A.
EXECUTIVE SUMMARY
Insurance life industry has been growing over the past five years, but
has slightly dropped in 2016. The competition for life insurance goes into
three main aspects: Customer service, technology and financial strength. The
Big-3 consists of: Manulife (13.5% of market share), Sun Life Financial (13.3%
market share) and Great-West Life (11.5% market share). Both the companies are well-known in the industry. Although
Manulife is bigger in size than Sun Life (total assets of Manulife is almost
triple that of Sun Life), its net income over the last three years has not been
as good as it has been expected.
Both Manulife and Sun Life showed
unpredictable revenue from 2013-2015. Sun Life Financial has twice Operating
profit margin than Manulife Financial. Net income of Manulife has decreased by
49% from 2013 to 2015 while Sun Life’s net income increased by 18% over the
last 3 years. These facts may negatively impact on the investment decision into
Manulife.
In liquidity aspect, Sun
Life is able to pay for its long-term liabilities better than Manulife. Plus,
Sun Life has more Cash from operating activities than Manulife. Moreover, Sun
Life is more efficient at collecting payments from its customers and has more
days to pay for it creditors more than Manulife.
As per the leverage
ratios, Sun Life is not heavily dependent on borrowing as compared to Manulife.
Sun Life is making all of its interest payments on time. Sun Life has a lower
debt ratio than Manulife indicating a good sign for investors as lower debt
means lower risk. The interest coverage ratio of Sun Life is also better as it
represents that the company is able to meet its debt obligations better than
Manulife. But the cash flow adequacy of both the firms is above 1 indicating
that they are generating enough cash for its operations. Therefore, it can be
said according to these factors that Sun Life overall is doing better
In terms of activity, Sun Life has been
doing better than Manulife since it had higher accounts receivable turnover,
which indicated that the management team did well in receivable collection from
customers. In addition, Sun Life also had a higher total asset turnover over
the past three years, this show that the company had been able to generate
sales better than the competitor.
Profitability ratios have been changing
significantly every year for both companies. Sun Life and Manulife companies do
not have a cost of goods sold in their Income statement so they do not have
Gross profit margin but their operating profit margin of Manulife has been
declined more than 50% from 2013 to 2015 while Sun Life was doing good last
year. As the companies are insurance
companies so they their cash flow margin high. High cash flow margin means
company can convert their sales to cash quickly. Being an insurance companies
the main source of income is through premiums which helped cash flow margin to
be at high.
Regarding Market ratios, except
unremarkable difference in dividend yield, EPS, P/E and dividend payout ratio
of Sun Life were all better than those of Manulife. Therefore, the better
business performance of Sun Life led to better earnings and a higher
expectation of investors of the company’s growth probability. The increasing
net income has not only benefit Sun Life’s investors but also facilitate the
company to invest for business expansion to attain higher growth in the future.
A. INDUSTRY AND ENVIRONMENT
Firms and industry
Sun Life and Manulife are strong brands
insurance companies offering protection, wealth management, financial planning
and several other products and services. Both the companies are Canada based
leading financial service groups. Sun Life is a well-capitalized and has a
strong and solid financial rating. Manulife
Financials is also a well-known brand and has diversified revenue streams which
helps it reduces the risks.
Sun Life has total revenue of $19,274
million while Manulife has $59,847 million which is a lot higher than Sun Life.
Manulife’s market capitalization is $1,560,329,602,128. Total assets of Sun Life
are $246,853 million whereas Manulife has more assets which attained $704,643
million in its hands. Sun Life’s total capital increased from 6.4% to $49.4
billion whereas Manulife’s total capital increased 7.4% to $24.5 billion.
Manulife has a net income of $2,617 million whereas that of Sun Life is $2,300
million. MFC’s basic and diluted EPS is the same i.e. 1.26 while Sun Life has
3.57 basic and 3.55 as its diluted EPS. Sun Life’s core earnings have increased
overtime. Sun Life’s return on equity as compared to Manulife has also
increased
Manulife
Manulife is a global financial service firm with many offices in Canada,
Asia, and the United States. Manulife has 34,000 employees and 64,000 agents
under contract. It was founded in 1887. In Canada Manulife operates Manulife Bank,
Manulife Investment, Manulife Group Benefit and Manulife Private Wealth (Manulife, 2015) .
Manulife acquired the Canadian Asset of Standard Life
for 4 billion dollars in 2014. Standard Life firm was one of the five biggest
companies for life insurance. The acquisition helps Manulife expand its
business in group benefit insurance
products and mutual funds (Hoffman, 2016) .
