Manulife Financial's Management Hosts UBS Global Financial Services Conference (Transcript)

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Manulife Financial Corp. (NYSE:MFC) UBS Global Financial Services Conference May 8, 2012 10:20 AM ET


Robert Allen Cook – Senior Executive Vice President & GM-Asia


Peter Rozenberg – Analyst, UBS Securities Canada

Peter Rozenberg – UBS Securities Canada

Hi we’re going to start. My name is Peter Rosenberg, Canadian Financial Services Analyst at UBS. I have the pleasure of introducing Robert Cook, Senior Executive Vice President and General Manager of Asian Operations for Manulife, since 2007. Robert has been with Manulife for over 30 years holding management positions in the Company’s Canadian, International and Corporate Divisions.

Manulife is the largest insurance company in Canada and one of the largest in North America with a market capitalization of $22 billion. Notwithstanding a difficult interest rate environment, the company has made excellent strides in reengineering its products, improving pricing, improving mix, and substantially reducing risk.

Manulife’s Asian operations currently account for 34% of adjusted earnings and a significant 49% of insurance sales in 2011. With Asia a key focus, I present Bob Cook.

Robert Allen Cook

Well thank you very much, Peter. It’s a pleasure to join you all here in New York from my home base, which is in Hong Kong, which is Manulife’s regional headquarters in Asia. I am mostly going to talk to you about Manulife’s strategy in Asia, but I just want to get started with, to put it in context of our overall corporate strategy. What we are trying to do is reformulate the direction of growth that we are taking the company and we’ve been engaged in that process for the last two years to three years.

The core elements of our strategy are outlined on the left hand side of the slide, which is to develop our Asia opportunity to the fullest, to shift away from guaranteed business to non-guaranteed business in our wealth businesses throughout the world, to continue to build our core balance foundation of our franchise in Canada and in the U.S. to shift to some higher ROE and lower risk businesses.

The result of that strategic repositioning will be a company whose earnings are less volatile, whose growth rates are more sustainable and consistent and a company that has a better risk profile. We do acknowledge as we execute this strategy, that we do have some headwinds of continuing low interest environments throughout the world, as well as a great deal of uncertainty about the regulatory capital environment in which we will have to operate in the years ahead. Nonetheless, our management objective remains the same, which is to deliver $4 billion of earnings in 2015 and an ROE of 13%.

So, let me move on to talk about what I do day to day, which is run Manulife Financial Asia Limited. And I want to talk to you today a little bit about some of the context of our operations in Asia, talk to you a bit about our strategy for growth, and then conclude with a few remarks about kind of a look ahead of some of the runway for our strategy going forward.

I think this slide gives you a little insight into an overview of the Manulife’s operations in Asia. When I talk to audiences all around the world, including audiences in Asia, the two things that surprise them the most about the Manulife Financial story in Asia, are first of all, how long we’ve been there. And we’ve been in Asia for 115 years now.

It shocks people that we expanded from Canada to Asia before we expanded from Canada to United States. I think we have the longest continuing history of operations of any international life insurer in Asia. We built a very solid foundation of the experience, a solid foundation of relationships throughout the region, which will enable us to continue to drive our growth going forward.

The second thing that surprises people when I tell them Manulife Asia’s story is how big a part of Manulife we already are. There are a lot companies around the world who are pursuing international strategies in Asia and in many cases that’s a promise for the future or it’s a tiny 5% sleeve of their total operations. But as Peter said in his introduction of me and as you can see from the slide here, the Manulife Asia story is already being delivered today.

Over the last five years, we have moved our share of the Company’s worldwide insurance sales from less than a fifth to half of the Company’s worldwide insurance sales coming from Asia. On the bottom line, you see a very diversified picture there of earnings from around the world, but again a third of our bottom line is already coming from Asia. So this is not a story that is a promise for the future. This is a story that is already being delivered today.

Now as most of you know, Asia is not a homogenous market in the sense that the United States is – we operate in 11 countries in Asia and our approach has to vary market-by-market. But what this slide gives you is kind of a sense of some of the threads of strategy that weaved through our various operations in Asia.

