Manulife (NYSE:MFC) is expected to report earnings for the first quarter of 2013 on Thursday, May 2.  The Canadian insurance company has been focusing on Asian markets for growth and reported a 22% year-on-year increase in premium income from the region in 2012. In Canada, the company delivered a solid fourth quarter with a 132% increase in sales driven by popularity of its group benefits and affinity markets products, both of which achieved record sales. We expect the company to deliver another solid performance this quarter.
We have a price estimate of $14 for Manulife’s stock, in-line with the current market price.
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The Path Ahead Leads East
Manulife 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. These operations account for a third of the company’s premium income. Insurance sales in the region have been growing at a high compound annual growth rate (CAGR) of close to 30% over the last four years.
The growth opportunity in these regions is massive. Insurance penetration, measured by taking premiums as a percentage of GDP, is below 5% in Indonesia, Malaysia, Vietnam, Thailand, China and India currently. Japan, Taiwan, Korea and Singapore are more mature markets with higher insurance penetration. The gross savings as a percentage of GDP is quite high at 41% in Asia, which indicates that most people in the region can afford insurance products. The middle class, which is the target demographic for insurance companies, is growing at a very fast rate with over 1.2 billion people expected to make the transition into this section of society by 2020. Asia is expected to account for over half of the world’s middle class population in the next 10 years.
Let’s take China for example. 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 amongst foreign invested insurance companies with a market share of 5% of the foreign-owned life insurance market in China. Participating life insurance policies, in which the policyholders get a share of excess profits earned on investment, are the main products offered by the company, accounting for nearly 80% of its premium income in the country.  The opportunity for expansion in the market is quite large; China has a population of 1.4 billion, of which 51% reside in urban areas. The life insurance density, in terms of premiums per capita, is around $99 and is quite low compared with $1,716 in the U.S.
Manulife also has established operations in Japan with a market share of 6.5%. It is the third largest global insurer behind Prudential Financial (NYSE:PRU) and MetLife (NYSE:MET). The company is also looking to capitalize on the growth in the Indian economy as the country’s Union Cabinet passed a proposal to increase foreign direct investment in the insurance sector from 26% to 49% in 2012. This bill is expected to be passed by the country’s parliament this week.  Manulife has an agreement with Kotak Mahindra to promote distribution in India and will gain from regulatory reforms in the country. 
Around 25% of Manulife’s premium income comes from Canada. The company has been operating for over a century in Canada with individual insurance products aimed at middle and upper income segments and group life, health, retirement and disability products for Canadian employers.
Manulife claims to have served one in every five Canadians, but has been losing ground to competitors like Great-West Lifeco., Sun Life Financial and Desjardins Financial Security following the 2008 financial crisis when it had to enter an external reinsurance agreement to reduce risk in 2009, which had a big impact on its market share. Manulife’s market share dropped from 13% in 2008 to 6.5% at the end of 2011. However, the company was able to regain some lost ground in 2012 and showed premium growth of 5% in the country for the first time since 2008.
We maintain a conservative outlook for Manulife in Canada as we believe the company is looking to consolidate and retain market share rather than expand aggressively. You can modify the interactive chart below to gauge the effect a change in the forecast would have on our price estimate.
At the end of 2003, Manulife acquired John Hancock Financial Services for $10 billion and merged it with its own U.S. operations the following year. The company offers financial products like life insurance, mutual funds, 401(k) plans, long-term care insurance, and annuities in the U.S. market using a network of independent firms named John Hancock Financial Network for distribution along with financial advisors. Manulife is the seventh largest life insurer in the country with a market share of 3.25%  and earns nearly 40% of its premium income from the country.
For more details, read our article: A Closer Look At The U.S. Life Insurance Market.Notes:
- Q1 2013 Manulife Financial Corporation Earnings Conference Call, Investor Relations [↩]
- Foreign Insurance Companies In China, PWC, December 2012 [↩]
- Insurance and pension get FDI boost, need parliament nod, Indian Express, 5th October, 2012 [↩]
- Manulife and Kotak Mahindra agree to collaborate to promote fund management and distribution opportunities in Asia, Press Release, August 10, 2010 [↩]
- National Association Of Insurance Commissioners Life And Fraternal Insurance Industry [↩]