Sun Life Financial's Global Expansion Plan
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Insurance continues to be a thriving business in emerging economies , as life insurance premiums in Asia and Latin America are expected to increase at a CAGR of 13% during the next seven years. Similarly, property and casualty insurance premiums are expected to rise at a CAGR of 10% over the same period.
Despite the high growth rate expected in the emerging markets, the US, Europe and other industrialized economies will continue to be a significant contributor to the global insurance market with the US remaining the largest market for insurance companies.
Sun Life Financial (NYSE: SLF), which is one of the largest insurance and wealth management companies in Canada, has done well to strategically grow its presence in Europe and the US. During 2011, the company’s board approved a diverse "four stream strategy" proposed by the management in an effort to strategically grow its presence in these markets.
Snapshot of the first quarter 2013
Sun Life’s Asset management arm, Massachusetts Financial Services (MFS), reported a remarkable first quarter of 2013. The assets under management reached a staggering $350 billion, which is a 22% increase over 2012 figures. Further, it posted an operating profit of $100 million, marking a 43% increase over the same quarter the previous year. Moreover, during the period, Sun Life was ranked the best specialist equity fund house by Morningstar UK.
At present, global expansion of MFS is Sun Life's primary strategic goal. Sun Life plans to expand its base in the US insurance market, particularly focusing on group insurance & asset management business. This will enable the company to develop on its strengths, as it recently entered into an agreement with Delaware Corporation to sell its annuity business for $1.35 billion. This deal may hurt its earnings in the near term, however, going forward it will have a positive impact through declining exposure to volatile equity markets and interest rates.
Additionally, markets responded well to this divestiture, as Sun Life’s shares reported large gains. The stock appreciated approximately 40% after the news and became the third best performing insurance stock in North America.
Asia is identified by the company as a key market and an important part of its overall strategy. With average year-on-year growth of 11% the Asian insurance market is well positioned to exceed $1 trillion in the next five years. Sun Life already has presence in four of the ten ASEAN countries, as it now plans to strengthen its existing business operations and make new strategic acquisitions in order to increase penetration.
India is a significant market for Sun Life with an estimated CAGR of 15%. The pending proposal to increase the cap of FDI in insurance from 26% to 49% will make India a key revenue driver for Sun Life in the future. The company, along with its JV partner Aditya Birla, has become the fourth ranked asset management company. As several developed economies are presently suffering from a sluggish economic environment, India serves as an opportunity for massive growth.
Although a large portion of global growth in the insurance market is expected from Asia, Sun Life has not written off the Canadian market. It desires to establish itself as the numero uno of the Canadian insurance market, which was originally a part of its four stream strategy.
According to a recent report published by global advisory firm Ernst & Young, the Canadian life insurance market was severely challenged by the macroeconomic environment and regulatory challenges. However, only those firms are expected to succeed that creatively adjust its products, business strategies and services to position itself for growth and profitability in a highly competitive environment characterized by lower margins and changing demographics.
Manulife reported a strong 2012, as the insurance and wealth businesses grew 49% and 30% respectively. This enabled the company to beat analyst estimates and record earnings of $0.56 per share. The company experienced a huge surge in demand for its products in Asia, the US and Canada. With high volatility in equity markets, the company did well with its present hedging program, reducing market sensitivities to 19%.
Moving forward with continued focus on the Asian markets and reducing sensitivity to foreign exchange, interest rates, and stock market fluctuations, the company looks set for a steady 2013.
Sun Life Financial also competes with AIG, although the latter is a much larger insurance company in terms of market capitalization and revenues. Nevertheless, both companies offer similar services to potential clients.
AIG generates the highest percentage of its revenues through property and casualty insurance at around 61%, which is followed by life and retirement plans at around 24%. The remaining revenues are generated through direct investments.
Property and casualty insurance premiums through Asia-Pacific account for 33% of premiums earned from this particular service. During 2012, AIG generated $11 billion in revenues through this division from the Asia-Pacific region.
According to the projections offered by Trefis, revenues from this division are expected to surpass $20 billion by the end of 2020. However, if the company fails to exceed the $20 billion mark, resulting in property and casualty investment assets remaining under the $200 billion mark, subsequently there may be a strong downside to AIG’s stock. With several insurance companies relying on Asia-Pacific to report consistent growth, it becomes imperative for potential investors to follow the Asian markets closely.
Why invest in Sun Life Financial ?
Sun Life is presently focused on achieving its four stream strategic objectives and reducing its riskier business operations in the U.S. Furthermore, as the global economic environment improves and interest rates move up, the company is expected to achieve its target earnings and market share sooner than later.
With the global insurance market set to grow rapidly and keeping in mind the company’s four point plan of action, I keep a bullish view on this stock and consider it a worthwhile long term investment.
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Kiran Gulati has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!