Gains in Manulife Financial Corp.'s investment portfolio – which holds everything from bonds to trees – are reshaping the way the company calculates its long-term growth potential.
The insurer and asset manager is increasingly benefiting from returns on investments such as real estate, timberland and agriculture, boosting the company's earnings outlook.
When Manulife reported third-quarter earnings Thursday, it said this trend allowed for an alteration to its non-GAAP profit measure called "core earnings." This metric was introduced two years ago in an effort to stabilize quarterly results, and give investors a clear picture of the underlying earnings capacity of the company.
Back in 2012, volatile markets were shaking up the financial results that had been so stable before the global crisis. Core earnings removes the direct impact of interest rates and unsteady equity markets, as well as some other one-time items. Many international insurers report such a figure.
On Thursday, Manulife said it plans to double the quarterly investment gains it includes in core earnings up to $100-million, or a maximum of $400-million per year. The change will take effect in 2015. This category of investment-related experience reflects the returns Manulife makes from fixed-income trading and private equity, among other areas.
The move is, in part, an expression of confidence in the reliability of earnings from these securities and other investments, but it's also a mark of learning. "It reflects the fact that we have two years more experience than when we started this thing, and we've had very strong [investment] experience," said Steve Roder, chief financial officer of Manulife.
In hindsight, the initial $50-million maximum was "a little cautious," said Mr. Roder. The company's analysis shows that gains have averaged more than $100-million in recent quarters, and an average of over $80-million per quarter since the start of 2007.
In the three months to Sept. 30 the investment-experience gains were particularly driven by strong returns in the company's portfolio of alternative assets. "This quarter we had some very good realizations of private equity assets in the energy sector and natural resources," Mr. Roder said.
Manulife may be best-known as an insurer, but the company has been growing its investment management expertise in a wide variety of assets. These long-term holdings range from vineyards and farmland to finding and developing oil and gas assets. The company's Boston-based Hancock Timber Resource Group, for example, manages more than six-million acres of trees. That makes it the largest manager of timberland for public and corporate pension plans and other institutional investors in the world, with assets as far away as New Zealand.
Manulife believes this expertise sets it apart from other institutional money managers and has increasingly targeted new clients in recent years. This quarter, funds managed on behalf of institutional clients hit a new record of $38.8-billion in the company's investment division, Manulife Asset Management. That adds to the $11.3-billion that the company manages for itself.
Warren Thomson, chief investment officer at Manulife, said insurance policy liabilities benefited from "additional investments in real estate, private equity and timberland" in the third quarter.
Analysts generally regarded the core earnings target change positively, if with little surprise. The move "underscores the recent strong experience and improved future outlook," said analyst Tom MacKinnon of BMO Nesbitt Burns, in a note to clients.
Robert Sedran, an analyst with CIBC, noted that the "extra $200-million in incremental gains per year is very roughly 5 per cent of earnings," which propels the company further toward its target of $4-billion in core earnings in 2016.