Manulife pulls leveraged insurance product for Hong Kong wealthy

Manulife Financial Corp. pulled leverage for an insurance product targeting wealthy Hong Kong clients after the offering drew scrutiny from regulators and competitors, according to people familiar with the matter.

The product pitched by the Canadian insurer allowed wealthy individuals to buy a policy worth US$80 million in nominal value with almost four times leverage and offered returns exceeding 10 per cent, according to marketing materials seen by Bloomberg News.

Manulife’s clients required an initial investment of US$14.4 million for the product, with an additional US$56 million borrowed at a fixed interest rate of 3.39 per cent for five years. By comparison, market lending rates on other policy loans currently available to retail customers hover around seven per cent.

While premium financing, or borrowing against the value of a life insurance policy, is a common practice for high-net-worth individuals, this specific program stood out because of its aggressive leverage and unusually low financing costs, according to people familiar with the matter, who asked not to be identified discussing private information.

A spokesperson for Manulife said the company regularly reviews its policy services and makes adjustments as part of its routine operations, adding that it remains committed to meeting customer needs.

Aggressive structures have caught the attention of the city’s insurance watchdog. Asked about the product, Insurance Authority chief executive Clement Cheung said that the regulator doesn’t comment on individual cases. More broadly, he said the regulator has noticed “some premium financing and relatively creative financial arrangements in the industry” and remains focused on protecting policyholders’ interests.

Manulife’s Alpha Score sits at 63 out of 100, a Moderate label in the Financial Services sector. The score reflects the company’s stable earnings base offset by the regulatory and reputational risk tied to products like this one. For a firm that generates roughly a third of its core earnings from Asia, the Hong Kong insurance regulator’s public acknowledgment of “creative financial arrangements” is a signal worth tracking. The Insurance Authority has broad powers under the Insurance Ordinance to impose conditions on authorized insurers, including requiring them to stop selling specific products. Manulife’s decision to pull the product before being ordered to do so suggests the company is managing that risk proactively.

The product’s structure carried two features that made it stand out from standard premium financing. First, the 3.39 per cent fixed rate for five years was roughly half the prevailing retail policy-loan rate in Hong Kong. Second, the leverage ratio of nearly 4-to-1 on an $80 million policy meant the borrower’s equity was only $14.4 million. A 25 per cent drop in the policy’s cash value would wipe out the entire equity position. The returns above 10 per cent cited in the marketing materials depended on the policy’s investment performance exceeding the low financing cost by a wide margin. If the policy’s underlying investments underperformed, the borrower would still owe the full loan amount plus interest.

The Insurance Authority’s focus on premium financing is not new. In 2023, the regulator issued a circular reminding insurers to ensure that premium financing arrangements were suitable for customers and that intermediaries disclosed the risks, including the possibility of margin calls if the policy’s cash value fell. The circular followed a series of complaints from policyholders who had taken out leveraged policies and later faced losses when interest rates rose or investment returns fell short. The Manulife product, with its combination of high leverage and below-market financing, would have been a natural target for the regulator’s next round of scrutiny.

For Manulife, the pullback removes a source of premium growth in Hong Kong, a market where the company has been expanding its wealth-management and insurance offerings. The product’s high returns and low financing costs were a draw for the city’s wealthy clients, who have few options for leveraged exposure to insurance-linked investments. Without the product, Manulife will need to find other ways to compete for that client segment, which is also courted by rivals such as AIA Group Ltd. and Prudential Plc.

The broader question for the industry is whether the Insurance Authority will take further action on premium financing products. Cheung’s public comment that the regulator has noticed “relatively creative financial arrangements” suggests the agency is watching the space closely. If the regulator issues new guidance or imposes restrictions on leverage ratios or financing terms, it could affect the entire Hong Kong insurance market, not just Manulife. For now, the company has moved first, pulling the product before any formal action was taken.