Manulife lifts dividend on positive outlook

Meets $4B earnings target for fiscal 2016 as it sees sales and margins improve

Despite skepticism early in the year as low oil prices challenged Canada’s financial services sector, Manulife Financial Corp. met a long-standing core earnings target of $4 billion in year-end financials reported Thursday.

The results and growth outlook led the Toronto-based insurance giant to boost the quarterly dividend by two cents per share, or 11 per cent.

On an afternoon conference call with analysts, Don Guloien, Manulife’s chief executive, noted that the company has raised the dividend three times in the past four years, for a total increase of 58 per cent.

Manulife cut the dividend in half, to 13 cents, in 2009 after stock markets tumbled during the financial crisis. The quarterly dividend is now 20.5 cents.

John Aiken, an analyst at Barclays Capital, noted that Manulife met the $4 billion earnings target for fiscal 2016 — first set as a threeyear target in 2012 — despite generating less than half the expected level of investment gains.

“Underlying earnings growth remained impressive, particularly in Asia, which should continue to fuel a positive outlook,” the analyst wrote in a note to clients. “With investment gains coming back on line, earnings growth should continue to be strong through 2017.”

In the fourth quarter, which ended Dec. 31, Manulife reported growth of new business value from the previous quarter in each of its segments, including a 15 per cent increase in Asia.

On the conference call, executives said sales and margins improved due, in part, to a relationship forged with DBS Bank Ltd. in 2015. The partnership called for Manulife’s life and health insurance products to be sold through DBS branches in Singapore, Hong Kong, China, and Indonesia.

Manulife generated net income attributed to shareholders of $63 million (1¢ per share) in the fourth quarter, compared to $246 million (11¢) in the corresponding period a year earlier.

The insurer’s net income includes the mark-to-market impact of interest rates and equity markets, which the company says does not reflect the underlying earnings capacity of the business. As a result, Manulife also reports core earnings. Core earnings in the fourth quarter were nearly $1.29 billion (63 cents a share), up from $859 million (42 cents).

Manulife took charges of $1.2 billion in the quarter due to the direct impact of markets.

“While the overall impact of higher rates is highly positive over the long term for our company, net income was negatively impacted by market movements in the fourth quarter,” Guloien said.

Manulife’s core earnings in the fourth quarter included a $142 million tax release, which Aiken said reduced the recurring earnings per share figure to 56 cents from 63 cents. Still, the analyst said the earnings were “well above expectations.”

On the conference call, Manulife executives were asked whether the impact of market fluctuations and interest rates could take a toll on the company’s capital cushion.

Guloien said there are six components each quarter that can go either positive, neutral, or negative, and all went negative in the fourth quarter.

“That’s an usual event. It was an unusual quarter to have all of those things go negative,” he said. “I won’t lose any sleep over this. This is going to happen some percentage of the time. It’s not going to happen every quarter …. It can happen from time to time.”

As for Manulife’s capital cushion, Guloien said the company holds capital “well above” what regulators require and is sometimes accused of being too conservative in choosing to maintain the buffer rather than buying back shares or deploying the capital in other ways.

In addition, he said the company is better prepared to weather a downturn than during the financial crisis as a result of pricing adjustments on certain products, and hedging most of the equity risk.

“We can’t say absolutely if we went through another sort of onein-two-hundred-years event that there’s no problem. But we do a lot of scenario testing in very robust negative scenarios,” he said. “And we feel pretty comfortable.”

In January, Manulife settled long-standing class action lawsuits in Ontario and Quebec dating back to the aftermath of the financial crisis. The $69 million settlement of the cases, which related to disclosure of market price risk in segregated funds and variable annuity products, was made without any admission of liability.

Underlying earnings growth remained impressive ... which should continue to fuel a positive outlook.