Manulife Financial Corporation (NYSE:MFC) Q1 2024 Earnings Call Transcript

Manulife Financial Corporation (NYSE:MFC) Q1 2024 Earnings Call Transcript May 9, 2024

Manulife Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning ladies and gentlemen, and welcome to the Manulife Financial first quarter 2024 financial results conference call. I would now like to turn the meeting over to Mr. Ko. Please go ahead, Mr. Ko.

Hung Ko: Thank you. Welcome to Manulife’s earnings conference call to discuss our first quarter 2024 financial and operating results. Our earnings materials, including webcast slides for today’s call, are available on the Investor Relations section of our website at Manulife.com. Before we start, please refer to Slide 2 for a caution on forward-looking statements, and Slide 36 for a note on non-GAAP and other financial measures used in this presentation. Note that certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from what is stated. Turning to Slide 4, Roy Gori, our President and Chief Executive Officer will begin today’s presentation with the highlights of our first quarter results and strategic update.

Following Roy’s remarks, Colin Simpson, our Chief Financial Officer, will discuss the company’s financial and operating results in more detail. After their prepared remarks, we’ll move to the live Q&A portion of the call. With that, I’d like to turn the call over to Roy Gori, our President and Chief Executive Officer. Roy?

Roy Gori: Thanks Hung, and thank you everyone for joining us today. Starting on Slide 6, yesterday we announced our first quarter 2024 financial results. We continue to execute against our strategy driving quality growth and delivering superior results as we began 2024. Our top line growth was broad-based with record levels of new insurance business results, including double-digit growth in APE sales across each of our insurance segments and $6.7 billion of global WAM net inflows, with positive contributions from each global business line. This quarter, we closed a master and reinsurance transaction with Global Atlantic which includes the largest ever LTC block. Despite the modest impact of the transaction, we generated 16% growth in core earnings supported by strong contributions from Asia and global WAM.

Core EPS grew by 20% as we continue to return capital to shareholders, including through share buybacks. Core ROE grew nearly two percentage points from prior year to 16.7% and is well ahead of our medium target of 15%-plus, and we are delivering superior returns whilst maintaining our robust balance sheet and ample financial flexibility. Growing ROE is a key priority and a key outcome of our transformation journey, which takes me to Slide 7. During the quarter, we announced the largest ever universal life reinsurance deal in Canada, which is another milestone and a testament to our execution capabilities. We once again transacted at an attractive earnings multiple ahead of where we currently trade. The transaction will release $800 million of capital which we plan to return to shareholders through an amendment to our existing share buyback program to repurchase up to 5% of our outstanding common shares.

After accounting for buybacks, the deal will be accretive to both core ROE and core EPS. We also expect to reduce $600 million of ALDA backing the transacted block. This transaction is another example of the value that we continue to create for our shareholders and will contribute to higher returns going forward. Turning to Slide 8, expanding ROE is critical to delivering value to our shareholders. We’ve made tremendous progress since 2017 increasing core ROE by more than five percentage points, up from 11.3%. We continue to take organic and inorganic actions that drive even higher ROE. Our unique footprint and strong cash generation enables us to invest in our highest potential businesses to generate superior returns. During the quarter, we delivered 34% NBV growth with Asia comprising approximately 70% of the balance.

In addition to record top line metrics, we’ve generated strong bottom line growth, and our transformation is driving increased earnings contributions from our high return businesses with over two-thirds of core earnings delivered by our highest potential businesses during the quarter. This is up from 60% in the prior year. Inclusive of dividends over the past year, we’ve returned $4.1 billion of capital to our shareholders. We continued to expand global WAM’s capabilities and footprint by closing our acquisition of CQS in April. CQS’ experience in alternative credit investments not only expands our presence in Europe but also accelerates the growth of our global wealth and asset management capabilities, broadening the solutions we can offer our clients around the world.

