Manulife Financial Corp. (MFC) reported first-quarter 2014
core earnings of $653 million (C$719 million), up 14.0% year over
year. The improvement was driven by higher fee income on
increased asset under management, lower hedging costs and net
modestly favorable currency impacts. However, lower favorable tax
impact was a major drag.
Net income for Manulife in the quarter amounted to
approximately $742 million (C$818 million) compared with a net
income of $535.8 million (C$540 million) in the same period last
During the quarter under review, Manulife's total insurance
sales were $487 million (C$537 million), down 15% year over year.
The decline was attributable to lower sales in Canada Group
Wealth sales for the fourth quarter came in at $12.5 billion
(C$13.8 billion), up 5% year over year. The improvement stemmed
from strong sales in the Canadian and North American
Asia Division's core earnings were $221 million compared with
$224 million in the year-ago quarter. The growth in core earnings
was driven by higher new business margins and improved
policyholder experience. However, premiums and deposits were $3.4
billion, down 18% year over year.
The company's Canadian division's core earnings of $206.7
million (C$228 million) in the reported quarter increased 27.4%
year over year. The improvement in core earnings was driven by
in-force business growth, including higher fee income from
growing wealth management businesses; higher new business margins
due to product changes and higher interest rates and improved
claims experience. Premiums and deposits in the quarter were $5.5
billion (C$6.1 billion), up 13% year over year, driven by
continued strong growth in Manulife Mutual Funds and Group
The U.S. Division reported core earnings of $339 million, down
29% year over year. Premiums and deposits were $12.1 billion, up
4% year over year. The increase was driven by record sales in
mutual funds, partially offset by lower life insurance
Manulife strengthened its Minimum Continuing Capital and
Surplus Requirements ratio to 255% as of March 31, 2014, up 7%
over the prior quarter.
Funds under management reached an all-time record high of $574
billion (C$635 billion) as of March 31, 2014.
Manulife Financial presently carries a Zacks Rank #3
Other life insurers like Lincoln National Corp. (LNC) and
Torchmark Corp. (TMK) have reported better-than-expected
first-quarter earnings. Another player, Protective Life Corp.
(PL), with a Zacks Rank #2 (Buy), is scheduled to release its
first-quarter earnings on May 8.
Had it not been benefited by the Affordable Care Act
(ACA), the GDP growth rate of the U.S. economy in the
first-quarter 2014 would have been negative 1.0%.
Per the Bureau of Economic Analysis' advance estimate,
real gross domestic product (GDP) growth rate came in at a
sluggish 0.1% in the first quarter of 2014, much lower than
2.6% growth clocked in the previous quarter. Economists, on
the other hand, were expecting GDP growth of 1.2%.
Real GDP, which is the mirror of true economic growth, is
the sum of consumer spending, investment made by industry,
excess of exports over imports and government spending,
adjusted for price changes i.e. inflation or deflation.
Bad Weather Played a Spoil Sport
First quarter GDP suffered from unusually severe winter
weather, which included record cold temperatures and
snowstorms. Weakness in trade and inventories, lower
non-residential fixed investment growth, and lower state and
local government spending were the factors behind the slow
economic growth in the first quarter of the year. This
decline was, however, more than offset by lower imports and
higher spending on personal consumption, which managed to
keep GDP growth in green.
Health Care Spending Steals the Show
A surge in health care spending during the first quarter
of 2014 helped the country's GDP by 1.1%. The quarter saw a
9.9% or $43.3 billion spike in health care spending, the
highest since the third quarter of 1980 when health care
spending rose 10.0%.
Health care spending in the quarter was a reflection of
the implementation of Obama's Affordable Care Act (ACA),
which provided coverage to nearly 8 million Americans during
its first open enrollment session on public exchanges. Under
the law, millions of Americans were given subsidies to
purchase an array of health plan choices.
The newly-insured Americans, who had earlier restrained
from spending on medical facilities due to tight budgets,
started utilizing medical facilities like doctor visits and
hospital services, drugs and nursing homes after gaining
coverage via subsidized public exchanges, thus pushing up
spending on health care.
For the past many years, spending on health care remained
restrained due to a weak economy.Health care spending,
however, started showing signs of growth in the fourth
quarter when it rose 5.6%, the highest since 2004.
