Tuesday, October 03, 2006

RBC CM on Manulife's New Product

RBC Capital Markets, 3 October 2006


Manulife just announced the domestic launch of its Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity (VA).

Investment Opinion

• GMWB Variable Annuity Available October 23rd. This is another first-to-market for Manulife, with which it has already had success in both the U.S. and Japan. The product provides investors with: (i) a predictable minimum guaranteed income; (ii) upside potential based on investment performance, and (iii) withdrawal flexibility. The product balances capital preservation, return and liquidity for both pre-retirement or early retirement life phases.

• GMWB Market Expected to be $50B by 2011. Investor Economics forecasts a bright future for this product, estimating that the GMWB market will range from $5.5B to $8.4B in 2007, and grow 5-10 fold in four years to a range of $28.5B to $53.6B by 2011. The GMWB VA has been extremely popular in the U.S. and in Japan, accounting for 50%+ of U.S. VA sales and 30% of Japanese VA sales for Manulife in 2006.

• Banks and Other Lifeco’s May be Impacted. Sources of funds for this product may include: (i) transfers from existing segregated funds; (ii) employees retiring/terminating from defined contribution (DC) plans; (iii) RRIF transfers from RRSPs and, and; (iv) transfers from GICs. Transfers from both segregated funds and from DC plans may come at the expense of Great-West Lifeco and Sun Life, as they hold the #1/2 market positions in each of these markets. Transfers from RRSPs and GICs may adversely impact bank deposits.

• Timing Prime for 2007 RRSP Season. The launch of the product should position MFC well for the 2007 RRSP season as distributors will have had ~2 months of sales experience leading into Q107. We do expect this product to be replicated eventually by the other lifecos since the main constraint for product launch is back-office system development. However, based on MFC’s experience in the US and Japan and because they are the first-to-market in Canada, we expect MFC to be the market leader in this product.

• Valuation. Our $43 (unchanged) price target reflects a 16x forward P/E now at $2.71 for MFC, above our Canadian lifeco target average of 14.5x to reflect excellent operating performance, strong capitalization and a leading global market position, with particularly strong growth prospects in the U.S. and Asia. For 2006, we estimate $2.50 cash EPS (3¢ above consensus) and for 2007, our $2.89 estimate is 8¢ above consensus. In both cases, we have more aggressive operating margin expectations, reflecting continued excellent execution, positive interest rate EPS torque, and favourable share buyback activity. Risk centres on foreign exchange translation, as nearly two-thirds of earnings are USD-based and unhedged. Also, Manulife could be susceptible to a downturn in claims experience or an unusually bad credit market.