In addition, we will return the $2 billion of capital released from our two recent reinsurance transactions on low ROE businesses to shareholders through buybacks. All of these actions support long term ROE growth, and we are focused on exploring additional opportunities to continue to generate higher returns. I’m excited by our momentum in the first quarter and by the opportunities ahead of us to continue generating shareholder value. I’ll now hand it over to Colin to review the highlights of our financial results. Colin?

Colin Simpson: Thanks Roy. 2024 started well, and I’m excited to go into a little more detail on the quarter’s results before the Q&A. I’ll start with our top line on Slide 10. Our APE sales increased 21% from prior year with double-digit growth across each of our insurance segments. This increased was supported by higher sales across several Asian businesses, higher large case group insurance sales in Canada, and an increase in demand from affluent customers in the U.S. The momentum in our sales contributed to strong increases in new business CSM and new business value of 52% and 34% respectively. Our value metrics grew by more than our volume metrics, demonstrating our focus on pricing discipline and business mix shift towards higher margin products.

Global WAM saw strong net inflows of $6.7 billion, reflecting positive flows from each business line. As you can see, there’s real momentum in our global portfolio of businesses. Turning to Slide 11, which shows the growth in our profit metrics, core EPS increased 20% as we grew core earnings and continued buying back shares. During the quarter, we further improved our core ROE to 16.7%, above our medium term target of 15%-plus for the fourth consecutive quarter. We remain focused on driving up ROE and have been able to demonstrate progress through the execution of our two recent reinsurance transactions, along with business performance improvement and astute capital allocation. On Slide 12, you can see that we continued to show steady growth in our adjusted book value per share, supported by an increase in our book value together with our CSM, which is a store of future earnings.

This resulted in growth from the prior year quarter of 11%, or 13% excluding the effect of foreign exchange rate movements to $33.39. Bringing you back to our core earnings results on Slide 13, I’d like to call out some of the highlights of the drivers of earnings analysis presented relative to the prior year quarter. The first point to highlight is the 8% growth in core net insurance service results due to increases in expected earnings on insurance contracts in both our Asia and Canada segments. Secondly, an increase of 18% on our core net investment result was mainly due to a release in our expected credit loss, or ECL provision over the quarter compared with provisions for certain commercial mortgages in the prior year. This reflects the benign credit environment during the quarter and the impact of reducing assets with the Global Atlantic reinsurance transaction.

Towards the bottom of the table, you will see that global WAM was a notable contributor to the results supported by higher average AUMA, improved margins, and expense discipline. These factors were partially offset by higher workforce-related expenses, reflecting strong TSR performance included in other core earnings. I should also mention the net impact of the reinsurance transaction with Global Atlantic was an $18 million reduction in core earnings. Note that this included some favorable one-time items during the quarter mostly related to the release of ECL on debt instruments sold. More information on the earnings impacts is available in the appendix. Onto Slide 14, when we announced the reinsurance transaction with Global Atlantic back in December of last year, we had told you that we expect to recognize a net income $1 billion of unrealized losses from assets disposed as part of this transaction.

We actually saw a lower non-core charge of approximately $750 million across several lines, although mostly related to the recognition of unrealized losses. The charge was lower than expected due to a decrease in interest rates since the end of the third quarter of last year, which was the basis of the estimated impact we announced. Of note, there was an offsetting change in OCI neutralizing the book value impact. We closed this transaction on February 22 and are now focused on future inforce activity. Lower than expected returns on ALDA resulted in a $255 million charge, largely reflecting the ongoing pressure on commercial real estate due to increasing cap rates. The 40% reduction from peak in our U.S. office values reflects the difficult market and is also a demonstration of our disciplined approach to asset valuations, where more than 95% of our real estate portfolio is appraised by external appraisers each quarter.

We’re encouraged to see continued sequential improvements in our ALDA experience compared to recent periods and the charge was partially offset by a $216 million gain due to higher than expected public equity returns during the quarter. This meant that our net income for the quarter was $1.6 billion, much more in line with our core earnings when you exclude the impact of the reinsurance transaction. The next few slides will cover the segment view of our results, starting with Asia on Slide 15. The first quarter was another strong quarter with double-digit growth in both top and bottom line metrics. APE sales increased 13% from prior year quarter, largely driven by growth in bank assurance sales in mainland China, as well as growth in Singapore and Japan, partially offset by lower sales in Hong Kong and continued industry headwinds in Vietnam.

