Manulife (NYSE:MFC) has been focusing on the emerging markets in Asia as a key growth driver, and we believe that the company is looking in the right direction. Our $13 price estimate for the company’s stock is at a premium of about 25% to the current market price. Here we discuss a few key factors that drive our valuation.
Asia Key To Success
- How Important Is Asia For Manulife’s Growth?
- How Much Can Manulife’s Revenue Grow In The Next Five Years?
- How Did Manulife’s Operating Margins Change In The Last Five Years?
- How Much Did Manulife’s Revenue & EBT Grow In The Last Five Years?
- What Is Manulife’s Fundamental Value Based On Expected 2016 Results?
- What Is Manulife’s Revenue And EBT Breakdown By Operating Segment?
Asia is expected to account for 85% of the world’s middle class in the next five years, providing a huge potential customer base for insurance companies such as Manulife. As the region goes through a period of economic boom, the insurer has plans to double its agents in the geography to capitalize on the healthy trend.  The company reported record sales in the Asian continent during the first quarter of 2012 (See Manulife Delivers In Asia Yet Again) and is looking to expand its base of operations. It recently became the first foreign insurance company to foray into Cambodia, which has observed surge in the middle class income group due to recent investments from South Korea and China. (See Manulife Heads To $13, Expands Asian Reach To Cambodia)
Although its ventures into the Korean market have faced restrictions due to licensing difficulties, Manulife plans to enter the potential market through investments in existing businesses. After the exit of competitors Prudential Financial (NYSE:PRU) and MetLife (NYSE:MET), Manulife is now the frontrunner to acquire ING’s Asian operations.  With proactive incursions, we expect Manulife to gain market share in the Asian life and health insurance market over the next few years. Insurance premiums in Asia grew 23% year-on-year in the first quarter of 2012.
U.S. Annuity Sales Expected To Rise
The demand for retirement solutions in the U.S. has been rising steadily for the last few years. Manulife reported an 11% year-on-year growth in retirement plan services sales. With a growing awareness for financial well being coupled with an expected rise in life expectancy and retirement age, we anticipate the growth in annuity sales to continue. (See Good Times Ahead For Retirement Solutions Providers) Prudential Financial’s recent deal with automaker General Motors‘ (NYSE:GM) has opened new avenues for pension obligation transfers which might fuel further growth in retirement product sales. A cut in highly risky variable annuities will also help Manulife improve its operating margins.
Affordable Care Act to Effect Life and Health Insurance
The Affordable Care Act, recently passed by the Obama administration in the U.S. will lead to increased life and health insurance sales, as its “individual mandate” clause requires Americans who don’t have insurance to buy it.  This will add nearly 30 million Americans to the insurance pool, by 2014. The bill is not all silver linings for insurers as it prohibits underwriting based on preexisting medical conditions. We expect the lack of selectivity and rebates required to be paid to consumers, in case of excessive administrative to cut Manulife’s operating margins in the Life and Health insurance business.
Home Sweet Home
Back home in Canada, Manulife has been losing market share. The company has increased focus on the market and its marketing campaign focusing on social media has been well received. We expect Manulife to gradually reclaim lost ground in the Canadian life and health insurance market, which accounts for 15% of our price estimate for the company.
You can gauge the impact of a change in forecasts on our estimate, by modifying the charts above.Notes:
- Manulife Doubling Asia Agents as Region’s Profit Swells, Bloomberg [↩]
- Manulife Said in Second Round of ING Asia Insurance Bidding, Bloomberg, 31st May, 2012 [↩]
- Affordable Care Act means $1.1 billion insurance rebate, MSNBC, 3rd July, 2012 [↩]