Manulife Financial: A Great Long-Term Hold In The Canadian Lifeco Space

seekingalpha08-17

Manulife Financial Corporation is a global financial services powerhouse with a significant presence in Asia and wealth management, serving 35 million customers.Shares have increased 23% year to date ...

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Introduction Shares of Manulife Financial Corporation (NYSE:MFC, TSX:MFC:CA) have been on a tear lately, up 23% year to date and 41% over the last year. With strong share price performance driven by increasing ROEs across the Canadian Lifeco space, I think shares are still attractively priced when we consider that the company's ROEs are sustainable. As such, I believe the company's valuation doesn't fully account for sustainable ROEs in the 17-18% range. Long-term, I'm bullish on the company's Asia and wealth management exposure, noting that Manulife is currently best positioned out of the other Canadian Lifecos to best capitalize on this trend. Company Overview Despite being a Canadian Lifeco, Manulife actually has pretty diverse global operations. It has a significant presence in Asia and a growing foothold in the United States. Having been in business for over 160 years, the company has evolved to become a leading provider of financial services internationally. It also has expanded outside just insurance to get into the financial advisory, wealth and asset management, and groups and institutions workforce solutions business. As a top 10 life insurance company in the world, Manulife serves 35 million customers, employing some 38,000 people with assets under administration of $1.5 trillion, making it a global powerhouse in financial services. Strong Asia and Wealth Management Results When looking at the latest results for Manulife's Q2 '24, the company reported an okay quarter, with earnings per share coming in at $0.91, beating sell side estimates by 3 cents. This EPS figure was up 9% against last year, reflecting stronger CSM amortization as a result of business growth and CSM adjustment in Q4 '23, better credit experience, and strong growth in Wealth Management, which was partially offset by higher non-attributable expenses. On core EPS, the company came in slightly better than the consensus estimate of $0.87, reflecting a lower effective tax rate in wealth management, which lifted the company's EPS figure by 5 cents. In addition, Manulife also saw favorable credit and policyholder experiences in Canada. One of the detractors, surprisingly, was in the U.S., where experience was weak related to LTC and lapses. Q2'24 Results (Manulife Supplemental Information Package) For context, I think it's helpful to go into Manulife's results by business segment before extrapolating a conclusion on the overall quarter. In Asia, Manulife's earnings from the region were up 34% year over year, reflecting higher CSM amortization, good claims experience and higher investment income, mostly due to business growth and higher yields. In my view, this is an exceptional performance, but we should note that this growth rate shouldn't be expected long-term. For example, Asia benefited from higher interest on allocated capital, about $19 million, with the offset reported as a greater loss in the corporate segment. In Hong Kong, sales were up 15% compared to last year, as a result of higher sales from agency and bancassurance channels, offset by lower broker sales. One takeaway from the earnings call was that even though this was a double-digit EPS growth rate, the company did point to intense competition for MCV this quarter. Weaker MCV sales in HK were offset by good momentum in Japan and International high net worth clients. Historically, this has been a growth region for Manulife and management has reiterated several times their optimism for the segment. Investor Presentation In Wealth and Asset Management, core earnings were up 25% year over year, reflecting growth in AUM from market impact and flows, a tax true-up of $21mm from Asia, and better pretax margins due to expense management. Overall, I think operating leverage was decent at 2.4% in the quarter, supported by solid revenue growth. This segment also benefited from higher interest on allocated capital of about $9 million. Regarding the company's ROE expansion going forward (which I'll discuss more in the outlook section), improving margins in this segment is key to Manulife achieving the stretch ROE target of 18% On Canadian core earnings, Manulife had favorable insurance experience in the quarter with earnings up 7% compared to last year, which was partially offset by lower investment spreads. As a reminder, the insurance spread represents the difference between the returns earned on the invested assets and the interest credited to policyholders (therefore, lower insurance spreads are a negative). Finally, on the U.S. side of the business, this was the area that I think performed poorly, as higher experience losses led the U.S. earnings lower by 11% year over year. Weaker experiences came from both LTC and lapse. When we look at previous quarters, LTC and lapse experience have been volatile and led to material losses in the past. Importantly, under IFRS 17, most insurance experience gains/losses are not booked directly in earnings, but rather in the CSM. The reinsurance transaction reduced core earnings by $19mm because of lower earnings on investments and insurance experience. So where does this leave us? Overall, despite negative U.S. EPS growth, I think the quarter was still pretty positive for Manulife (even though