Most people these days understand the need for insurance, to protect themselves and their family against any mishaps that may befall.

Hospitalisation and surgical, accident, motor and life insurances are just some of the many insurance products available today and it is not uncommon to see an individual having more than one insurance policy.

Manulife Holdings has been operating in Malaysia since 1963 and is a member of Canada-based Manulife Financial Corporation, a leading Canadian-based financial services group.

The company’s core business is in the provision of individual life insurance products. In addition, it also offers wealth management solutions such as unit trusts and private retirement scheme.

Growing Premium Income

For most insurance firms, the primary source of income comes from premium revenue, which is paid by customers for insurance products. Hence, premium growth is an important indicator in assessing the growth of an insurance company.

In this aspect, Manulife had seen a steady increase in its operating revenue and net premiums in the past five years. In particular, net premiums recorded a compound annual growth rate (CAGR) of 10.9 percent between FY09 and FY13.

From the chart below, investors may observe the relatively big jump in net premiums earned in FY13, which grew RM169.4 million or 33.6 percent year-on-year.

Source: Company Annual Reports

The growth in net premiums in 2013 can be primarily attributed to the new preferred bancassurance partnership between the group’s life insurance business and Alliance Bank Malaysia, which enlarged the group’s distribution channel.

The 10-year bancassurance partnership allows Alliance to sell, market and distribute life insurance products developed by Manulife, to its customers. According to Manulife, new sales contribution from the bancassurance channel leaped to 18 percent in FY13, up from less than 3 percent in FY12.

Asset Management Services, Possible Future Growth Engine

On 31 December 2013, Manulife completed the acquisition of MAAKL Mutual, an established mutual funds platform and its agency distribution. The deal allowed the group to expand its asset management business on a bigger and stronger platform amidst stiff competition in the fund management industry, complementing its insurance business as well.

Post acquisition, Manulife has about 3,000 agents, with more than 1,000 from MAAKL. In addition, the group will add 27 funds to its offerings.

One reason for the acquisition was the existing strong line-up of Employees Provident Fund-approved funds within MAAKL, which included 10 Islamic funds. According to the company, it would have taken about six to seven years to reach the total of 27 funds that is under MAKKL starting from scratch.

Manulife will be propelled into one of the top 10 largest players in the unit trust segment in Malaysia after the acquisition and the firm plans to double the size of its agency force in the next five years

In September, the group merged MAAKL with its other wholly-owned subsidiary, Manulife Asset Management Services (MAMSB), which is consolidated as a single entity and retained the name MAMSB.

With the company seeking inorganic growth in its unit trust business, investors can look forward to accelerated growth in this segment that could turn out to be a new growth driver. While the traditional insurance business faces increasingly stiffer competitions, expanding its other segment could turn out to be a good strategy.

Valuation

Most investors find evaluating financial firms complicated and would avoid doing so. However, there are still some common metrics that can help evaluate these firms. For insurance firms, two commonly used metrics are price to book (P/B) ratio and the return on asset (ROA).

Manulife’s P/B stands at 0.83, based on 29 December’s closing price of RM3.10. Comparing to its five year P/B range of between 0.8 and 1.4, the firm is currently trading at the lower range of its valuation based on historical data.

Though the valuations may seem enticing, investors should note that the company’s share price had fallen 13.9 percent year-to-date (based on the closing prices on 2 January and 29 December), one reason for the low P/B valuation.

In addition, the group’s earnings in the current FY14 had been hit by a decline in Malaysian Government Securities, on top of a decreasing value of corporate debt portfolio. Manulife’s trailing-twelve-month ROA stands at 0.85 percent, which is lower compared to the industry average of 0.93 percent based on data on Reuters.

Industry Headwinds

Besides facing stiff competition in the industry, the group also faces other challenges within the industry.

Malaysia is set to implement a six percent goods and services (GST) tax starting April 2015. Analysts and industry observers have noted that insurers, in particular those with high operating costs, could potentially experience a squeeze in their margins due to the GST.

This further adds on to the worries of lower demand for insurance products as a result of the slower economic growth from lower crude prices and a weaker ringgit.

That said, rising costs of healthcare in Malaysia and greater awareness of a need for insurance could still drive growth for insurance products in 2015. However, snatching a sizeable piece of the pie would not be easy especially with other big players around.

Given the uncertainties, investors should act cautiously, and perhaps it might be better to wait and see if the group’s asset management business will take flight in the coming year before putting their money in the stock.

This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.