UNIVERSITY OF OREGON
INVESTMENT GROUP!
March 11th 2011
Financial
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Manulife Financial Corporation (Update)
SELL
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Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
Valuation (per share)
RIV Analysis
Comparables Analysis
PE Analysis 2011
PE Analysis 2012
Target Price
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Current Price
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$10.6 – $20.79
MFC / NYSE
1.59
1.776 Billion
2.598 Million
33.53 Billion
$17.84
$.132
2.75%
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$15.9
$14.63
$18.7
$19.23
$17.52
$17.84
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Summary Financials
Revenue
Net Income
Operating Income
2010 A
$38,679
$ (321)
$2,951
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B! USINESS OVERVIEW
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Manulife Financial Corporation is one of the top Canadian-based financial groups in the world. Well positioned in
over 22 countries, Manulife’s reputation and trusted name have led them to significant success for the past 120 years.
Stemming from a small insurance institution in the 1890’s, Manulife has seen continual and rapid expansion by living
it’s mantra of being a forward thinking company.
Covering Analyst: Zachary Bracken
Email: bracken@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG’s portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
Manulife Financial Corporation
University of Oregon Investment Group
http://uoig.uoregon.edu
Currently, Manulife primarily offers life insurance and wealth management products such as pension products,
annuities, mutual funds, and banking products. To truly understand Manulife, it is necessary to break them down by
division.
US Division (48.85% of Total 2010 Rev)
The US Division operates as John Hancock Financial Services (JH). Selling both life insurance and wealth
management services, John Hancock focuses on high net worth and emerging affluent markets by providing business
planning and other solutions, with a high level of protection. In addition, John Hancock captures the middle income
segment of America by providing personalized products with an emphasis on family oriented wealth management
products.
Canada Division (25.53% of Total 2010 Rev)
The Canadian Division is ranked as one of the top insurance organizations in Canada. Similar to John Hancock, the
Canadian Division targets the middle and upper income individuals and business owners by offering life, health,
disability, and retirement benefits that are family oriented. Products include segregated funds, mutual funds, fixed
annuities, and high interest savings accounts.
Asia Division (19.81% of Total 2010 Rev)
Manulife’s Asia Division includes China, the Philippines, Singapore, Indonesia, Taiwan, Japan, Vietnam, Malaysia, and
Thailand. Although they have been here since 1897, the demand for financial services has been relatively small until
recently. Manulife has consistently maintained the 2nd highest market position of all life insurance companies in Asia.
Products include mutual funds, pensions, variable annuities, and segregated funds.
Reinsurance Division (3.04% of Total 2010 Rev)
Manulife’s reinsurance division has become North America’s leading provider of risk management. Reinsurance
occurs when an insurance company insures its’ policies in order to spread the risk of policies out. Insurer’s pay a
reinsurance premium for the policies and in return are subjected to a smaller payout if the original insurer seeks
compensation. For example, an insurance company may 100 policies at $100. Theoretically, they could be responsible
for up to $10,000. The company will pay a premium in order to shield themselves from some of the risk.
Manulife mainly operates in the reinsurance of life, property and casualty, and international employee benefits.
Corporate Division (2.77% of Total 2010 Rev)
Corporate Division revenue primarily consists of earnings on assets backing capital and changes in actuarial methods
and assumptions. Assets are mainly composed of
• Real Estate
• U.S. and Canadian Treasury Bills
• Private Equity
• Bank Loans
• Mortgages
As a result, revenue and net income are positively correlated with the Treasury bill rate and success of equity markets.
Record low interest rates have resulted in the decreased value of assets and driven the Corporate division’s revenue
and net income into the red zone.
BUSINESS AND GROWTH STRATEGIES
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US Division N et Income Goal By 2015: $1.7 billion (124% )
Manulife is hoping that the US Division will be one of the highest areas of growth in the coming years, due to the
brand loyalty and high market segment that the John Hancock name caries. They plan to increase revenues, and more
importantly net income, by offering new and innovative products that will capture more market share, increasing fees
to customers, and realizing the gains associated with a higher 10 year Treasury bill rate.
