3 Reasons to Buy Manulife Financial

Lower leverage rates and promising potential in China and Japan make Manulife a strong contender for your portfolio.

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The Motley Fool

Life insurers have not been the talk of the town these past five years, and for good reason, considering that they generate the majority of their money through long-term fixed-income investments. Indeed, central banks keeping interest rates low only accentuated their poor performances, but underlying this reality is the fact that their core products of insurance and wealth management services are showing promising sales growth.

Here are three reasons why you should look into Manulife Financial (TSX: MFC)(NYSE: MFC).

1. Asian focus

In the first quarter of 2014, sales in Asia were up 25% on a year-over-year basis, but not so robust in the Americas. Obviously, the growth story is in Asia, and it is not about to be oversaturated like in the Americas. The two main markets in Asia for the company are Japan and China, and both have their own features. For instance, Japan’s aging population is attractive to the company since the average age there is 46. Liken this to Canada, where the average age is 41, and you start to realize that the market for retirement products and life and health care insurance in Japan is a good opportunity for growth.

In China, the focus is on the new middle class that has been emerging in recent years. The figure is astounding — it’s estimated at over 300 million! This is almost equal to the entire population of North America. In China, Manulife can offer many products like health care insurance and wealth management products. The members of this new middle class have a lot more disposable income compared to their parents, and thus represent a chance to increase the amount of premiums and deposits Manulife can gather.

2. In the process of deleveraging its balance sheet

During the 2008 financial crisis, Manulife found itself overleveraged to absorb the shock that followed the central bank interventions. While it did not experience the same problems as its peers in the United States, where banks and insurers went bankrupt, it did force management to make some hard choices regarding the dividend midterm and profitability. The company had to increase its capital to attain its goal of a 25% leverage ratio, lowering the potential for earnings growth in the process. Currently, the ratio stands at 31% and is on its way to reach its target by 2016. Unfortunately, we cannot expect any dividend increase until the company is closer to its target.

3. Increase in book value per share and market sensitivity

Like other financial institutions, Manulife should be evaluated on its price-to-book value rather than on its price-to-earnings ratio. The company is doing a great job increasing its book value per share from $12.26 in the first quarter of 2013 to $13.56 for the first quarter of 2014, an increase of 11% on a year-over-year basis. Management also rebalanced its hedging program to limit its vulnerability to an increase in equity markets while increasing its exposure to interest rate fluctuation.

The bottom line

Manulife, like many life  insurers, had a hard time in the last couple of years with low interest rates, but there seems to be light at the end of the tunnel. Its leverage is close to target levels, and stronger volumes in growth markets should provide it with ample revenue to invest. This is good timing considering that the Federal Reserve is telling investors that mid-2015 is the target date for a rise in interest rates.

I don’t expect Manulife will double overnight, but I think it will give you a steady flow of income over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor François Denault has no position in any stocks mentioned.

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