A Look At Manulife’s Strategy In Canada

Canadian insurance company Manulife (NYSE:MFC) earns revenues primarily from its operations in three major geographic regions – Canada, Asia and the U.S. Manulife’s operations in Canada, which contribute 30% of the company’s total core earnings, saw a slump in performance across business lines in 2014. However, in the first half of 2015 Manulife has seen a pick up in business growth in Canada. Core earnings from operations in Canada increased by 23% between Q2 2014 and Q2 2015, primarily due to growth in the company’s wealth and asset management business in the country. While the U.S. and Asia have become key growth areas for Manulife, Canada remains a crucial market for the company. In this article we take a quick look at Manulife’s strategy to boost its operational performance in Canada. Additionally, we look at what Manulife could do to further enhance its growth prospects in a mature Canadian market.

We have a price estimate of $19 for Manulife’s stock, which is more than 10% higher than the current market price.

See our full analysis of Manulife here

Manulife’s Multipronged Growth Strategy

Manulife has managed to return to growth in Canada, albeit slowly, in the past few quarters. Below we discuss few of the company’s efforts towards returning to growth on its home turf.

Focus On Margins

Manulife’s strategy in Canada has been to focus on margins rather than market share. Manulife had operating margins for its life insurance and wealth management operations in Canada of around 9.2%. As Manulife has renewed its focus on its Canadian operations we estimate the company’s operating margins to improve gradually to over 10% by the end of our forecast period in 2022. This upside on operating margins is based on multiple factors such as product enhancements and pricing initiatives. ^[1] Additionally, efforts to improve the efficiency of traditional insurance distribution channels – as well as investing in creating a simplified online channel and using data analytics to target and guide customers to purchases – is crucial for Manulife going forward. At the same time, the low interest rate environment will continue to be a drag on the insurer’s margins in the short term. However, we expect that to improve as central banks raise interest rates, giving a much needed boost to investment incomes.

Acquisitions To Fuel Business Growth

In order to accelerate growth in assets and its wealth management business in the country, Manulife completed the acquisition of Standard Life’s Canadian operations in January. The acquisition brought nearly 1.4 million additional customers to Manulife’s fold. Additionally, Manulife stands to benefit from increased presence in some Canadian markets which were previously underpenetrated by the company. ^[2] Strong sales in Standard Life’s wealth management business, including mutual funds, group retirement solutions and segregated funds, have also provided a boost to Manulife’s business. ^[3] Going forward, we expect it to fuel strong growth in the company’s wealth and asset management as well as retirement services businesses.

What Could Manulife Do Differently?

Demographic Dividend

As of 2014, Manulife had nearly $132 billion in variable annuity assets in Canada. Going forward, growth for Manulife will rely on not just its brand or size, but also on how the company takes advantage of the fact that a large number of baby boomers will reach retirement age in the coming years. Compared to about 15% of the total population in 2013, people aged 65 and above are expected to rise to more than 20% in 2030. This should lead to growth in demand for retirement products and presents an opportunity for Manulife. ^[4]

Use Data Analytics To Reach Customers

Increasingly, customers are using technology to make decisions while purchasing insurance. Manulife is likely to invest heavily in data analytics to draw insights into rapidly changing customer behaviors. The company’s anticipated investments in technology to focus on customers’ habits and preferences should help in growing its business in Canada. This would also be useful in maintaining a strong retention rate of existing customers, given the fact that customer acquisition costs are relatively high.

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1. Annual General Meeting Presentation, 2015, Manulife Investor Relations [↩]
2. Manulife Investor Day [↩]
3. Statistical Information Package, Manulife Investor Relations [↩]
4. Population projections: Canada, the provinces and territories, 2013 to 2063, Statistics Canada [↩]