In addition, Manulife believes the retirement of the baby boomer generation will leave tremendous room for growth
of the life insurance and wealth management industry.
Although a growing US economy is dangerous to the Canadian exchange rate, they believe the new income will
outweigh the change in currency.
Canada Division N et Income Goal by 2015: $1.5 Billion (55% )
Manulife believes the key to growth in the Canada Division is rigorous marketing of their life insurance and financial
products in order to capture a greater market share. Even though, Manulife is a leading brand in its’ home country,
Canada is not predicted to experience the same increase in demand for financial products as the US, and will therefore
have less growth.
Following in suit of the US Division, the Canada Division will also raise fees in order to generate more revenue and
higher margins.
Asia Division Net Income Goal by 2015: $1.5 Billion (118% )
The Asia Division is poised for the most top line growth of all divisions. As China, Japan, and other Asian nations
become more industrialized and their GDP continues to rise, so does the amount of disposable income each person
has. Financial products that were previously luxury goods for the average man are becoming a common fixture of the
Asia middle class.
Manulife is positioned extremely well for the coming years due to the massive market share it already has (2nd). Over
the past year, net income and revenue have both increased by 9%. Manulife sees this as an extremely good
opportunity and plans to grow by offering new products to fit the needs of the changing customer base. They hope
that Asia will be 24.45% of total revenue by 2015 (currently 19.8%).
Reinsurance Division N et Income Goal by 2015: $200 Million (9% )
The Reinsurance Division will see far less growth over the coming years when compared to the other divisions. As
stated above, the Reinsurance Division tends to do best in times of uncertainty and higher risk. As a result, Manulife
predicts that this will grow slowly over the next few years but hopes to maintain the high market share it has (given its
concentration).
Corporate Division Net Income Goal by 2015: $(500) Million (76% )
Manulife foresees that the Corporate Division has a strong competitive advantage because of the leadership role it
holds in the management of real assets. Their attempt to diversify their equity regionally and into fixed income
management funds has proven successful thus far.
The Corporate Division also launched a new hedging program this year in order to decrease sensitivity to interest rates
and increase profitability. As of the 4th quarter 2010, they are ahead of expectations for decreasing interest rate
sensitivity.
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Manulife Financial Corporation
University of Oregon Investment Group
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MANAGEMENT AND EMPLOYEE RELATIONS
Chief Executive Officer
Donald Guloien is the current President and CEO of Manulife. Guloien started working for Manulife in 1981 as an
analyst and quickly progressed to leadership roles in the company’s insurance and investments operations, global
acquisition and business development divisions. Guloien currently has $3.6 Million in stock options.
Chief Operating Officer
As Chief Operating Officer, John DesPrez is responsible for Manulife’s operations in both Canada and the US. Prior
to this position, DesPrez served as the President and CEO of John Hancock Financial Services (now a subsidiary of
MFC). DesPrez currently has $2.35 Million in stock options.
Chief Financial Officer
Prior to joining Manulife, Michal Bell, current Chief Financial Officer, served as the Executive Vice President and
CFO of CIGNA, a health insurance company out of Philadelphia. As the current CFO of Manulife, Bell is in charge
of all financial affairs of the company. Bell currently has $800,000 in stock options.
PORTFOLIO HISTORY
On June 2, 2006, MFC had a 2:1 stock split.
RECENT NEWS
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John Hancock Introduces New Module On the Use of Life Insurance For Special Needs Planning:
tradershuddle.com Feb 23,2011
New and innovative ideas are key to the growth of Manulife in the US. A product such as this demonstrates
their ability to meet the needs of all their customers and effectively capture more market share.
MetLife Has the Best Relative Performance in the Life & Health Insurance Industry (MET, LNC, PRU,
MFC,CNO) zacks.com Mar,04 2011
Manulife is beginning to emerge from the most recent economic downturn and compete with some of the
best performers in the industry again.
INDUSTRY
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Manulife Financial Corporation
University of Oregon Investment Group
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Manulife Financial mainly competes in the Life Insurance and Annuities industry. As demonstrated by the figure
above, industry performance over the past few years has been abysmal. Year over year negative growth of 5.5% has
been accompanied by record breaking probability lows of 3% (from 8.4%).
