Manulife’s Operations In Asia And Future Outlook

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Manulife (NYSE:MFC) has a well-established presence in various territories across Asia-Pacific, with operations in Japan, China, Hong Kong, Thailand, Malaysia, Taiwan, Indonesia, Singapore and the Philippines. Presently, the company derives nearly 33% of its total net income from its Asian operations. The company experienced a 26% increase in insurance sales in the region, but wealth management sales plummeted by 17% during the first nine months of 2014 compared to a year ago. The decline in wealth management sales has been primarily due to a weak market sentiment in several Asian markets, as well as weak investor demand for these products in Japan. [1] Compared to last year, the total net income from Asian operations for the first nine months of 2014 has fallen by almost 50%. [2]

In this article we discuss the company’s presence within the Asia market. We also take a brief look at its performance in the region during 2014 as well as the future outlook and potential opportunities in the Asian markets.

We have a price estimate of $19 for Manulife’s stock, which is about in line with the current market price.

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Japan

Japan has a mature insurance market, with penetration (direct premiums as a percentage of GDP) of 6.7% in 2013. [3] In terms of life premiums, Japan is the second biggest market in the world after the U.S. In 2013, premiums in the U.S. were $533 billion whereas in Japan life insurance premiums were $423 billion. [4] Manulife entered the market in 1997 and has established a strong foothold since. It is one of the largest foreign life insurance companies in Japan, besides Prudential Financial (NYSE:PRU) and MetLife (NYSE:MET). Overall, foreign-owned insurance companies had nearly a 21% share of the life insurance market in the country. [3]

Life insurance sales in the country surged by around 54% year-over-year for the first nine months of 2014. On the other hand wealth sales, which includes products such as mutual funds, fixed and variable annuities, declined by over 30% during the same period. [2]

China Is A Lucrative Market

With a population of around 1.4 billion and more than half of that residing in urban areas, the Chinese market presents a massive opportunity for expansion for Manulife. The life insurance density in terms of premiums per capita is around $99, which is quite low compared with the U.S., which has a density of $1,716. There is significant opportunity for annuity and retirement solutions sales due to a greatly improved life expectancy, which currently stands at around 75 years. [5] Thus, there is likely going to be a significant rise in the senior population in the coming years. [6]

However, the strict regulatory measures in China represent a key hurdle to operating and growing business in the country. Generally, the most promising distribution strategy adopted for fast sales growth is the bancassurance model, wherein the insurance company utilizes banks as a distribution center. However, the China Insurance Regulatory Commission (CIRC) has restricted the maximum number of insurance companies allowed at a single bank branch to three. In addition, the companies need to conduct a suitability test of potential customers to ensure that appropriate products are offered to them. Along with this, intense competition from domestic players is another challenge for insurance companies in China. It remains to be seen how Manulife will adapt its business strategy to tap the huge Chinese insurance market.

Other Asian Markets

Besides the abovementioned countries, Manulife has operations in Hong Kong, Indonesia, Singapore, Vietnam, Malaysia, Thailand and Cambodia. In Hong Kong, the company reported a 16% year-over-year increase in insurance sales during the first nine months of 2014. For the same period, Group Pension sales grew by only 3%, whereas Individual Wealth Management sales declined by 3% year-over-year. Indonesia, which is another key market, has registered a year-over-year decline of 4% in insurance sales and 28% in wealth sales during the first nine months of 2014. [2]

Insurance sales in the other Asian regions (excluding Japan, Hong Kong and Indonesia) grew by only 4% year-over-year, but a 10% drop in wealth management sales more than offset the overall growth. Except Singapore, all the other countries have a very low penetration of life insurance and the growth in these economies offer a conducive environment for Manulife to expand its business.

New Growth Opportunities Beckon

India’s economy also offers a promising opportunity for business growth. India is home to the second-largest population in the world, but a very low level of insurance penetration of around 3.96% in 2013. [7] In recent weeks, it has increasingly appeared that the Union Government of India is set to relax foreign direct investment (FDI) rules in the insurance sector in the country, meaning that a foreign company will be able to invest up to 49% in a local insurance company. [8] That will provide Manulife with an opportunity to enter the Indian market, likely in a joint venture with an existing player, and tap the tremendous growth potential that the insurance sector in the country offers.

Future Outlook

Manulife’s Asian division accounts for nearly 40% of our valuation of the company. We expect the company to grab over 1% market share in the life and health insurance market in Asia by the end of our forecast period in 2021. Given the company’s long term presence and deep understanding of the market, as well as the potential opportunity the regional economies offer, we believe that this is an achievable target. This is also supported by the fact that in Asia, the middle-class population is set to cross 1.7 billion by 2020, which will be more than a threefold jump since 2009. And in the coming years, both India and China will be major contributors to the brisk pace with which the middle class is rising in Asia. [9] If the company is able to capture around a 1.5% share of the market during the same period, there would be an upside of more than 10% to our price estimate for the company. We will be closely following the developments in the Asian market and their potential impact on Manulife’s performance.

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Notes:
  1. SEC 6-K Filing []
  2. Statistical Information Package, Q3 2014 Earnings Release, Investor Relations [] [] []
  3. OECD Insurance Indicators [] []
  4. Swiss Re sigma study on world insurance in 2013, Swiss Re Press Release []
  5. CIA World Fact Book []
  6. Population Estimates and Projections, World Bank []
  7. Indian Insurance Market, Insurance Regulatory and Development Authority []
  8. Why is Insurance Bill So Important?, Livemint []
  9. The Emerging Middle Class in Developing Countries, Homi Kharas, The Brooking Institution []