I think the first thing to highlight is the little circle in the middle there is that our approach to Asia is to manage as a Pan-Asian portfolio. Our approach, a little different from some countries, is we’re consistent with our overall theme of diversification. We want exposure to both developed market and non-developed markets. We want exposure to Northern Asia, as well as Southeast Asia. So that is the essence of the strategy we’re trying to pursue. There are really just kind of three elements of my strategy in Asia that cross all the countries.

The first is to expand into multiple channels of distribution. Historically, Manulife’s strength in Asia has come from its agency system, and what we’re trying to do is expand into the other channels that are available to us in each of the countries in which we operate in.

The second thing we’re trying to accomplish is that historically, Manulife’s strength in Asia has been on the life insurance side, the protection side of the business. And when I went to Asia a little over five years ago, I set out to make it look a little bit more like Manulife is in Canada, and in the United States. In that, I want to achieve a better balance between life insurance and a variety of wealth management businesses throughout the region.

And finally, we’re trying to develop the Manulife brand in the region. As you all know, in the United States, Manulife operates under the John Hancock brand, which is 95% name recognition. In Canada, the Manulife brand is a top five brand in the country. But in Asia, our distribution partners don’t have the same benefit of that brand assets, and so we are trying to invest to build that going forward.

So I just like to expand on each of those kind of core elements of our strategy in Asia, a little bit. And the first is the overall theme of Asia, which is, the Company is trying to shift a balance of its investment in growth around the world to taking more advantage of the opportunity in Asia.

I think the real story in Asia is not just the story everybody’s familiar with of GDP or economic growth that is faster than the rest of the world. I think the real story is what I call the rise of the middle class in Asia. When people enter what’s called the middle class, they become potential customers for life insurance companies.

Before then, they’re struggling to put a roof over their head or buy a refrigerator to preserve food for their family. When they enter the middle class, their needs then shift to saving for a variety of goals, whether it’s to start a business to fund education for their children or whatever and they then become candidates for the kind of products that we can manufacture.

Now what this slide shows you is how dramatic that growth in the middle class is going to be over the next few years in Asia. Over the next decade, there’s an estimate that there’s going to be a little over 1 billion people around the world enter the middle class. 85% of that global growth is going to take place in Asia.

To make the example even crisper, as shown on the bottom part of this slide here, an example from Indonesia. Indonesia has about 250 million people, but as recently as five years or six years ago, our targetable population in Indonesia was only about 1.5 million people. Today, it’s risen dramatically to 50 million people. And over the next five years, that’s going to triple again to 150 million people.

Now on the one hand, it’s an enormous opportunity for us. On the other hand, it’s a daunting challenge. If the potential customer base I have is going to triple over the next five years, how am I going to triple the size of my company? How am I going to find triple the number of qualified people, triple the number of qualified life insurance agents to sell to them? So that is again, it’s an opportunity and a challenge for us as we move forward on our strategy in Asia.

Channel, channel diversification, again historically, the Manulife, the image of Manulife in Asia has been an agency company and you can see from the left-hand side of this chart, you see that story was true. We were 75% – 70% to 75% of our sales came through our captive agency channels. And that’s a great channel and we’re going to continue. We still love it. We’re going to continue to invest in it.

We’re going to continue to grow in it. It’s a very stable, dependable source of high quality business. But there’s only so many people that a channel like that can reach and we need to reach out into other channels and we’ve been doing that through both expansion of bancassurance channels in various countries and expansion into independent distributors, particularly in the developed countries around the world. And you can see the results of pursuing this strategy is – last year, our sales had balanced out at 50-50 between our core strength and agency, and the other channels. So, this strategy is working and is being delivered.

On the wealth side, again, the strategy, the core strategy is to diversify into wealth businesses for us. What that means is single premium life insurance, mutual funds and defined contribution pension. That’s the kind of products that we look to deliver. Our growth rate is good, but there is still a lot of runway forward.

Again, I think you probably all heard the various statistics about the rise of the affluent classes in Asia, which are the key target markets for products such as this one. On the brand side, we’ve gone from spending nothing on brand development to about $12 million this year in brand development across the region. It is concentrated in certain countries where we think we can get a greater voice and our message can be heard and this slide just shows you a variety of investments that we’re making around the region.