Although the initial downturn was bad, equity markets plummeted and investment income quickly followed. With
about 28% of revenue coming from investment returns, high delinquency rates on consumer loans and real estate hit
insurance industries especially hard as many of them place a large investment in these assets.
Factors
Employment
Many life insurance products are offered
through employers as added benefits. The
recent
economic
downturn
was
accompanied by large employee layoffs.
Because many people view life insurance as
a luxury good, the demand for these
financial services plummeted alongside the
employment rate. In addition, as employers
attempted to cut costs, life insurance
benefits fell by the wayside. As the
economy recovers, the demand for life
insurance will too, but at a much slower rate
in the first few years.
Median Age of Population and Disposable Income
As baby boomers begin to retire, Generation X moves into their late 30’s and 40’s. As a result, the median age of the
population will be higher and demand for life insurance and wealth management products will rise as people begin to
plan for retirement. In addition, Generation X is entering the prime of their careers’. Many people will begin to make
more money, disposable income will increase, and people will be more willing and likely to purchase life insurance
products.
10-Year Treasury Bill Rate
Approximately two-thirds of an insurance
company’s assets are made up of fixed
income securities. These fixed income
securities are heavily influenced by the 10
year T-Bill rate. Higher interest rates
allow insurers the opportunity to realize
higher investment income and increase
profitability. Even though a higher
interest rate decreases the price of bonds,
higher coupon rates more than
compensate for the difference. On the
right is an exhibit demonstrating the
expected yield on a 10 year treasury bill.
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Future Outlook
US
Industry revenue is expected to increase at an average annual rate of 4%. A large part of this is due to the increase in
interest rates. As interest rates settle, growth will flatten out and the industry will return to its cyclical nature.
Profitability is also expected to increase dramatically. As employment rises, delinquency rates on loans, real estate, and
other debt related securities are expected to fall. This will undoubtedly increase investment income and raise
profitability from the 3% low to pre-downturn levels of 9.8%
Asia
Currently the three fastest growing GDP’s are America’s, China’s, and Japan’s. The insurance industry is expecting to
capitalize on the massive increase in Asia’s GDP. As GDP rises, so does disposable income, which has proven to be
strongly correlated with life insurance sales. As Asia’s population becomes more affluent, they will demand more
wealth management services and more luxury goods.
Clarence Wang, an analyst at Swiss Re, has even gone so far as to claim,
“Emerging Asia outpaces all other emerging regions. This is most obvious in life insurance while emerging Asia can sustain
annual growth of 10% over the next 10 years.”
Both analysts and mangers of life insurance seem to agree that Asia is the next hot spot for wealth management
development.
S.W.O.T. ANALYSIS
Strengths
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Top Market Share in Top Emerging Economies: Manulife is the most well positioned company among its top
competitors and holds high brand loyalty in the two economies targeted for the most growth.
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Decreased Sensitivity to Interest Rates: Results from hedging actions are ahead of schedule resulting in a
more diversified asset base.
Weaknesses
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Commercial Loans: Many of Manulife’s assets are in commercial loans that are still at risk of delinquency.
Although the long term projections have delinquency rates decreasing, the next year is still uncertain. Higher
than expected delinquency rates may result in abnormal loses such as this year’s goodwill impairment that
push net income below zero.
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Negative Net Income: Last year’s large and abnormal goodwill impairment left Manulife trailing behind its’
competitors.
Opportunities
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Federal Estate Tax Expiration: In 2011 the federal estate tax will reset and people will seek out life insurance
and other wealth management products in order to protect their assets from higher tax rates
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•
Increased Globalization: Emerging economies will soon desire wealth management and look to Manulife and
its competitors to fill the gap.
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Acquisitions: The number of firms in the life insurance industry is expected to decrease over the coming
years. Buying up smaller firms will result in larger market share and revenue
Threats
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Taxes: Tax laws concerning wealth management can heavily influence where people place their money. A
sudden hike in taxes from investing in life insurance products may stunt growth.
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Volatile Market Conditions: Unfortunately much of the industry is built on speculation and the expectation of
certain criteria. Although firms do their best to shield themselves by diversifying their portfolios, unforeseen
events like the recent downturn can prove disastrous.
