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Manulife Upgraded to Outperform

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We are upgrading our recommendation on the shares of shares of Manulife Financial Corp. (MFC - Free Report) to Outperform from Neutral following the recent announcement by the company to expand into Korea, which marks an expansion in its key Asian market. The company has also set up a head office in Cambodia.  We believe further penetration in Asian markets will fuel long term earnings growth for the company.

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. 

The company is doing business in the Asian market for over a century, which gives it a competitive advantage. Moreover, changing demographics has 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. However, the company is effectively building its hedging program to decrease both interest rate and equity market exposures. Manulife has, however, decreased its earnings sensitivity to both the above mentioned variables. It has reached its 2014 goal of offsetting interest rate sensitivity. The company now stands at 93% of its 2014 goal for equity market sensitivity. Manulife further plans to decrease these exposures.

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 has been experiencing declining wealth sales in Canada as the competitive environment and continued low interest rate are adversely impacting investment product sales. We expect this line to remain under pressure in the near term given the current market scenario.

For the past several quarters the sharp decline in global equity markets, coupled with low bond yields, pressured the company’s capital position and the trend may continue in the near term as well.

Manulife currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. The company closely competes with China Life Insurance Co. Ltd. (LFC - Free Report) and Sun Life Financial Inc. (SLF - Free Report) .

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