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Morningstar | Manulife's Income Yield Vulnerable to Prospect of Looser Monetary Policy

Manulife, one of the big three Canadian life insurers, competes directly with Great-West and Sun Life. While Manulife has attempted to reposition itself since the global financial crisis, it is still arguably the worst positioned of the three. Manulife’s asset management business is not as attractive as Sun Life’s, nor does Manulife do as well in its core insurance operations as Great-West. For pure insurance operations, Manulife's underwriting has been subpar, with the insurer paying out the highest percentage of benefits and expenses to premiums, compared with peers. Manulife also has the most volatile earnings of the three, due to its higher exposure to products that are linked to capital markets and have embedded guarantees. These products tend to be more difficult to price and manage over time. Other sources of earnings volatility include Manulife's exposure to alternative asset classes in its portfolio. These disadvantages have been borne out in Manulife’s return on equity, which has averaged just over 8% over the past five years, well below our estimated cost of equity of 11%. That said, there are some bright spots for the firm and recent performance has been solid. Disclosed returns for business in Asia and for the wealth and asset management businesses are high. Management is increasingly focusing on its higher-return businesses, notably through multiple acquisitions and partnerships, and through multiple new distribution agreements throughout Asia. While most of Manulife’s business still produces suboptimal returns, we have seen some progress in the firm’s product mix, including adding higher-margin mutual fund assets and favorable exposure to Asia. However, life insurance will remain a structurally difficult sector in which to operate as competitors fight for scale in newer markets. As it currently has a higher exposure to annuities and other products with embedded guarantees, we believe Manulife will have a difficult time consistently earning acceptable returns, and the ride is likely to be volatile along the way due to the effect of market cycles on earnings.