PORTER’S 5 FORCES ANALYSIS
Supplier Power Low
Suppliers generally all have the same product to offer. Specifically tailoring a product to each customer is crucial to
keeping happy customers. In addition, supplier’s products are heavily dependent on external factors completely out of
their control.
Barriers to Entry: High
Entry into the market requires extremely high levels of capital that the typical firm doesn’t have. In addition, the
market is saturated with wealth management products. Entering a market and attempting to diversify one product
from another will be difficult to do. Customers tend to be loyal to their preferred wealth manager.
Buyer Power Medium to High:
Buyers are presented with multiple substitutes for their product at any given time. However, as stated above, people
tend to remain loyal to their wealth manager and it takes a lot to convince someone to move their money to different
hands.
Threat of Substitutes: High
The market is saturated with wealth management products that promise a better return than another company. As a
result, maintaining market share is a crucial key to success.
Degree of Rivalry: High to Medium
Markets in currently developed countries have been saturated by life insurance and wealth management companies. As
a result competition is fierce and market share is extremely important. Growth in emerging economies will be
accompanied by a flood of wealth management companies trying to establish as much market share as possible as fast
as possible.
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Manulife Financial Corporation
University of Oregon Investment Group
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CATALYSTS
Upside
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Acquiring real estate seems to be positively correlated with stock price. This is most likely due to the purchase
being interpreted as Manulife’s financial stability.
•
Analyst Coverage: In September, a financial advice internet site linked to Google, gave optimistic views of
MFC stock prices. Since then the price of the stock has increased 45%.
Downside
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Analyst Coverage: Although at times it will tend to boost stock prices, a less than optimistic review can lead
to lower stock prices as was the case in early February when Macquaire Group announced its analysis of MFC
stock price. The price fell 6.6%.!
COMPARABLES ANALYSIS
In screening for comparables, I prioritized finding companies that are expecting heavy growth in the US and Asia, as
this will help to best model the future returns of Manulife. Second on my list was finding companies that modeled the
growth and risk of Canada and the rest of the world. After searching, I felt that Prudential, MetLife, Sun Life, and
ING Group were the most appropriate companies to model this risk and growth.
Prudential 40%
“Prudential Financial is a financial services company that offers products such as
life insurance, annuities, retirement-related services, mutual funds, investment
management, and real estate services. It has two businesses: Financial Services
Businesses and the Closed Block Business. The Financial Services Businesses
comprises the United States Retirement Solutions and Investment Management
division, United States Individual Life and Group Insurance division, and
International Insurance and Investments division, as well as its Corporate and
other operations. The Closed Block Business comprises the assets and related
liabilities of the Closed Block and certain other assets and liabilities, including IHC
debt.”- Reuters.com
Prudential’s market power and potential growth in both the US and Asia are the main reasons for the 40% weighting.
In addition, Manulife’s and Prudential’s close 5 year average P/E ratio, 1.25x and 1.21x respectively, similar betas, and
direct competition with each other make them nearly identical and thus a 40% weighting is appropriate.
MetLife 30%
“MetLife, Inc. is a provider of insurance, employee benefits and
financial services, with operations throughout the United States and
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Manulife Financial Corporation
University of Oregon Investment Group
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the regions of Latin America, Asia Pacific and Europe, Middle East and India (EMEI). The Company provides a
variety of insurance and financial services products, including life, dental, disability and long-term care insurance,
various annuity products, and auto and home insurance. Within the US, it provides a range of savings and mortgage
banking products. The Company’s segments include Insurance Products (group life, individual life and non-medical
health insurance products), Retirement Products (individual and institutional annuity products), Corporate Benefit
Funding, Auto and Home segment, International, as well as Banking, Corporate and Other.”- Reuters.com
MetLife’s weight was chosen for similar reasons to Prudential’s. However I felt as though, MetLife’s lower market
share in Asia meant less growth and therefore assumed less risk. For this reason I gave MetLife a 30% weighting.
