In any public statement, interview or speech provided by the senior management of Manulife is the clear expectation that this is how the company expects to do business now and moving forward.

During the past two years there has been an intent focus on credit quality, available corporate liquidity and risk. Risk management has been the new corporate buzz word on Wall Street and Bay Street with corporations and business schools making public acknowledgements that risk management is a top priority of their corporate culture or curriculum. As an investor and businessman I know there is a significant difference between saying and doing and when management says one thing I expect them to walk instep with their public and private commitments.

Manulife has a strict risk management culture that included oversight governance from a Product Oversight Committee, Credit Committee & Global Asset Liability Committee. Since going public as a corporation Manulife has clearly presented to investors the risk management policy, expectations, identification & monitoring, measurement, controls and mitigation activities they have in place. In their 2007 Annual Report they clearly define their strategic risk, market risk, foreign currency risk, credit risk, insurance risk, liquidity risk, operational risk, derivatives risk, interest rate risk and risk from variable products & managed assets.



If I can add a perspective:
There are ten pages or 8% of the 2007 annual report devoted to strictly conveying risk that the company is exposed to in its various operations in detail for shareholders. These aren’t hidden in the notes of financial statements or written in fine print as legal disclaimers at the end of the report. In each annual report Manulife commits an entire section to the explanation of risk and this isn’t a recent event in light of the credit crisis. As a percentage of the annual report risk management was:
- 8% in 2006
- 6% in 2005
- 7% in 2004
- 11% in 2003
As you go through those reports Manulife’s risk profile has changed little over that period.

Financial strength of the company and credit ratings, in light of recent events, remain strong.




One difficulty in evaluating any insurance company is gaining an appropriate assessment of their bond and investment portfolios. With the Lehman Brothers and large financial failures in 2007 and throughout 2008 we’ve seen many companies take large write-downs on losses through direct or indirect credit exposure. Manulife stated in September that less than 1% of their $164B in assets has exposure to Lehman Brothers, AIG or Washington Mutual and that their par value investments in each respectively was $395M, $374M and $41M.

The company has stated that $96B of their bond portfolio is rated at investment grade or better (BBB or higher). In my research the lowest component of their bond and private placements has a rating of 80% investment grade and comprises only 4% of the portfolio in the category of basic materials. 27% of the portfolio is Government and agency bonds with 22% in financials.

Their investment division holds 45% bonds, 7% of stock, 16% mortgages and 13% private placements. Mortgages are comprised of 55% Canadian and 45% US with 74% of total mortgages as commercial and 21% of the total portfolio as government insured. The remainder of the non-commercial mortgages are Canadian residential and agricultural.

Since 45% of Manulife’s investment portfolio is comprised of bonds some future losses are likely to materialize. Greater transparency of the bond portfolio would be helpful in any assessment, but likely due to the size and scale of the portfolio very few investors would have the time to perform a comparative risk assessment based on any number of factors.

Segregated funds have been a major concern of the equity markets in recent weeks and put Manulife and other insurers in the spot light. Segregated fund products in recent years have been very attractive to insurance companies and aggressively sold to investors seeking capital preservation of their investments with the potential benefit of upside as markets appreciate. As equity markets have declined significantly in recent months questions have been raised about these products and whether additional capital needs to be raised in order for companies to meet these longer-term obligations. In my situational analysis one significant internal threat for my investments in insurance companies has been the increased affinity for these products. While they offer lucrative fees and an incentive from the issuing company’s perspective the explosive growth of these products has been concerning and likely something that will be appropriately managed in future years.

One benefit is that although segregated products have been sold by Manulife in all their major markets many of these products do not require repayment for another 7-30 years and the potential costs of these products are within the stated resources of the company.