Manulife Financial not yet backing off $4B annual profit goal despite headwinds

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An employee arranges paperworks at the local office of Canada's Manulife Financial Corp. in Jakarta, Indonesia on July 8, 2002. THE CANADIAN PRESS/AP, Dita Alangkara

TORONTO - Low interest rates and a volatile equity climate could force Manulife Financial Corp. (TSX:MFC) to abandon its lofty goal to achieve $4-billion in annual earnings by 2015.

The Toronto-based company said Thursday that if low interest rates persist, it will likely book a $500-million hit to its earnings this year.

Still, it is not backing away from plans to achieve the $4 billion in annual earnings and 13 per cent return on investment by 2015, at least for now.

Manulife's annual earnings were $129 million in 2011 compared with a loss of $1.66 billion in 2010.

"There continue to be several headwinds and risk factors," Michael Bell, the company's chief financial officer, said on a conference call to discuss the insurer's fourth-quarter earnings.

"As a result of the deterioration in the economic conditions and global instability, our 2015 objectives no longer include a cushion for further unfavourable conditions."

He added that any additional risk factors could make the company unable to achieve the hoped-for earnings improvement.

Stock and interest rate declines affect insurers because they tend to invest much of the money they make from policyholders into equity and bond markets.

Under international financial reporting standards, the company must use so-called mark to market reporting, meaning it has to record the impact of current interest rates on its financial statements even though they could change substantially in the future.

"If rates decline to a level where we are required to change the reserving scenario, our earnings will become more sensitive to interest rates and corporate spreads in the absence of any mitigating management actions," said Bell, who also announced he would be leaving the company soon.

"We are pleased with the work we've done to ensure that our company can operate effectively in this low interest rate environment and that we are well-positioned compared to many others in our industry."

Canada's largest insurer has been working to reduce its exposure to volatile stock markets and interest rates. President and CEO Donald Guloien said Thursday it has now achieved 93 per cent of its hedging goals and has exceeded its 2014 goal for a reduction in interest rate sensitivity.

It came under fire from shareholders to turn around its finances following losses of more than $3.3 billion in the second and third quarters of 2010 due to declining stock markets and interest rates.

In the most recent quarter, the Toronto-based financial services firm booked a loss of $69 million in the fourth quarter as it took a charge of $665 million related to low interest rates. It said the results were equivalent to a loss of five cents per share, compared with a profit of $1.79 billion, or 96 cents per share, a year ago.

Still, that was enough to best analysts expectations of an 11-cent per share loss.

Total quarterly revenue was $9.7 billion, up from $3.42 billion a year earlier.

Manulife booked a number of one-time items during the quarter totalling $100 million "of after-tax headwind that I would not expect to be a recurring item in 2012," Bell said.

"I think were going to get some natural uptick in Q1 because of the non-recurrence of those items."

Bell will be leaving the company after overseeing its annual 2011 financial reports to return home to Philadelphia where his family moved in the summer.

Bell, who will stay on with the company as it searches for a replacement CFO, has been part of the team responsible for reducing Manulife's exposure to volatile stock markets and interest rates.

"This is far from a positive, as Michael had shown a very firm grasp on the company's operations and, in our view, he will be difficult to replace," Barclays analyst John Aiden wrote in a note.

"We would not be surprised to see Manulife underperform in the near term given the less than stellar 'core' earnings coupled with the announcement of the CFO's departure."

Manulife Financial Corp. is Canada's largest life insurance company with about 25,000 employees in 21 countries.

Shares of Manulife closed down 23 cents or 1.9 per cent to $11.88 on the Toronto Stock Exchange.