HomeMost PopularManulife: Taking A Closer Look At Canadian Life Insurance

Manulife: Taking A Closer Look At Canadian Life Insurance

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All figures are in Canadian dollars (CAD) unless specified otherwise.

All financial information is sourced from Seeking Alpha unless specified otherwise.

An Investment Opportunity

Manulife (TSX:MFC:CA)(NYSE:MFC) has made significant progress in de-risking its asset portfolio since unveiling its strategic roadmap in 2018. Given the current economic climate, characterized by rising interest rates and a forward-looking, high-quality investment strategy, Manulife is well-positioned for growth. With a strong dividend yield, promising growth prospects, and an attractive valuation, now is an opportune time for long-term investors to consider acquiring Manulife shares.

About Manulife

Manulife is a global insurance company operating in Canada, the U.S., and Asia. They operate through three segments:

  1. Insurance and Annuity: Provides various insurance products including life insurance, long-term care insurance, and annuities.
  2. Wealth and Asset Management: Offers investment advice and solutions to individual and institutional clients.
  3. Corporate and Other: Includes property and casualty reinsurance businesses and run-off reinsurance operations.

The difference between net income and core earnings is that core earnings provide insight into a company’s operating performance, excluding market-related gains or losses and other items that may not reflect the underlying earnings capacity of the business.

As of YTD 2023, Asia contributed 30.36% of core earnings, followed by 26.61% from the United States, 22.94% from Canada, 19.16% from Global Wealth and Asset Management, with the remaining earnings from corporate and other sources.

Performance & Analysis

New business has been thriving for Manulife, with Year-to-Date (YTD) sales reaching $3.233 billion, a 7.1% increase compared to the same period in 2022. This growth was driven by the rebounding Asian markets, although there were softer sales in Canada and the U.S. New Business Value rose by 6.8% to $1.094 billion, while total CSM for new business climbed 5.2% to $1.034 billion.

In the Wealth and Asset Management (WAM) sector, Global Assets Under Management (AUM) increased by 9.7% to $819.6 billion, driven by net inflows totaling $6.6 billion for the year.

YTD core earnings stand at $3.168 billion, translating to $1.63 per share, an improvement over last year’s earnings of $2.919 billion or $1.45 per share. This growth can be attributed to higher expected investment returns, fewer adverse mortality-related claims, and improved returns on surplus assets, although partially offset by increased debt financing costs.

Since launching its operational efficiency focus in 2018, Manulife reports a YTD expense efficiency ratio of 46.1%, a slight uptick from 44.7% last year. This increase is mainly due to elevated distribution and labor costs, as well as a resurgence in travel expenses as the world returns to pre-pandemic norms.

From a regulatory standpoint, Manulife maintains a solid financial position with a LICAT ratio of 136% at the end of Q2 2023, comfortably above the regulatory minimum of 100%. The financial leverage ratio remains stable at 25.8%, marginally down from 26% in Q2 2022.

Factors Driving Growth

Relative Valuation

When comparing key valuation metrics such as the Price-to-Book (P/B) ratio and Return on Equity (ROE), Manulife holds a favorable position among its peers. The current P/B ratio of 1.1x for Manulife is lower than the median of its peers at 1.4x. In Canada, Sunlife carries a higher P/B ratio of 2.68x compared to Manulife at 1.08x. Analyzing the historical P/B ratios, Manulife has historically traded at around 67.34% of Sunlife’s P/B and 70.71% of Great West Life’s P/B ratio. This suggests that Manulife’s current P/B ratio is below its historical levels.

Despite having a higher ROE compared to its peers, Manulife’s P/B ratios have not reflected this trend. The higher ROE combined with a lower P/B ratio may be attributed to Manulife’s slightly riskier portfolio. However, the wide gap in these ratios, particularly with Sunlife, appears excessive.

Investment Portfolio and Interest Rates

A significant portion of Manulife’s investment portfolio, approximately 81%, is allocated to fixed-income assets. With interest rates trending higher, Manulife’s fixed-income investments are expected to generate higher returns as debt securities mature and are reinvested. The company’s fixed-income portfolio is well-diversified across various sectors and includes a significant percentage of issuers outside of the U.S.

The rise in interest rates also benefits Manulife’s direct mortgage portfolio (13% of total invested assets). As mortgage rates increase, Manulife can earn higher returns through new originations and refinancing by its clients.

Dividend Strength & Growth Potential

Manulife stands as one of the premier dividend-paying companies in Canada, with a current dividend yield of 5.71%. Comparing this to the dividend yields of Sunlife (4.48%) and Great West Life (5.12%), Manulife’s yield is compelling. Over the past decade, the company has achieved a Compound Annual Growth Rate (CAGR) of 10.61% in its dividend payouts. Manulife has consistently increased its dividend since 2013 and maintains a payout ratio of under 50%. In addition to dividends, Manulife also returns capital to investors through share buybacks.

Manulife aims to increase its earnings contribution from Asia to 50% by 2025. Currently, Asia accounts for 36% of core earnings, putting the company on track to achieve this target. The growing Asian life insurance market further supports Manulife’s strategic focus on the region.

Strategic Direction and Risk Management

Manulife has made efforts to optimize its operations and reduce exposure to higher-risk segments, such as long-term care and variable annuity businesses. By de-risking its asset portfolio, Manulife aims to attract investors and improve its risk profile relative to competitors. The company also focuses on high-potential businesses, including Asia, investment management, and behavioral insurance products, with the goal of having 75% of its core earnings come from these areas by 2025.

Risks to Consider

Investors should be aware of potential risks associated with Manulife, including the impact of a potential recession on the company’s investments and the deteriorating value of commercial real estate holdings. Global equity market downturns can significantly affect public equities and alternative long-duration assets, which are part of Manulife’s portfolio. These risks should be carefully considered by investors.

Conclusion

Manulife’s compelling investment thesis, strong financial performance, and strategic initiatives position it as an attractive long-term investment. With a focus on high-potential markets, a robust dividend yield, and a portfolio poised to benefit from rising interest rates, Manulife offers both growth and income potential. While risks such as real estate exposure and economic downturns exist, Manulife’s efforts to de-risk its portfolio and optimize operations enhance its resilience. For investors seeking a combination of growth and income, Manulife stands out as a buy.

Note: This article discusses securities that do not trade on major U.S. exchanges. Investors should be aware of the associated risks.

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