So with those few strands of strategic DNA across the region as a whole, I’d just like to say a few words about our kind of our business model as it exists in different countries. And the business model is in fact different in every country. So, let me start with Japan which is our biggest business in Asia. Japan is arguably the second or by some measures even the largest insurance market in the world. And the competitive dynamics there are quite a bit different than what you may be familiar with in North America. You’ve got these two insurance markets roughly the same size.

In America, you have a thousand people, thousand companies competing for share in that market. In Japan, you have 25. So, even a midsized player in Japan can build a very, very large business. And as a measure of that in the first quarter of this year, our estimate is that we sold more life insurance in Japan than any company sold in America.

So we have about a number 10 size company in Japan. It’s selling more insurance than anybody is selling in the United States. So it is a very big business and a very profitable business. The essence of our strategy in Japan is diversify, diversify, diversify. With a market that big and only 25 players, we are in effect trying to find pockets of growth.

So we are diversifying by target customer segments, we are diversifying by the channels we employ and we are diversifying by product. I’ll just give you a little flavor of how that strategy works. In – a couple of years ago, we entered the independent channel of distribution.

The reason why we did that is that even though people’s impressions of Japan as a mature slow growing market are correct in total, underneath that total number is the fact that the traditional saleslady channel that has been employed by the very large Japanese mutuals, that has declined by half over the last decade.

So just working out the map for yourselves, if you have a total industry that’s roughly flat, but you have the biggest channel shrinking by half in order to make the math work, there must be some channels that are growing dramatically. And that is the fact and that’s what we have been pursuing. So, we’ve been pursuing the independent channel that services the corporate market, we’re pursuing the independent channel that serves the Japanese retail customer, and we’re pursuing sales of protection-oriented products through banks. So that is the essence of our strategy in Japan.

In Hong Kong, a totally different business model. In Hong Kong, we’ve been present in the Hong Kong market for 115 years, one out of every five people in Hong Kong is already our customer. So our core strategy in Hong Kong is one of cross-selling and increasing our share of wallet of the people in Hong Kong.

We think that strategy has a lot of runway for growth, by virtue of the fact that of those 1.5 million people who are our customers, half of them only own one product. So, we see a tremendous opportunity to leverage them and sell them additional products, and that’s the core of our strategy going forward.

The other thing of course, is that Hong Kong just keeps getting richer and richer. The total population of Hong Kong is frankly, not expected to grow that much over the next few years, but the GDP per capita will, I think grow quite dramatically, particularly, as the financial services and some higher value-added industries continue to grow in that market.

I’ll pick a third country, again, a third completely different business model in China. In China, we operate as a joint venture. We’ve been in China for about 15 years. Our core strategy in China rather has been to build out a national platform. Now this is quite differentiated from most of the foreign companies who are operating in China who have chosen to focus their efforts on two or three provinces, particularly provinces on the east coast of China.

We’ve chosen a different model to try to build out a national franchise, it’s difficult to do. As a foreign company, we need to build that city by city. We cannot get a national license in China. So, it is a lot of slogging and a lot of government relations work to build out this franchise.

But to just give you one example of how that will be an advantage for us going forward is the agreement we reached last year with the Bank of China to be the only foreign company to have a national distribution deal with the Bank of China. Now, think about it, if two foreign companies are going in, knocking on the door of Bank of China and one of them is saying, “I operate in four cities in which you have branches,” and we go in and we say, “I can deliver products to you in 50 cities in which you operate,” obviously we have the significant advantage in that kind of a competitive profile, and that’s what we are leveraging now, having successfully built out this national platform.

I’d like to turn now to a couple of slides in a little more detail on the Southeast Asia or the ASEAN countries. Again, apart from Singapore which is a very developed market, most of the countries in the ASEAN grouping are developing in nature. But the total grouping is very large, more than 0.5 billion people. GDP growth is very close to the levels posted by China. The demographics are very young, so this whole force that I talked about earlier of the rise of the middle class plays out extremely, extremely strongly here in Southeast Asia.

