Manulife (NYSE:MFC) reported net income of C$1 billion for the third quarter of 2013, compared to a net loss of C$211 million for same period last year.  Core earnings, which exclude the effects of certain one-time charges, were up 24% over the prior year, helped by a strong performance by the wealth management business which led to higher fee income. Wealth management revenues were up 34%, with double digit growth in Canada, the U.S. and Asia. Funds under management reached a record high of $575 billion. 
The company is expected to benefit from the recent surge in interest rates, which have climbed 100 basis points since the end of April. We have a price estimate of $17 for Manulife’s stock, about in line with the current market price.
Investing In Bonds
About half of Manulife’s assets are invested in bonds, the yields from which dropped from 5.14% in 2007 to 3.85% in 2012. However, interest rates have been climbing in 2013, as the 10 year U.S. Treasury bond yield has climbed from 1.66% in May to 2.77% currently,  while its Canadian counterpart has increased from 1.67% to 2.61% in the same time period.  Rising yields from its investments will lead to lower new business strain for Manulife, as well as a reduction in charges related to reinvestments for its in-force business. A further 50 basis point increase in interest rates through the next year would have a positive impact of $150 million on the company’s net income
Rising interest rates will also improve the company’s capital ratio due to the mark-to-market accounting standards it follows. Manulife’s Minimum Continuing Capital and Surplus Requirements (MCCSR) capital ratio improved by 7 basis points to 229%, well over the minimum statutory requirement of 120%. 
Manulife continued to gain back lost ground in Canada, with core earnings climbing 17% over the last year. Strong mutual fund sales and a 23% increase in sales of Group Retirement Solutions products led to a 32% increase in wealth product sales in the country. Total insurance sales increased 27%, as strong Group Benefit sales offset an 8% decline in individual insurance annualized premium sales.
Manulife’s market share in the Canadian market fell from 13% in 2008 to around 6% by the end of 2012. The company has gained some momentum in 2013, however, as year-to-date insurance sales are up 6% over the prior year. We believe that Manulife can regain some lost ground from competitors like Great-West Lifeco., Sun Life Financial and Desjardins Financial Security in the coming years.
Around a third of Manulife’s core earnings came from Asia, where the company has established operations in Japan, China, Hong Kong, Thailand, Malaysia, Indonesia, Singapore and the Philippines. Earnings from the region were up 5% as a 4% decline in insurance sales was offset by a 21% increase in wealth product sales. Pension sales were particularly strong in Hong Kong as total annualized premium equivalents increased 8% over the prior year and total weighted premium income was up 6%. Japanese corporate product sales dipped through the quarter, but management insinuated that insurance sales in the country began to pick up momentum through September.
Nearly half of Manulife’s Asian insurance sales and 30% of its wealth management product sales come from Japan, which is the second biggest market in the world after the U.S.  Manulife Japan has a market share of 2.2% in terms of new business annual premium equivalent (APE) with around 1 million policies in force.  The company’s premiums from Asia have grown at a CAGR of nearly 30% through the last four years, and we expect it to maintain growth in the coming years.
Strong mutual fund sales helped Manulife’s earnings in the U.S., which were up 25% from the third quarter of 2012. Wealth product sales surged 43% while the company’s strategy to re-price lower risk insurance products led to a 3% increase in insurance sales. Long term care product sales were up 15%
Manulife is the seventh largest life insurer in the U.S., with a market share of 3.25%  The company operates under the John Hancock brand in the U.S. and earns nearly 40% of its premium income from the country. We believe that Manulife can sustain growth in the U.S. in the coming years.Notes:
- Statistical Information Package, Manulife [↩]
- Manulife Financial Management Discusses Q3 2013 Results – Earnings Call Transcript [↩]
- Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [↩]
- Canadian Govt Bonds 10 Year Note, Bloomberg [↩]
- Minimum Continuing Capital and Surplus Requirements (MCCSR) for Life Insurance Companies [↩]
- Swiss Re’s World Insurance [↩]
- Manulife Asia: Delivering Now… More to Come [↩]
- National Association Of Insurance Commissioners Life And Fraternal Insurance Industry [↩]