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Manulife and the Middle Kingdom's millionaires

Manulife CEO Don Guloien, shakes hand with He Xing Chen, 5, at the Shanghai Expo

Kevin Lee/kevin lee The Globe and Mail

For one week this past month, as Manulife prepared to unveil yet another massive loss, the company's 18-member board of directors pounded the pavement in Beijing and Shanghai.

Some of Canada's most prominent business figures - including Gail Cook-Bennett, former chair of the Canada Pension Plan Investment Board, and Robert Harding, chairman of Brookfield Asset Management Inc. - hopped on and off buses, lunch boxes in tow, as they toured insurance offices, met with employees at company dinners, and saw for the first time the operations of Manulife's new Chinese wealth management venture.

Manulife, which lost more than $3.3-billion in the two most recent quarters, is fighting to restore its reputation, and Asian expansion is a key part of its strategy. For the company's board and executives, Manulife's recent troubles are all the more reason why it should be muscling into an area of the world that is enjoying robust growth.

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On Friday, executives gathered with analysts and investors in Toronto to outline how the insurer hopes to raise its annual profit to $4-billion and its return on equity to 13 per cent by 2015. The strategy hinges on success in Asia - where the firm believes it has built up an enviable position, and which it describes as its growth engine for the 21st century - as well as wealth management sales.

A one-time darling of Canadian investors, Manulife fell hard during the financial crisis as the guarantees on many of its investment products produced a flood of red ink. Its share price plunged to one-third of its level preceding the downturn. Low interest rates and rocky stock markets will challenge its North American operations for a long time to come, and upcoming changes to regulations and accounting rules pose a threat. Canada's largest insurers are scheduled to meet with Sir David Tweedie, the chairman of the London-based International Accounting Standards Board, next week in an effort to kill proposed accounting changes that could have a large negative impact on them.

But low interest rates, rocky stock markets and changing capital rules will challenge its North American operations for a long time to come.

With its business at home under fire, Manulife is in the vanguard of Canadian financial institutions trying to seize the lusher opportunities across the Pacific. It's no coincidence that the three most recent additions to the firm's board - former banking and insurance regulator John Palmer, Teck Resources Ltd. CEO Don Lindsay, and former ambassador to the People's Republic of China Joseph Caron - each have experience in Asia. Buoyed by its success in Japan, where it has a substantial and profitable operation, Manulife has been pushing into countries such as Vietnam, the Philippines and Malaysia, where the profits are still minimal but the growth potential is off the charts.

None of those countries, though, holds the potential of China, with its burgeoning number of millionaires and sky-high savings rate. Manulife has already gained traction selling insurance in the country. Now it's seeking to gain a foothold in China's fast-growing wealth management business. It broke into that industry in March when it was able to secure a 49-per-cent stake in a Chinese fund management company.

For a company so badly bruised by the financial crisis, the stakes are high. If its Chinese gambit succeeds, Manulife may be able to reignite its long-term growth. "While it's not all about China, China is obviously a very important piece," says chief executive officer Don Guloien.

The danger is that China could prove to be a sinkhole for Manulife's money and time. Already, some foreign insurers have pulled back from the market, saying they can't overcome the home field advantage of China's domestic firms. Analysts and investors wonder when - or if - Manulife's push into China will finally start to boost the company's battered bottom line.

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The perils of partnership

Manulife is no stranger to China. In 1996, it became the first foreign company to partner with a Chinese firm and create a joint venture life insurer when it teamed up with Sinochem Group, a state-owned company.

Growth was initially plodding because of strict rules imposed on foreign investors. Manulife-Sinochem had to obtain a new license for each expansion - sometimes province by province, sometimes city by city. It also had to educate Chinese consumers about life insurance, an unfamiliar product to many potential buyers. "Life insurance to Chinese people is a new product, even a new lifestyle," says Sinochem Group chief financial officer Yang Lin.

After 14 years of hard work, Manulife-Sinochem has built a business that spans 43 cities and 11 cities, bringing it more than halfway to its goal of becoming the first foreign venture to operate across China. It ranks in the top three among Chinese insurers with foreign ownership, battling it out with front-runners AIA and Prudential Corp. PLC.

The relationship between Manulife and Sinochem has developed to the point that Sinochem is looking to partner with Manulife in areas beyond insurance. "We have started to co-operate with Manulife in the energy business areas," Mr. Yang says. "We have started this process. No results yet, but I think before long it will be productive. I am confident we can expand the co-operation from [the]non-banking financial sector to other sectors."

Profits, though, are still minuscule and competition is ferocious, especially from domestic firms. Some foreign companies have already concluded that China is not a market for them. "[Domestic firms have]been far better at penetrating and being successful and growing than the foreign joint ventures," says Dikran Ohannessian, president of Sun Life Financial Asia.

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Sun Life decided last year that it would rather hold a smaller stake in a domestic insurer than continue on as a foreign joint venture. It diluted its stake in its Chinese venture, winding up with a smaller part of a larger, essentially Chinese, organization. "The performance, the way we had envisioned it to grow, it wasn't there," Mr. Ohannessian says.

