Manulife Financial Corporation (NYSE:MFC) Q4 2022 Earnings Call Transcript

Manulife Financial Corporation (NYSE:MFC) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good morning, and welcome to the Manulife Financial Fourth Quarter 2022 Financial Results Call. Your host for today will be Mr. Hung Ko. Please go ahead, Mr. Ko.

Hung Ko: Thank you. Welcome to Manulife’s earnings conference call to discuss our fourth quarter and year-end 2022 financial and operating results. Our earnings materials, including the webcast live for today’s call, are available on the Investor Relations section of our website at manulife.com. Turning to Slide 4. We will begin today’s presentation with an overview of our progress in 2022 and an outlook for 2023 by Rory Gori, our President and Chief Executive Officer. Following Roy’s remarks, Phil Witherington, our Chief Financial Officer, will discuss the company’s financial and operating results and provide an update on IFRS 17. After the prepared remarks, we will move to the live Q&A portion of the call. We ask each participant to adhere to a limit of 2 questions, including follow-up questions.

If you have additional questions, please requeue and we will do our best to respond to everyone. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 45, for a note on the 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. 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. Yesterday, we announced our fourth quarter and full year 2022 financial results. We’ve made significant progress against our strategic priorities and are pleased to have delivered strong results, which are a testament to the resilience and strength of our diverse global franchise. We’re especially pleased with these results against the backdrop of the year that was challenging for businesses broadly with multiple headwinds impacting our industry as well as ongoing market volatility. On our financial results, we’re proud of 2 records we achieved in 2022, a record net income of $7.3 billion and the highest ever remittances of $6.9 billion. Meanwhile, we’ve also driven robust new business value growth in both of our North American segments in 2022, with NBV growth in the U.S. and Canada of 25% and 18%, respectively.

This strong performance demonstrates the power of our diversified franchise, given the impacts of COVID-19 restrictions in Asia. We also took meaningful actions to significantly reduce the risk profile of our business. We reinsured more than 80% of our legacy U.S. variable annuity block through 2 transactions that released $2.5 billion of capital and further reduced our go-forward risk profile. Core earnings from the LTC and VA blocks represents only 18% of total company core earnings in 2022, a material reduction from 25% just 2 years ago, and we are on track to deliver on our 2025 business mix targets. And our sensitivity to market movements is also greatly reduced since 2009. At the end of 2022, our sensitivity to interest rate movements was approximately 1/10 of that in 2009, and our sensitivity to equity markets has more than halved during the same period.

We’re also growing our scale and market share globally. In Asia, we are not only at scale but we were also the fastest-growing life insurer among the top 3 pan-Asian players between 2017 and 2021. Our Global WAM business recorded $3.3 billion of net inflows in 2022 against the industry backdrop of net outflows in North America. This performance extended our remarkable track record of delivering positive net flows in 12 of the past 13 years. In Canada, we grew our net income, core earnings and NBV at double-digit growth rates in 2022. We continue to distribute significant cash returns to our shareholders. Between 2017 and 2022, we grew our common share dividend by 10% per year on average, and I’m pleased to share that our Board approved an increase of 11% starting in March of 2023.

In addition to sustained dividend increases, in 2022, we enhanced shareholder returns through $1.9 billion of share buybacks, which represents 4.1% of outstanding common shares. We’re also strategically deploying capital to invest for the future. In 2022, we acquired full ownership of Manulife TEDA, making us the first foreign company to be given approval to acquire an existing asset management JV in China. And in Vietnam, we commenced offering insurance solutions under our 16-year exclusive partnership with VietinBank, one of the largest banks in Vietnam. Turning to Slide 7. The achievements that I’ve mentioned earlier was supported by our strong digital and ESG leadership as well as our winning team. We’ve made notable progress on our digital customer-centric initiatives, as evidenced by the 15 percentage point increase in our global straight-through processing metric compared with the 2018 baseline, with improvements across all segments.

Our 2022 NPS marked a significant 19-point improvement from the 2017 baseline. We also led or were on par with the leading peers in 11 of the 16 business lines where we benchmark. We have invested $1 billion since 2018 to enhance our digital capabilities to make decisions easier and lives better for our customers, while at the same time, driving significant efficiency improvements in our operations. As a leader in ESG, we’re also achieving strong results and serving our customers and other stakeholders in a socially responsible and sustainable way. In 2022, we shared our impact agenda, an articulation of our long-standing commitment to empowering health and well-being, driving inclusive economic opportunities and accelerating a sustainable future.

