Is Manulife’s Volatile Investment Income A Cause For Concern?

Manulife Financial (NYSE: MFC) is a leading Canada-based financial services group operating in 22 countries worldwide and offers financial protection and wealth management products and services like individual life insurance, group life and health insurance, annuities, mutual funds etc. Like all other insurance companies, Manulife is heavily dependent on Investment Income for its profitability. Trefis has analyzed trends in Manulife’s Investment Income over recent years in an interactive dashboard, and also highlighted how Manulife’s Investment Income compares with peers Prudential and MetLife.

Trefis estimates Manulife’s valuation to be $20 per share (20% more than the current market price) after incorporating changes based on Manulife’s earnings release earlier this month. You can also see more Trefis data for Insurance companies here.

What is Investment Income?

Investment Income represents the net income generated by an insurance company by investing insurance premiums on a mix of assets including fixed maturity securities, mortgage loans, policy loans, equity securities etc. Notably, the investment income is volatile by nature and can swing considerably from one period to the next. However, as we detail below, Manulife’s Investment Income has seen substantial changes over recent years even as peers Prudential and Metlife reported higher, more stable Investment Income figures over the same period.

How has Manulife’s Investment Income trended over recent years, and what’s the forecast?

Manulife’s Investment Income swelled at an average annual rate of 53% over 2015-17 before dropping by 77% in 2018 to just $3.5 billion. The drop in 2018 was driven by negative revenue from fixed maturity securities and equity securities. Notably, Manulife’s Investment Income have fluctuated considerably over recent years because:

• Manulife derives a majority of its investment income from fixed maturity securities.
• Minor fluctuations in the fixed income market can have a significant impact on Manulife.
• This coupled with significant decrease in U.S. segment revenues were the reasons behind decline in investment income in 2018.

We expect fixed-income and equities markets to recover in 2019, which should help Manulife’s Investment Income cross $10.8 billion for the year.

The volatile nature of this income also means that its share of Manulife’s top line has swung considerably over recent years

• Revenue share of investment income in total revenues has grown from 24.4% in 2015 to 33.1% in 2017. Further, we expect it to be around 22.5% in 2019.
• We expect total revenues to cross $47.8 billion in 2019 – an increase of 58% y-o-y. This should be driven by recovery in U.S. Insurance segment as well as a growth in Insurance Income as detailed above.

How does Manulife’s Investment Income compare with the figure for peers Prudential Financial and MetLife?

• Prudential and MetLife have reported a steady increase in their Investment Income over recent years – a trend we believe will continue in 2019.
• In 2019, we expect MetLife to report $17.4 billion in investment income, which should be the highest among the three insurance giants compared here.
• Manulife grew at an average annual rate of 53% over 2015-2017, which was highest among its peers, but it reported a significant setback in 2018.
• Manulife’s growth rate of 208% for 2019 might appear as an outlier in relative terms. However, it translates into an increase of $7.2 billion. It would enable the total figure to cross $10.8 billion which is still lower than $14.9 billion in 2017.
• In 2018, revenue share of Investment Income declined for all the three companies

Notably, the share of Investment Income to the top line is much more stable for Prudential and MetLife compared to Manulife. While MetLife and Prudential appear to be considerably more cautious about the assets they invest in, Manulife seems to have a high risk – high return approach to investment. Manulife’s Investment Income can potentially trigger sizable losses if recessionary economic conditions prevail.

Per Trefis, Manulife’s Revenues (shows key revenue components) are expected to cross $47.8 billion in 2019 – leading to an EPS of $2.23 for the year. This EPS figure coupled with a P/E multiple of 8.8x, works out to a price estimate of $20 for Manulife’s stock (shows cash and valuation analysis), which is 20% higher than the current market price.

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