Manulife (NYSE:MFC) has built strong foundations for sustainable growth in some of the fastest growing markets in Asia. The company has established operations in Japan, China, Hong Kong, Thailand, Malaysia, Taiwan, Indonesia, Singapore and Philippines and is looking to enter other high growth markets in India, Korea and Cambodia. Insurance sales in the region have been growing at a compounded annual growth rate (CAGR) of around 29% over the last four years and accounted for almost half of the company’s total sales in 2011. The bottom line, however, needs improvement as only 35% of Manulife’s net income is derived from Asia.
Asia is expected to account for over half of the world’s middle class population in the next ten years. We discuss below China and Japan – two of the most important markets for Manulife.
We have a price estimate of $13 for Manulife’s stock, about 10% above the current market price.
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Manulife entered China in 1996 in partnership with Sinochem Group. The company operates in 13 provinces and 50 cities with a workforce of over 14,500 agents. It has over 650,000 customers in the country and ranks third among foreign invested insurance companies. The opportunity for expansion in the market is quite large; China has a population of 1.4 billion about 51% of which is residing in urban areas. 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 as the country’s one-child policy, started in 1978, has greatly improved life expectancy which currently stands at 75 years. The ratio of workers to retirees is around 5:1 and is expected to decline to about two workers for each retiree in the country by 2040. Insurance sales have grown at a CAGR of 9% over the last four years whereas total weighted premium income has grown at a rate of 19%.
The biggest hurdle in China is the control exerted by the government. Insurance companies primarily rely on the the Bank Insurance Model (BIM) or “bancassurance”, whereby retail banking networks are used for distribution. The China Insurance Regulatory Commission (CIRC) has restricted the maximum number of insurance companies allowed at a single bank branch to three. With high competition, particularly from domestic insurance companies, foreign companies will have a tough time expanding in the country. In 2011, foreign companies had only 3.7% of the Chinese market share.
Japan has a very mature insurance market. In terms of life premiums, Japan is the second biggest market in the world after the U.S. In 2011, premiums in the U.S. were $538 billion whereas in Japan the number was $525 billion, more than the rest of Asia combined.
Manulife entered the market in 1997 and has established a strong foothold since. With a market share of 6.5%, it is currently the third largest global insurance company in the country, behind Prudential Financial (NYSE:PRU) and MetLife (NYSE:MET). These companies benefited greatly from AIG’s (NYSE:AIG) divestiture following the financial collapse of 2008, as Metlife acquired ALICO and Prudential acquired Star Life Insurance Co., Ltd. and Edison Life Insurance Company.
Insurance sales in the country have been growing at a CAGR of 35% over the last four years whereas the premium income growth rate has been around 23%. Demand for retirement products in the country is quite high, with the highest portion of the population in the 60-64 age group.
Distribution through financial agents known as the sales lady distribution channel has traditionally been the predominant distribution network in the country, but its market share has declined from 66% in 2002 to 41% in 2010. The biggest winner of market share has been the bancassurance model, which now accounts for 26% of insurance sales. Manulife has acquired seven banking partners since 2009 to sell insurance products. These include Bank of Tokyo-Mitsubishi UFJ, Shizouka Bank, Chiba Bank, Machjuni Bank, and Hiroshima Bank. With a competent distribution network and an established brand image, Manulife appears to be set for solid and sustainable growth in Japan.
We expect Manulife to gain market share in Asia in the next few years, reaching 1.63% by 2019. Asian insurance and wealth management is the most important division for the company, accounting for a third of our price estimate. There is a potential upside of 10% to our estimate should the company’s share exceed beyond 2% within the next seven years demonstrating the large opportunity for taking market share in the some of the world’s largest markets. You can adjust the interactive chart below to gauge the effect a change in market share will have on our price estimate for Manulife’s stock.