Manulife redoubles its Asia ambitions in a world of uncertainty

EVEN after operating in Asia for more than century, Manulife Financial Corp. is counting on the region to be its most promising driver of growth in an increasingly turbulent world.

The Canadian insurer, wealth adviser and fund manager expects to hit a goal of getting half of its profit from the region by 2025 — despite recent rocky quarters — and may not stop there, Chief Executive Officer Roy Gori said in an interview. While Manulife is proud of its geographic diversity, he said, it hasn’t set a “fixed ceiling” on the portion of its earnings it sees Asia generating.

Gori spoke after a major review session with his leadership team and signaled the company will stick to the “all-weather” plan it has run during his first five years at the helm. That playbook entails freeing up capital from its legacy portfolio and controlling expenses so it can focus on high-potential businesses — including Asia and wealth management — while also improving its technological prowess and creating a culture that attracts top talent.

“Asia and wealth and asset management are massive priorities where we do think we have a right to win and are in fact winning,” Gori said in the interview, at Bloomberg’s New York headquarters Friday. “How do we double down in those places and continue not just the success we’ve had, but how do we actually amplify that?”

It remains to be seen whether Manulife’s game plan will keep working in a world of surging inflation, rapidly rising interest rates and an array of geopolitical land mines. That’s not to mention the additional challenges in Asia, a region roiled by China’s zero-Covid policy, its tensions with the US over Taiwan and a crackdown on dissent in Hong Kong that has jeopardized the city’s status as a global financial hub.

That all makes for a different environment from the one Gori enjoyed in his early days as CEO, a title he’s had since October 2017. In his time running the company, Manulife has grown from the sixth-largest pan-Asian insurance company to the third-largest, Gori said. Manulife last year generated about 39% of its core earnings from the region, including contributions from wealth and asset management.

Boosting Earnings

The Asia expansion has helped Manulife’s results since Gori took the helm, contributing to its almost 20% annualized earnings growth, boosting its return on equity to more than 13% from 10% and helping drive a key expense measure to less than 50% of revenue.

Flareups of Covid-19 infections and government actions to tamp them down have weighed on Manulife’s business in the region for the last two quarters, hurting sales and forcing it to pay more than expected in claims.

“We expect some of these issues to normalize over time,” Gabriel Dechaine, an analyst at National Bank of Canada, wrote in a note in August. “However, with some governments prone to lock down their economies in order to manage Covid-19 risks, the route back to double-digit earnings growth from Manulife’s most valuable segment may be longer than expected.”

Investors have so far taken the Asia hiccups in stride, with Manulife’s shares falling 5.3% this year, less than the 11% drop for the S&P/TSX Financials Index and an 18% slide for Sun Life Financial Inc., the company’s most comparable rival. Yet, since Gori took over, Manulife is down 9.8%, versus a 21% gain for the financials index and a 17% advance for Sun Life.

The insurance industry as a whole is undervalued right now because it generates so much of its earnings from policies that already are in place — about 75% of profit in Manulife’s case, under new international accounting standards, Gori said.

Tailwind Provided

And rising interest rates are providing a tailwind, he said. For Manulife, every 50-basis-point increase in rates translates into an additional C$1.6 billion ($1.2 billion) present value of future earnings, he said. Higher rates also help Manulife’s global wealth- and asset-management business, which is more heavily weighted toward fixed income than is true for some of Manulife’s peers, said Paul Lorentz, who leads the unit.

“In the past, you didn’t get paid a lot on that when rates were low, and now we’re moving into environment where fixed income becomes a lot more attractive,” he said.

Manulife has a strong balance sheet, with C$23 billion in capital above its supervisory target, that makes it resilient in the face of challenges and allows it to fund share buybacks and dividend increases in an uncertain macroeconomic environment, Chief Financial Officer Phil Witherington said.

“We are still in a very strong capital position,” Witherington said. “So as well as having that all-weather strategy, it’s an all-weather balance sheet.”

But the higher rates also threaten to slow growth and increase unemployment, Gori said. The “guessing game” that markets are playing on whether central banks’ rate-hiking campaigns are working — which can be difficult to divine when the lag between monetary-policy moves and their effect on inflation can last nine months — adds a layer of complexity, he said.

‘Whac-A-Mole’

“It’s playing Whac-A-Mole in slow motion, where the moles are moving at pace but the whacking is done in slow motion,” Gori said. “That uncertainty is creating a lot of anxiety, and that is an issue.”

Europe will be the most challenged region, while North America is well-positioned to deal with those issues, Gori said. Manulife’s businesses in Canada and the US both stand to benefit from an under-penetration of insurance and the growing awareness of the need for such products spurred by the pandemic, he said.

Asia’s growing middle class and aging population bode particularly well for Manulife’s business there in the face of global challenges, he said.

“Asia is well-equipped to deal with some of those headwinds just through the demographics that we have in Asia,” Gori said. “So I think Asia will continue to outgrow the rest of the world.” – BLOOMBERG