Manulife (NYSE:MFC) reported a 24% increase in core earnings for the fourth quarter of 2013, with income from Asia and the U.S. climbing 26% and 25%, respectively.  Wealth products drove earnings as the company reported record high funds under management of C$599 billion. Wealth sales were up 15% over the prior year with a 24% increase in Canada and a 22% increase in the U.S. Group retirement solutions were particularly popular in Canada, with sales surging 79% while U.S. sales were driven by continued strong mutual fund sales.
Insurance sales, however, were down 32% from the prior year with a 5% decline in Asia and a 59% decline in Canada. Management attributed the decline in Canada to normal variability of Group Benefit sales. Manulife observed high sales in Japan through the last three months of 2012 and was unable to replicate that performance this year. Excluding these outliers, total insurance sales were actually up 7% over the prior year.
Our $17 price estimate for Manulife’s stock implies a discount of 10% to the current market price. We are in the process of updating our model to account for the earnings release.
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Focus On Asia
Manulife has been focusing on its Asian operations for growth. The company was one of the first insurers to enter the Asian market in 1897 and has since established operations in Hong Kong and Shanghai, Japan, the Philippines, Thailand, Malaysia, Singapore, Indonesia and Vietnam. These operations account for a third of the company’s core earnings. Both insurance and wealth sales were down during the fourth quarter, with the latter dropping 18% from the prior year. This was primarily due to lower sales in Japan, which accounts for 37% of the company’s Asian insurance sales and 17% of wealth sales.
In the fourth quarter of 2012, Manulife reported exceptionally strong corporate product sales in Japan and was not able to repeat its performance in 2013. Japan insurance sales declined 28% from the previous year while wealth product sales fell to half the value reported in 2012. The strategic income fund was quite popular in the country last year but not so much in 2013.
Japan is the second biggest life insurance market in the word, after the U.S.  and is an important market for any insurance company operating in Asia. Manulife Japan has around $30 billion in assets under management, with over 1,300 employees and a distribution network of 2,900 agents. The company has around 1 million policies in force in the country with a market share of 2.2% in terms of new business annual premium equivalent (APE) and 1% in terms of in-force APE.  The insurance market in the country grew at a compound annual growth rate (CAGR) of 10.4% from 2005 to 2012.  But insurance penetration, measured by taking premiums as a percentage of GDP, is quite high in Japan, close to 10%.  This indicates that future growth might not be at as high as in the past few years.
In other countries, Manulife reported strong results. Hong Kong insurance sales climbed 35%, driven by strong whole life par product sales. The announcement of an upcoming increase in prices was a major catalyst for these sales. Hong Kong accounted for 30% of Manulife’s Asian insurance sales during the fourth quarter. Indonesia insurance sales were up 30% over the prior year, driven by the company’s bancassurance distribution agreement with Bank Danamon. We believe that Manulife can achieve strong growth in Asian markets outside of Japan in the coming years.
Gaining Ground In Canada
Manulife reported record wealth product sales in its home country, Canada, climbing 18% over the prior year. Sales of mutual funds and group retirement solutions were particularly strong, with the former rising 19%. Assets under management reached C$ 27.6 billion, 33% higher than the figure reported at the end of 2012. On an annualized premium equivalent basis, individual insurance sales were 16% higher than 2012 with single premium product sales rising 18%. Manulife’s market share in the Canadian market fell from 13% in 2008 to around 6% by the end of 2012 but the company is looking to regain lost ground by expanding its distribution network through broker-dealer partnerships. Manulife has also launched RetirementPlus, a segregated funds product which offers customizable retirement and income solutions to customers. We expect a steady recovery from Manulife in Canada going forward.
U.S. Remains Strong
The U.S. is a big market for Manulife. The company earns more than half of its core earnings from the country, in which it operates under the John Hancock brand. For the fourth quarter, Manulife reported a 22% increase in wealth product sales while insurance sales were down 21%. On the wealth side, John Hancock Investments sales surged 49% but Retirement Plan Services sales fell 20%. This decline was down to an industry-wide slowdown as well as competitive pressure. Life insurance sales fell 24% as the company looked to shift its business mix to focus on profitability. However, Long-Term Care sales grew 30% and accounted for 10% of the company’s total insurance sales in the U.S.
Manulife is the seventh largest life insurer in the U.S., with a market share of 3.25%  It also offers 34 mutual funds rated four or five star by Morningstar. We believe that it can maintain its market share in the U.S. market over the next few years.Notes:
- Manulife Financial reports full year net income of $3.1 billion and core earnings of $2.6 billion [↩]
- Swiss Re’s World Insurance [↩]
- Manulife Asia: Delivering Now… More to Come [↩]
- Asia-Pacific Insurance Market Outlook to 2016 – Growth Opportunity in India & China [↩]
- Swiss Re’s World Insurance and figures for GDP growth are taken from the World Bank’s website [↩]
- National Association Of Insurance Commissioners Life And Fraternal Insurance Industry [↩]