The overall increase in sales contributed to a 68% and 28% growth in new business CSM and NBV respectively, which we refer to as our value metrics. We delivered 39% core earnings growth with meaningful increases in contribution from both Hong Kong, which is our largest inforce business, and Japan. Moving over to global WAM’s results on Slide 16, we reported very strong net inflows of $6.7 billion for the quarter, continuing our momentum of positive net flows in 13 of the last 14 years in competitive markets. The strong net inflows this quarter were due to higher new plan sales and retirements. We also saw demand increasing in our retail business supported by strong equity markets, and we continued to generate strong inflows in our institutional business.

Global WAM also delivered double-digit core earnings growth supported by higher average AUMA, which increased 9% from prior year quarter along with our disciplined expense management. To that end, we are starting to see savings as a result of our restructuring efforts in the prior quarter with core expenses up only 2%, which is much improved from 2023 results. Heading over to Canada on Slide 17, we delivered another strong quarter of new business metrics. APE sales increased 54% from prior year quarter mainly due to higher large case sales in our group insurance business, which was also the main contributor to our 71% growth in new business value. Core earnings increased 3% primarily driven by business growth and a lower ECL provision, but these were partially offset by lower investment spreads.

Slide 18 shows our U.S. segment’s results. In the U.S., we saw somewhat of a return of demand from affluent customers which drove up APE sales, NBV, and new business CSM results. The business delivered strong core earnings which increased 18% from the prior year quarter, mainly reflecting a higher ECL provision in the prior year quarter as well as the impact of higher yields and business growth. This was partially offset by more adverse net insurance experience. In addition, the reinsurance transaction reduced core earnings by US $19 million. Onto Slide 19 and our balance sheet, we started off the year with a strong LICAT ratio of 138% in the first quarter, which was $24 billion above the supervisory target ratio. Our financial leverage ratio of 24.3% remains within our target ratio of 25%, adding to our ample financial flexibility.

Through dividends and share buybacks, we returned over $0.9 billion of capital to shareholders during the quarter. As previously announced, we launched a new buyback program in late February related to our reinsurance transaction with Global Atlantic. Following our Canadian UL reinsurance transaction, we announced that we plan to amend the program to purchase up to 5% of our outstanding common shares. We have now received approval from OSFI and the TSX for the new program, which will return the freed up capital from the two transactions to shareholders. As such, you will see an acceleration of our buyback activity from the $0.2 billion in the first quarter to more like $0.6 billion a quarter run rate for the rest of the year. Finally moving to Slide 20, which summarizes how we are tracking against our medium term targets, in the first quarter we exceeded all of our medium term targets.

We also generated 44% of earnings from the Asia region and increased our contribution from highest potential businesses to 67%. As you can see, Asia continues to play a pivotal role in our earnings growth and we are looking forward to welcoming you to Asia for our in-person investor day in June. This concludes our prepared remarks. Before we move to the Q&A session, I would like to remind each participant to adhere to a limit of two questions, including follow-ups, and to re-queue if they have additional questions. Operator, we will now open the call to questions.

See also Insider Buying Alert: CEOs Are Buying These 10 Stocks and 20 Countries with the Highest Literacy Rate in the World.

Q&A Session

Operator: Thank you. We will now take questions from the telephone lines. [Operator instructions] Our first question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman: Hi, good morning. Just wanted to start off asking a question about Asia – obviously very strong results. If I look at the core earnings there, just wondering if there’s anything that you would flag that’s not sustainable? I guess the ECL may be a very small component of that, but wondering if there’s anything else there that would impact the run rate going forward.