While we are already Net Zero in our Scope 1 and Scope 2 greenhouse gas emissions, we are committed to further reducing our absolute emissions by 35% by 2035 and to achieving Net Zero Scope 3 finance submissions in our general account by 2050. In recognition of our continued and strengthening commitment to sustainability performance, in 2022, we were once again named to the S&P Dow Jones Sustainability Index, 1 of only 7 insurers across North America to be included. And within the top 10% of our industry peers globally. Our high-performing team in winning culture have been key to our success. We have achieved a top quartile employee engagement ranking annually since 2020. And in 2022, we ranked in the top 6% amongst global financial and insurance companies.

In addition, we’ve been consistently recognized as an employer of choice including as 1 of the World’s Best Employers by Forbes for the third consecutive year. The Canadian insurance industry will adopt IFRS 17 in 2023. While this is a significant endeavor, we are fully prepared for a successful implementation and are looking forward to the improved transparency and stability in our financial results that the new accounting standards will bring. Throughout 2022, we’ve been proactive in providing insights into the expected impacts of IFRS 17, both on transition and on our medium-term targets. Let me highlight a few points. First, IFRS 17 does not impact the fundamental economics of our business. Second, we expect our core earnings, book value and LICAT to be more stable under IFRS 17.

Third, the contractual service margin, or CSM for short, is a key value metric under IFRS 17. A growing CSM balance will drive future earnings growth. And we have announced a target of growing our CSM balance by 8% to 10% per year. Turning to Slide 8. Looking ahead, while we continue to navigate macroeconomic uncertainties in the short term, we see both challenges and opportunities in 2023 and beyond. Some of the notable headwinds and tailwinds are: First, we may see volatility in equity markets and interest rates continuing in 2023. But higher rates are clearly beneficial to our insurance businesses as we’ve seen in our 2022 results; second, while we may see short-term disruption related to the transition from COVID Zero policies in Asia, we expect business momentum to strengthen as pandemic restrictions normalize; third, while in North America, we may see GDP growth slowing down, many Asian countries are forecast to deliver economic growth of 5% or higher in 2023, which is a benefit to our business, given our presence at scale in the most attractive growth markets across the region.

Notwithstanding the pandemic and recent macro headwinds, the 3 megatrends that underpin our strategy remain unchanged. Our business is uniquely positioned to continue to capitalize on these megatrends. As a top 3 Pan-Asian insurer, we see significant growth opportunities emerging in Asia, including in Hong Kong, where we are a leading insurer and well positioned to benefit from the significant MCV and GBA opportunities, following the reopening of the border between Mainland China and Hong Kong. Our global WAM business is not only a leading global retirement solutions provider with approximately 9 million customers but we are also a top 10 global retail multi-manager. In our home market of Canada, we serve 1 in 4 Canadians, and we are a leader across many of our business lines.

And globally, we are a leader in our unique behavioral insurance offering. We are confident that our all-weather strategy, diverse business model and considerable financial strength and flexibility position us well to win and deliver in 2023 and on our 2025 strategic targets. Thank you. And I’ll hand it over to Phil Witherington, who will review the highlights of our financial results. Phil?

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Phil Witherington: Thanks, Roy. Before we start, I would like to recognize that the fourth quarter of 2022 is our last reporting period under IFRS 4. Starting with the first quarter of 2023, we’ll be reporting under IFRS 17 and IFRS 9. In the latter part of my presentation, I’ll provide an update on our IFRS 17 transition impacts. I’ll start on Slide 10. We generated core earnings of $1.7 billion, a modest 2% decrease from the prior year quarter. The results reflect a number of factors, including lower core earnings in Global WAM, lower new business gains in Asia and the U.S. and lower in-force earnings in the U.S. due to the VA reinsurance transactions. These were largely offset by higher yields on surplus fixed income investments, gains on seed money investments and lower withholding taxes in Corporate and Other, improved policyholder experience in North America and in-force business growth in Asia and Canada.

