Manulife Financial (MFC)

Manulife Financial Corporation (MFC) is a broad-based financial services firm headquartered in Toronto, Canada. It converted from a mutual life insurance company to an investor-owned, publicly traded company in July 1999. The company is a leading provider of financial protection and wealth management products in 19 countries and territories worldwide. The company provides a wide range of financial products and services, including life insurance, group life and health insurance, pension products, annuities, and mutual funds to individual and group customers in the US, Canada, Asia, and Japan. The company operates as Manulife Financial in Canada and Asia, and primarily through John Hancock (which merged with Manulife in April 2004) in the United States.

The company offers clients a diverse range of financial protection products and wealth management services through its extensive network of employees, agents, and distribution partners. Manulife provides mutual fund services through Elliot & Page, Ltd. and investment and asset management services through Seamark Asset Management, Ltd. It is also a major player in the North American real estate market. It has an extensive global network of employees, agents, and distribution partners operating in 15 countries across the world. For 2007, insurance premium income accounted for 55.6% of the firm's total revenue, investment income brought in 29.1%, and 15.3% from other revenue.

For reporting purposes, Manulife segregates its diverse operations into five broad divisions: US Insurance, US Wealth Management, Asia & Japan, Reinsurance, and Canada. Effective January 1, 2008, the company adopted a new allocation approach for investment gains and losses. Previously, investment gains and losses were reported within the business units that owned the specific asset and credit experience was reported in the Corporate division. Under the new approach, general account investment gains and losses and credit experience are consolidated into two pools: one for insurance and the other for wealth management. The investment and credit result for each pool is then redistributed to the business units on a pro-rata basis based on the respective policy liabilities. Where investment gains and losses arise from specific product features such as variable annuity guarantees and future fees assumed in variable universal life and equity-linked reserves, or where investment gains and losses arise on full pass-through products, such as par insurance, these gains and losses remain in the business where the products are sold.

After the merger with John Hancock Financial, Manulife stands as Canada's largest life insurance company, largest financial institution, and largest public company, based on market capitalization. In North America, the company ranks as the second largest life insurer, based on market capitalization, and, with more than 20,000 employees and thousands of distribution partners serving millions of customers in 19 countries and territories, the company ranks as the fifth largest life insurance company in the world. In terms of solvency, Manulife maintains a strong balance sheet, high liquidity level, and strong financial strength ratings reflected by A.M. Best s "A++" rating on financial strength.

Manulife continues to focus on innovating and developing new products, managing and expanding its various distribution channels and further developing its financial and risk management capabilities. This is evident across all major product segments and geographical divisions.

In 2007, the company introduced new product classes throughout Asia, including new variable annuity offerings in Singapore and Taiwan. Existing products were also improved, while the next generation of variable annuity products introduced into the United States, Canada, and Japan markets were well received. In addition, the company introduced new insurance and mutual fund offerings across the organization with new life products in the United States and new equity funds in Hong Kong.

The pace of new product introductions remains strong and together with the expanding distribution MFC continues to enjoy strong sales across all geographies. For 1Q08, John Hancock (JH) Life sales increased 42.2% to US$209 million. John Hancock Variable Annuity sales of US$2.5 billion were up 17.7%, driven by continued strong performance of the Income Plus For Life benefit rider launched in 2Q07 and favorable initial sales results from the new distribution partnership with Edward Jones. JH Mutual Funds achieved record first quarter sales in open-end funds and reported a significant increase in net sales over the prior quarter, attributable to a more diverse line-up of mutual fund offerings including Lifestyle asset allocation fund. Two new funds Optimized Value and Floating Rate Income Funds were also launched in the quarter. Sales were up 13.0% to C$2.6 billion.

Canada Individual Life sales of C$57 million grew 29.6% year-over-year, while Canada Individual Wealth Management sales of C$2.3 billion reported an increase of 11.65 over the prior-year period. The company also introduced a new, non-participating whole life insurance product, Performax Gold and continued to post robust sales in innovative products including IncomePlus and Manulife One.