Sun Life
Sun Life was
founded in 1865. Is a global financial insurance company provides protection
wealth for individual and companies. They offer their products in different
countries, Canada, United State, Europe, and Asia.
Sun life provide three types of insurance, Individual and investment which
include, long term care and personal health insurance, Permanent life, term
life, universal life, saving and
retirement which include, mutual funds, accumulation annuities and payout
annuities (Hoffman, 2016) .
Industry performance
Industry revenue Insurance life companies
have growing a lot on the past five years to 2016 so, that helped raise revenue
insurance companies. Despite the growth, the low interest rate damaged the
fixed income; for that reason the trend fluctuated and wasn’t steady. The revenue was expected to increase by 3.4%
(96.3 billion) for five years to 2016 and decline by 1.4% in 2016 (Hoffman,
2016) .
Competitive environment
There are some reasons that make the life insurance industry
competitive, for example the prices of insurance. The most essential forms of
competition include customer service, technology and financial strength (Hoffman,
2016) .
First of all, insurance life companies should train their employees to
have market knowledge that would help to generate good customer service.
Experienced employees will be able to give appropriate advice to their
customers, and build trust between the company and their clients. Second,
competition is growing due to development of technology. Companies have to
update all their programs to make it easy for clients to check their account.
Easy access to a customer account increases the productivity of the life
insurance employees. Finally, financial strength plays a major role in
competition. Clients look for large, well-known companies that have financial
stability. Moreover, major players try to have a competitive brand name to make
them more attractive to their clients (Hoffman, 2016) .
Life insurance and annuity industries are at a moderately high level of
market share. The industry has dropped from 41.3% in 2011, to 38.3% in 2016 (Hoffman,
2016) .
However, the market has been still controlled by the three big insurance and
annuity companies, who are:
1.
Manulife: 13.5% of market share
2.
Sun Life Financial: 13.3% of market share
3.
Great-West Life: 11.5% of market share
Economic climate and Outlook
-
The insurance industry has been in tough time when the global economy is
still trying to fully recover from the 2008 crisis. Plus, the prospect of
Brexit has created more challenges for the industry (Ralph, 2016) .
-
The low interest rates due to low economic growth make it more difficult
for insurers to generate profits.
High growth rate
of emerging markets attracts big insurers like Manulife to expand their
business to those regions. However, it it not easy to gain a fast growth as
expected (eg: Axa was failed to meet its target in emerging markets during the
period 2011-2015) (Ralph, 2016) .
B.
FINANCIAL ANALYSIS
Income
statements and Balance sheets for the past three years
The figures are
in millions of Canadian dollars, except EPS.
Long-term revenue, Gross Profit,
Net Income Growth (Comparison)
·
Total
Revenue for Manulife is unpredictable with in last three years. It increased by
119% from 2013 to 2014 then decreased by 37% in 2015 over 2014. Sun Life
financial had also the same problem, it grew by 86% in 2013-2014 and decreased
by -25% in 2014-2015. This situation may be the result of the industry’s
downtrend. However, in long term, Sun Life revenue has a better growth than
Manulife.
·
Manulife’s
operating profit in year 2013-2014 was 14% and in years 2014-2015 it decreased
to -39%. Sun Life Financial has twice Operating profit
margin than Manulife Financial.
·
Net
income of Manulife has decreased by 49% from 2013 to 2015 while Sun Life’s net
income increased by 18% over the last 3 years.
In general, Sun Life has been in a
better position of long-term revenue, operating profit, and Net income growth.
Though the difficulty of the economic and industry, these above trend show a
better sign of business performance of Sun Life in compared to Manulife.
Calculation and comparison of
Financial Ratios
LIQUIDITY RATIOS
|
2015
|
Sun
Life
|
Manulife
|
||||||||||||||||||
|
Current Ratio
|
1.03
|
0.91
|
||||||||||||||||||
|
Quick ratio
|
1.03
|
0.91
|
||||||||||||||||||
|
Cash Flow liquidity
|
0.10
|
0.08
|
||||||||||||||||||
|
Average collection period
|
59.67
|
81.34
|
||||||||||||||||||
|
Days payable outstanding
|
55.06
|
31.80
|
||||||||||||||||||
|
|
2013
|
Sun
Life
|
Manulife
|
|
Current Ratio
|
1.03
|
0.99
|
|
Quick ratio
|
1.03
|
0.99
|
|
Cash Flow liquidity
|
0.08
|
0.10
|
|
Average collection period
|
73.45
|
144.32
|
|
Days payable outstanding
|
42.32
|
39.17
|
Generally, Sun Life’s liquidity has been better than
Manulife’s. Current ratios of Sun Life have been higher than Manulife’s for the
past three years. The percentage difference has not too big, approximately 5%,
but Sun Life seems to be able to pay for their long term liabilities better
than Manulife.
