Manulife’s Pricing Strategy Hurts U.S. Insurance Operations, Asian Expansion On Track

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Manulife Financial

Manulife (NYSE:MFC) reported strong results for the first quarter of 2014, with net income rising 50% and core earnings up 17% over the prior year. [1] Core earnings from Canada climbed 27% while earnings from Asia rose 8%, despite FX headwinds. However, core earnings from the U.S. were down 15% as insurance sales fell 24% from the Q1 2013 level leading to higher new business strain. This was largely due to pricing actions the company took last year to improve profitability. These pricing initiatives were not matched by Manulife’s competitors, and the company lost market share as a result. Rate increases also affected insurance sales in Canada, which fell 45%.

Wealth sales were up 5% over the prior year, with record mutual fund sales in the U.S. and strong pension sales in Canada. The company remains on track to expand operations in the Asia-Pacific region, but might have to consolidate its domestic operations. Our $17 price estimate for Manulife’s stock implies a discount of 10% to the current market price.

See our full analysis of Manulife here

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Strong Insurance Sales In Asia

Manulife has been focusing on Asia for growth in the last few years; the company’s revenue from the region increased from C$6.8 billion in 2009 to C$10 billion in 2012, but fell to C$8.9 billion in 2013 as Asian currencies weakened against the Canadian dollar. The company continued to expand in the first quarter of 2014, with core-earnings up 18% after adjusting for currency fluctuations, the sale of Manulife’s Taiwan business and increased dynamic hedging costs.  Insurance sales in the region increased 23% over the prior year, with a 28% increase in Japan. However, rising interest rates and market uncertainty led to a 37% decline in wealth product sales with Japan sales plunging 59%.

Japan is a key market for Manulife in Asia, accounting for half of its insurance sales and a quarter of wealth product sales. Insurance sales spiked in the first quarter of 2012 in Japan due to anticipation of tax changes in April 2012 and the non-recurrence of this event led to a 41% decline in sales in the first quarter of 2013. Sales normalization as well as the successful launch of enhanced corporate term products in the country led to a 28% increase in the first quarter of 2014. Manulife has a market share of 2.2% in terms of new business annual premium equivalent (APE) in Japan, with around 1 million policies in force in the country. [2] The company has around $30 billion in assets under management, with over 1,300 employees and a distribution network of 2,900 agents. We expect it to maintain its focus on Japan while expanding in other countries such as Indonesia, where Manulife has a bancassurance distribution agreement with Bank Danamon. Indonesia insurance sales climbed 13% in the first quarter of 2014, accounting for 105 of Asia insurance sales.

Wealth Sales Soar In Canada

Like in the U.S., Manulife took pricing actions last year to improve the profitability of its Canadian insurance business. However, the impact of these actions was largely limited to the group benefits division, excluding which, the company reported an 8% increase in insurance sales with retail sales climbing 9% over the prior year. Wealth sales in the country increased 18% over the prior year, with strong demand for mutual funds driving a 36% surge in mutual fund sales. Sales of group retirement products also increased 41% over the prior year.

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 now looking to expand its distribution network through broker-dealer partnerships.  We believe it can achieve growth, particularly in the retail markets.

U.S. Pricing Needs To Improve

Manulife is the seventh largest life insurer in the U.S., operating under the John Hancock brand with a market share of 3.2%. [3] However, the company lost market share in the first quarter due to pricing actions taken last year. In contrast, the market leader, MetLife (NYSE:MET), reported a 9% increase in premiums, fees and other income for the first quarter, with strong sales. However, the company’s margins fell as its mortality ratio (direct claims experienced as a percentage of the expected claims) increased from 91.3% in the first quarter of 2013 to 93.6%, outside the target of 85% to 90%. Manulife’s management suggested that it will introduce product enhancements and resort to a more competitive pricing structure to revive sales. We believe that the company will have to find a balance point that allows it to maintain sales growth while keeping margins in the desired range.

On the wealth side, Manulife’s mid-market 401(k) product was particularly popular, leading to a 13% increase in wealth product sales. Mutual fund sales were up 20% to a record high level for the company. Manulife announced that it will improve pricing and transparency and increase investment options for its core 401(k) small case market products. We expect strong sales from the company in the coming years as demand for retirement products in the U.S. continues to increase.

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Notes:
  1. Manulife Financial Management Discusses Q1 2014 Results – Earnings Call Transcript []
  2. Manulife Asia: Delivering Now… More to Come []
  3. National Association Of Insurance Commissioners Life And Fraternal Insurance Industry []