Manulife Financial Corporation (NYSE:MFC) Q4 2023 Earnings Call Transcript

Manulife Financial Corporation (NYSE:MFC) Q4 2023 Earnings Call Transcript February 15, 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. Welcome to the Manulife Financial Fourth Quarter and Full Year 2023 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 fourth quarter and full year 2023 financial and operating results. Our earnings materials, including webcast slide for today’s call, are available on the Investor Relations section of our website at manulife.com. Turning to Slide 4. We’ll begin today’s presentation with a highlight of our full year results and strategic update by Roy Gori, our President and Chief Executive Officer. Following Roy’s remarks, Colin Simpson, our Chief Financial Officer, will discuss the company’s financial and operating results in more detail. After the prepared remarks, we’ll move to the live Q&A portion of the call. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 43 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 2023 financial results. As you can see, our strategy and disciplined focus on execution are delivering even in uncertain market conditions. We generated double-digit top line growth with a record APE sales during the year. While Global WAM delivered another year of positive net inflows despite challenges in the retail fund market, that is the 13th year of positive inflows in the past 14 years. Core EPS grew 17%, supported by strong core earnings growth and the impact of share buybacks. Our core ROE increased to 15.9%, achieving our medium-term target. We delivered robust growth of 9% in adjusted book value per share, and our strong LICAT ratio of 137% and low leverage ratio provides ample financial flexibility.

Turning to Slide 7. Today, we’re a very different company from when we began our efforts to reshape our portfolio towards lower risk and higher returns and 2023 was also a milestone year in that transformation journey. As part of that agenda, we further grew our highest potential businesses. In Asia, we saw double-digit growth across key new business metrics. We are a high-growth top 3 Pan-Asian life insurer. In Global WAM, we acquired CQS whose multisector alternative credit capabilities complement our existing fixed income and multi-asset solutions business and are a powerful addition to our global credit offering. We also generated remittances of $5.5 billion and returned $4.3 billion of capital to shareholders through dividends and share buybacks.

And I’m pleased to tell you that yesterday, our Board approved a 9.6% increase in our common share dividend beginning in March. But first, it goes without saying that meeting our customers’ needs and expectations is at the core of what we do. We’ve sped up our processing times, reduced costs and improved the customer experience. As a result of these and other actions, we’ve seen a 22-point increase in our Net Promoter Score since 2017, and we are leading or on par with our peers across the majority of our business lines. And none of this would be possible without our winning team and culture, and I’m proud that for the fourth consecutive year, we achieved top quartile employee engagement results. Finally, we ended the year with a significant milestone in our transformation journey, the announcement of the largest ever LTC reinsurance deal, which I’ll touch on in the following slide.

You’ll remember that in December, we announced the milestone LTC transaction. We transacted at attractive terms, derisked our business and it will be accretive to core EPS and core ROE after deploying the capital released to share buybacks. The transaction, which we expect will close by the end of February, also contributes to establishing an active LTC reinsurance market. It’s another example of the value we continue to unlock for shareholders as we reshape our portfolio to focus on lower risk and higher return businesses, and we aren’t stopping here. We continue to work on opportunities to create shareholder value through organic and inorganic actions across our legacy and low ROE businesses. Moving to Slide 9. Our transformation journey began in 2018 when we started reshaping our businesses by reducing risk, improving ROE, strengthening capital and growing high-return businesses.

Thanks to disciplined execution, today, our high-return businesses represent a larger share of our earnings. These are impressive results considering that the transition to IFRS 17, which defers the recognition of new business gains into CSM resulted in a 2 percentage point reduction in 2022. In fact, Asia already represents over 60% of our CSM balance and 70% of our new business CSM, indicating its immense future earnings potential. And as we’ve changed our business mix over this time, we’ve significantly expanded our core ROE by almost 5 percentage points. We’ve also taken significant actions to reduce risk, including our US variable annuity reinsurance transactions in 2022. Our portfolio optimization actions, along with growth in our highest potential businesses, has reduced the core earnings contribution from LTC and VA significantly from 24% in 2017.

And together with December’s LTC transaction, this contribution is expected to further decrease to 11%. Returning capital to shareholders remains a priority. And since 2018, we’ve returned $18.9 billion through dividends and share buybacks. Those buybacks have generated a benefit of more than $1.3 billion as our average repurchase costs were well below our recent share price levels. In closing, I’m excited by the progress that we’ve made and by our momentum heading into 2024. Our unique and diverse geographic footprint, all-weather strategy and focused execution position us well to continue delivering superior value. Given our strong capital position and cash generation, we will continue to look at opportunities to unlock shareholder value, including inorganic opportunities to deploy capital.

