We recently launched coverage of Manulife Financial (NYSE:MFC) with a price estimate of about $13.50, which is 20% ahead of the current market price. Manulife is a leading Canadian-based financial services group operating in 22 countries and territories worldwide. The company provides products and services such as individual life insurance, group life and health insurance, long-term care services, pension products, annuities, mutual funds and banking products as well as reinsurance services. The company operates in Canada and Asia as Manulife Financial and in the United States under the John Hancock brand. Its major competitors include MetLife (NYSE:MET), AIG (NYSE:AIG), Prudential Financial (NYSE:PRU) and Hartford Financial (NYSE:HIG).
Manulife’s Major Value Drivers
We have broken down Manulife into 6 different divisions which drive Manulife’s value:
Canada – Insurance and Wealth Management – Manulife derives almost 15% of its value from its Canadian operations, which provide individual and group life insurance policies, health and retirement products and various wealth management products.
Asia – Insurance and Wealth Management – Manulife’s Asian operation is the largest source of value for the company, contributing about 23% of the stock price. Manulife has operated in Asia since 1897 and provides a variety of life insurance and wealth management products.
U.S. Life and Health Insurance – Manulife operates in the United States through its wholly owned subsidiary John Hancock Financial, which it acquired in 2004. John Hancock provides life and long-term care insurance products and services in the U.S. market primarily to middle income and high net worth clients.
U.S. Retirement Solutions – Manulife’s U.S. retirement solutions division also operates under the John Hancock brand and offers retirement plans, mutual funds, annuities and other wealth management products and services focused on individuals and businesses.
Reinsurance – Manulife offers reinsurance services and assumes risk from other insurers and reinsurers. The company specializes in life retrocession and property and casualty reinsurance.
Investment of Insurance Premiums – Manulife derives almost a fifth of its value from its investing activities. Insurance companies use their invested assets to pay for the insurance claims of their customers and to generate additional income that can be paid out as dividends to their shareholders.
Shrinking Investment Returns
Unfavorable macroeconomic conditions are weighing on Manulife’s return from invested assets. The Federal Reserve’s decision to keep long term interest rates low had a direct impact on insurance companies’ yields on fixed maturity investments. Given the current high unemployment rate it is unlikely that the Fed will raise interest rates anytime soon. Manulife saw an 18% decline in its fixed maturity yield in 2010. Since Manulife invests over $90 billion in fixed maturity securities, low interest rates have a magnified impact on the company’s profitability.
Asia to Drive Growth
Manulife collected about $4.7 billion in premiums and fees for life & health insurance policies in Asia in 2010, and this premium revenue has grown at a rate of over 15% in the last five years. Over more than a hundred years of operations in Asia, Manulife has developed a robust distribution network which includes exclusive agents, independent agents, banks, financial advisers and other alternative channels. It has a formidable position in the Asian market and is well-positioned to participate in the Asia-Pacific Region’s growth story.