Manulife Earnings Preview: Asia Again Holds The Key

Manulife’s (NYSE:MFC) investment in high-growth emerging markets in Asia have helped the insurance company ride virtually unscathed through the uncertainty prevalent in the U.S. and Europe. ^[1] The company’s earnings for the second quarter of 2012, scheduled to be reported on Thursday, August 9, will highlight its growth in the promising geography. Discussed below are a few key metrics which influence our price estimate of $13 for Manulife’s stock, which is 20% above the current market price.

See our full analysis of Manulife here

Limelight on Asia Again

In the first quarter of 2012, Manulife reported a 31% year-on-year increase in insurance sales in Asia, reaching a total of $365 million. These sales now account for 10% of the company’s total revenues. Manulife has increased focus on the region since the last quarter, becoming the first foreign insurance company to foray into Cambodia. (See Manulife Heads To $13, Expands Asian Reach To Cambodia) The country is going through an economic boom, fueled by investments from South Korea and China and its 15 million strong population provides high growth potential for the company.

Manulife is the front runner to acquire ING’s Asian operations, following the exit of competitors Prudential Financial (NYSE:PRU) and MetLife (NYSE:MET) from the bidding process. The company has already established a strong base of operations in Indonesia and Vietnam, which are huge markets with a combined population rivaling that of the U.S. Manulife is also vying for Aviva’s insurance business in Malaysia to increase penetration in Asian markets.

The company estimates that the world’s middle class, which is its target demographic, will reach a population of 1 billion in the next five years. 85% of this population is expected to reside in Asia, leading to huge growth in the Asian insurance market in the next few years.

U.S. Retirement To See A Boost

Sales of retirement products in the U.S. have been growing consistently for the last few years. Manulife reported 11% year-on-year growth in retirement plan services sales in the first quarter.  With the baby boomers starting to retire, this trend is likely to continue. (See Good Times Ahead For Retirement Solutions Providers)

Prudential Financial’s recent pension obligation transfer deal with automaker General Motors (NYSE:GM) has opened new avenues for insurers in the U.S. The Russell 1000 Index of large U.S. companies revealed a $435 billion gap between pension liabilities and assets, ^[2] indicating a huge and untapped potential market for insurance companies.

We expect an increase in premiums from annuities and pension plans in the coming years.

Regaining Home Turf

Although Manulife has lost its hold on the Canadian market in recent years, the first quarter saw a 79% increase in insurance sales in the region. It also launched a social media-based marketing campaign to regain market share in Canada. We expect Manulife to gradually reclaim lost ground in the Canadian life and health insurance market, which accounts for 15% of our price estimate for the company.

You can gauge the impact of a change in forecasts on our estimate by modifying the charts above.

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1. Manulife Seeks Assurance in Asia, The Motley Fool, 25^th July, 2012 [↩]
2. GM Seen Fueling Pension Deals as Employers Face Shortfall, Bloomberg, 19^th June, 2012 [↩]