Thursday, December 28, 2017

New Manulife CEO Roy Gori Veers from Alternative Assets

  
The Globe and Mail, Tim Kiladze, 28 December 2017

Three months into his tenure as Manulife Financial Corp.'s chief executive officer, Roy Gori is taking on the role of insurgent.

As an outsider who joined the Canadian insurance company in 2015, he is largely free from internal politics or long-standing loyalties. Hardly anything in his path appears untouchable – not even a signature bet of his predecessor.

Late last Friday, the last business day before Christmas, Manulife Financial Corp. unveiled two charges worth $2.9-billion. The first, a $1.9-billion writeoff, was beyond the insurer's control, stemming from new tax laws in the United States. The second charge, worth $1-billion, is the product of a significant shift in investment strategy. Mr. Gori has decided to lessen Manulife's dependence on alternative assets, such as timberland, agricultural crops and oil and gas wells – a decision that reverses one of former CEO Don Guloien's expansion strategies.

In the past five years, Manulife's exposure to "alternative long duration assets" nearly doubled, to $35-billion from $18-billion. The company had also launched a business to emphasize them. Because interest rates remained so low for so long, alternative assets soared in popularity and Manulife hoped to persuade other institutions to invest alongside its own bets.

Alternative assets account for 11 per cent of Manulife's $325-billion investment portfolio and they have caused some headaches. In 2015, the oil and gas collection generated $875-million in writedowns after energy prices plummeted and the total portfolio's value is generally volatile, which can be a problem because Manulife must continually mark it to market prices.

Mr. Gori's plan is reduce the insurer's exposure to these assets over the next 12 to 18 months. Once the transition is complete, Manulife will have freed up $2-billion in capital that currently acts a safety cushion in case of losses. That money will be redeployed into other business lines.

We believe that alternatives are still, and will be, an important asset class for us," Mr. Gori said in an interview. "However, given the nature of the asset class, they can be more risky." His decision, then, is a trade-off: The repositioning will hurt long-term asset returns, but it will reduce volatility and improve capital efficiency – the latter being one of his five major strategies.

Mr. Gori appreciates that actions such as this one can cause internal dissent. But he is adamant that they are necessary. And more change is coming, both at Manulife and in the life insurance business.

"There is this sense of complacency in the industry," he said in an interview.

To get everyone on board, Mr. Gori said, "it is critical we clearly map out what we want to change." When he hits roadblocks, he must remember that outsiders, namely shareholders, are desperate for action. He believes Manulife trades at a discount and he said one message was repeated when meeting with all types of stakeholders over the past six months: "There was a real, strong readiness to embrace change."

Underlying that is the notion that shareholders seem ready to swallow a billion-dollar writedown so long as it is for the long-term good. Manulife's shares have barely fallen since the charges were announced after markets closed on Friday – albeit on lower holiday trading volumes. Over the past 10 years, Manulife's shares have delivered a total return, including dividends, of negative 6 per cent. Rival Sun Life Financial's equivalent return is 47 per cent.

Although Manulife's alternative asset exposure had been questioned for some time, Mr. Gori has other pressing issues. The insurer's U.S. long-term care business is widely seen as its biggest problem. People are living longer, healthier lives and claims for home care often aren't made until 20 to 40 years after a policy was first purchased. It is tough for any insurer to manage its risk and generate adequate returns to cover those costs in an era of low rates.

Manulife's John Hancock subsidiary is also stuffed with variable rate annuities that tend to guarantee policy-holders a fixed-return or payment. Mr. Gori has said the returns from that business aren't good enough. But the new CEO said the timing of his retreat on alternative assets was partly pegged to the U.S. tax changes. Manulife had already been studying what to do with the exposures, but wasn't sure just how far it wanted to go if it cut back. Getting a final answer on the U.S. corporate tax rate, which will boost future earnings, helped determine the "quantum" of the pullback.
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