Asia and Japan's Insurance sales were up 45.9% while Wealth Management sales reported a growth of 55.2% year-over-year. Other Asian Territories' Insurance and Wealth Management sales were up 21.6% and 33.2% respectively. Japan Variable annuity sales more than doubled to US$51 million as a result of expanded distribution through regional banks and securities firms, while Pension sales in Hong Kong were 34% higher than prior-year quarter. Other Asia territories continued to execute on the core strategies with new product introductions in Malaysia, Taiwan and the Philippines, and expanded distribution agreements in Indonesia.

Expansion of distribution capabilities continued with the company establishing a distribution partnership with Edward Jones in the US, a large retail brokerage with advisors and clients across the US. The acquisition of Berkshire-TWC in Canada was completed and this more than doubled the distribution force of independent advisors. Through the company's diverse business model and expense control efforts, we believe the momentum Manulife has built up in both its insurance and wealth management sales will continue to grow the top-line and generate strong profits, going forward. Indeed, the company's strong demand for variable annuity and 401(k) products in the US and Canada are driving top-line growth in the company, while sales in Japan have also started to improve. Manulife-Sinochem continued to expand its operations in China. Operations in China continued to grow and expand, as the company received two additional licenses in the quarter, bringing the total up to 30, the highest for any foreign life insurance company operating in China.

The integration of John Hancock more than doubled MFC's funds under management to C$380.7 billion at the end of the fourth quarter of 2004. Total funds under management as on March 31, 2008 were C$400.1 billion. The company is using its scale to expand its operations overseas. Profitability from the company's core businesses in the United States and Canada has continued to grow primarily driven by increased sales through product innovation, coupled with expense reductions and strong investment performance, which has led to a strong level of capitalization. Manulife's ability to grow its business, improve its expense position, and enjoy favorable claims experience will, we believe, drive bottom-line growth and ROE expansion. Adjusted ROE resided at 18.4% for FY07, up 160 basis points from the prior year.

On September 25, 2007, the company's key insurance subsidiaries were upgraded to "Aa1" from "Aa2" by Moody's Investors Service, making Manulife Financial one of the two publicly traded life insurance companies in North America with such ratings. This reflects the company's success in persistently strengthening its diversified and predictable earnings profile, its excellent financial flexibility and conservative capital structure, and its durable, well-positioned franchises in North America and Asia. The ability to generate considerable organic earnings growth allowed MFC to increase quarterly dividend twice in 2007 and return almost C$3.6 billion to shareholders through share buybacks and dividends.

On June 6, 2008, A.M. Best affirmed the financial strength rating (FSR) of "A++" (Superior) and issuer credit ratings (ICR) of "aa+" of The Manufacturers Life Insurance Company, John Hancock Life Insurance Company and their affiliates. Additionally, A.M. Best has affirmed the ICR and all the debt ratings of Manulife Financial Corporation and its subsidiaries. The outlook for all ratings is stable.

Following the merger with John Hancock in 2Q04, the bond portfolio has steadily improved. Below investment grade bonds have gone down to 4.4% from triple"B's to roughly 23.0% from 31.7% and "B" and below rated bonds have fallen most significantly to 1.0% from 3.3% over the same time frame.

The company is continuously working on reducing its direct and indirect exposure to subprime portfolios. Currently, the company has a subprime real estate mortgage backed securities exposure of C$584 representing only 0.35% of total invested assets. Thus, the company may ultimately not have significant losses associated with its subprime portfolio in the near future. In addition, the company does not have CDOs, third party asset backed commercial paper or synthetic securitizations and most importantly, it does not write credit derivatives. The company has a Monoline insurance exposure limited to C$922 million of wrapped bonds representing 0.6% of total invested assets. However, we think that the company is in a less risky position related to these assets, than most of its peers.

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