Manulife (TSX:MFC)(NYSE:MFC) is a long-standing Canadian company and the largest life insurance company in Canada by market capitalization. The company offers individual life insurance, group life and health insurance, long-term care, pension products, variable and fixed annuities, mutual funds, and financial products. Manulife operates in Canada, the United States (U.S.), and Asia.
The company is also one of the largest life insurance companies internationally, with a large portion of Manulife’s business being done outside Canada and North America. Manulife’s significant Asian operations gives the company diversification benefits and exposure to faster-growing areas of the world.
Manulife is one of the most hated life insurance companies on the Toronto Stock Exchange and has fallen out of favour after the great recession in 2008 and 2009. The company had been underwriting profitable insurance products with guarantees based on capital market values prior to the financial crisis but had not properly managed asset and liabilities, which resulted in an asset-liability mismatch, leading to huge losses.
The company’s trillion-dollar balance sheet meant that hedging the associated risk was of primary importance. Manulife failed to do this, focusing instead on maximizing short-term earnings. This mismanagement resulted in massive losses for the company after global stock market values fell significantly during that period.
Subsequent to the financial crisis, old management was replaced, and the new management subsequently reversed those faulty practices. Manulife has since taken appropriate measures to control risk and help prevent such occurrences in the future.
Since 2009, Manulife has steadily grown book value and earnings. The company has done an excellent job of growing the business in Asia. Despite prudent capital allocation, however, the company’s stock price still suffers from bad publicity of Manulife’s experience during the financial crisis, and the market is not properly recognizing the stock’s value. Manulife has a great future, and the company can be purchased at a very attractive price.
The company’s most recent earnings were a neutral, guidance on the Q3 insurance review was a positive, and management updates were a positive. Manulife is trading at 7.5 times price-to-earnings ratio versus a competitor average of 10 times and a 10-year historical average of 11 times. It is expected that de-leveraging should contribute to a higher valuation multiple over the next five years.
The Asian growth story remains compelling, despite the drag from the Asia-Pacific region. Although, negative revenue growth from the Asia-Pacific is expected over the next year, the company’s diversified revenue model with significant foreign revenue exposure is expected to help the stock price. The Life Insurance Adequacy Test ratio remained strong at 145%, thus allowing the company some flexibility to repurchase shares and reduce liabilities.
Wealth & Asset Management is a huge opportunity for Manulife and expected to be one of Manulife’s key growth areas. Although earnings in this segment was up only 0.5% year over year, management has noted that higher growth is expected in the future. Manulife’s business results is also expected to improve from a turnaround in the U.S. business and growth from the new joint venture in Southeast Asia.
Expect exciting things from Manulife in the future!