Sun Life Financial 20%
“Sun Life Financial Inc. is an international financial services organization
that offers a diverse range of life and health insurance, savings,
investment management, retirement, and pension products and services
to both individual and corporate customers. Sun Life Financial manages
its operations through five business segments: Sun Life Financial Canada,
Sun Life Financial United States, MFS Investment Management, Sun Life
Financial Asia and Corporate. The Corporate segment includes the
operations of the Company’s United Kingdom business unit (SLF U.K.) and Corporate Support operations, which
include the Company’s reinsurance businesses. The Company’s assets under management (AUM) consist of general
funds, segregated funds and other AUM.”- Reuters.com
Sun Life was chosen in order to model the risk from Manulife’s Canadian market. It competes in the same markets as
Manulife but looking forward I don’t believe it models Manulife as well as MetLife and Prudential. Therefore, I gave
Sun Life a 20% weighting.
ING Group 10%
“ING Groep N.V. is a global financial institution offering banking,
investments, life insurance and retirement services. It operates in six
business segments: Retail Banking, ING Direct, Commercial banking,
Insurance Europe, Insurance Americas and Insurance Asia/Pacific.”Reuters.com
With multiples on opposite ends of the spectrum from Manulife, ING was probably the least comparable company.
However, I feel that ING’s large global presence appropriately models the risk Manulife is attempting to gain by
expanding internationally. For this reason, ING was given a weight of 10%.
Multiples
Due to the unique nature of the financial industry, it was inappropriate to use enterprise value multiples.
After a bit of research, it became obvious that valuing these companies based on market value would give the most
accurate multiples.
Market Value/Book Value- This multiple is perhaps the most useful in understanding how the company’s equity
has performed over the past year. A multiple of over 1 implies overvaluation and less than 1 implies undervaluation.
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Market Value/Operating Income- Last year Manulife had an unusually large goodwill impairment of $1039. This
drove net income to just below zero. As a result, Manulife’s MV/NI multiple was -102x and inaccurately modeled the
company. As a result, I concluded that MV/OI would be the next best option.
Market Value/Revenue
RESIDUAL INCOME VALUATION
Due to the unique nature of Manulife and the financial industry, a DCF analysis will not effectively model the
company. The lack of current assets, liabilities, and depreciation allows the free cash flow to be almost identical to net
income. As a result, a residual income model was chosen in order to most appropriately model Manulife.
A residual income model is actually quite simple. The expected return of the company’s equity from last year
(CAPM*Shareholder’s EquityT-1) is subtracted from net income of this year. Whatever is left over (the residual) is then
discounted by the 1+CAPM. The sum of these discounted values is added to the initial shareholder’s equity to get the
value of the equity. Dividing by outstanding shares gives the price per share.
Beta
Due to the recent economic downturn, it was extremely difficult to find a representative beta. Running weekly and
monthly regressions for the past 5 years against the S&P 500 returned unpromising results. The betas that were in line
with the industry beta were statistically insignificant and the betas that were statistically significant didn’t model the
company’s risk. A Vasicek beta of 1.59 was eventually calculated using the 1 year weekly beta (1.47) and the industry
beta (1.75) in order to model both the forward looking risk of Manulife and the risk of the industry.
Total Company Revenue
Total company revenue is broken down by geographic division (Appendix 5). The growth rate for revenue was a
function of management objectives/guidance and industry growth rates.
•
US Growth: Manulife plans to grow revenues organically and by fee increases. IBIS world predicts the US life
insurance industry to grow at 4% until 2016. However, management believes that the John Hancock brand
can command more growth. For this reason, growth begins at 5% with and initial trend upwards and then a
steady decline in growth. There is growth in 2012. This is due to industry expectations of a sharp spike in
growth.
•
Canada Growth: Canada will grow similarly to the US but Manulife does not have the strong brand image in
Canada that it does in the US. For this reason, growth begins at 4% trends up to 5% and back down to 4%
relatively quickly.
•
Asia Growth: Asia is one of the fastest growing economies in the world. Manulife has been lucky enough to
maintain a large market share out East and as a result will capture a large amount of this growth. For this
reason revenue is grown quickly in the first three years and trending back to the geographic growth rate in
later years.