Net income attributed to shareholders of $1.9 billion, decreased by $193 million from the prior year quarter, mainly due to losses from investment-related experience and a smaller gain from the direct impact of markets, partially offset by the favorable impact of an increase in the Canadian corporate tax rate. Of note, investment-related experience in the fourth quarter reflected losses in our older portfolio driven by real estate fair value appraisals, partially offset by the favorable impact of fixed income reinvestment activities and favorable credit experience. I’ll speak more about our older performance in a moment. We recognized a net loss of $357 million from investment-related experience. A $100 million gain was included in core earnings and a loss of $457 million was reported outside of core earnings.

On a full year basis, overall investment-related experience was a gain of $1.2 billion, of which $400 million was reported in core earnings. Our net income in the fourth quarter also included a $297 million gain from the impact of the Canadian corporate tax rate change, an $86 million fair value gain as a result of acquiring the remaining 51% equity interest in our Asset Management business in Mainland China, and a $35 million gain from the reinsurance of our legacy New York VA block. Slide 11 shows a recent history of our investment-related experience, including a total gain of $1.2 billion in 2022 that I noted earlier. In addition to the continued strong credit experience and gains from fixed income reinvestment activities in 2022, our older portfolio also achieved higher-than-expected returns, contributing $147 million to investment-related experience gains.

The strong performance of our older portfolio is shown on Slide 12. The average annual return of our diversified portfolio since the acquisition of John Hancock 18 years ago was 9.3%, outperforming our current best estimate long-term return assumption of 9.2%. Slide 13 shows our source of earnings analysis for the fourth quarter of 2022 compared with the prior year quarter. Expected profit on in-force decreased by 1%, driven by lower U.S. Annuities in-force earnings due to the 2 reinsurance transactions completed in 2022, partially offset by in-force business growth in Asia and Canada. Excluding the impact of the VA reinsurance transactions, our in-force earnings would have grown by 5%. New business gains decreased by 21%, primarily driven by lower gains in Asia and the U.S. In Asia, the weaker customer sentiment in Hong Kong, seen in the third quarter continued into the fourth quarter, leading to lower sales volumes.

This was partially offset by higher sales and improved margins in Japan. Lower new business gains in the U.S. were primarily due to lower brokerage sales. Policyholder experience was a net charge of $82 million on a pretax basis, an improvement of $38 million compared with the prior year quarter, mainly driven by improved policyholder experience in Canada. Slides 14 and 15 show our earnings by segment and return on equity in the fourth quarter and full year 2022. My remarks will focus on the fourth quarter results. Core earnings in our global WAM business decreased by 34%, primarily driven by a decrease in net fee income from lower average AUMA due to the unfavorable impact of markets. Core earnings in Asia increased by 1%, driven by favorable changes in new business product mix and in-force business growth, partially offset by the impact of lower new business volumes, primarily in Hong Kong due to the factors I noted earlier.

We continued to deliver double-digit core earnings growth in Canada, with a 22% increase, reflecting more favorable experience gains in all business lines, higher Manulife Bank earnings and higher in-force earnings. Core earnings in the U.S. decreased by 25%, largely driven by reduced in-force earnings, due to the VA reinsurance transactions and lower new business gains. The core gain in Corporate and Other of $86 million was $165 million favorable compared with the prior year quarter, mainly due to higher yields on fixed income investments, gains on seeds money investments and lower withholding taxes, partially offset by higher interest on allocated capital to operating segments. And we delivered core ROE of 13.2%, an improvement of 0.5 percentage point compared with the fourth quarter of last year.

Turning to Slide 16, which shows our APE sales and new business value generation. In the fourth quarter, we generated APE sales of $1.3 billion, down 12% from the prior year quarter. In Asia, APE sales decreased by 9%, reflecting continued weak customer sentiment in Hong Kong. This was partially offset by higher sales in Japan and Asia Other and notably Mainland China. In Canada, APE sales decreased 15%, reflecting the lower segregated fund and power insurance sales, partially offset by higher group insurance sales. APE sales in the U.S. decreased 21%, reflecting lower customer demand, amid volatile equity markets. And on a full year basis, APE sales decreased 7% compared with the prior year. In the fourth quarter, we delivered new business value of $525 million, a decrease of 9% from the prior year quarter.

In Asia, NBV decreased 17%, reflecting lower sales in Hong Kong and unfavorable changes in product mix in Asia Other, partially offset by the benefit of higher interest rates and higher individual protection and other wealth sales in Japan. NBV increased 6% in Canada, primarily due to higher margins in our insurance businesses, partially offset by lower volumes in annuities. In the U.S., NBV increased 12%, driven by higher interest rates, higher international sales volumes and product actions, partially offset by lower brokerage sales volumes. For the full year, we delivered new business value of $2.1 billion. Turning to Slide 17. Our Global WAM business recorded net outflows in the fourth quarter after 8 consecutive quarters of positive net inflows.