Some of the things we’re doing there, our core expertise is still building captive agency systems and that strategy is well in play in Southeast Asia. You see here over the last five years, we’ve almost tripled the number of agents that we have in Southeast Asia and we will continue to pursue that strategy going forward.

The most recent leg or extension of that strategy is to move beyond some of the kind of capital cities in some of the countries in which we operate. So for example, in Indonesia, the core of our operations are still in Jakarta, but we are moving out into Surabaya and many of the other provincial capitals. So we think there’s a lot of room to build out our agency system in many of these countries.

Vietnam may turn out to be our largest agency system anywhere in the region. It could very well surpass China in the next couple of years with the expansion that we’re achieving in that market.

On the bancassurance side, the reality is Manulife in Asia was a little bit slow to seeing the opportunity from selling insurance through banks. I think both ourselves and one or two of the other well-entrenched players in Asia, we were so wedded or our culture was so driven by our agency systems that we kind of missed this opportunity, and we’ve been in catch-up mode.

But in Southeast Asia, as the market for selling through banks is at a much earlier stage of development, we have been able to get in on the ground floor and build out our bancassurance businesses in these countries, with a great deal of success, and this slide shows you some of the basic statistics of an almost tripling of our sales from this channel over the last five years or so, and we see, again, a lot of opportunity for continuing growth here.

When I first moved to Asia, a little over five years ago, I was more than willing to write the check for the upfront payments you have to make to get some of these big deals in Asia. But we weren’t winning any of the deals at that stage because we weren’t perceived to have the expertise needed to successfully execute.

Well, that’s changed over the last five years. And I think it was particularly highlighted last year. You would have seen our announcement of a major deal in Indonesia, an exclusive 10-year deal with Bank Danamon, which is one of the largest and most respected banks in Indonesia.

We were head-to-head in competition with the major players in the region and we won because we have been able to build up the case studies of success throughout the region that convinced the bank that we would be successful in executing. And that partnership is off to a great start this year.

I guess just to conclude my remarks before I open it up for questions. I want to talk a little bit about some forward-looking comments. If I look at Manulife’s history in Asia, we have really had kind of four drivers of our growth. And those drivers will continue to be how we achieve success in the future. And the four drivers are organic growth, which is the – this is the rise of the middle class story. This is the GDP story that I talked about earlier.

The second driver is expansion into new businesses. If I look historically, some examples of that include the entry into the MPF business in Hong Kong, about eight years or nine years ago. This is a defined contribution pension business. At the time we entered that business, everyone assumed that the banks would just dominate that industry and there was just no room for insurance companies to do it. But we didn’t believe that.

We were able to leverage the expertise of our 401(k) experience in the United States, our DC experience in Canada. And we were able to build the second biggest pension business in Hong Kong, second only to HSBC, which is the dominant bank in Hong Kong. And Japan as I talked about earlier, the entry into some of the new channels is another example of new business development.

So, if I look forward, some of the other areas where this driver of growth could persist, the other countries are looking at the Hong Kong success with the MPF business, and looking at that as a solution to some of the pension problems that they have in their countries. Broadly speaking, the governments in Asia do not want to provide state pensions to people. But they recognize that with the aging population, there is a need for people to save more for retirement. And so the other approach of private pensions with some form of tax advantage is taking hold across the region and we hope to leverage that going forward.

Another future driver in this category of new business opportunities is in the health space. Many countries in Asia are still very young. Places like Vietnam, Indonesia, the average age is under 30. On the other hand, in addition to Japan, which everybody is familiar with, there are other countries in Asia such as Hong Kong and China, which are rapidly aging.

China is probably the most rapidly-aging country in the world right now as a result of the impact of the one-child policy. In Hong Kong, the projections are that 20 years from now, the demographic profile of Hong Kong will have the same agedness as Japan has today. So with this aging population in a variety of our markets, the opportunity for growing health businesses is very real.

We continue to build out our mutual fund businesses. Five years ago when I moved to Asia, we had asset management companies in three countries. Now we have asset management companies in nine countries across the region. The only gap in our portfolio right now is in the Philippines.