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University of Oregon Investment Group
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•
Reinsurance Growth: The reinsurance sector tends to boom in time of extreme uncertainty. As a result,
reinsurance is held constant at 2%.
•
Corporate Growth: The corporate end of Manulife will see large growth over the next few years due to
speculation of a rise in interest rates. Corporate growth is held constant at 10% using management guidance.
Total Operating Expenses
Total operating expenses were also broken down by geographic division. The growth rate for expenses was a function
of management objectives/guidance and industry growth rates.
•
US Expenses: Because the increase in revenues is due to changes in the interest rate and an increase in prices,
I have US expenses growing at slightly less than industry revenue growth. Eventually these costs will catch up
with Manulife which is why the revenue to expenses margin decreases in time.
•
Canada Expenses: Following similar reasons for US expense growth, the expenses growth rate in Canada was
modeled to reflect the increase in prices of current services.
•
Asia Expenses: Expenses in Asia were very difficult to predict. I expect expenses to lag behind the sudden
growth in revenue that Asia will experience in the next couple years. However, I believe that eventually that
the revenue to expense margins will shrink. For this reason, expenses are slowly trended upward and but
don’t return to 8%.
•
Reinsurance Expenses: Because there is such little growth in the reinsurance division, expense growth here is
relatively constant.
•
Corporate Expenses: Corporate expenses usually amount to impairments and an unrealized loss to the
company’s balance sheet. Although interest rates are rising and hence bond prices are falling, the extra
coupons outweigh the decline in bond prices. Therefore, I have corporate expenses experiencing negative
growth of 8% in the first year, rising slightly when bond yields increase, and returning to 8% again later on.
Tax Rate
Tax rates were also broken down by division in order to best predict where the majority of taxes would be paid. It was
difficult to use historic taxes to predict the future because of the tax benefits Manulife has received in the past few
years. However, management provided forward looking tax rates by geographic location. Taxes were assessed on the
pre-tax income of each division. The aggregate tax was then divided by total company pre-tax income to get the tax
rate for the company.
Interest Expense
Interest Expense was predicted as an average of past interest payments broken down by geographic division.
Additional Cost of Hedging
Management recently began an interest rate hedging program in order to reduce their sensitivity to interest rate
changes in the future. Management predicted the 2015 cost of this program to be $400 Million. Cost per year is taken
as the product of the former year’s value and (1+CAGR).
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Shareholder’s Equity
Management wants to and foresees shareholder’s equity of $31.7 Billion by 2015. This results in a 3.36% year over
year growth. This was the best guidance for predicting shareholder’s equity and it was carried out until 2018.
PRICE TO EARNINGS ANALYSIS
The Price to Earnings method is one of the most common techniques for valuing financial institutions. Following the
information from the revenue model, I predicted the PE multiple for both 2011 and 2012, (19.69x and 12.22x
respectively).
By multiplying by the earnings per share for the years, I arrived at an implied price for each year ($18.7 and $19.23).
Both of these tend to be in line with analysts expectations. Averaging these two multiples yields 15.95x, a multiple that
is both common for the industry, MFC’s margins, and MFC’s pre-recessionary levels.
RECOMMENDATION
SELL for Tall Firs and Svigals’
Based on my analysis, I am recommending a sell. By equally weighting my RIV, comparables, and P/E analysis’, I
came up with an implied price of $17.52, which represents a 1.83% overvaluation. Although they are expected to see
large growth in emerging economies in the future, this fails to yield higher returns for shareholders.
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APPENDIX 1 – COMPARABLES ANALYSIS
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APPENDIX 2 – RIV ANALYSIS
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APPENDIX 3 – RIV ASSUMPTIONS
APPENDIX 4 – BETA SENSITIVITY ANALYSIS
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APPENDIX 5-RIV REVENUE MODEL
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APPENDIX 6 – P/E ANALYSIS
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APPENDIX 7 – SOURCES
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Yahoo Finance
Google Finance
Reuters.com
Factset
All companies 10-ks and 10-qs
Manulife.com
Ibisworld.com
Mergentonline.com
Ycharts.com
Bloomberg
Businessweek.com
US Treasury
Barclay’s Aggregate Bond Index
Swissre.com
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