The net outflow of $8.3 billion reflects weak investor sentiment amid record industry fund outflows in North America mid-market volatility. On a full year basis, we delivered net inflows of $3.3 billion. In Retail, net outflows were $4.7 billion compared with net inflows of $7.5 billion in the prior year quarter. The decrease reflects higher mutual fund redemptions and lower investor demand amid higher interest rates and equity market declines. In Retirement, net outflows were $4.6 billion compared with net outflows of $1 billion in the prior year quarter, primarily driven by higher planned redemptions in the U.S. Our Institutional Asset Management business recorded net inflows of $0.9 billion compared with net inflows of $1.6 billion in the prior year quarter, driven by lower net flows in real estate, timberland and infrastructure products, partially offset by higher sales of fixed income mandates.

Overall, 2022 Global WAM’s average AUMA decreased by 12% compared with the prior year quarter, driven by unfavorable market movements in the earlier part of 2022. Turning to Slide 18. Net fee income yield of 43.7 basis points was modestly lower than the prior year quarter, driven by lower fee spread. Our core EBITDA margin of 27.3% was 4 percentage points lower than the prior year quarter, reflecting lower fee revenue from lower average AUMA. For the full year, our core EBITDA margin was resilient at 30.4%, enabled by our substantial scale and disciplined approach to managing operating expenses. Moving to Slide 19. We have achieved a remarkable track record of generating positive net flows in 12 of the past 13 years, a demonstration of our strong and diverse Global WAM franchise across retail, retirement and institutional business lines and across geographies.

Turning to Slide 20. Our strategic focus on digitization and efficiency and disciplined approach to managing operating expenses enabled us to contain core general expense growth to 5% in the fourth quarter and remain in line with 2021 on a full year basis. We achieved an expense efficiency ratio of 50.9% for both the fourth quarter and the full year 2022, despite the inflationary environment. We committed to the target efficiency ratio of below 50% and see it as an important strategic priority to deliver sustainable shareholder value. Slide 21 reinforces our strong balance sheet and capital position. Our LICAT ratio of 131% remains strong and represents approximately $20 billion of capital above the supervisory target. The 5 percentage points decrease compared to the third quarter was driven by a capital redemption, continued common share buybacks and the unfavorable impact of market movements on capital, primarily due to the narrowing of corporate spreads.

Our financial leverage ratio declined by 1.1 percentage points from the prior quarter, reflecting the redemption of $1 billion of subordinated debt, share buybacks and retained earnings growth. We delivered record remittances of $6.9 billion in 2022, an increase of $2.5 billion compared with 2021, supported by 2 VA reinsurance transactions completed in 2022. Turning to Slide 22. We’re committed to creating value to shareholders, including through the use of regular dividends and share buybacks. As Roy mentioned earlier, we have increased our dividend per common share by 10% on an annualized basis since 2017. And we announced yesterday a $0.035 or 11% increase to the quarterly dividend per common share. In addition, we repurchased 4.1% of the company’s outstanding common shares for $1.9 billion in 2022, demonstrating our strong conviction to execute on buybacks.

For the 5-year period from 2018 to 2022, we returned a total of $14.7 billion of cash to our shareholders, which represents approximately 33% of our market capitalization as at the end of 2022. Slide 23 shows the summary of our financial performance for the fourth quarter and the full year 2022, and Slide 24 outlines our medium-term financial targets and recent performance. Our performance reflects the resilience of our business against a backdrop of a challenging macro and operating environment in 2022. Turning to Slide 25, which provides additional information on our IFRS 17 opening balance sheet as of January 1, 2022. Our opening total equity under IFRS 17 was $46.9 billion, 20% lower than reported under IFRS 4 and in line with our previous guidance.

The main driver of the decrease is the establishment of the CSM, partially offset by other measurement changes, including 2 provisions held for noneconomic risks and changes to discount rates. As a quick recap, one of the key impacts of IFRS 17 is the requirement to set up a new insurance liability component for CSM, which represents expected future profits and is treated as available capital under LICAT. For these reasons, we believe the CSM is an important metric for measuring future earnings capacity and value of the business. As noted previously, we expect the new business CSM balance to grow at 15% per annum and the CSM amortization into core earnings to be approximately 8% to 10% per annum. The difference in discount rates used for IFRS 17 compared with IFRS 4 has a modestly negative impact.

