Tuesday, March 14, 2006

Manulife Continues to Gain Ground in US Variable Annuities

Scotia Capital, 14 March 2006

• U.S. variable annuity Q4/05 industry statistics were released late last week.

• While Manulife continues to gain market share in terms of both sales and assets, the same cannot be said for Sun Life. Manulife's market share and positioning in variable annuity sales continues to climb, up from 5.6% to 6.0% QOQ, with market positioning increasing from #9 at the beginning of 2005 to #7 at the end of the year (and up from #8 as at Q3/05). More importantly, in terms of assets, Manulife's market share of total U.S. variable annuity assets continues to climb, up from 3.1% at Q3/05 to 3.23% at Q4/05 (and increasing to #10 rank at the end of 2005 vs. #11 at Q3/05 overall in terms of assets). Despite efforts to ramp up distribution and improve product, Sun Life's market share in terms of U.S. variable annuity sales, at 1.0%, has not moved throughout 2005, remains below its 2004 level, and well below 2001-2003 levels. In terms of assets, the company's market share continued to decline (from #17 and 1.35% at Q3/05 to #17 and 1.24% at Q4/05), as negative net sales for the insurer continue to hurt asset growth. The big continue to get bigger in U.S. variable annuity, and cracking the top 10 in terms if assets and/or sales is becoming increasingly difficult in this business.

• Sun Life's heavy investment (we estimate $30 million) in expanding U.S. variable annuity distribution is expected to bear fruit in early 2006 - we remain somewhat sceptical. The company notes that it there is a lag before the impact of the 50 wholesalers recruited over the last twelve months begin to significantly impact the bottom line. We remain somewhat sceptical. Furthermore, net sales continue to be negative, and at negative US$926 million (2005), are US$307 million behind last year's comparables, well below top ten players such as Manulife (at positive US$4.6 billion), Lincoln (at positive US$3.7 billion) and Prudential (at positive US$1.4 billion), all of whom have seen net sales increase in 2005.

• Sun Life hopes to climb into the top ten in the next three-four years. We remain sceptical. Assuming the industry increases sales at a rate of 5% per annum, Sun Life must increase its sales at an annual rate of over 40%, a tall order in our opinion.

• Expanding and diversified distribution as well as an excellent product offering continues to help Manulife. Manulife continues to benefit from excellent product and an expanding and diversified distribution system. We see no reason for this sales momentum to not continue through 2006.

• Sun Life continues to be a show me story, while Manulife, in our opinion, is already there and then some. Currently the spread between the companies in terms of a forward P/E multiple is 9%, above its 6% historical average. We remain somewhat sceptical as to Sun Life's ability to significantly increase marketshare (and achieve its goal of top ten in the next three years) in the highly competitive U.S. variable annuity market, and as such believe the relative multiple spread between the two companies will more than likely remain above historical averages, and continue to expand, rather than contract.