Meanwhile ACA Delivers as Expected
The increase in health care spending does not come as a
surprise. It had long been anticipated that health care
spending will jump with millions of Americans opting for
health insurance through Obamacare. The primary goal of ACA
was to ensure access to affordable health care to Americans.
The first quarter trend attests that ACA has largely
delivered what was expected out of it.
While health care spending saw a rise, the increase was
driven by higher use of medical services rather than an
increase in cost of medical services. As per the Council of
Economic advisors 'Health care prices continued to increase
exceptionally slowly, growing at an annual rate of just 0.5%
(0.9% on a year-over-year basis), while utilization (real
health care spending) rose at a 9.9% annual rate in the first
The Momentum Likely to Continue
After accruing to first quarter GDP, ACA is expected to
boost the country's second quarter GDP growth as medical
spending continues to rise. Millions of Americans who got
coverage in a special two-week enrollment period in April
(which will go into calculating second quarter GDP) will
spend to fulfil their pent up demand for health care
services, which will ramp up medical utilization.
Stocks to Pick
Though higher health care utilization is a positive, it's
not something we can count on going forward. The support to
GDP from higher health care utilization will return to more
normalized levels over the long term as health insurance
coverage stabilizes and the pent up demand for health care
spending is met.
However, recent trends will benefit health care stocks
such as medical and clinical service providers, health
insurers and hospitals. Medical and clinical services
companies will benefit as more people use medical services
like ambulatory surgical and emergency service centers and
kidney dialysis centers.
Moreover, an increase in the number of enrollments with a
surge of younger people (youngers primarily cover the cost of
older and sicker population) under the Affordable Care Act is
favourable for health insurers. Hospitals stocks are also
expected see higher revenues from millions of new insured
customers and higher Medicaid patients.
Below we present three stocks, which possess the potential
to grow appreciably in the new environment, each of which
also has a favorable Zacks Rank:
) looks promising with a Zacks Rank #2 (Buy) and long-term
expected earnings growth rate of 9.7%. In its first quarter
2014 earnings release, the company stated that membership
applications were strong and the company had enrolled over
400,000 members. Through the entire open enrollment period,
which officially ended on April 15, the company added more
than 600,000 members from public exchanges.
While the company was earlier concerned that subsidized
health insurance through a health exchange will attract more
sick and old people, driving up their claim costs and making
business from exchanges unprofitable, initial results have
been quite positive. The company is pleased with the mix of
business coming from exchanges, which has also brought in
young adults and children.
WellPoint now perceives strong growth in the newly-created
health exchange market and consequently expects its earnings
per share to be more than $8.40 for full year 2014 compared
with its previous expectation of more than $8.20 per share
announced in March.
Another player worth mentioning is
) with a Zacks Rank #2 (Buy) and long-term expected earnings
growth rate of 10.2%. Similar to WellPoint, this insurer is
also witnessing profitable business from health exchanges
operating in 17 states. At the end of the first quarter,
Aetna had 230,000 paid public exchange members included in
its reported results. The company now expects to end the year
with approximately 450,000 paid public exchange members.
The company also forecasts 2014 revenue to be in a range
of $56 billion to $57 billion, up from its previous
expectation of $54 billion. It also raised its operating
earnings per share projection to a range of $6.35 to $6.55
per share from the previous projection of at least $6.25 per
Our third pick is a hospital stock,
Universal Health Services Inc.
), with Zacks Rank #3 (Hold) and long-term expected earnings
growth rate of 10.28%. During its first quarter 2014
earnings, the company beat analyst expectations and recorded
above-average profit and revenue increases.
The company disclosed that the revenue increase was due in
part to strengthening surgical volumes along with an
improvement in the mix of customer services with less
uninsured patients and more Medicaid and commercial insurance
patients. Hospitals have traditionally faced huge unpaid
bills from uninsured patients leading to bad debt. The
situation is set to improve with more and more patients
getting insurance cover, which increases their ability to pay
AETNA INC-NEW (AET): Free Stock Analysis
UNIVL HLTH SVCS (UHS): Free Stock Analysis
WELLPOINT INC (WLP): Free Stock Analysis
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