Tuesday, June 27, 2006

Manulife Continues to Gain Share in US VA Market

  
Scotia Capital, 27 June 2006

Event

• U.S. variable annuity (VA) quarterly (Q1/06) industry stats were released late last week.

What It Means

• While MFC continues to gain market share and positioning in terms of both U.S. VA sales and assets, the same cannot be said for SLF.

• SLF's heavy investment (we estimate $10 million) in expanding U.S. variable annuity distribution is expected, as per management, to bear fruit in 2006. We remain somewhat sceptical.

• SLF continues to be a "show me" story, while MFC, in our opinion, is already there and then some. We remain somewhat sceptical as to SLF's ability to significantly increase market share in the highly competitive U.S. variable annuity market.

• That said, we expect MFC's valuation premium to SLF (MFC is currently at a 14% premium on a NTM P/E multiple, up from 10% three months ago and 7% six months ago, well above its historical average of 6%) is more likely to remain at current levels, or perhaps modestly contract, rather than expand going forward, as we expect the exceptional rate of top-line growth in Manulife's U.S. business to moderate somewhat going forward.

MFC continues to gain share in US VA market, SLF continues to lose ground

• U.S. variable annuity Q1/06 industry statistics were released late last week.

• While Manulife continues to gain market share and positioning 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 6.0% in 2005 to 6.4% in Q1/06, with market positioning increasing from #7 at the end of 2005 to #5 at the end of Q1/06 (and up from #8 as at Q3/05). 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 in the last four quarters, remains below its 2004 level, and well below 2001-2003 levels. Market positioning fell from #19 in 2005 to #20 in Q1/06. In terms of assets, the company's market share continued to decline (from #17 and 1.32% at Q4/05 to #18 and 1.29% at Q1/06), 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 $10 million) in expanding U.S. variable annuity distribution is expected to bear fruit in 2006 - we remain somewhat sceptical. The company notes that there is a lag before the impact of the 50 wholesalers recruited over the last 12-15 months begins to significantly impact the bottom line. We remain somewhat sceptical. Furthermore, net sales continue to be negative, and at negative US$926 million in 2005 and negative US$178 million in Q1/06, are well below top ten players such as Manulife (at positive US$4.6 billion in 2005 and positive US$1.2 billion in Q1/06), Lincoln (at positive US$3.7 billion in 2005 and positive US$1.1 billion in Q1/06), and Prudential (at positive US$1.4 billion in 2005 and positive US$0.6 billion in Q1/06).

• Manulife's exceptional U.S. VA sales growth is likely to return to more "normalized" levels for Q3/06 and Q4/06. At the company's recent Investor Day (June 13, 2006) management indicated that the 61%, 63% and 60% sales growth in U.S. variable annuity for Q1/06, Q4/05 and Q3/05, respectively, would likely not be sustainable, for two reasons. One, we are close to approaching a year following the May, 2005 launch of the Second Generation Product, the highly successful VA product that drove the growth, and two, other competitors have now copied the product to various degrees. We would expect the company to maintain market position and share (#2 in the non-proprietary channel) until its next new product launch, which we anticipate could be late 2006 or early 2007. We also expect that going forward the exceptional gains in market share experienced of late, aided by new found momentum post the Hancock close, will more likely be harder to duplicate.

• MFC premium to SLF less likely to expand going forward, and may have peaked, as we expect Manulife's U.S. sales growth to return to more "normalized" levels. We expect the valuation spread between MFC and SLF (MFC is currently at a 14% premium on a NTM P/E multiple to SLF, up from 10% three months ago and 7% six months ago, well above its historical average of 6%) to no longer significantly expand as we expect the exceptional rate of top-line growth in Manulife's U.S. business to moderate somewhat going forward.
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