some earnings quality was weak as tax gain drove the beat). The biggest reason I say this is because of the company's return on equity profile improving, not just in Q2 '24, but over the last few quarters. During Q2 '24, Manulife saw ROE clock in at 15.7%. As this growth has led to an acceleration in momentum, management has recently increased the company’s long-term target for core ROE to 18%+, which is a material positive, in my view. The adjusted book value of the company stood at $34 per share in the second quarter, up 15% compared with the same quarter in the previous year. While this is still above the current share price, I don't think this should be surprising given that ROE is improving. Investor Presentation What's driving this ROE expansion? Growth. During the quarter, growth remained impressive for Manulife as the firm reported a 17% increase in annualized premiums and new business value grew by 23% on a year-over-year basis. Perhaps unsurprisingly, shares responded positively following the quarterly results and conference call, with shares up about 3% since the announcement and release. As I've discussed at length with previous insurance companies I've covered, ROE is the single most important metric one should pay attention to with insurance companies. Those that have better ROEs often have better financial stability and profitability, which typically translates to more reliable coverage and potentially more competitive rates. High ROE, particularly those that can be sustained for long periods of time, can also indicate efficient management quality and a competitive advantage. Those that do (like Manulife) often trade at a premium to book value. Investor Presentation This improved outlook has also meant that the company can now focus more on return of capital to shareholders. So far, Manulife repurchased 31 million shares (of 90 million planned) for $1.1 billion. In addition, the company lifted the intended buyback to $3 billion from ~$2 billion. My expectation is that management will continue to prioritize shareholder returns and execute on their enhanced buyback plan. This not only reflects confidence in the company's financial health but also demonstrates a commitment to delivering value to shareholders through substantial share repurchases. This, I view this as a shareholder-friendly move that also has a positive impact on EPS growth going forward. Investor Presentation Valuation and Wrap Up Based on the 15 sell side analysts who cover Manulife's stock, there are 11 “buy” ratings and 4 “hold” ratings. Over the last few quarters, the company has seen several upgrades in rating, as well as revision upwards to target prices. Following the latest quarter, analysts have an average price target of $38.57 on Manulife's stock, with a high target of $43.00 and a low target of $30.55. From the current price to the average price target one year out, this implies about 8% upside, not including the company's 4.5% dividend yield. Seeking Alpha  In my view, given that Manulife is poised to see 7.2% earnings growth from 2024 through 2026, I think the valuation at 8.9x core earnings and 8.3x forward looks reasonable. While a valuation of 1.5x book is above its peer group average, which includes companies like Sun Life (SLF:CA), iA Financial (IAG:CA), and Great-West Lifeco (GWO:CA), I think the company's expanding ROEs are reason enough to buy the name. While my preference would be for iA Financial, which I previously covered here, I don't think one can go wrong with an investment in Manulife. Given that the company pays a higher dividend, I'd say Manulife is more suited towards income-oriented investors. For those who want more capital appreciation, iA Financial would be my go to. In terms of the risks to the investment thesis, the main one would be on interest rates. Generally speaking, insurance companies do better in rising rate environments. With interest rates expected to drop over the next twelve months, this is a headwind for Manulife. So far, the company has done a good job of matching its assets to its liabilities in terms of duration, so it has insulated itself to a certain extent. That said, broader macroeconomic conditions, particularly around a recession or worsening credit conditions, would have a material impact on the company's financial performance. With the company's Asia exposure, investors should also bear in mind that this is a growth economy, and while faster growing, business conditions can be more unstable and would likely be hit harder in a global recession. So far, the Asia side of Manulife's business has been a standout winner, and I don't see this shifting much long-term. That said, investors should monitor this part of the business carefully, particularly when it comes to the region's economy as well as governance. Conclusion Altogether, Manulife's recent performance highlighted its impressive ROE expansion as well its key growth areas like Asia and wealth management. Despite facing challenges in the U.S. market and potential macroeconomic headwinds, I like Manulife because its ROEs look sustainable and management's focus on capital management shows its commitment to delivering shareholder value.  In my view, the attractive valuation, coupled with a robust dividend yield, makes Manulife a compelling choice for income-oriented investors. For those seeking a blend of steady income and long-term growth potential, Manulife stands out as a strong candidate for investment, which is why I rate shares as a “buy.”","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2460922173"}