Phil Witherington: Hello Meny, good morning. This is Phil, and thank you for the question. You’re right to point out it’s been a strong core earnings quarter for Asia, in fact a strong quarter for all of our value metrics across the board. The level of earnings that you see are largely sustainable, and I’ll peel the onion a bit on this. The driver of growth in core earnings is the fact that we’ve grown the CSM by adding quality new business over the course of the past 12 to 18 months, and you can see that through the CSM expansion on the balance sheet and we also had the impact, the favorable impact of the methodology change that took effect from Q4 that we spoke about last quarter. Now in terms of items within the core earnings this quarter that are, I suppose, not necessarily indicative of the overall run rate, I’ll highlight two points.

One is that Asia, and this is coming from Japan, benefited by approximately US $9 million in the first quarter from the impact of the Global Atlantic reinsurance transaction, and secondly you may recall that last year in Q1 in Asia, there was negative policyholder experience through core earnings. This quarter, that was a modest positive of $5 million, and I would expect our policyholder experience to vary from quarter to quarter and be approximately neutral on average, so I feel that the core earnings that you’re seeing is largely sustainable. That’s underpinned by the fundamentals of our business, and we may see some variability from–modest variability from policyholder experience and ECL, but I think this is a good indication of the future.

Thanks for the question, Meny.

Meny Grauman: Thanks Phil. Then just as a follow-up, just focusing on sales and specifically the decline in Hong Kong, if you could just talk to what you’re seeing in terms of the MCV sales in particular. I’m wondering if the decline we’re seeing there is a function of the fact that you had so much growth after coming out of lockdowns, or is there any other dynamic there that you’re seeing when it comes to mainland Chinese visitor sales that would be impacting the results, beyond just the fact that you had such a strong reopening?

Phil Witherington: Great, thank you for the follow-up question, Meny. It’s been a really strong quarter in Hong Kong, and as I said last quarter, our focus is on value generation and value metrics, and notably we’ve seen 15% growth in new business value in Hong Kong. But it’s not just NBV – we’ve seen growth in core earnings and new business CSM as well. Now, the variability in APE is caused by variability in volume through the third party broker channel, and that’s MCV broker channel, and what we’re seeing with that channel is really quite fierce competition, as well as possibly an element of pent-up demand in the prior year period. But I think the main driver there is intense competition, and when I look the MCV business that we’re sourcing from channels outside of third party brokers, so the agency channel and the bank assurance channel, we’re seeing strong double-digit growth, and that’s what I would expect.

I said many times, the MCV customer segment is a legitimate customer segment that we expect to grow over the medium term. It reflects approximately 20% to 25% of our business from a new business value perspective in Hong Kong, and the other side of that is that our core business in Hong Kong is our domestic business, and that accounts for 75% to 80% of our NBV in the Hong Kong market. Now, that core strength domestically is really important, and I spoke last quarter of the very strong growth that we’d seen in the domestic business. We saw about 15% growth in the fourth quarter of last year – that level of sales has been sustained into the first quarter. Now in terms of outlook for Hong Kong, I’m confident that we will continue to see growth in value metrics.

This is our focus, and we get most value from our proprietary channels and exclusive bank channels. We will see some variability in APE from quarter to quarter as a result largely of the broker channel, but overall I feel confident about the future.

Meny Grauman: Thanks Phil. Thanks for the detail.

Operator: Thank you. The following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Deschaine: Hey, good morning. I’ll stick with that line of questioning and then I’ll switch over to something else. I’m wondering if you’re starting to see the impact of the decline in sales on the MCV products because of that regulatory investigation, whatever you want to call it, across the industry – I want to point that out, and then is there–you know, it’s more of a risk to your sales number, the profit impact is probably pretty insignificant if the sales do decline, because it’s a small portion of your sales and I think it’s lower margin product. Maybe you can edify me there.