In fact with acquisitions over the last couple of years in Taiwan and in China, albeit there’s something like 1,500 asset managers operating in Asia. Less than 1% have on the ground operations in all of Greater China being the Mainland, Taiwan and Hong Kong and we are one of that 1%. And that gives us a tremendous, I think differentiating factor in our ability to build some innovative product for people throughout the region giving them diversified exposure to the Greater China opportunity.

So the first driver of growth is just organic. The economic miracle of Asia. The second driver of growth is the entry into new businesses. The third and fourth drivers of growth are acquisitions and new market entry. Again, both of those have been an element of our past. We entered Malaysia and Thailand as part of the John Hancock acquisition in the United States. We entered Japan through an acquisition of a failing mutual company in Japan. I mentioned earlier the acquisition of some asset management companies.

So, we have a long and successful history of integrating new companies into our fold in Asia. There are a lot of opportunities for acquisition right now in Asia and we are certainly in the deal flow for all of them. However, our history again is one of being a very disciplined buyer, and so we’re not going to do deals just for the sake of expanding our portfolio. But when it makes sense to us, we will certainly pursue that in Asia.

And I think there is what the slide refers to as consolidation in certain countries. There are a variety of countries where the regulators are of a view that they have too many small companies in their industry and they would much rather have an industry that was founded on a smaller number of stronger institutions. So, I think regulator pushing of some consolidation in some countries will also drive some opportunity for this non-organic growth.

And the final driver is expansion into new markets, obviously India and Korea, are kind of missing gaps in our portfolio in Asia. Historically, we have not pursued India because of the ownership restrictions in India. More recently, some of the regulatory changes around product in India have called in to doubt as to what is the appropriate business model to make money in India. But we have maintained an active research brief into the country and obviously, the economic opportunity there is very interesting, and if we can find a business model that we think will work, we’d be prepared to enter India.

And Korea is of interest because it is a rich developed country. It’s difficult, the only means of entry into Korea right now is acquisition. There are no new licenses being granted. And the result of that is that the prices for the few properties that do come to the market tend to be a bit frosty.

And so we haven’t been able to find an entry path there that makes sense to us. But we continue to monitor both countries. And as you would have seen the press release from us a few weeks ago, we are expanding into Cambodia as our 11th country in Asia. It will be a small opportunity, but it is an indication that we will continue to pursue new market entry.

So bottom line, again my story is that I think the – in some respects, I think that Manulife Financial Asia story is a little underappreciated. And so I very much like the opportunity to come and tell you about it because we are already a big part of Manulife around the world and we are and we’ll continue to be a very fast growing part of Manulife. Thank you very much.

Peter Rozenberg – UBS Securities Canada

Go ahead.

Robert Allen Cook

We’d be happy to take any questions.

Question-and-Answer Section

Unidentified Analyst

Hi. Thanks, Bob. I think 10-year JGBs are yielding 85 basis points. In Japan, what do you use for cost of equity assumption of your capital employment? What’s your current ROE and what is a sustainable ROE in Japanese business?

Robert Allen Cook

Well, I mean, your basic statistics are obviously correct. The thing about Japan is unlike some other markets where we’re having to adjust our business model for low interest rates, low interest rates have been a fact of life in Japan for quite a period of time. So our basic product portfolio has largely already been shifted for a low interest rate environment. We had a little tweak we had to make to a product last year where the sales were a little more popular than we expected. We needed to manage the portfolio and mix it a little bit. But the other thing that’s interesting about Japan is that the customer has become used to low interest rates. And that is the more difficult phenomenon in some of the other countries in Asia where the drop in interest rates largely occurred last year is that the customer is still adjusting to that. So, whereas we can sell a lot, a whole variety kind of products in Japan that the customer’s comfortable with, our strategy in terms of dealing with declining interest rates in other countries is often at times to shift the product mix to more of an accident health product, a critical illness product, or unit-linked products because the customer just needs a different kind of value proposition.

The returns we’re getting on our Japanese portfolio meet our corporate targets. So, despite the low interest rate environment we are able to build margins into the product. The most recent example of that is our entry into the fixed annuity market in Japan. Now we don’t participate in the end-based fixed annuity because we can’t figure out how to make money on that, but we participate in the foreign currency-denominated fixed annuity market in Japan, which is a very sizeable market in Japan.