In 2015, Sun Life has more Cash from operating activities
than Manulife, but less than Manulife in 2013 and 2014.
We can assume that Manulife were able to pay for their short
term liabilities better than Sun Life in the past two years, however in 2015 Sun
Life started to improve their liquidities better than Manulife which is a good
sign for Sun Life.
Sun Life is more efficient in collecting payments from its
customers, hence, the cash liquidations is better than Manulife. Sun Life’s
ability of paying debt and expenses is healthier than Manulife.
LEVERAGE RATIOS
|
2015
|
Sun Life
|
Manulife
|
|
Debt ratio
|
91.32%
|
94.05%
|
|
Long term debt to total capital
|
0.14
|
0.03
|
|
Debt to equity
|
10.53
|
15.80
|
|
Times interest earned
|
9
|
2.38
|
|
Fixed charge coverage
|
NA
|
NA
|
|
Cash flow adequacy
|
3.58
|
7.10
|
|
2014
|
Sun Life
|
Manulife
|
|
Debt ratio
|
91.55%
|
94.14%
|
|
Long term debt to total capital
|
0.19
|
0.09
|
|
Debt to equity
|
10.84
|
16.08
|
|
Times interest earned
|
7.06
|
3.77
|
|
Fixed charge coverage
|
NA
|
NA
|
|
Cash flow adequacy
|
1.47
|
8.81
|
|
2013
|
Sun Life
|
Manulife
|
|
Debt ratio
|
91.30%
|
94.35%
|
|
Long term debt to total capital
|
0.22
|
0.14
|
|
Debt to equity
|
10.50
|
16.69
|
|
Times interest earned
|
5.93
|
3.59
|
|
Fixed charge coverage
|
NA
|
NA
|
|
Cash flow adequacy
|
0.54
|
9.25
|
Analysis
of leverage ratios
Sun Life Financials debt ratio is lower by
91.32% in 2015, which doesn’t, changed a lot since 2013. On the other hand,
Manulife has 3% higher debt ratio than Sun Life and the percentage did not
changed since 2013 as well.
Long Term debt of Manulife is 0.03 times its
market capitalization and Sun Life had higher that is 0.14 in 2015. Good sign
is that both companies long term debt to total capitalization declined from
last year. But Manulife is doing much better in maintain its debt. The
company’s ratio decreased from 0.14 to 0.03 in last three years. This might be
because of the higher shareholders equity or lower long-term debt they
borrowed.
Times interest earned is 2.38 for Manulife
and 9 times for Sun Life’s in 2015. There has been a decline in Manulife’s
Interest earned and increase in Sun Life’s Interest earned from last three
years. Due to increase in interest expense and decrease in operating income for
Sun Life made its interest ratio increase.
Sun life debt to equity ratio is lower by
5.58 times. This is good sign from perspective of the investor since lower debt
represent less risk at the same time having more debt can be a good sign for
the firm because they can deduct taxes using WACC. So, overall return is lower
than the finances of its debt.
Fixed charge coverage ratio does not apply
to both companies, as there was no information for rent expense on Annual
reports. Without rent expense the ratio was same as times interest earned.
Cash Flow adequacy of both the firm is
above one this indicates that firms operations produce sufficient cash to meet
necessary business obligations. Profit generated from operation is sufficient
enough to cover long-term debt and other financing activities.
Thus, judging by these numbers it can state
that Sun Life is a better company to invest in from an investor’s point of
view.
