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TOP 1000

The insurer's exiting boss stabilized the business. The new guy has a chance to do more

Top 1000 Rank #1 | 2016 Revenue $53.5 billion | 2016 Profit $2.9 billion

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As a high school student in the 1970s, Donald Guloien says he developed an uncommonly specific ambition: to become the CEO of a "Canadian-based multinational financial institution." Now, at age 60, Guloien is approaching retirement after eight years at the helm of the country's largest life insurer, Manulife Financial Corp. Yet he's wistful: "I wish we had started on the journey of customer centricity earlier," he says, sitting in a forest-green leather chair in the Toronto office he'll occupy until this autumn. "If the financial crisis hadn't happened, we would have started that day one," he says. "I mean, that was always my objective."

The trouble was that Guloien walked into a firestorm. In the late 1990s and early 2000s, his predecessor, the ambitious Dominic D'Alessandro, had taken a staid Canadian insurer and built it into a financial services rival to the Big Six banks at home, and a major player in the United States and Asia. Manulife's share price soared to more than $40 in 2007. But when global financial markets crashed in the fall of 2008, the crisis exposed serious vulnerabilities in some financial products the company had sold, and regulators in Ottawa warned Manulife that its capital was precariously low.

By the time Guloien made the move up from chief investment officer to CEO the following May, the share price had skidded to $22, and things soon got worse—much worse. In August, 2009, Guloien outraged shareholders by slashing Manulife's dividend by half to conserve cash. Then, in November, the company issued $2.5-billion worth of new shares, which diluted the value of existing investors' holdings. To reduce risk, Guloien reined in sales of variable annuities, which had been highly profitable in good times, but then turned into a massive drain during the financial crisis. He also put in place costly new hedges for the stock investments backing those annuities.

Yet Manulife's share price kept sliding, down to $10.22 in July, 2012, and new headwinds emerged. Interest rates declined to historic lows—a big problem for life insurers. They have to set aside more money now to cover future obligations, and the yields on their huge long-term bond portfolios shrink. Like banks, insurers are also trying to modernize their technology, and they're keeping a wary eye on hotshot new fintech competitors.

Despite those headwinds, Guloien has grown the company. Manulife's Asian division and its wealth management operations have kept expanding. Tracking life insurers' core revenues—from things like premiums, earnings on investments and fees from wealth management—is difficult under new international financial reporting standards (see sidebar, p. 29), but what Manulife classifies as core revenue has increased from $35 billion to more than $50 billion over the past five years. Manulife's share price has also climbed back to about $24. Yet there isn't much cause for celebration among longtime shareholders. The stock is worth scarcely a toonie more than when Guloien took over in 2009.

But as Guloien now prepares to hand the reins to Roy Gori, who's been CEO of Manulife Asia since 2015, he says the company's growth will continue. If Gori can keep expanding Manulife's Asian and wealth management operations, Guloien says shareholders can expect double-digit earnings growth.

There are certainly lots of reasons for optimism in Asia, where Manulife already earns more than a third of its profits. The company has been there for 120 years, and it is now benefiting from expanding populations and strong economic growth. About two-thirds of Manulife's insurance sales are in Asia these days, and because many consumers there are just entering the middle class, they need other financial products as well.

It's not surprising that Gori was chosen to succeed Guloien. A gregarious Australian, Gori is just 48 years old, yet he spent more than two decades travelling and working in Asia before joining Manulife from Citigroup Inc. "We care about the same things, but he's got a very effervescent personality," says Guloien.

Gori has had success exploiting Asia's growth, but in North America, there seem to be more headaches than opportunities. The combination of low interest rates and an aging population is a millstone for life insurers. Manulife's traditional insurance and variable annuity products are capital-intensive and less lucrative than its wealth management operations, and will weigh down its earnings for years to come. One of the biggest burdens is Manulife's long-term healthcare insurance business in the United States. Costs and rates have climbed dramatically over the past decade, and last year, the company said its giant U.S. subsidiary, John Hancock Financial, would stop selling the policies altogether.

Guloien concedes that Gori has his work cut out for him in North America. "We'll still have some volatility in earnings, caused by that big chunk of capital tied up in legacy businesses," says Guloien. "I would have loved to be able to solve that problem on my watch, but that's impossible to do. So that will be a challenge he will have."

To offset the burden from those businesses, Gori needs to keep expanding Manulife's wealth management operations—mutual funds, investment advice and the like. Unlike insurance, there are no long-term obligations associated with them, and they generate revenue from fees.

Of course, competing life insurers and banks are also chasing wealth management clients. This is where Guloien's notion of "customer centricity" comes in. Millennials, in particular, aren't very interested in purchasing traditional life insurance. Many also prefer to deal with their finances online, rather than through an insurance agent or financial adviser.

Manulife has introduced a slew of changes in recent years to keep up with shifting demand and technological change. To save time and reduce costs, the company has cut back on onerous medical questioning and testing of insurance customers, which research results show is of little value. Manulife finds that Asia is a good place to try out new technology, and it has been using the WeChat social messaging service to sell insurance and pay claims. In the United States, John Hancock has rolled out an online financial advice service and the first phase of a digital platform for buying insurance. Staying ahead of fintech upstarts is a constant challenge, says Guloien. "We want to be the ones who disrupt the industry," he says. "Quite frankly, we like to live in fear that if we don't do that, somebody will do that to us."

So what do all those prospects and trends add up to for investors? Darko Mihelic, an analyst at RBC Capital Markets, is guardedly optimistic. Manulife has set a target of boosting its return on equity to 13% over the next few years, from about 9% lately. "We still do not see a clear path to more than 13% ROE, but this objective should be easier to achieve in an improving macroeconomic environment," Mihelic wrote in a recent research note.

Guloien says that Gori will have much more leeway than he did to pursue growth. "We came through the crisis, we've dealt with all the aftermath of the crisis, and then we launched the company on this mission of focus on Asia and in global wealth, because you can't shrink a company to greatness," he says. True, but as Manulife's history also demonstrates, you don't want to expand too quickly, either.