Manulife (NYSE:MFC) is scheduled to report earnings for the fourth quarter of 2013 on Thursday, February 13.  The Canadian insurance company had a strong third quarter, with a 24% increase in core earnings and funds under management reaching a record high of $575 billion. Strong wealth management sales in Canada, the U.S. and Asia helped the company maintain double-digit growth. We expect another quarter of consistent results from the company, but currency fluctuations can impact earnings from Asia. Our $17 price estimate for Manulife’s stock implies a discount of 10% to the current market price.
Japanese Yen To Hurt Operations
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Manulife has been turning east for growth in the last few years. The company has established operations in Japan, China, Hong Kong, Thailand, Malaysia, Indonesia, Singapore and the Philippines, accounting for one-third of the company’s insurance premiums, which have grown at a CAGR of nearly 30% over the last four years. For the third quarter, Manulife reported a 4% decline in insurance sales, which was offset by a 21% increase in wealth product sales as core earnings from the region went up 5%. 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%.
However, the weakening of the Japanese Yen in comparison to the dollar might impact Manulife’s results. Half of the insurer’s Asian insurance sales and 30% of its wealth management product sales come from Japan. Prudential Financial (NYSE:PRU), which earns a third of its international premiums from the country, recently reported premium volume of $1.5 billion on a constant exchange rate basis, but just $1.2 billion on an actual exchange rate basis. We expect a similar impact of FX fluctuations on Manulife’s earnings. 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.  Japan is the biggest insurance market outside the U.S.,  and will be crucial for Manulife’s Asian operations in the coming years.
U.S. And Canada Sales
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. For the third quarter, Manulife’s earnings from the U.S. were driven by a 43% increase in wealth product sales. Mutual fund sales were up 25% over the prior year while the company’s decision to re-price lower risk insurance products led to a 3% increase in insurance sales.
Total individual life insurance premiums across the U.S. grew 4% through the first nine months of 2013, with a 19% increase in variable universal life insurance policy premiums, a 5% increase in whole life and 4% in term life insurance premiums.  Manulife reported a 15% increase in long-term care product sales. We believe the company to maintain momentum through the fourth quarter.
Manulife has been recovering ground in its home country of Canada. The company’s market share in the Canadian market fell from 13% in 2008 to around 6% by the end of 2012, but it reported strong results in 2013. Core earnings for the third quarter were up 17% over the prior year, with a 32% increase in wealth product sales and a 27% increase in insurance sales. Manulife has been able to achieve this turnaround by focusing on its group offerings; Group Retirement Solutions product sales surged 23% through the third quarter while Group Benefit sales were also strong. We will keep a close eye on the results to see if the company can continue its recovery.
Investment Returns To Increase
Manulife’s loss ratio (expenses to premiums) is around 130%, indicating that the company would be running in losses if it was not able to generate sufficient returns from its investments. Half of Manulife’s assets are invested in bonds, the yields from which fell following the 2008 financial crisis. Excluding capital gains, Manulife’s yield from bonds was around 5.3% in 2007 but fell to just 3.8% in 2012. However, the decline in yield has been accompanied by an increase in asset prices; Manulife reported capital gains of around $3 billion in 2012 and close to $9 billion in 2011.
Around 35% of the company’s assets are invested in Canada and around 50% in the U.S. The Federal Reserve’s decision to scale back its $85 billion monthly bond purchases has led to an increase in yields. The 10-year U.S. Treasury bond yield has increased from 1.6% in May, when the Fed first suggested the possibility of QE tapering, to over 3% but is still a long way off from the pre-recession level of 5%.  The Canadian Government 10-year bond yield is highly correlated with its U.S. counterpart and has increased from 1.68% in May to 2.4%.  Manulife’s net yield, including capital gains and losses, was around 5.14% in 2007. We currently expect the net yield to reach this level by 2015, with operating margins reaching the historical average of 15% by this time.Notes:
- Investor Relations [↩]
- Manulife Asia: Delivering Now… More to Come [↩]
- Swiss Re’s World Insurance [↩]
- National Association Of Insurance Commissioners Life And Fraternal Insurance Industry [↩]
- LIMRA’s U.S. Individual Life Insurance Sales Summary Report, Third Quarter 2013 [↩]
- Daily Treasury Yield Curve Rates, U.S. Department Of The Treasury [↩]
- Canadian Govt Bonds 10 Year Note, Bloomberg [↩]