Manulife Earnings Preview: FX Headwinds, Investment Income In Focus

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Manulife Financial

Manulife (NYSE:MFC) is scheduled to report its earnings for the first quarter of 2015 on Thursday, May 7. [1] During the last quarter of 2014, Manulife, which has operations spread across Asia, Canada and the U.S., had shown positive signs of business growth in the U.S. alongside strong growth in sales in Asia. However, there were mixed signs that emerged from Canada. The company’s investments in oil and gas holdings also suffered during the last quarter due to a sharp decline in oil prices. [2] During the first quarter, we expect Manulife to build on the growth momentum in the North American markets. While the Asian markets could witness good numbers, FX headwinds will be a challenge. In this note, we take a look at the factors that will drive the company’s earnings during the first quarter.

We have a price estimate of $19 for the company’s stock, which is slightly higher than the current market price.

See our full analysis of Manulife here

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Asian Operations – Focus on Business Growth

Japan, which is the second biggest market in the world after the U.S., is a key market for Manulife. The company also has operations in Hong Kong, Thailand, Malaysia, Taiwan, Indonesia, Singapore and the Philippines.  In 2014, insurance sales increased 31% year-over-year (y-o-y) in Asia on the back of strong growth in corporate products in Japan and new product launches and sales efforts in Hong Kong. [3] The company’s bancassurance distribution channel has also proved to be successful. In the last quarter of 2014, Manulife’s core earnings declined 9% y-o-y due to the impact of FX headwinds. During the first three months of 2015, the Japanese Yen has remained weak and this is likely to impact the company’s earnings irrespective of likely growth in the region.

In addition, the company has been continuously making efforts to enhance product offerings in other countries in the Asian region. The company also made certain appointments in the management team related to different business lines in the region. We expect Manulife to continue to harness business opportunities in the region. Currently Manulife’s share in the Asian market is less than 1%. Going forward, we expect Manulife’s share in the Asian life insurance market to continue to increase to over 1% by the end of our forecast period.

How Is The North American Revival?

Manulife, operating under the John Hancock brand in the U.S.,  is the seventh largest life insurer in the U.S. with a market share of 3.1%. [4] During 2014, Manulife’s North American operations witnessed a slump in business growth. Subsequently, the company focused on targeted pricing and product enhancements to stimulate business growth. As a result, the company’s insurance sales picked up and grew 12% y-o-y in the U.S. in the last quarter of 2014.We expect that momentum to continue in 2015 as the company remained focused on enhancing product offerings in the country.

In its home country of Canada, Manulife has been recovering lost ground. Insurance sales in the fourth quarter saw a 6% y-o-y upswing. Wealth sales declined 8% y-o-y, but improved 10% over the third quarter performance. In 2014 Manulife acquired Standard Life plc and we expect it to fuel the company’s wealth and asset management business going forward.

Investment Returns Will Be Low

A large portion of Manulife’s assets are invested in fixed maturity securities, the yields on which have been suppressed since the recession. While interest rates are likely to increase going forward, it may be more gradual than originally anticipated due to some macroeconomic uncertainty.

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Notes:
  1. Q1 2015 Manulife Financial Corporation Earnings Conference Call, Manulife Investor Relations []
  2. Manulife’s CEO Donald Guloien on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha []
  3. Statistical Information Package, Manulife Investor Relations []
  4. NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS LIFE AND FRATERNAL INSURANCE INDUSTRY, 2015 []