For its part, Manulife insists China is a bet that will play off in the long run. The penetration of life insurance in China is a scant 2 per cent, meaning a relatively small proportion of the population has bought it so far. Nevertheless, life insurers took in $109.2-billion (U.S.) in premiums in China last year, up from $34.4-billion five years ago. The fast-growing market is already the sixth largest in the world.

Manulife thinks China's brand new wealth management industry could be just as big. The country is home to the world's fourth-largest high-net-worth population, after the United States, Japan and Germany, according to rival insurer AIA. Yet only about 600 mutual funds are available in the country of 1.3 billion people, compared to more than 2,400 funds in Canada, with its population of only 33.3 million.

Growth opportunities are ripe given that China's household savings rate stands at a staggering 36.7 per cent, far above the 2 to 5 per cent rates common in Canada and the United States. "The demographics are quite unusual here because of the one-child policy, so people are very, very concerned about saving for retirement," Mr. Guloien notes.

"Out of approximately 1,500 asset managers working in Asia, we are one of only 12 with on-the-ground operations in all of Greater China, in the mainland, Hong Kong and Taiwan, and that is one of the differentiating factors that we will use to build our wealth management business in Asia," Bob Cook, the head of Manulife's Asian business, told investors in Toronto Friday.

Manulife made its first attempt to buy into the Chinese wealth management market in 2008, when it entered the bidding for ABN Amro Teda Fund Management, a Chinese fund company. Manulife lost to South Africa's Old Mutual, which had bid $260.9-million (Canadian).

Less than a year later, the financial crisis forced Old Mutual to abandon its offer. Manulife swooped in, picking up the 49 per cent stake for $156-million (U.S.). "It just happened, it was like a dream come true," Mr. Guloien says.

With a slim 1 per cent share of the total market, Manulife Teda ranks 31st in a crowded field of roughly 60 competitors. As foreign firms crowd into the market, observers warn that some will be disappointed. "The latest potential downside for succeeding in China comes from the simple fact that China is now a high-profile subject within many foreign firms. All too often, there are too many cooks in the kitchen," writes Z-Ben Advisors, a Shanghai-based consulting firm.

But at least Manulife is in the game. Peter Alexandra, principal at Z-Ben Advisors, believes the insurer has achieved a coup by scooping up the last full 49 per cent stake in a Chinese fund manager that is likely to come up for sale in a market that everyone wants to enter. "No matter what difficulties or what possible buyers remorse Manulife might have at any point in time, they bought the last 49 per cent stake in China," he says.

The question is when Manulife's Chinese operations will start to deliver significant profits to the company's coffers. Excluding the company's sizable and profitable operations in Japan, only about 15 per cent of the insurer's 2009 profit came from the Asia-Pacific region.

The vast majority of those earnings - 93 per cent - originated in Hong Kong. Each of Indonesia, Singapore and the Philippines were individually more profitable than mainland China, according to RBC Dominion Securities analyst André-Philippe Hardy.

For all the high hopes around mainland China, the profit it produces for Manulife is still not much more than a rounding error on the company's earnings statement. When one analyst was asked whether Manulife's Chinese operations will ever become a significant source of earnings for the beleaguered insurer, he said yes - but he expects to be sitting at a bingo table with a bib on when it finally happens.

Even Manulife's own executives are skeptical that China can become a major profit driver during their careers. They talk about building a growth engine for the next generation of employees.

At a banquet for top Manulife-Sinochem agents at Shanghai's Gran Melia Hotel, Mr. Guloien and the company's directors posed for endless photos with the employees, who treated them like rock stars.

When Marc Sterling, Manulife-Sinochem's chairman, took the microphone on stage, he told the audience that the insurer is only scratching the surface thus far.

"We will be an enormous company," he says. "And you should let the board of directors know that we want to be the biggest company in Manulife."



Nov. 26, 1996: Manulife-Sinochem holds a grand opening ceremony to mark its launch as the first foreign joint venture life insurer in China. Canadian Prime Minister Jean Chrétien and former Chinese Premier Li Peng attend the ribbon cutting.

February, 1999: Manulife-Sinochem's headquarters move to 21F, Jinmao Tower in Shanghai, then the tallest building in China.

2001: The company issues its 100,000th insurance contract.

2002: Manulife-Sinochem wins approval from the China Insurance Regulatory Commission to officially open its branch office in Guangzhou, the first branch licence granted to a foreign joint venture life insurer.

October, 2003: Mr. Chrétien attends the ribbon-cutting ceremony at Manulife-Sinochem's Beijing branch.

August, 2005: Manulife-Sinochem officially launches its group insurance business.

November, 2009: Less than a week after Manulife stuns investors with the news that it is selling common equity to shore up its capital levels, the insurer pays $156-million (U.S.) for a 49 per cent stake in ABN Amro TEDA Fund Management Co., a Chinese fund company.

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