Manulife: Canada’s Largest Insurance Company

MFC - ManulifeThe insurance industry has many of the characteristics that appeal to dividend investors.

Many of the phenomenal historical investments of lore (Warren Buffett’s Berkshire Hathaway NYSE:BRK.B, Fairfax Financial TSE:FFHHoldings  have been in the insurance industry.

The insurance industry is also poised to benefit from some favorable industry dynamics moving forward.

First and foremost is the interest rate environment that we currently operate in. After literally decades of declining interest rates, the Federal Reserve is working to raise the Fed Funds rate. This will improve the performance of insurance company’s investment portfolios.

US 10 Year Treasury
Source: US 10-Year Treasury Yield Courtesy of Investing.com

The aging baby boomer population will also create plenty of additional customers for companies in the business of providing health and medical insurance.

Savvy investors are looking for ways to benefit from these trends. Manulife Financial TSE:MFCNYSE:MFC Corporation , offers investors exposure to this profitable industry.

This post will analyze the investment prospects of Manulife in detail.

Manulife Business Overview

Manulife is a diversified insurance provider with significant operations in Asia, the United States, and Canada. In Asia and Canada, the company operates under the brand name of Manulife Financial (or Manulife Asia). In the United States, the company operates under the name John Hancock (a wholly-owned subsidiary of Manulife).

Operationally, Manulife is divided into two segments for reporting purposes. These segments are:

  • Insurance
  • Wealth & Asset Management

In the Insurance segment, Manulife offers individual life insurance, group life and health insurance, long-term care services, pension products, annuities, mutual funds and banking products.

In the Wealth & Asset Management segment, Manulife primarily invests the company’s insurance float (which is premiums collected but not yet paid out as claims). They also offer ETF products (more on that later) and institutional investment funds.

Looking at the company’s asset management business, in particular, it looks to be a strong driver of future business growth. Q3 2016 marked the 27th consecutive quarter of positive net flows in the company’s Wealth & Asset Management segment (meaning more people are purchasing Manulife’s funds than selling them).

MFC - Wealth Asset Management
Source: Manulife Investor Presentation

With this impressive record of growth, the company now manages an investment portfolio of $966 billion. This portfolio of nearly one trillion dollars gives the company impressive economic clout.

MFC - Assets
Source: Manulife Investor Presentation

For investors considering purchasing shares of Manulife, one thing I want to point out is the company has a very high level of earnings volatility. There is a distinct reason for this.

Manulife invests a huge base of assets on a very long-term basis. This is similar to Brookfield Asset Management, another company that’s recently been covered.

While this long-term orientation is very beneficial for optimizing returns, their investments are marked to market on a quarterly basis which can create serious swings in the businesses’ net income. In 2015, this concern was realized – the dramatic decline in energy prices resulted in a substantial fair value adjustment, which reduced Manulife’s net income by 37%.

The bottom line is that Manulife investors should be aware of this volatility, and have a strong stomach to withstand it. It will smooth out in the long run.

Now that we have an understanding of the company’s overall business operations, I will now outline my investment thesis surrounding this stock. Specifically, I’ll be covering the following topics:

  • Growth in Wealth & Asset Management
  • Geographic Diversification
  • Advancements in Technology
  • Dividend Yield, Payout, & Growth

MFC Growth in Wealth & Asset Management

I’ve already shown that Manulife has done an impressive job of growing their Assets Under Management (AUM) over time.

Looking ahead, one of the key drivers of business growth for Manulife will be their Wealth & Asset Management business. There are many reasons for this, but I’ll be discussing two in particular – the launch of their ETF product line and the current interest rate environment.

In September, Manulife announced the addition of three key executives for their ETF lineup. This is indicative of an underlying strategic focus on ETF sales – which is in line with overall industry dynamics. Investors funneled $375 billion dollars into ETF products in 2016, which is more than any other year in history and up significantly (~8%) from 2015’s $348 billion.

Manulife’s ETF offerings are actually administered through John Hancock, which is a wholly-owned subsidiary of Manulife. Their ETF lineup includes the following:

  • Large Cap ETF
  • Mid Cap ETF
  • Developed International ETF
  • Consumer Discretionary ETF
  • Consumer Staples ETF
  • Energy ETF
  • Financials ETF
  • Healthcare ETF
  • Industrials ETF
  • Materials ETF
  • Technology ETF
  • Utilities ETF

As you can see, John Hancock ETFs span a wide range of industries and allow investors to hold a widely diversified investment portfolio.

The earnings from the company’s Wealth & Asset Management business are also poised to grow because of our current interest rate environment. As I’ve mentioned, the Federal Reserve is finally taking measures to increase interest rates after decades of declining bond yields.

The recent increase in bond yields can be seen in the following diagram.

