Manulife Financial Corp.'s acquisition of John Hancock in 2004 hasn't done anything for the insurer's share price over the past decade. Will a breakup help?
Investors are hopeful. Manulife shares rose nearly 2 per cent after a media report on Thursday suggested that the company is considering hiving off its U.S. operations, perhaps through an initial public offering or sale.
Analysts, too, can see the upside to a U.S. spinoff. They estimate that Manulife's shares could be worth $28 or more – about 10 per cent above the current level – if the market starts to value the company as a sum of its parts.
Are you rolling your eyes? Manulife acquired Boston-based John Hancock for $15-billion more than a decade ago, adding U.S. insurance and wealth-management capabilities to a global network that spanned Canada and Asia.
Today, the U.S. arm may be worth less: Some estimates peg the value of the entire U.S. division at just $13-billion to $14-billion, and $10-billion for the insurance operations alone.
Manulife's share price has reflected this disappointment with the original deal for John Hancock. The shares rose to $27.50 soon after the acquisition closed, in 2004, briefly sitting atop the S&P/TSX composite index as Canada's most valuable company. The shares continued to rally to more than $44 prior to the start of the financial crisis in 2007.
Today, nearly a decade after this peak, the shares trade at just over $25 – feeding demand for change.
Certainly, a new Manulife is taking shape. Roy Gori will replace retiring chief executive officer Don Guloien at the start of October. Craig Bromley, general manager of the John Hancock division, stepped down in May. And now, there is speculation of a major restructuring after the Wall Street Journal reported that the company has hired investment bankers from Morgan Stanley to look at strategic options.
The speculation is being taken seriously. MetLife Inc. is also in the midst of a breakup, hiving off its retail life-insurance business, suggesting that insurers are desperate to unlock value.
More importantly, though, Manulife's U.S. insurance business – the so-called "legacy" business lines – has long been a drag on the more stable and upbeat results from the rest of company, which consists of wealth management and insurance operations in Canada and Asia.
U.S. insurance absorbs about 50 per cent of Manulife's capital but accounts for only 30 per cent of the company's profit. Its return on equity, a measure of profitability, is a mere 5 per cent or 6 per cent, according to one estimate, versus 14 per cent to 15 per cent for the rest of Manulife.
Get rid of the dead weight, the thinking goes, and Manulife shares could take flight.
Tom MacKinnon, an analyst at BMO Nesbitt Burns, estimates Manulife shares could be worth nearly $28 if the market values the U.S. insurance operations separately from the rest of the company – perhaps more if Manulife redeploys the capital to profitable operations in Asia or within wealth management.
According to his numbers, the U.S. insurance arm is worth $5.60 a share, or eight times its estimated 2018 profit. The rest of Manulife is worth $22.50 a share, or 12.8 times estimated profit.
"We believe the 10-per-cent difference in our $27.80 estimate and the current $25 stock price is due to the more onerous drag investors are putting on the valuation of the [U.S.] legacy business and the capital it absorbs, as well as the inherent volatility in results it historically has caused," Mr. MacKinnon said in a note published in response to news reports of a possible spinoff.
Other observers are working with similar assumptions. Paul Holden, an analyst with CIBC World Markets, estimates the John Hancock insurance division is worth between $9-billion and $10.5-billion, based on profit estimates.
His price target on Manulife is $28, but he suggests that his views on the stock could turn sunnier if the company comes up with good ideas for reinvesting its cash.
If Manulife hived off all of John Hancock – that is, insurance and wealth management – the spinoff could be valued at $14.5-billion, according to Sumit Malhotra, an analyst at Bank of Nova Scotia. He has a $29 target price on Manulife, arguing that the combination of improved profitability and reduced earnings volatility would drive its valuation higher.
"To be clear, there are many moving parts here," Mr. Malhotra said in a note. However, he added, "a change at the top of an institution does put all of the metaphorical cards on the table, and we expect that this process is on-going at Manulife."