Manulife Redoubles Its Asia Ambitions in a World of Uncertainty

Even after operating in Asia for more than a century, Manulife Financial Corp. counts on the region as its most promising growth engine in an increasingly turbulent world.

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(Bloomberg) — Even after operating in Asia for more than a century, Manulife Financial Corp. expects the region to be its most promising growth engine in an increasingly turbulent world.

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The Canadian insurer, wealth adviser and fund manager expects to hit a target of deriving half of its profits from the region by 2025, despite tough recent quarters, and it may not stop there, CEO Roy said Gori in an interview. While Manulife prides itself on its geographic diversity, he said, it has not set a “fixed ceiling” on the portion of its earnings it sees Asia generate.

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Gori was speaking after a major review session with his leadership team and indicated that the company will stick to the “all the time” plan he has put in place during his first five years at the helm. This playbook involves freeing up capital from its legacy portfolio and controlling expenses so it can focus on high-potential businesses such as Asia and wealth management, while improving its technology skills and creating a culture that attract the best talent.

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“Asia and wealth and asset management are massive priorities where we think we have a right to win, and indeed we are winning,” Gori said in the interview Friday at Bloomberg headquarters in New York. “How do we bend in those places and continue not only the success that we’ve had, but how do we really expand that?”

It remains to be seen whether Manulife’s game plan will continue to work in a world of rising inflation, rapidly rising interest rates and an array of geopolitical landmines. That’s not to mention the additional challenges in Asia, a region affected by China’s zero-Covid policy, its tensions with the US over Taiwan and a crackdown on dissent in Hong Kong that has threatened the status of city ​​as a world financial center.

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All of this makes for a different environment than the one Gori enjoyed in his early days as CEO, a title he has held since October 2017. In his time at the helm, Manulife has gone from the company’s sixth of pan-Asian insurance in the third. – the biggest one, said Gori. Manulife generated about 39% of its core revenue from the region last year, including contributions from wealth and asset management.

Increase in earnings

Expansion into Asia has helped Manulife’s bottom line since Gori took the helm, contributing to its annual earnings growth of nearly 20%, boosting its return on equity to more than 13% from 10% and helping to push a key expenditure measure to less than 50% of income. .

Outbreaks of Covid-19 infections and government actions to curb them have weighed on Manulife’s business in the region over the past two quarters, hurting sales and forcing it to pay more than expected in claims.

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“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 likely to lock down their economies to manage the risks of Covid-19, the road back to double-digit earnings growth in Manulife’s most valuable segment may be longer than expected “.

Investors have taken the Asian hiccup in stride so far, with Manulife shares down 5.3% this year, less than the 11% drop in the S&P/TSX Financials index and an 18% drop of Sun Life Financial Inc., the company’s most comparable rival. . However, since Gori took over, Manulife is down 9.8%, compared with a 21% gain for the financial index and a 17% advance for Sun Life.

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The insurance industry as a whole is undervalued at the moment because it generates much of its earnings from policies that are already in force, about 75% of profits in Manulife’s case, according to new international accounting standards, Gori said.

Tailwind provided

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

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

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Manulife has a strong balance sheet, with capital of $23 billion above its supervisory target, making it resilient to challenges and enabling it to fund share buybacks and dividend increases in an uncertain macroeconomic environment, said the CFO Phil Witherington.

“We’re still in a very strong capital position,” Witherington said. “So in addition to having this all-weather strategy, it’s an all-weather balance sheet.”

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

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Whack-A-Mole

“It’s playing Whac-A-Mole in slow motion, where the moles move to the beat but the hits are in slow motion,” Gori said. “That uncertainty is creating a lot of anxiety, and that’s a problem.”

Europe will be the region with the most challenges, while North America is well positioned to deal with these issues, Gori said. Manulife’s businesses in Canada and the United States will benefit from 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 these headwinds just through the demographics we have in Asia,” Gori said. “So I think Asia will continue to outperform the rest of the world.”

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