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Morningstar | Manulife Sees Improvement in 2Q

Manulife’s second-quarter results were strong, with the company maintaining the momentum from the past few quarters. Annualized reported and core ROE were 12% and 14%, respectively, as the firm continues to improve its profitability. While we generally like the moves management has been making, we don’t believe Manulife has a moat, which will likely limit long-term returns. We will maintain our CAD 23 and $17.50 per share fair value estimates.

Manulife saw solid year-over-year increases in core earnings across all of its segments. Canada posted the highest growth, as unfavorable claims experience last year turned more favorable during this year's second quarter. The one negative from the quarter, though, was that net flows in the global wealth and asset management segment fell to just CAD 100 million, well below the multibillion rate that Manulife has seen in recent quarters. The shortfall was concentrated in the U.S., which saw net outflows of CAD 2.2 billion due to the redemption of three large-case retirement plans. We think the asset management industry is structurally much more attractive than life insurance, so we view the shift on the company's part in this direction positively, even with the second quarter's temporary disruptions.

Management continues to reposition Manulife's businesses, as well as lower costs. During the quarter, the firm improved its capital efficiency, which freed CAD 400 million in capital. While cost-reduction efforts led to a charge of CAD 250 million during the second quarter, management expects it will will eventually lead to annual savings of CAD 300 million. We have tended to take a favorable view of the moves management has made to improve profitability. Even so, Manulife has  generally generated returns below our estimate of the firm's cost of equity since the financial crisis, so improvement is necessary to just get to sustainable adequate returns.