Monday, September 25, 2006

Manulife Continues to Gain US VA Market Share

  
Scotia Capital, 25 September 2006

Event

• U.S. Variable Annuity Q2/06 industry stats were released late last week.

What It Means

• For the 11th quarter in a row, Manulife gained market share in terms of U.S. variable annuity assets, with market share reaching its highest level ever. For the 12th quarter in a row, Sun Life lost market share in terms of variable annuity assets, with market share reaching its lowest level in over six years.

• Sun Life's heavy investment (we estimate $10 million) in expanding U.S. variable annuity distribution is expected, as per management, to bear fruit in the second half of 2006. As we have yet to see any market share gains in variable annuity sales we remain somewhat sceptical.

• We expect Manulife's valuation premium, relative to the group average, is more likely to remain at current levels if not modestly contract, as opposed to expand, simply because we expect its exceptional top-line growth in the U.S. to moderate somewhat going forward. This moderate contraction in its premium to the group in the last three months (down from 11% to 9% on a forward P/E) is consistent with its modest reduction in market share of U.S. VA sales, declining from 6.4% in Q1/06 (as reported three months ago), to 6.2% share as at Q2/06.

U.S. VA market stats out - Sun Life continues to struggle to gain share

• While Manulife continues to gain market share in terms of assets, the same cannot be said for Sun Life. In terms of assets, Sun Life's market share continued to decline (from #16 and 1.32% at Q4/05 to #17 and 1.29% at Q1/06 to #17 at Q2/06 with 1.21%), as negative net sales for the insurer continue to hurt asset growth. The big continue to get bigger in U.S. variable annuity, and cracking the top 10 in terms if assets and/or sales is becoming increasingly difficult in this business.

• Sun Life's heavy investment (we estimate $10 million) in expanding U.S. variable annuity distribution is expected to bear fruit in 2006 - we remain somewhat sceptical. The company notes that there is a lag before the impact of the 50 wholesalers recruited over the last 15-18 months begins to significantly impact the bottom line. We remain somewhat sceptical. Despite efforts to ramp up distribution and improve product, Sun Life's market share in terms of U.S. variable annuity sales, at 1.0%, has not moved in the last five quarters, and it remains below 2004 levels and well below 2001-2003 levels. Furthermore, net sales continue to be negative, and at negative US$926 million in 2005 and negative US$396 million in 1H/06, are well below top ten players such as Manulife (at positive US$4.6 billion in 2005 and positive US$2.4 billion in 1H/06), Lincoln (at positive US$3.7 billion in 2005 and positive US$2.0 billion in 1H/06), and Prudential (at positive US$1.4 billion in 2005 and positive US$1.3 billion in 1H/06.

• Manulife's exceptional U.S. VA sales growth is likely to return to more "normalized" levels for Q3/06 and Q4/06. At the company's recent Investor Day (June 13, 2006) management indicated that the 41%, 61%, 63% and 60% sales growth in U.S. variable annuity for Q2/06, Q1/06, Q4/05 and Q3/05, respectively, would likely not be sustainable, for two reasons. One, we are over a year following the May 2005 launch of the Second Generation Product, the highly successful VA product that drove the growth, and two, competitors have now copied the product to various degrees. We would expect the company to maintain market position and share until its next new product launch, which we anticipate could be late 2006 or early 2007, and expect that going forward the exceptional gains in market share experienced of late, aided also by new found momentum post the Hancock close, will more likely be harder to duplicate. We saw the beginning of this trend in Q2/06, with the company slightly losing market share (from 6.4% at Q1/06 to 6.2% at Q2/06); the first time we've seen a slip in market share for the company in nearly three years.

• Manulife's premium to group - less likely to continue to expand. We expect Manulife's valuation premium, relative to the group average, is more likely to remain at current levels if not modestly contract, as opposed to expand, simply because we expect its exceptional top-line growth in the U.S. to moderate somewhat going forward. Manulife is currently at a 9% premium on a forward P/E basis to the group average (or a 13% premium to Sun Life, a 5% premium to Great-West Lifeco and an 18% premium to IAG), well above its average, since the close of the John Hancock acquisition of a 5% premium to the group (or a 7% premium to Sun Life, a 2% premium to Great-West Lifeco and a 11% premium to IAG). The 9% premium to the group is down from an 11% premium three months ago. This moderate contraction in its premium is consistent with its modest reduction in market share of U.S. VA sales, declining from 6.4% in Q1/06 (as reported three months ago) to 6.2% share as at Q2/06.
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