Manulife Financial Corporation

Manulife Financial Corporation (TSX: MFC) is a leading international financial services group that offers financial advice, insurance, and wealth and asset management solutions to individuals, groups and institutions. With its global headquarter in Toronto, Canada, the group operate as Manulife across Canada, Asia, and Europe, and as John Hancock in the United States.

Recently, the company announced that it had offered senior notes of the principal amount of USD 1,155,000,000 in Taiwan with a coupon rate of 3.050% due August 27, 2060. The funds will be used for unsecured obligations of MFC and for the payment of all its existing and future unsecured and unsubordinated indebtedness.

Q1FY20 Financial Highlights: MFC declared its quarterly results, wherein the company posted revenue of CAD 27,486 million as compared to CAD 22,220 million in the previous corresponding period (pcp). The increase was driven by higher net investment income during the quarter. Income before income taxes stood lower at CAD 832 million, as compared to CAD 1,756 million in pcp. The quarter was marked by an increase in total contract benefits and expenses, due to higher net benefits and claims, while the decline in the general expenses, commissions, interest expense has supported the company’s profitability. Net benefits and claims were higher due to an increase in insurance contract liabilities. Net income stood at CAD 839 million as compared to CAD 1,516 million in pcp due to the narrowing corporate spreads and the steepening of the yield curve in the US, partially offset by gains from the sale of available-for-sale bonds coupled with gains from the direct impact of equity markets and variable annuity.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company is primarily exposed to the Equity Market and Interest Rate risks; however, the companies interest rate and equity market sensitivities have decreased significantly since 2009 with the implementation of robust hedging program. Further, COVID-19 pandemic continues to disrupt economies and capital markets worldwide, the second wave of the outbreak could have significant weigh on the group's performance.

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MFC corrected ~26% so far this year, due to a volatile equity market in the recent past. The company took prudent measure and reduced its general expenses by 5% on y-o-y basis, which contributed to the improvement in efficiency ratio, which is impressive. Within the Asia Geography, the company made digital enhancements and expanded its distribution capabilities and offers ~97% of the company’s products with non-face-to-face solutions, which augurs well for new business prospects considering the current scenario. The company is focusing on expanding its agency, which would reaffirm the company’s footprint across new markets. Furthermore, the company has expanded its partnership with Akira Health in order to provide a broader range of online medical services to its insurance clients to better support their health and wellness. With the launch of JH eApp, a digital new business platform, the company have simplified its life insurance purchase which would accelerate the business in the coming quarters. The company has strong and well-diversified digital and in-person distribution platform, which includes independent advisors, contracted agents, financial planners, brokers, broker-dealers, and other distribution partners. This enables the group to meet the varying needs of the international base of customers, regardless of their chosen distribution channel. We have valued the stock using P/BV based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Financial) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 19.63 on September 2, 2020.

MFC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Fairfax Financial Holdings Limited

Fairfax Financial Holdings Limited (TSX: FFH) is a holding company which is engaged in property and casualty insurance and reinsurance and the associated investment management.

Q2FY20 Financial Highlights: FFH announce its quarterly results, wherein the Company reported gross premium written of USD 4,702.7 million, increased from USD 4,335 million in the previous corresponding period (pcp). The increase was driven by higher net premium earned from Northbridge and Odyssey Group and Allied World segments. Net premiums written by the insurance and reinsurance operations increased by 5.4% to CAD 3,555.5 million from CAD 3,372.5 million in the previous corresponding quarter. The operating income stood at USD 120.5 million. Interest expense stood at CAD 122.2 million, which includes CAD 74.4 million incurred on borrowings by the holding Company and the insurance and reinsurance companies and CAD 31.5 million incurred on borrowings by the non-insurance companies. The quarter was marked by higher loses on claims, a marginal increase in the operating costs and commissions, while other expenses improved to USD 938.4 million, significantly lower than USD 1,434.6 million in pcp. Net earnings were reported at USD 426.3 million, against USD 579.5 million in the previous corresponding quarter.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The Group’s total debt to total capital ratio, excluding non-insurance companies, increased to 31.8% on June 30, 2020, from 24.5% on December 31, 2019. Higher debt might hinder the financial flexibility of the company.

Valuation Methodology: P/BV Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of FFH tumbled ~34% so far this year amid volatility in the equity market. The Company has reinvested cash and short term investments at its insurance and reinsurance operations primarily into higher-yielding investment-grade corporate bonds with an average maturity date of 4 years and average interest rates of 4.1%, which will benefit interest income in the future. Further, to enhance the liquidity, the Company has completed the issuance of CAD 650.0 million principal amount of 4.625% unsecured senior notes due April 29, 2030, which would support the Company's short-term working capital requirements. The Company repaid USD 1,070 million, which it had drawn from its credit facility during March 2020, which is a positive sign. The Company reported strong performance from the underwriting segment, with a combined ratio excluding COVID-19 losses of 91.2%, coupled with continued favourable reserve development and growth in gross premiums written, which is notable. FFH has a tremendous global presence and has a strong business model with ample financial flexibility, which is likely to help the group in navigating the current challenging environment.  The group is expected to witness some challenges in the near term as it operates in some segments where the premium directly linked to the economic activities. However, re-opening of the economies across the globe would drive the insurance premium and as well as the cash flows of the group.  We have valued the stock using Price to Book based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Financials) median on NTM basis. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 403.97 on September 2, 2020.

FFH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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