ACTIVITY RATIOS
In Manulife’s annual reports, it has not mentioned
the accounts payable as well as the figures of accounts payable (or similar
item) were not shown in the notes to financial statements. Therefore, the
Accounts payable turnover ratio cannot be calculated. Moreover, in the balance
sheet of Manulife, there was not “Property, Plant, Equipment” item as well as
not explanation in the notes, hence, the Fixed asset turnover ratio cannot be
calculated as well.
|
2015
|
Sun
Life
|
Manulife
|
|
Accounts receivable turnover
|
6.12
|
4.49
|
|
Accounts payable turnover
|
6.63
|
NA
|
|
Fixed asset turnover
|
30.31
|
NA
|
|
Total asset turnover
|
0.08
|
0.05
|
|
2014
|
Sun
Life
|
Manulife
|
|
Accounts receivable turnover
|
8.90
|
6.91
|
|
Accounts payable turnover
|
11.04
|
NA
|
|
Fixed asset turnover
|
46.42
|
NA
|
|
Total asset turnover
|
0.12
|
0.09
|
|
2013
|
Sun
Life
|
Manulife
|
|
Accounts receivable turnover
|
4.97
|
2.53
|
|
Accounts payable turnover
|
8.63
|
NA
|
|
Fixed asset turnover
|
21.09
|
NA
|
|
Total asset turnover
|
0.07
|
0.04
|
Analysis
of Activity Ratios
The accounts receivable turnover of Sun Life
over the years have been greater than Manulife although Manulife obtained much more
revenue than Sun Life (almost double), showing that Sun Life has managed well
in receivables collection from customers. Furthermore, Sun Life also has a
higher Total asset turnover than Manulife. This is because Manulife’s total
assets is almost triple bigger than Sun Life’s total assets while Manulife has
not generated sales as adequate to its total assets.
In terms of activity, Sun Life has been
doing better than Manulife although Manulife is bigger in size. This is one of
the reasons that Sun Life’s market share is almost equal to Manulife’s (13.3%
vs 13.5%).
PROFITABILITY RATIOS
|
2015
|
Sun Life
|
Manulife
|
|
Gross profit margin
|
N/A
|
N/A
|
|
Operating profit margin
|
15.04%
|
7.60%
|
|
Net profit margin
|
11.34%
|
6.03%
|
|
Cash flow margin
|
23.15%
|
30.01%
|
|
Return on Assets (ROA)
|
0.89%
|
0.29%
|
|
Return on Equity (ROE)
|
10.20%
|
4.95%
|
|
2014
|
Sun
Life
|
Manulife
|
|
Gross profit margin
|
N/A
|
N/A
|
|
Operating profit margin
|
9.21%
|
7.84%
|
|
Net profit margin
|
6.84%
|
6.21%
|
|
Cash flow margin
|
7.00%
|
19.87%
|
|
Return on Assets (ROA)
|
0.79%
|
0.58%
|
|
Return on Equity (ROE)
|
9.34%
|
9.95%
|
|
|
|
2013
|
Sun Life
|
Manulife
|
|
Gross profit
margin
|
N/A
|
N/A
|
|
Operating
profit margin
|
15.08%
|
20.10%
|
|
Net profit
margin
|
6.79%
|
16.09%
|
|
Cash flow
margin
|
4.52%
|
50.98%
|
|
Return on
Assets (ROA)
|
0.47%
|
0.58%
|
|
Return on
Equity (ROE)
|
5.43%
|
10.33%
|
Gross
profit margin: It doesn’t not apply to financial and insurance companies.
Analysis
of Profitability Ratios
Sun Life Financial
has twice Operating profit margin than Manulife Financial. All the
profitability ratios for Sun Life are higher than Manulife for 2015. During
previous two years Manulife had high ratios in profitability.
Manulife’s Gross profit margin has been
declined every year. From 2013 to 2015 it dropped 37%. On the other hand, Sun
Life gross profit margin has not changed much since the last three years which
is not a good sign but it has not dropped and has been stable which is a
positive point.
If we look for the cash that the company
has from operations, Manulife has higher cash generated from operations than Sun
Life in the last three years.
Manulife has higher total assets than Sun
Life in all three years because of cash and short-term securities as well as
higher assets in real estate. Net earnings for both companies in 2015 did not
had huge difference but because of higher assets of Manulife resulted in lower
ROA. ROE is being stable for Sun Life from past two years where as Manulife ROE
had a significant drop because of higher equity, which shows company was not
using shareholders’ money wisely.
