Manulife (NYSE:MFC) reported a sharp 23% decline in insurance sales for the first quarter of 2012 as the insurers’ net income dropped by 56% over the prior year. The management attributed the decline in sales to product changes in Asian markets as well as pricing actions to protect margins. The decline in sales was offset by a strong performance in the wealth management business. Core earnings, a non-GAAP measure introduced by the company last year which excludes the impact of interest rates, equity markets and other one-time items, increased by 18%, year-on-year.
Manulife’s operations can be broadly divided into three main geographies: Canada, the U.S. and Asia. The U.S. accounted for half of the core earnings in the first quarter, with a 71% increase over the prior year. Core earnings from Asia declined by 15% and accounted for 27% of the total core earnings. Canadian earnings were up 4% from the 2012 level.
We have a price estimate of $14 for Manulife’s stock, in-line with the current market price.
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Manulife has established operations in Japan, China, Hong Kong, Thailand, Malaysia, Taiwan, Indonesia, Singapore and Philippines. Lower interest rates prevalent in Asian market have taken a toll on Manulife’s investment income. As a result, the company, like most insurers, has adopted price increments to maintain profitability. These pricing actions and other non-recurring events had a detrimental effect on insurance sales, which fell 31% from the 2012 levels. Wealth sales, however, reached a record high, over double the level achieved last year.
Insurance sales spiked in the first quarter of last year in Japan due to anticipation of tax changes in April 2012. Sales in 2013 dropped 41% from the 2012 level, but excluding sales driven by the tax changes, the 2013 sales were actually 4% higher than the same quarter last year. Manulife’s strategic income fund was one of the most popular wealth management products in the country and drove a 75% increase in the company’s wealth management sales. For more on the Japanese market please read: An Overview Of The Japanese Life Insurance Market.
Price increases led to an 11% decline in insurance sales in Hong Kong but strong sales through the banking channels led to an 8% rise in sales in Indonesia. These banking channels also allowed a 41% increase in wealth sales in the country.
Manulife operates in the U.S. as John Hancock Financial Services, offering offers financial products like life insurance, mutual funds, 401(k) plans and long-term care insurance. Wealth management sales in the country increased 45% over 2012, with a 78% increase in mutual fund sales. Sales to institutions accounted for 35% of the mutual fund sales, as opposed to 28% last year. Mutual funds assets under management reached a record high of $48 billion, a 13% increase over the balance at the end of the 2012 calendar year. Retirement product sales increased by 5% as assets under management increased 6% over the December 31 2012 level.
Life insurance sales in the country were up 8% from the prior years level, driven by newly launched products like protection universal life, which accounted for almost half of the quarterly sales. Manulife took pricing actions to counter the effect of low interest rates last year. The management expects other insurers like MetLife (NYSE:MET) and Prudential Financial (NYSE:PRU) to take similar actions this year, giving Manulife a better market position.
For more details, please read our article: A Closer Look At The U.S. Life Insurance Market.
In its home ground, Manulife achieved an 8% increase in wealth management product sales driven by high mutual fund sales, which were more than twice the 2012 levels. Variable annuity sales declined 30% as the company cut back on the equity linked product while insurance sales fell by 10% due to pricing initiatives.
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 forecast would have on our price estimate.