Phil Witherington: Yes, thanks Gabriel for the question – this is Phil again. You’re right to highlight the regulatory investigation. It’s not anything specific to Manulife, the regulatory authorities in Hong Kong have announced an investigation and conducted an investigation to unlicensed selling of insurance policies to customers from mainland China. This is limited to the broker channel and has no direct impact on Manulife. Of course, at Manulife we have robust processes in place to enable compliance with all applicable laws and regulations. You asked whether that investigation in the broker channel is driving the variability that we see in Q1 in APE – it’s not, and we’re not seeing at this point any impact directly from that regulatory investigation, although I will highlight two things.

One is that we have seen a decline in the first quarter relative to last year in the broker channel, and that’s really driven, as I’ve said earlier, by fierce competition in that channel. But we’re seeing growth in our other MCV channels – agency and bank assurance, so I think that’s one important point. I think the second important point is that while we haven’t seen it yet, it’s reasonable to expect that the regulatory actions will or may cause some disruption in the MCV broker channel in the months to come, and that’s really as–I would expect brokers to be reviewing their processes in light of recent regulatory developments. Now, you are right, Gabriel, to highlight that the variability in potential sales from the broker channel has much less of an impact on value metrics.

It’s lower margin business largely because of the product mix, the savings oriented product mix that comes through that channel. If we look at our Hong Kong business, only 13% of new business value comes from the broker channel, so it’s really quite modest and our results will therefore be resilient to variability in that channel. Earnings, given the IFRS-17 methodology which is driven by CSM and risk adjustment in the balance sheet, I would expect earnings also to be stable, regardless of what happens to APE variability.

Roy Gori: Hey Gabriel, Roy here. I just want to add a couple of quick comments. I think Phil captured the essence of what’s actually happening in Hong Kong and our outlook quite well, but we actually welcome the regulatory scrutiny and focus on MCV and the processes that are critical to selling and selling appropriately. We’ve always set a very high bar in terms of the practices that we employ, both from a compliance and from a governance perspective, so actually we think this is a good thing for the industry to have a higher standard of care applied. In the long run, it’s going to make this segment a much more sustainable and profitable segment, so it’s something that we’ve actually been quite pleased with.

Gabriel Deschaine: Got you, thanks for the fulsome response. My next question, just an update on the legacy process there. I don’t know if Marc or Colin have something to add there. I know when you disposed of the LTC block last December, you isolated another $4 billion of product–a portfolio of similar characteristics to what you sold, if that number has maybe expanded or if your–your main struggle is what would you bundle in with that sub-portfolio, if you will, because my understanding is that potential buyers would want something in addition to LTC. Thanks.

Marc Costantini: Thank you Gabriel. This is Marc – good morning.

Gabriel Deschaine: Good morning.

Marc Costantini: Yes, when we announced the transaction, as you mentioned, obviously it was a very substantial transaction for us and the industry. It validated, obviously, our assumptions on our balance sheet tied to LTC, and really created a lot of interest in our business and Manulife. I would say we transacted with a world-class counterparty as well. We had, as you mentioned, some significant interest in the transaction by other parties around the industry, and as you mentioned, we do have another block of business that has the same vintage and characteristics, and as I’m sure you saw in our results for the last little while, the LTC experience is positive, right, which is another positive halo to our block and our performance overall as a firm.

We’ve demonstrated obviously execution capability in this space. We don’t talk about what’s forthcoming, but we do have interest in the block and we are optimistic that the validation of our assumptions and our experience stands by itself, but we’ve had interest in the block and we continue to optimize, as we demonstrated by this Canadian transaction, our overall legacy business, and we do so always with very favorable economics to our shareholders, and we can promise you that’s what we continue to do on a daily basis around our inforce.

Gabriel Deschaine: Got it, thanks. Good rest of the week.

Operator: Thank you. The following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young: Hi, good morning. Just wanted to start with credit – you know, there was an ECL release, as you talked about, and there was a release even if you exclude the impact from the sale of the fixed income portfolio around the Global Atlantic deal, and so this seems a little counterintuitive to what I’m thinking, I guess, given the macro environment. I just wanted to dig into it a little bit – are you not seeing any negative migration from stage 1, 2 and 3? Did you change any forward-looking indicators or model weightings, or is there anything else unusual to think about from a credit perspective, and if you can weave in how you think about credit evolving, that would be helpful as well.