MFC - 10 Year Treasury Zoomed
Source: US 10-Year Treasury Yield Courtesy of Investing.com

For Manulife, this will be beneficial as a large portion of the company’s asset management AUM is invested in fixed income securities. Their asset mix is outlined in the following diagram.

MFC - Asset Mix
Source: Manulife Investment Fact Sheet

Higher fixed income returns mean faster growing AUM, which means a larger fee base. This will translate into more earnings for Manulife shareholders.

Manulife Geographic Diversification

As an investor, I place a high degree of emphasis on geographic diversification. Canada is only a small component of overall economic output, and it’s important to have exposure to the wider global economy.

While many people think of Manulife of a company whose operations are primarily in Canada, their operations are actually worldwide. This is nicely depicted in the following diagram.

MFC - Operations
Source: Manulife Investment Fact Sheet

In terms of business sales and company growth, Manulife continues to benefit from a concentration in the Asian market. In the third quarter of 2016, the company’s insurance sales in Asia were up 28% year-over-year (which drove the company’s overall insurance sales growth of 20%).

MFC - Asian Exposure
Source: Manulife Investor Presentation

Clearly, Asia is an important market for Manulife. Within that continent, Manulife’s operations are diversified. The company is taking advantage of various megatrends, and realizing significant growth in countries like Vietnam, Indonesia, China, Singapore, and the Philippines.

MFC - Asian Growth
Source: Manulife Investor Presentation

Asia will almost certainly play a major role in Manulife’s growth moving forward.

Advancements in Technology for MFC

Operating in an industry (insurance) that is being disrupted by many smaller fintech companies, Manulife has identified technology as a focus for future growth. They have delivered new platforms that have been well-received by customers and investors alike.

One of the most notable is called ManulifeMOVE. it is outlined in the following diagram.

MFC - Technology
Source: Manulife Investor Presentation

ManulifeMOVE rewards the company’s policyholders for healthy behavior. Manulife benefits from this program in three ways.

First of all, MOVErs typically purchase more policies from Manulife after engaging in the MOVE program. This drives sales growth for the company.

Secondly, ManulifeMOVE increases policyholders’ digital engagement, which reduces the costs that the company must pay for customer service.

Lastly, Manulife’s policyholders enjoy better physical health, which means fewer insurance claims paid. This improves Manulife’s combined ratio (a measure of the risk management of insurance underwriting).

All of these factors (increased sales, decreased costs, and better underwriting) are serious positives for investors.

Manulife is leveraging technology through other channels as well. For example, the company has introduced the WeChat app in mainland China to help simplify and streamline the procedure for processing insurance claims.

MFC - WeChat App
Source: Manulife Investor Presentation

Manulife has further streamlined their company by introducing the POSsible system, which is an end-to-end digital platform for Manulife’s insurance agents.

MFC - POSsible Digital Platform
Source: Manulife Investor Presentation

As the above diagram shows, the introduction of POSsible in mainland China has resulted in >30% productivity gains for Manulife agents.

For a large company, I’m very impressed with Manulife’s ability to create and implement new technologies. It will be exciting to see what other technologies the company introduces in the future.

MFC – Dividend Yield, Payout, and Growth

Long-term Manulife shareholders will not remember the company as a safe dividend investment.

Manulife is infamous for slashing their dividend by ~50% during the financial crisis and freezing it for three years thereafter.

However, things are looking better for Canada’s most well-known insurer. The company has a current dividend yield of ~3.0%, with a very sustainable payout ratio of 48%. The company appears at no risk of freezing or reducing their dividend.

Better yet, the company has returned to annual dividend increases, with double-digit raises in each of the past three years.

One Concern – Executive Compensation

When looking at potential investments, I sometimes examine their executive compensation structure to ensure that the company is aligning the interests of employees and shareholders.

Unfortunately, Manulife’s Chief Executive Officer, David Guloien, is paid much more than many of his industry counterparts. Before being appointed CEO in 2009 (during the heat of the global financial crisis), Mr. Guloien was employed as Manulife’s Senior Executive Vice President and the Chief Investment Officer of their Wealth & Asset Management division. Given that this segment is expected to be a driver of growth moving forward, this is very encouraging.

Consider his exact compensation over the past few fiscal years, as described in an investor document:

MFC - CEO Pay
Source: Manulife 2015 Proxy Circular

Manulife’s management attempts to pay their executives based on the total returns realized by their shareholders. However, Mr. Guloien’s pay is above many of his industry counterparties (even CEOs of much larger companies). This is concerning to me.

Final Thoughts

Manulife has many of the characteristics of an appealing dividend investment.

Similar to Brookfield Asset Management and Fairfax Financial Holdings Ltd., the company benefits from a geographically diverse asset base and a substantial level of economic clout. These two factors create a fantastic competitive advantage – an economic moat, if you will – that should be appreciated by investors.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
Join 6,000+ Investors & Build a Winning Portfolio