Summary:
Manulife’s deep reach in the Asian market and a growing asset management
business would drive long-term earnings growth. It also holds a significant market in
Canada and the Standard Life Overseas Holdings takeover broadened its share in the
region. With issuance of notes outside Canada in the first quarter, Manulife seems to
attempt diversifying its source of procuring funds. However, the company’s soft
results from the U.S. division and low interest rates continue to hurt the overall
performance. Additionally, recent volatile global equity markets coupled with low bond
yields has largely affected the company’s capital position. With respect to quarterly
results, the company’s first quarter earnings improved year over year on new
business volumes growth, particularly in Asia, and favorable foreign currency
translation. However, an increase in hedging costs limited the upside.
Reasons To Buy:
- Manulife has an impressive inorganic growth story. In Jan 2015, the company completed the acquisition of Standard Life plc’s Canadian operations for $3.7 billion (C$4 billion). The deal added scale to the company’s core business lines in Canada, including insurance, group benefits, group retirement and retail wealth. The acquisition will increase the breadth of products and services that Manulife can offer to Canadians, and expand its distribution reach. It will also increase the company’s earnings capacity beyond the 2016 core earnings objective of C$4 billion. The acquisition contributed about $36 million benefiting the second quarter results of the division. Manulife also agreed to acquire Standard Chartered’s existing pension business in Hong Kong in Sep 2015. This transaction will also help it to become its exclusive mandatory provident distribution partner for a 15-year period. This initiative will not only help accelerate growth in Asia but will also be a testimony to the prudent use of capital in high-growth, less capital-intensive, higherreturn businesses. The company also completed the acquisition of New York Life’s Retirement Plan Services business.
- In its effort to ramp up its growth profile, Manulife has entered into a 15-year regional distribution agreement with DBS in Asia for providing bancassurance solutions in Singapore, Hong Kong, Indonesia and Mainland China. The company also added new partnerships in Cambodia and Japan widening its bank distribution. This strengthens its foothold in Asia and paves way for longterm growth. The company also launched Vitality, which will give it a competitive edge in the U.S. Additionally, in July, the company completed related reinsurance transaction. The company launched ManulifeMOVE in Hong Kong and Macau and subsequently commenced insurance sales. It also recently expanded the ManulifeMOVE wellness program for the Philippines. It ramped up its exchange traded fund lineup by unveiling five new funds, taking the tally to 11.
- Manulife is aggressively developing its business in Asia which in turn is reaping solid operational results. In the first quarter of 2016, core earnings from this division increased 19% year over year, driven by solid growth in new business volumes, better product margins and favorable policyholder experience. Insurance sales improved 14% fueled by record sales in Asia as double-digit growth in most territories was noticed. New business value increased 70% owing to strong sales volume and higher product margins in Japan and Asia. Also, new business margins in Asia improved 340 basis points to 28.8% in the first quarter. This market appears attractive given its changing demographics which show that Asia’s population is getting wealthier and older at a fast pace. Per OECD Development Center, by 2020, the middle class in Asia will comprise 1.7 billion people. Also going by the United Nations’ population projection, two-third of the world’s middle class is expected to be in Asia by 2030. In order to tap this market, Manulife has expanded its distribution network across the region, securing and deepening strategically important distribution agreements with key partners in Japan and Indonesia. We expect the company to gain strong hold over the Asian markets, which play a crucial role in its long-term growth.
- Manulife is consistently expanding its wealth and asset management business around the world. Assets under management grew 8% in the first quarter and continue to see strong investments in all public asset classes. The first quarter of 2016 also marked the 25th straight quarter of positive net flows. Recently, Manulife's investment division, Manulife Asset Management, announced its plan to expand its operations in Europe. The investment wing already boasts a compelling presence in North America and in Asia. Manulife Asset Management has identified Europe (and the wider EMEA market) as a significant growth area. This has prompted the life insurer to make long-term investments in this particular region.
- Manulife boasts a strong capital position and ended the first quarter with a risk adjusted capital ratio of 233%. It has also been effectively lowering its leverage ratio. However, the same at first quarter end declined owing to debt issuance, preferred shares issuance and adverse forex. Notably, the debt offering marked Manulife's first issuance beyond the Canadian market in five years, pointing to its effort of diversifying funding resources..Nonetheless, a strong capital position has enabled the company to hike its dividend by 9%, thereby marking the third increase in less than two years.
- In Canada, 2014 core earnings had lagged expectations. The division’s lackluster earnings were attributed to declining group benefit sales in Manulife bank lending volumes where the company decided to maintain pricing discipline despite strong competitive pressures. However, the year 2015 witnessed improvement on the back of the Standard Life acquisition. The momentum continued into the first quarter of 2016.
- Core earnings in the U.S. division increased owing to improved policyholder experience, higher fee income from the Wealth and Asset Management businesses as well as accretion from Standard Life acquisition. However, given strong competitive pressures and a continued low interest rate environment, we expect earnings from this division to remain be under pressur in the near term.
- For the past several quarters, volatile global equity markets coupled with low bond yields resulted in enormous pressure on the company’s capital position. Manulife has been forced to raise its reserves to guarantee future liabilities, thus draining the bottom line. We expect the global equity markets to remain weak and volatile in the near future. As a result, we anticipate higher reserve charges for its equity-linked products, which will also hurt its earnings. Though the company has made significant progress in reducing its stock market exposure, and its interest rate exposure to some extent, it still remains more exposed than its peers.
- Manulife draws a substantial portion of its earnings from the international market, which makes its profitability vulnerable to foreign exchange losses. In an attempt to lower its forex exposure, the company has started incurring hedging costs.
