The plan to reinvigorate Manulife
‘I feel good about the progress we’ve made,’ says chief executive of insurance giant
Roy Gori doesn’t expect to be able to turn Manulife Financial Corp.’s stock performance around overnight.
The insurance and asset management giant’s chief executive, who has been in the job for just over a year, says he’s pleased with progress the company has made pursuing his strategic initiatives, such as rolling out consumer-friendly and cost-saving technology, and the redeployment of capital into higher-return businesses.
But as to whether they will be enough to bring back investors — who have been waiting since the financial crisis for shares that closed Thursday at about $21 to regain their pre-crisis heights — he has no illusions. “The honest truth is there is some skepticism as to whether we can continue to execute,” Gori said in an interview with the Financial Post this week. “We can’t just do that over the course of three quarters. We need to do that consistently over many quarters.”
For Manulife, it hasn’t been an easy road since the post-crisis days of 2009, when over-exposure to interest rates and equities forced the firm to shore up capital through measures that included cutting the quarterly dividend in half.
The subsequent years of historically low rates that followed combined with increasing longevity to drag on returns.
By design, the Manulife that Gori inherited is far less sensitive to interest rates and equity markets than it was then. As CEO, Gori has already led the company to realize more than two-thirds of a pledge last year to free up $5 billion from underperforming “legacy” businesses by 2022, through a combination of stronger accountability, cost management and new strategic opportunities.
But for the Australian-born 49-year-old, who took over as CEO in late 2017 after a quick introduction to Manulife via its Asian operations, not everything has gone according to plan. This past October, the short-selling firm Muddy Waters targeted Manulife with the suggestion the Toronto-based firm could lose a court case in Saskatchewan, putting it on the hook for billions of dollars. Shortly after, Manulife issued a statement refuting the report’s conclusions, and added that it believed the position advanced in the lawsuit by hedge fund Mosten Investment LP was “legally unfounded.”
Despite the firm’s defence, Manulife shares fell 5.7 per cent in the two days following the short report, before sliding below $20 as markets in general tanked in October.
In the interview this week, Gori said the attack is among the sort of “unexpected challenges (that) are par for the course for any big company and any CEO.”
Though the court case described in the short-seller’s report had not been disclosed in the company’s financial statements, he noted that it had already been “in the public domain for a long time.” A story in the Financial Post last February detailed the fight at the heart of the case over side accounts on certain life insurance products that allowed investors to hold money at guaranteed interest rates.
“This is before the courts and that process often can take time, but we feel very confident about our position and where this will ultimately end,” Gori said this week. “This is not going to have a material impact on our business.”
Shortly after the Muddy Waters report was published, Saskatchewan amended its insurance regulations to prohibit insurers from accepting deposits above what’s required to pay premiums over a policy’s eligible period. As a result, Manulife said it would seek to have the court dismiss the hedge fund’s claims that life insurers can be compelled to accept unlimited premium payments, adding that the Saskatchewan amendments should accelerate resolution of the principal matters of the case in Manulife’s favour.
In November, the month after the short report, Manulife announced agreements to release over $1 billion of capital in keeping with its previously announced strategy. This included reinsuring substantially all of Manulife’s legacy U.S. payout annuities businesses.
The firm also announced plans to buy back up to 40 million of its own shares and increase its common share dividend by 14 per cent.
Again, these moves had little lasting impact on the direction of the stock. “I feel good about the progress we’ve made (on) an execution front in 2018,” said Gori, who was preparing to leave this weekend to attend the World Economic Forum, which begins Sunday in Davos, Switzerland. “We’ve got a lot of great, in my mind, proof points that articulate that we can execute the agenda we set … but we have to continue to do that.”
One plank in the plan to get there is to focus on areas of growth, such as Asia, where Gori got his start at Manulife after leaving Citigroup to join the Canadian company in 2015.
Despite recent trade and political tension between North America and China, Gori said he is “more excited now about (Manulife’s) Asia opportunity and … business than ever before,” particularly with China’s movement toward more liberalized markets for investment products and the loosening of foreign ownership and control restrictions on insurance companies in China.
The company’s beachhead in China is Manulife-sinochem Life Insurance Co. Ltd., of which it owns 51 per cent alongside partner Sinochem.
Gori said the venture is already in good position to take advantage of a growing middle class and demand for insurance and wealth management products in China, but that it is only a beginning.
“We clearly would like to have a greater interest in China, because we think the opportunity is very significant,” he said. “We’d love to (have) a greater share of the business, but it’s only an opportunity if we see that Sinochem has a desire to divest and at this point they don’t, and we’ll continue to work with them.”
He said diversification within Asia — in addition to China, Manulife operates in Hong Kong, Singapore, Japan and Vietnam — and across their North American operations gives him comfort the company can ride out any short-term issues.
In recent years, the company has fielded questions numerous times about whether it is considering selling John Hancock, the Boston-based insurance firm purchased in 2004 that doubled Manulife’s size and catapulted it into the upper echelons of Canada’s financial services industry. Some of the U.S. business lines, including variable annuities and long-term care, which face challenges due to longer lifespans and low interest rates, have also been the subjects of sale speculation.
Gori said the U.S. market is the largest for both insurance and wealth management, and while nothing would ever be ruled out as the company looks to get the highest return for capital invested, there is no need to sell Hancock.
“The pivot for us in the U.S. is really to see how we can use digital ways of interacting to transform the (insurance business and) allow us to gain share,” he said. “So our focus in the U.S. is to really double down on the opportunity we see there and to … complement that with a very strong wealth management business.”
Even in this scenario, there is still room to do more when it comes to dealing with the “legacy part” of the business, Gori said. “As I highlighted in 2018, we would never take anything off the table.”
Despite the constant talk about dealmaking and pursuing growth in hot markets around the world, Gori says the lasting mark he would like to leave at Manulife during his tenure as CEO has more to do with the corporate culture. He wants the company and its employees to focus on technology and customers, rather than products, and use the digital transformation to make processes more efficient for both the company and customers.
He wants the value of the company to be evident, even to the skeptics, through consistent performance. “We have to make sure that quarter in, quarter out, we’re executing against the agenda and that we’re demonstrating that we can deliver against the goals that we’ve articulated for the street,” Gori said. “I believe once we’ve established a credibility against that, we’ll unlock value in the stock price.”