Manulife Q2 Earnings Preview: Growth Momentum To Continue

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MFC: Manulife Financial logo
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Manulife Financial

Manulife (NYSE:MFC) is scheduled to report earnings for the second quarter of 2014 Thursday, August 7. [1] In the first quarter, Manulife reported a 50% year-over-year increase in net income and around 17% year-over-year jump in core earnings. [2] We expect the insurance company to carry forward its growth momentum from the first quarter in the upcoming results, although currency headwinds will impact the overall earnings.

We have a price estimate of $18 for Manulife’s stock, which is at a slight discount to the current market price.

See our full analysis of Manulife here

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Asia Operations

Manulife has been placing an emphasis on expanding its business in the high-potential Asian market. The company earns nearly one-third of the total core earnings from its operations in Hong Kong, Shanghai, Japan, the Philippines, Thailand, Malaysia, Singapore, Indonesia and Vietnam. In the first quarter, core earnings (earnings from core businesses of the company) increased by 18%. [3] Insurance sales in the region increased 23% over the prior year, with a 28% increase in Japan. However, sales of wealth products declined by 37% in the Asian market due to rising interest rates and market uncertainty, led by a 55% year-over-year plunge in sales in Japan. We expect Asian currency movements to continue to impact earnings in the second quarter, even as the company will continue to expand and register strong growth in Asia.

Canada

During the first quarter, Manulife reported an 8% year-over-year increase in insurance sales in Canada (excluding group benefits), as retail sales increased by 9% over the previous 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. [3] Sales of group retirement products also increased 41% over the prior year. In the past few years, Manulife has lost market share primarily due to pricing initiatives undertaken to improve profitability, especially in the group benefits segment. We expect the company to make up for the lost ground and report growth in sales during the second quarter.

U.S.

Insurance sales declined by 24% in the U.S. in the first quarter, and margins also took a hit as the mortality ratio, defined as the percentage of actual claims to the expected claims, increased from 91.3% in the first quarter of 2013 to 93.6% in Q1 2014. This was beyond the company’s target of 85% to 90%, thereby forcing Manulife’s management to introduce improvements in products and a competitive pricing structure in order to revive sales. [3] Last week, competitor MetLife (NYSE:MET) reported flat earnings owing to weak underwriting in the U.S. as the mortality ratio increased to 87.3% in Q2 2014 compared to 86.5% in Q2 2013. It will be interesting to find out how Manulife’s strategy to strike a balance between pricing and profitability has panned out in the second quarter.

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Notes:
  1. Investor Relations []
  2. Manulife Financial Management Discusses Q1 2014 Results – Earnings Call Transcript []
  3. SEC 6-K Filing, May 1 2014 [] [] []