Scott Hartz: Yes, hi Doug, it’s Scott. Thanks for the question. Yes, it was a very good quarter for credit results – start with that. We were not seeing much, if any migration in the portfolio, so that led to very little in the way of addition to the ECL. Having a release is unusual – normally we would expect sort of through the cycle, a $30 million to $50 million addition to the ECL. It is a fairly benign credit environment, so we would expect to do better than that until that situation changes. As far as the release goes, which is unusual, there are really two factors driving it. One was a small release from the reinsurance transaction – we disposed of a large number of bonds, there was ECL tied to that and that led to a $60 million release, and then you’re right, there is–as part of the ECL process, we’re required to model out current market conditions, and we use a Moody’s model to do that.

What drives that are largely capital market issues such as equities markets which were very strong in Q1, credit spreads which continued to tighten in Q1, as well as other factors such as unemployment, which stayed low, so the model did result in a modest release, so those were really the drivers.

Doug Young: Just to clarify, that 30 to 50 addition, is that per quarter or per year?

Scott Hartz: That would be per quarter, and again you’ll see that–there’s going to be a lot of variability in that. In benign environments like today, you should expect to do better, and then to the extent we move into a recession, we will go above that to get to that long term average.

Doug Young: Appreciate that. Then just second, I guess this is for Steve – you know, negative lapse experience again in the U.S. life book. I assume that relates to the secondary guarantee business, and I’m just wondering how you’re feeling around that business, around the upcoming actuarial review of that book. Is the experience progressively getting better over the last–even though it’s negative, is it progressively getting better over the last year, does it stand about the same, and if you do have to reset reserves, do you have offsets elsewhere that you can kind of pull levers on? Just hoping to get some color on that.

Steve Finch: Sure Doug, thanks for the question. Yes, in terms of what we’re seeing on U.S. lapses, we have seen a continuation of some of the trends. Where it’s coming from, there’s a portion that’s coming from earlier duration lapses, really related to the economic environment and higher interest rates. That’s certainly more a short term concern. In terms of the protection products in general, I’ve commented a few times about how we saw a drop, a discontinuity in lapse rates when the pandemic started, and we saw that across Canadian UL, seg fund products. We’ve seen it trending back – you know, fully trended back in Canadian UL, which is a similar product, trended back in seg funds, but it has not fully trended back in U.S. life.

We do expect that trend to emerge over time. Then what I’d tell you about how we’re thinking about the actuarial assumption review here, just a little bit of context. As you know, we update assumptions very regularly and we have reviewed lapse assumptions over the years. The last U.S. lapse review was in 2021 – that fully reflected pre-pandemic experience, so we were up to date. As a result of those reviews, our long term assumptions are–you know, they’re low, they’re below 1%, so we’re taking all this information into consideration as we do our review, and too early to update you at this point but we will update you as we get through that review later this year.

Doug Young: Appreciate the color, thank you.

Operator: Thank you. The following question is from Paul Holden from CIBC. Please go ahead.

Paul Holden: Thank you, good morning. Want to ask about the strength in Asia other sales, maybe a few more details behind what drove that strength, and maybe more importantly, how sustainable that may be.

Phil Witherington: Great, thank you Paul, and good morning – this is Phil. You’re right to highlight that we had a very strong performance in Asia other markets – APE growth of 20%, and higher growth in value metrics relative to that. What we have seen in 2024 as we start the year and get through Q1 is a broadening of the recovery across multiple markets in Asia other, and you may recall that I said a few times last year that the emergence from the pandemic was uneven across Asia. We’ve seen some evening out of that recovery in 2024, notably with seven out of nine of our Asia other markets delivering double-digit growth in sales. Now when we deep dive, peel the onion into what’s going on within Asia, we’ve seen a record quarter in mainland China, and we often see seasonality of sales in China but this first quarter, it’s been particularly strong.