Probably, a little less familiar to people in a North American environment where retail customers are less comfortable taking currency risk, but because of a decade of low interest rates in Japan, Japanese retail consumer is kind of willing to for a part of their portfolio balance off, getting a couple of hundred basis points extra yield from say an Aussie dollar fixed annuity in return for taking some currency risk.

Unidentified Analyst

First, just a factual question. What is roughly the embedded value of your Asian operation as a percentage of the total Manulife embedded value?

Robert Allen Cook

See I don’t know if we disclosed by geography part of the embedded value, yes. We just – we disclose that insurance and wealth for the global so we don’t have that number for you today.

Unidentified Analyst

Okay. And then on the acquisition front, given that the frostiness of some of the prices you mentioned, and given that your share price is fairly depressed in my opinion, how are you going to like to juggle that in terms of making acquisitions?

Robert Allen Cook

Well, my specific comment about the frostiness was in reference to Korea, which has these unusual market dynamics of that being the only mode of entry and there’s quite a lineup of companies who would like to add Korea to their portfolio. In other markets, we still see the opportunity for making deals that would be accretive, if not immediately, very shortly after executions so – but that’s one of the criteria we look at when we make acquisitions. And as I’ve said before, we will be a very disciplined buyer and if it doesn’t meet those criteria we have, we will just walk away and we don’t – we feel we can get more than enough growth from our organic strategies. The non-organic is a nice addition if you can do it on your terms and we will only do it on our terms.

Peter Rozenberg – UBS Securities Canada

Can you talk about why the Asian returns are better than Canada and the U.S., in general?

Robert Allen Cook

It’s a good question. I think that historically, a big part of it comes from the distribution strategy that companies have traditionally used when you control a lot of product you offer when you’re selling through an owned or captive distribution system. Now, a lot of the question about margins in Asia, they’ll have arisen as the bancassurance channel has grown. And it is something you have to watch very carefully as you pursue that channel. Margin management is quite tricky.

To take an example, in China, for instance, the bancassurance went from zero to being half of the industry a couple of years ago, like almost overnight. We chose not to participate at all, because everything that was being sold at that time was a very short-term product, kind of a deposit substitute kind of product, and we couldn’t see how anybody could make any money on it apart from taking an inordinate amount of investment risk, investment risk that the bank wasn’t willing to take itself. So, we stayed away from that. The way we find that we can maintain our margins in pursuing a bancassurance strategy is to work with the bank to sell a full portfolio of product.

So, we will sell them a certain tranche of these short-term products because we know they need it to satisfy customer demand, but the deal has to be that it’s just part of an overall product mix where we’re going to sell some of the other products in our portfolio, the accident and health products which have very healthy margins regardless of channel that they’re sold in, some of the longer-term insurance products which again have healthier margin. And if we can manage that overall product mix, we can make that a profitable channel as well.

Peter Rozenberg – UBS Securities Canada

I have one more, just...

Robert Allen Cook


Peter Rozenberg – UBS Securities Canada

How are the risks different in Asia versus Canada and the U.S.?

Robert Allen Cook

In a one-minute answer. I guess the way I would answer that is that at least for our company, from a market risk perspective, the risks are lower than they are in North America, and they are much more concentrated in the interest rate category. And the reason for that is there are just a variety of investment opportunities that we have and do pursue in more developed markets like the U.S. that we just don’t have access to in Asia.

So from a market risk point of view, it tends to be concentrated in fixed income instruments. The other risk though that is I think a little bigger in Asia perhaps than in North America is the operational risk. And this takes many manifestations. Natural disasters seem to be much more prevalent in Asia and have a bigger impact. The ethics are still an evolving value in many markets in Asia. So, the potential for concerns around fraud in different parts of the operation is something that you have to monitor very carefully. So overall, I think the risk profile is lower in our operations in Asia, but for sure it’s different. It’s just a different mix.

Peter Rozenberg – UBS Securities Canada

Any other questions? Thank you very much.

Robert Allen Cook

Thank you.

Peter Rozenberg – UBS Securities Canada

Thank you, Bob.

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