We are reiterating our Neutral recommendation on Manulife Financial Corp.
(MFC - Analyst Report
), following the second quarter earnings release. During the last reported quarter, the company’s earnings grew year-over-year on the back of improvement in core earnings in Canada and lower hedging costs, partly offset by a decline in the U.S. division's core earnings.
On Aug 8, Manulife reported second-quarter 2013 earnings of $623 million (C$609 million) up 3.0% year over year. Net income came in at approximately $265 million (C$259 million), compared with a net loss of $ 284 million (C$281 million) in the last year quarter.
Manulife is one of the dominant life insurers within its domestic Canadian market and possesses rapidly growing operations in the U.S. and several Asian countries. It has a diverse global presence with 75% of its earnings coming from outside Canada. It has been doing business in the Asian market for over a century, which gives it a competitive advantage.
Moreover, changing demographics have fueled demand for insurance and wealth management products in these regions and the company will likely benefit from this due to its longstanding presence.
Manulife is aligning its product offering to concentrate more on higher margin, low risk products as against higher risk-capital intensive products. Currently, 88% of its total premiums and deposits are in these targeted (lower-risk) products. Although this will result in subdued growth relative to its historical pace, we believe that it will deliver more sustainable growth targets and improve product margins as well as earnings consistency over time.
Manulife’s business exposes it to market volatility, though the company is effectively building its hedging program to decrease both interest rate and equity market exposure.
Manulife retains a high quality investment portfolio. Its invested assets are highly diversified by sector and geography and have limited exposure to the high-risk areas. We continue to view the company’s investment management as a significant competitive advantage.
However, Manulife's exposure to equity and interest rates risk may pressure its capital position.
Manulife currently retains a Zacks Rank #3 (Hold).