Manulife Financial Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Manulife Financial Corporation is a multinational insurance and financial services provider, offering a range of insurance, retirement, and investment management products globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Manulife Financial Corporation (MFC) operates across multiple segments, primarily including Asia, Canada, and the United States. In Asia, it is a significant player in insurance and wealth management. In Canada, it provides similar solutions, alongside banking and group benefit plans. The U.S. segment focuses on long-term care insurance and retirement plans. Its global reach gives it access to diverse demographics, economies, and risk profiles. However, it also makes the company sensitive to market changes and risks in multiple countries, and makes it extremely hard for investors to accurately estimate its intrinsic value.

Revenue Distribution and Industry Trends: MFC’s revenue streams are complex and highly dependent on investment performance, product mix, and interest rate fluctuations.

Premiums from life and health insurance products form a substantial part of revenues.
Fee income from wealth and asset management services is a key driver.
Investment returns can have a dramatic positive or negative influence, depending on the market conditions and their own investment decisions.

The insurance and financial services sector is experiencing rapid changes. Technological innovation is pushing the digitalization and automatization of products and processes, and intense competition is putting pressure on revenues and margins. Additionally, demographic shifts with an aging population may present opportunities for some retirement products while simultaneously increasing long-term liabilities for certain insurance segments. Inflationary pressure creates a problem for asset managers, as rising expenses can squeeze margins while a company’s assets are being valued using nominal prices.

Margins: The following will be a key part of my moat rating later:

Operating margins are thin in nature, because of high competition, low differentiation between the products of the firms, and the need for a large sales force.
These margins are also sensitive to the economy, as higher unemployment and recessionary conditions directly impact the companies financials
Net margins are sensitive to interest rates, as high interest rates will hurt bond holdings, as well as make debt more expensive.

Competitive Landscape and Differentiation: MFC competes with other international and regional financial and insurance service providers. Its competitive advantages come from:

A large and diversified global network: Gives it access to a large market and mitigates risks in one specific area.
A strong brand: Creates a sense of security and quality among consumers
A comprehensive portfolio of products: Enables it to meet diverse customer needs across financial services
A solid financial base: Allows them to ride out times of low profitability or times with economic and financial instability. However, there is nothing that makes the company unique in all three aspects, which also affects the overall moat rating.

Recent Concerns/Controversies:

Interest Rate Sensitivity: MFC’s financials are sensitive to interest rate shifts. The recent increase in interest rates has put some pressure on the bond holdings of the company, but should also increase their earnings from their interest rate business.
Accounting practices: Manulife had a tough year in 2022 as their hedging practices were not up to par. The company has now adjusted some of those things in an effort to minimize these fluctuations in the future.
Long-term care: The U.S. long-term care insurance business has been a point of concern, with higher-than-anticipated claims costs. Management has tried to address this by limiting the sale of new policies and re-evaluating existing policies, but this will also make future revenue more volatile, and reduce the overall revenue of the company.

Financials Analysis:

Revenue: The company’s top line is influenced by premium growth, assets under management, and investment income. Volatility in financial markets creates volatility in this measure. Revenue growth has shown to be very erratic in nature and should be watched closely, given that it is a driver of its profitability.
Profitability: Net income is affected by factors such as insurance payouts, claims, investment gains and losses, and interest rate changes, which are hard to predict. Economic profits are also impacted heavily by the company’s own investment decisions, for which the company’s management bears full responsibility.
Balance sheet: The balance sheet is mostly affected by reserves and investment holdings, where the value may fluctuate wildly depending on interest rates, market sentiment, and overall market conditions.

Moat: 2 / 5 MFC has a moat which can be defined as “narrow.” Here are the reasons why:

Intangible Assets: The brand is a positive, but not as important as other insurance companies with a stronger focus in specific areas. Regulatory licenses also form a minor role here.
Switching Costs: Switching costs are important for asset management clients. It is quite rare for those to switch once they have chosen a particular provider.
Network Effect: The company has no reliance on network effects, making it a negative point in terms of moat creation.
Cost Advantage: The economies of scale the company has from its size are limited, and do not give a true cost advantage.

The above, when put together, means that the company has a narrow moat, mostly relying on brand and switching costs. There is not as much defensibility as other companies, and its market share is always threatened by new entrants and existing rivals.

Risks Affecting the Moat and Business Resilience: * Economic Downturns: Recessions and higher unemployment reduce the demand for insurance and investment products, which is a major downside risk to their revenues and profitability. * Increased Competition: Newer players, especially those who offer a lower-cost product can and are slowly eroding the existing market share of older and well established players. * Regulatory Changes: Financial services companies are always highly vulnerable to changes in regulations, which, for them, can change operating income and their profits quite dramatically. Also, in the U.S. the changes in laws regarding the healthcare and insurance sectors make these types of companies especially vulnerable. * Technological disruption: The company needs to continue investing in automation and AI to maintain its position and create more efficiencies in its operations. * Fluctuating interest rates: Higher rates could hurt their investment portfolio, but they may help the company get more profits from loans or financial activities. Likewise, low interest rates also have their issues with the company’s profitability and cashflows.

Mismanagement: A company with poor leadership, may, at times, make decisions that may severely impact the business and value for shareholders.

Understandability: 4 / 5 The sheer scale and scope of operations for MFC makes it a quite complex business to understand. It’s not a simple business to value. It operates across many geographies and segments that are affected by many macroeconomic forces, and its financial statements are influenced by fluctuations in both equity and bond markets. It is also very hard to predict, as different parts of the business (insurance, asset management, and loans) may have completely different outlooks.

Balance Sheet Health: 3 / 5 The company’s balance sheet is rather complicated, given the assets it is investing in and its high leverage. The large liabilities that come from insurance contracts need a lot of reserves, putting a pressure on their balance sheet and their long-term investments. But also because of regulatory requirement, they need to maintain a certain amount of equity capital which is generally good for business stability. Because of its mixed nature, I rate the company’s balance sheet as a 3/5.