Canadian insurer is considering IPO or spinoff for John Hancock subsidiary
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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 14, 2017).
Canadian insurer Manulife Financial Corp. is exploring a possible initial public offering or spinoff of its John Hancock Financial Services Inc. unit, according to people familiar with the plans, as life insurers continue to struggle with low interest rates and other challenges to the business.
If it proceeds with a breakup of the Toronto-based company, Manulife would be the latest life insurer to hive off a large part of its business. Industry executives have often cited the duress low interest rates put on some of their basic products. A move by Manulife would follow rival insurers MetLife Inc. and AXA SA in shedding large U.S. operations built around sales of life insurance, retirement-income annuities and other savings products to American families.
Manulife has been under pressure from some of its shareholders to sell John Hancock after years of disappointing returns from the U.S. unit, according to two people familiar with the company.
Manulife's stock has gained 7% on the New York Stock Exchange since its acquisition of John Hancock in April 2004. That compares with a 118% gain in the S&P 500.
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Manulife entered the U.S. life-insurance market with its roughly $10.3 billion purchase of the Boston-based insurer founded in 1862. The deal was announced with great fanfare as the keystone of the Canadian insurer's global strategy to expand in the U.S. But after years of disappointing returns from the business, which recently accounted for nearly 60% of Manulife's assets under management and administration, the Canadian insurer is instead focusing on expanding in Asia.
As recently as two years ago, Manulife reviewed plans that included a possible spinoff of the U.S. business. That proposal was dropped at the time.
Manulife's potential IPO or spinoff follows some months of work by investment bank Morgan Stanley to sell pieces or all of the John Hancock unit, one person said.
At recent analyst and investor events, Manulife executives have discussed shedding some weak parts of John Hancock. These included at least some blocks of long-term-care insurance and lifetime-income guarantees, according to a company presentation. Those are among the products harmed the most by low interest rates. Long-term-care policies typically pay for in-home aides or nursing homes. John Hancock quit selling stand-alone long-term-care policies to individuals last year.
Roy Gori, who will become Manulife's chief executive in October after current CEO Don Guloien retires, said during a session with investors in Hong Kong last month that he was "impatient" to shed the businesses.
At issue for most life-insurance firms is simple economics around policies. Many consumers buy long-term-care policies when they are in their 60s but don't file claims until they are in their 80s. This means insurers are exposed to decades of interest-rate risk.
Global interest rates have been near zero for almost an entire decade, and insurers have earned far less in investment income on older versions of the policies than anticipated when sold. Some have taken repeated charges against earnings to reflect the policies' poor financial results.
In addition to a potential move by Manulife, MetLife is nearing the final stages of divesting much of its U.S. retail-life insurance business -- the historical core of the company. Analysts estimate that MetLife's spinoff, named Brighthouse Financial, will have about $11 billion of adjusted book value, which is its assets minus liabilities.
Meanwhile, Paris-based insurance conglomerate AXA is planning to take its U.S. life-insurance operations public with a book value of about $14 billion to $15 billion, according to people familiar with the matter.
Over the past several years, some life insurers have sought to sell blocks of out-of-favor product lines to eliminate the earnings drag. But buyers have been scarce for large deals, and striking a pact can involve booking a large loss for the parent. As a result, a spinoff to existing shareholders of parts of a company's U.S. life-insurance operations -- not just the most-troubled product lines -- can become the preferred route for a divestiture, industry investment bankers, analysts and consultants say.
John Hancock contributed almost half of Manulife's closely watched "core" earnings of 1.1 billion Canadian dollars (US$864 million) during the first quarter. The unit also accounted for almost 60% of Manulife's C$1.004 trillion in assets under management and administration at the end of the first quarter, according to filings.
John Hancock's businesses include selling life insurance, mutual funds and other investment products to individuals and running 401(k) retirement-savings programs for employers. Outside the U.S., Manulife offers investment management, retirement funds, real-estate and wealth-management services in Canada and throughout Asia.
Manulife's U.S. long-term-care policies and certain other contracts with long-term guarantees that it has been seeking to sell have a combined book value of C$12.5 billion, according to an estimate by RBC Capital Markets analyst Darko Mihelic.
Divesting John Hancock would allow Manulife to free up regulatory capital and could add $5 a share to Manulife's stock price of roughly C$24 on the Toronto Stock Exchange, said Mr. Mihelic in a research report.
Manulife's shares rose 2% to $19.83 on the New York Stock Exchange on Thursday.
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July 14, 2017 02:47 ET (06:47 GMT)