction in the carrying value of oil and gas investments through impairment and fair value adjustments.
Still, Gori said the impacts on claims and sales have been “relatively modest” so far, and no changes have been made to Manulife’s medium-term targets.
“We did enter this crisis from position of strength,” he said, noting that the firm managed to improve its capital position in the first quarter.
Gori added that the Toronto-based insurer’s diversification — both geographically in North America and Asia, as well as through business lines that include wealth management and retirement planning — should help weather the crisis.
“I think that will be a strength for us,” he said. “We’re well-positioned to navigate.”
Analysts are keeping a close eye on the investment portfolios of insurers, and their exposure to shaken sectors such as retail, travel, and real estate, as they deal with continued low interest rates and other impacts of the pandemic across their operations.
One area of focus is bond investments, which haven’t resulted in significant losses over the past decade. Some predict those days are numbered, with companies likely to be downgraded or even fail if customers don’t return in sufficient numbers as cities begin to drop restrictions aimed at slowing the spread of COVID-19.
Gabriel Dechaine, an analyst at National Bank of Canada, said Manulife’s reported after-tax credit loss in the first quarter — $50 million — is only the fourth such loss in the past 34 quarters.
“Credit losses (are) likely to persist,” he said in a note to clients Thursday.
Dechaine said Manulife has disclosed that a 50-per-cent increase in defaults relative to the firm’s reserve assumptions would reduce earnings by $77 million.
“If the assumption is for a low default figure, this figure may be understated,” the analyst wrote.
While almost everything in the credit portfolio is investment grade, Dechaine noted that 59 per cent of the insurer’s $19.2 billion energy credit book is Bbb-rated.
The analyst said Manulife’s investment performance weakened more than he expected in the first quarter. Including a $700-million to $800-million oil and gas loss, suggesting the insurer “will be hard-pressed to recognize any core investment gains in 2020.”
However, Dechaine said Manulife’s capital position is sound, with “billions (of dollars) of ‘dry powder’” to support the company.
Even if excess regulatory capital is depleted by narrowing credit spreads in subsequent quarters, it is likely to “remain in a very healthy position,” the analyst wrote.