Seven years after Manulife MFC-Tpulled off the $15-billion purchase of John Hancock Financial Services Inc., there are calls from Bay Street to do what was once unthinkable: Sell the U.S. business.
That deal, one of the biggest corporate takeovers in Canadian history, made Manulife the fifth-largest life insurer in the world and, for a time, the largest firm by market capitalization on the Toronto Stock Exchange. It single-handedly transformed the company into a global powerhouse, and spurred a bout of nationalistic pride.
But these days, Manulife’s U.S. operations are sucking up a large proportion of its resources for little return.
They are responsible for the majority of the troubles that have caused the firm’s stock price to sink to less than half its pre-crisis value, and they are expected to be a drag on its earnings for years to come.
When on Monday Standard & Poor’s reduced its credit rating on Manulife’s key operating subsidiary for the third time in less than two years, it cited as a key factor the U.S. unit, which will be “weaker than historical levels given the current economic environment.”
Low interest rates and longer life spans are among the items that are taking a toll of profits and forcing the insurer to re-evaluate its business lines.
Some analysts and investors have recently been pressing the firm to consider more radical steps – selling or spinning off the John Hancock life insurance business.
Right now, it’s an unlikely prospect. While Manulife’s leaders have weighed all the options, they have no intention of giving up on the U.S. Instead, they’ve put together a plan that they say should revive the division’s growth. It involves intentionally shrinking some parts of the life insurance operations, such as so-called no lapse guarantee universal life policies. Same goes for variable annuities, the products that forced Manulife to raise billions of dollars in capital when stock markets plunged. Prices on these types of products are being raised, and the company expects sales to fall.
In the meantime, Manulife plans to emphasize its U.S. wealth management business, including mutual funds and pension products. As a result, the company expects to earn $1.6-billion in the U.S. in 2015, accounting for the largest chunk of the $4-billion profits it hopes to churn out that year.
The U.S. operations would then have a return on equity of 11 per cent, up from 8 per cent today. They would still be the bedrock of a company that is increasingly looking to Asia for future growth.
“We’re very excited about the growth of our U.S. business, particularly in the mutual fund and 401k area,” chief executive officer Don Guloien said in an interview last week. “And we will always act in the best interests of shareholders, so no thoughtful idea will not be considered.”
One of Manulife’s biggest recent headaches in the U.S. stems from its long-term-care business. The company recently asked state regulators to allow it to raise the premiums it charges customers who have already bought the insurance, which is designed to help them pay for nursing home stays or in-house care in their elder years. Those rate hikes, if allowed, would average 40 per cent. Manulife’s long-term-care business resulted in a $755-million charge in the latest quarter.
Kathy Kozakiewicz of Phoenix, Ariz., has a long-term-care contract from John Hancock, Manulife’s U.S. insurance business. She says she bought it after seeing her father-in-law, who didn’t have a long-term-care policy, linger for more than a year with Alzheimer’s before getting into a nursing home.
“I watched the family deal with that,” she said. “We have two children, and I didn’t want them to have to deal with what to do with mom and dad if something should happen. I wanted to have the insurance there to cover it.”
