Conversely, almost all major life and health insurers have aggressive plans to expand in Asia which could prevent Manulife from achieving a greater market share. There could be a 10% downside to our price estimate if the company's market share were to remain flat during our forecast period.
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Manulife Financial is a leading Canadian-based financial services group operating in 22 countries wordlwide. The company provides financial protection and wealth management products and services which include individual life insurance, group life and health insurance, long-term care services, pension products, annuities, mutual funds and banking products. The company also offers reinsurance services, specializing in life retrocession and property and casualty reinsurance.
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Manulife's most valuable business is its Asian insurance and wealth management operation. The company's second most valuable business is its U.S. Retirement Solutions business which provides annuities and pension plans in the U.S. The third most valuable business is the investment of the insurance premiums collected across all of the company's insurance products in assets such as bonds, equities and mortgages.
0.7% Share in $741 billion Asian Life Insurance and Wealth Management Market
Manulife's Asian life insurance and wealth management business is the company's largest source of value. This is due to the significance of the Asian insurance market, which we estimate to be about $741 billion in 2011.
Manulife has operated in Asia since 1897 and has developed a robust distribution network which includes exclusive agents, independent agents, banks, financial advisers and other alternative channels
1.5% Fees on $190 billion Variable Annuity Assets in the U.S.
The retirement solutions market in the U.S. has seen healthy growth over the past couple of years and Manulife is one of the leading providers of annuities and retirement plans. In 2012, the company managed about $190 billion in variable annuity assets and charged fees of 1.5%. We estimate that Manulife's variable annuity assets will grow at 5% annually over the Trefis forecast period.
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Modest growth in the U.S. life and health insurance market
Growth in the U.S. life and health insurance business continues to be impacted by the current high levels of unemployment and fears about the economy dipping into a second recession. Should economic conditions be exacerbated, consumers may further reduce or even eliminate insurance coverage in response to financial woes. Accordingly, we do not expect significant near-term growth in the U.S. life and health insurance market.
Investment losses are expected to decline
The financial crisis of 2008-09 caused financial services firms to book heavy losses on their invested assets. Insurance companies typically depend on investment income to pay off their liabilities (insurance benefits, claims and dividends). Heavy investment losses during the financial crisis caused operating margins to drop significantly. Going forward, we expect that insurance companies will cut down on their losses with reduced exposure to high risk securities coupled with an improving economic environment.
Improved liquidity position to help drive growth
In addition to nearly $230 billion in invested assets, the firm has a strong liquidity position with more than $13 billion in cash at the end of 2012. As some of this cash is used for more high return opportunities, this could significantly improve operating earnings going forward.
Trefis Forecast Rationale for Manulife's Yield on Fixed Maturity Investments
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${forecast} represents, as a percentage of the asset base, the returns that Manulife's fixed maturity investments generate.
Insurance companies use their invested assets to pay for the insurance claims of their customers and to generate additional income that can be paid out as dividends to their shareholders.
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${forecast} declined from 5% in 2007 to -0.6% in 2008 due to significant capital losses but jumped to 10% in 2009 on more than $4.5 billion of investment gains. Manulife reported about $3.5 billion in investment gains in 2010 which propelled returns to 8.4%. The yield increased to 11.95% in 2011 but fell to 3.85% in 2012. Going forward, we expect the yield to be under pressure from the current low interest rate environment but we expect it to improve gradually over our forecast period.
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- Low interest rate environment to depress yields
- We expect the low interest rate environment to persist at least through 2012 at which time rates will slowly rise along with an economic recovery.
- These low interest rates will keep returns depressed over the next few years.
- Even in an extended high interest rate environment the company may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring the company to liquidate fixed income investments in an unrealized loss position. We don't see such a scenario materializing in the near-term, but even a very high interest rate environment can adversely affect the company.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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