MARKET RATIOS
|
2015
|
Sun Life
|
Manulife
|
|
Earnings per share
|
3.57
|
1.06
|
|
P/E
|
12.09
|
14.13
|
|
Dividend Yield
|
3.50%
|
4.44%
|
|
Dividend Payout Ratio
|
42.30%
|
62.74%
|
|
Market price (as of Dec 31 2015)
|
43.15
|
14.98
|
|
2014
|
Sun Life
|
Manulife
|
|
Earnings per share
|
2.88
|
1.82
|
|
P/E
|
14.56
|
10.49
|
|
Dividend Yield
|
3.44%
|
2.99%
|
|
Dividend Payout Ratio
|
50.00%
|
31.32%
|
|
Market price (as of Dec 31 2014)
|
41.92
|
19.09
|
|
2013
|
Sun Life
|
Manulife
|
|
Earnings per share
|
1.56
|
1.63
|
|
P/E
|
24.05
|
12.10
|
|
Dividend Yield
|
3.84%
|
2.64%
|
|
Dividend Payout Ratio
|
92.31%
|
31.90%
|
|
Market price (as of Dec 31 2013)
|
37.52
|
19.73
|
Analysis
of Market ratios
Regarding Earnings per share, Manulife had
a greater EPS than Sun Life in 2013 but Sun Life’s EPS had been increasing over
the years to double Manulife’s in 2014 and triple in 2015. This is because the
return to common stock shareholders of Sun Life had considerably increased from
2013 to 2015 (C$942 million in 2013 – C$1,762 million in 2014 – C$2,185 million
in 2015) while Manulife’s common shareholders net income tended to decrease
(C$2,999 million in 2013 – C$3,375 in 2014 - C$2,075 in 2015). Furthermore,
total shares outstanding of Manulife (1.97B shares) tripled total shares
outstanding of Sun Life (612.86M shares). These factors made Sun Life had a
higher EPS than Manulife.
Price to earnings ratio of Manulife had
been much less than that of Sun Life due to its smaller EPS and because Sun
Life’s market price has been much higher than Manulife. This price gap seems to
be bigger over the years. This sign has shown that investors expect a higher
growth probability in Sun Life, for every dollar of earnings, investors have
been willing to pay more for Sun Life than Manulife.
The dividend yields of these two companies
are not much different. Sun Life’s dividend yield was a bit higher than
Manulife’s yield in 2013 and 2014, then a bit lower than 2015. So there is no
remark on this ratio of the two companies.
In terms of dividend payout ratio, Sun Life
had higher ratio in 2013 and 2014 but lower than Manulife in 2015. If looking
at the trend over the years, it is clear that Sun Life has reducing its payout
ratio in the condition that its earnings has been increasing, while Manulife
tended to raise it (especially in 2015, Manulife paid double to their investors).
The reason may be Sun Life has used its earnings for further investments due to
its positive growth. On the other
hands, Manulife may increase the payout ratio in order to increase its share
value on the market.
Conclusion and recommendation
Based on the liquidity ratios above, Sun
Life has better liquidity position than Manulife because they have more cash and
they are able to pay for their debt and operation activities. They can also
collect money from customers faster than Manulife. In addition, they are able
to keep more cash and have more time for paying their suppliers.
To conclude based on leverage ratios Sun Life is on top of
Manulife as all the leverage ratios are better for Sun Life from past three
years than Manulife. Manulife has high debt to equity ratio whereas it’s lower
in case of Sun Life. Even the Interest coverage ratio of Sun Life is far better
than Manulife. Thus, it shows that from an investor’s point of view Sun Life is
doing better than Manulife.
Looking on the profitability ratio for
years 2013 and 2014, Sun Life was not doing very well, and Manulife has a
higher profitability. But in 2015 Sun Life had really picked up and did well in
many of the profit margins. Overall Sun Life has a better prospect in profitability
because this company is growing and ratios are getting better. On the other
side, Manulife’s operating profit margin, cash flow margin, ROA and ROE are
declining every year which is not a good sign.
In the activity aspect, Sun Life has been
doing better than Manulife although Manulife’s company size is bigger due to
its better ability of managing receivables collection and a more efficient
generation of sales against total assets. This is one of the reasons that Sun
Life’s market share is almost equal to Manulife’s (13.3% vs 13.5%).
Market ratios tell much about the situation
of the two companies. Except unremarkable difference in dividend yield, EPS,
P/E and dividend payout ratio of Sun Life were all better than those of
Manulife. The insight of these difference is the better business performance of
Sun Life led to better earnings and a higher expectation of investors of the
company’s growth probability. The increasing net income has not only benefit
Sun Life’s investors but also facilitate the company to invest more so to
attain higher growth rate in the future.
In general, it is rational to say that Sun Life is a better choice to invest in. Although the fact
that Manulife is a larger company with much bigger total assets, it has been in
the downward cycle and been trying to struggle with difficulties. It may take a
few couples of years to recover and grow. Sun Life, on the other hand, has been
growing well in the past few years, which is an attractive investment choice
for investors.
References
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