Thursday, November 16, 2006

Motley Fool on Manulife

  
Motley Fool, Will Frankenhoff, 16 November 2006

Life has been good for investors in Manulife Financial, as shares of Canada's largest life insurance company have advanced some 22% over the past year. That outpaces the average 17% return posted by peers such as Sun Life Financial and MetLife, while trouncing the anemic 4% gain managed by once-mighty American International Group.

Thanks to this strong performance, shares of Manulife currently hover near all-time highs, trading at roughly 13 times fiscal 2007 estimates and 2.5 times book value. That's not exactly inexpensive relative to the above-mentioned competitors, who trade at an average 11 times forward estimates and 1.7 times book value.

Does this mean that Manulife is overvalued and that it's time for prudent investors to cash in their chips? In my Foolish opinion, the answer would be an emphatic "no." In fact, I believe that this premium -- no pun intended -- is well deserved and that further upside remains in the shares. Simply put, I like Manulife because of the company's leadership positions in both the Canadian and U.S. life insurance markets, the growth potential of its expanding Asian businesses, and the likelihood that the company will continue to grow earnings more quickly than its competitors.

Manulife goes on

Maunlife Financial, which merged with John Hancock Financial back in April of 2004, is the largest insurance company in Canada, the second-largest in North America, and the fourth-largest in the world, based on market capitalization. In addition to offering general life insurance products such as individual life insurance, group and health insurance, and long-term health, Manulife also provides mutual fund products through Elliot & Page Ltd., and wealth- and asset-management services through Seamark Asset Management. As of Dec. 31, 2005, insurance premium income accounted for 60% of its total revenue, investment income provided 29%, and other items contributed 11%.

Manulife segments its operations into five divisions: U.S. Insurance, U.S. Wealth Management, Asia & Japan, Reinsurance, and Canada. The company conducts business under the Manulife Financial brand in Canada and Asia, and as John Hancock in the United States. As of Sept. 30, 2006, the company had a record $341 billion (U.S.) in total funds under management, with more than 20,000 employees serving customers in 19 countries and territories globally.

Well, I don't know about you, but that generic description of Manulife's business has certainly cured my insomnia. Let's get to the reasons so why investors might be interested in this Canadian behemoth.

Leadership positions in the U.S. and Canadian markets

As I stated previously, Manulife holds leadership positions in both the U.S. and Canadian life insurance markets, markets that -- according to a survey conducted by insurance giant Swiss Re -- generated gross premiums of $517 billion and roughly $60 billion, respectively, in 2005.

Based on a variety of independent market surveys, including LIMRA, Tillinghast, and Fraser, Manulife's core life businesses in the United States were ranked (as of March 31, 2006) in terms of sales as follows: No. 1 in group long-term care, No. 2 in individual long-term care, No. 2 in universal life, and No. 3 in variable life. The company also didn't do too badly in terms of wealth-management products, either.

In the land of our northern neighbor, the company holds the No. 1 position in sales of group life, the No. 2 place in individual life, and the No. 3 spot in group health insurance. Manulife's position in offering wealth- and-asset management services to Canadians is equally notable, ranking No. 1 in group pensions, No. 2 in individual fixed annuities, and No. 4 in sales of individual segregated funds

The combination of these strong market positions, along with new product introductions, allowed Manulife to grow net income from its North American operations by some 25% in dollar terms in the most recent quarter ended Sept. 30.

Well, while the North American operations will remain the backbone of Manulife's business for the foreseeable future – and a highly profitable one at that – its business in Asia and Japan should be a main contributor to future growth.

Asia & Japan

According to Swiss Re, Asia boasts the fastest-growing insurance markets in the world (10.5% premium growth in 2005), and Japan is the world's second-largest life insurance market, with $376 billion in premiums. Manulife is poised to benefit from both of these trends, as evidenced by its positioning in various markets. It's got the No. 3 position in Vietnam, No. 4 in Shanghai, No. 5 in Hong Kong, No. 5 in Indonesia, No. 5 in Japan (in variable annuities), and No. 7 in Singapore, among others.

One area that shows exceptional promise is -- surprise, surprise -- China. The company's 51%-owned joint venture, Manulife-SinoChem Life Insurance, is currently the third-largest life insurance venture in a country where less than 4% of the population has coverage. According to Emil Lee, CFO of the venture, total premiums in this venture are estimated to reach roughly $106 million, up 20% over last year. The company is aggressively tackling this "final frontier" with plans to double its China sales outlets by the end of the decade, increase its direct sales force by 40% in 2006, and launch an asset-management joint venture with an appropriate partner.

To make a long story short, I believe that simple demographics and the rapid emergence of a consumer-oriented middle-class will make Asia the economic powerhouse of the 21st century. Manulife is in an excellent position to capitalize on this development.

Valuation

As I stated previously, Manulife trades at a premium to its peers, at roughly 13 times fiscal 2007 estimates and 2.5 times book value. That said, Manulife trades at a slight discount to its projected long-term growth rate (not counting the 2% yield), while Sun Life, MetLife and American International Group either trade in line with or at a premium to their estimated growth rates. Furthermore, while Manulife boasts a return on equity of 14% over the past 12 months, its peers average around 11%. That gap is widening, since Manulife has actually managed to raise its ROE to 16.6% in the most recent quarter, up from a mere 12% back in the third quarter of 2004.

All in all, I believe that Manulife is a premium way for long-term investors to play both the strength of the North American life insurance and wealth management markets, as well as the burgeoning growth of Asia.
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