Under IFRS 17, liability discount rates reflect the characteristics of the liability and not the expected returns of assets supporting the liabilities. As such, the weighted average liability discount rate has decreased overall, but the impact varies between segments and business lines. Turning to Slide 26. Based on the preliminary results from our IFRS 17 parallel runs for 2022, which is still underway and is not yet complete, I would like to provide an update on our estimated transition impacts. Under IFRS 17, core earnings for the 2022 comparative year are expected to be lower than IFRS 4 2022 core earnings by 5% to 10% compared with the previous estimate of approximately 10%. As I noted earlier, opening balance sheet total equity declined 20% on January 1, 2022, in line with the guidance that we provided.

With respect to January 1, 2023, we expect total equity to be approximately 15% lower on an IFRS 17 basis compared with IFRS 4 and book value per common share to be approximately 20% lower on an IFRS 17 basis compared with IFRS 4. Along with our second quarter results and with reference to the final 2023 LICAT guideline that was released by OSFI in July 2022, we announced that the estimated impact of IFRS 17 on our LICAT ratio was approximately neutral based on 30th of June market conditions. We also said that we expected the IFRS 17 LICAT ratio to be more stable than under IFRS 4 and in particular, less sensitive to changes in interest rates. Changes in market conditions, specifically rate movements in the second half of 2022, have reduced our LICAT ratio under IFRS 4.

Given the greater stability of our LICAT ratio under IFRS 17, we expect a low single-digit increase in our LICAT ratio as of January 1, 2023. There is no change to our medium-term financial targets, including the new CSM-related targets that were communicated last year. 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 2 questions, including follow-ups. Operator, we will now open the call to questions.

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Q&A Session

Operator: And the first question is from Meny Grauman from Scotiabank.

Meny Grauman: Just wanted to ask about investment-related returns. Phil, you referenced fair value changes on real estate. Just wanted to get some more details on that in terms of the asset class geographies? Is it something concentrated? So I’ll start there, please.

Scott Hartz: Sure, Meny. This is Scott Hartz. Thanks for the question. So yes, when we look at investment-related returns, as Phil pointed out, it’s been a very strong year with $1.2 billion of investment gains, $800 million above what we would have put into core earnings. And for the — all the portfolio, in particular, we had gains of $147 million for the year, meaning we slightly exceeded our long-term return expectations. But those returns will vary quarter-to-quarter, particularly all the returns, given the mark-to-market flows through earnings. And in the fourth quarter, we did see lower investment returns. That was largely driven by our real estate portfolio. Most of our other 5, all the categories performed in line with our long-term expectations.

So the loss you see, the $357 million for total investment gains, was driven by the real estate portfolio. Now it’s important to note that our real estate portfolio is almost entirely mark-to-market by external appraisers each quarter, over 95% of the portfolio. So only a few small properties that are not. And what we saw in the fourth quarter is that external appraisers raised their discount rates on real estate, and that was really across the board. So it really hit all categories, not just office, which office has been weaker over the last couple of years. But in the fourth quarter we saw that weakness extend across all categories, particularly in North America. Asia held up a little bit better. It’s important to note that these were mark-to-market losses based on higher discount rates.

And given the higher discount rates, we would expect to recover those losses in the future through higher returns. So that was really the driver, Meny.

Meny Grauman: Okay. Yes. I guess, it answers the question. I mean everyone is worried about office values in particular. So the question is, are we seeing the start of that downward revaluation of office properties? But you’re saying it’s more broad-based than that in terms of what we’re seeing this quarter?

Scott Hartz: Yes, that’s correct. I think we’ve seen weakness in office for a couple of years now. And we’ve got a highly diversified all the portfolio, other things we’re doing well. So that didn’t really show much. But in the fourth quarter, it really did extend to all categories of real estate.

Operator: The next question is from Gabriel Dechaine from National Bank Financial.

Gabriel Dechaine: I’ve got a couple of questions. One is on the reopening in Asia, specifically Hong Kong. I know these things don’t turn on a dime. I’m just wondering what sort of lag you expect from now until your sales hit? What you consider their normal run rate or something above where they are today?