Manulife Financial Corp.’s new Asian distribution deal is credit negative for the insurer, says Moody’s Investors Service, because it reduces the weight of the firm’s core strength, which is the profitable domestic market.
In a new report, Moody’s says that last week’s announcement of a 15-year distribution agreement between Manulife (TSX:MFC) and DBS Bank Ltd. in four of their major Asian markets (Singapore, Hong Kong, China and Indonesia) is credit negative “because Asian expansion is dilutive to MFC’s core strength: its strong market presence in its home market of Canada.”
See: Manulife partners with Singapore-based bank
Moody’s notes that the Canadian market is highly concentrated, provides scale, recurring earnings power, and considerable pricing power. “This favourable industry structure promotes consistent profitability,” it says. Whereas, growing its international operations will weaken Manulife’s credit profile because of its “weaker market presence internationally and the more volatile operating environments of international operations.”
Manulife already has the largest commitment to Asian operations among Canadian life insurers, Moody’s reports, noting that 28% of net income came from its Asian division in 2014. That said, they also present attractive growth opportunities, it says.
“Many of the Asian countries have very low life insurance penetration and very favourable demographic trends, including large emerging middle classes. The lack of state welfare schemes in many Asian countries is a key driver behind the growth opportunity for insurance and savings products,” it says.
And, it notes that one of the key determinants of success in these markets includes gaining access to distribution. “DBS will be a very strong distribution partner. In most cases, the primary product offerings are simple insurance and wealth products that do not embody the type of policyholder-friendly features that have generated significant earnings and capital volatility in the U.S. and Canada,” it says.
The rating agency also says that increasing its exposure to faster-growing foreign markets, while maintaining balanced growth, is a key strategic objective for Manulife. “As a result, we expect that [Manulife’s] reliance on earnings from international operations will increase, and will proportionately displace the stable and sustainable earnings from within Canada, which are growing at a slower rate,” says Moody’s. “The DBS deal will accelerate this trend. DBS has particular strength in Singapore, one of the most stable operating environments in Asia.”