I’ll now hand it over to Colin to review the highlights of our financial results. Colin?

Colin Simpson: Thanks, Roy. 2023 was indeed a milestone year for Manulife, marked not only by strong business performance and the announcement of a major reinsurance transaction but also a smooth transition to IFRS 17. We continue to deliver strong growth in new business metrics, earnings and adjusted book value, and the fourth quarter contributed to that momentum. I’ll go into a little more detail on the quarter’s results before the Q&A. I’ll start with our top line on Slide 11. Our fourth quarter APE sales increased 20% from the prior year with double-digit growth across each of our insurance segments. This increase was supported by the ongoing benefit of the return of demand across various markets in Asia, high large and midsized group insurance sales in Canada and a rebound in demand from affluent customers in the US.

The momentum in our sales growth contributed to strong increases in new business CSM and new business value of 41% and 20% respectively. Global WAM saw modest net outflows of $1.3 billion due to a large case pension plan redemption in our US retirement business. On a full year basis, we generated net inflows of $4.5 billion, which is creditable in a year in which investors kept money on the sidelines, benefiting from higher short-term interest rates. I’m proud of the growth we’ve achieved across our new business metrics compared to 2022 despite the uncertain economic conditions, which is testament to the strength of our global and diverse portfolio of businesses. Turning to Slide 12, which shows the growth in our profit metrics. Core EPS increased 20% as we grew core earnings and reduced share count.

Looking at this quarter’s results, we delivered a core ROE of 16.4%, above our medium-term target of 15% plus for the third consecutive quarter. Driving up ROE is a key priority, and our recent milestone reinsurance transaction did exactly that. You should expect us to continue evaluating in-force opportunities to improve our return on equity. When we transition to IFRS 17, we noted we expect to see more stable growth in our adjusted book value per share as it better aligns with the economics of our business. And Slide 13 demonstrates just that. A 9% increase over the year or 13% after excluding the effect of foreign exchange rate movements in adjusted book value per share to $32.19. A key driver of the CSM growth this quarter was an update to actuarial methods and assumptions.

We targeted a risk adjustment for non-financial risk that is calibrated to a 90% to 95% confidence range, which is conservative relative to peers. We have been trending towards exceeding the top end of this range. And so during the quarter, we recalibrated our risk adjustment towards the midpoint of this range. This had the impact of increase in the CSM and reducing the risk adjustment, which still sits at $18.5 billion. We will continue to monitor risk adjustment target levels across the industry and expect these to converge over time. More information is available in the appendix of this presentation. Bringing you back to our core earnings results on Slide 14, I’d like to call out some of the highlights of the drivers of earnings analysis, focusing on the quarter relative to the prior year.

There were three main drivers of the increase in core net insurance service results. Expected earnings on insurance contracts increased across each insurance segment, led by Asia, which benefited from the impact of basis changes in the third and fourth quarters. Secondly, business growth in our group insurance and affinity markets businesses in Canada improved our net insurance results. And lastly, our insurance experience was favorable due to a nearly $60 million release of provisions held in our P&C reinsurance business for catastrophes from prior years, mainly relating to Hurricane Ian. These factors contributed to a 25% increase in core net insurance service result. In terms of our core net investment results, we continue to see the benefits of higher interest rates and business growth year-on-year.

We reported no increase in our expected credit loss provision over the quarter, which has improved investment results somewhat. Towards the bottom of the table, you’ll see that Global WAM was a notable contributor to the results, supported by higher average AUMA. These factors were partially offset by higher performance-related costs included in other core earnings, along with an increase in certain corporate costs. Our market experience for the quarter saw offsetting impacts that resulted in a modest net charge and $114 million gap between core earnings and net income. We reported a $381 million charge from lower-than-expected returns on ALDA, largely reflecting the ongoing pressure on commercial real estate due to increasing cap rates, but this was partially offset by $182 million gain due to higher-than-expected public equity returns during the quarter.

Our multiyear track record in ALDA as shown in the appendix is a testament to our strong capabilities in managing these assets and supports our long-term return assumptions. You will also see a positive contribution to net income from the basis change that I mentioned on the previous slide. The next few slides will cover the segment view of our results, starting with Asia on Slide 16. Both top and bottom line performance were once again strong. APE sales increased 11% from the prior year quarter as we continue to capitalize on the return of demand from MCV customers. The increase in sales contributed to a 27% and 5% growth in new business CSM and NBV, respectively. We delivered strong core earnings growth of 14% year-on-year with a meaningful increase in the contribution from Hong Kong, our largest in-force business.

We have made great progress shifting our portfolio towards our higher potential businesses of Asia and Global WAM, but the combination of the pandemic in IFRS 17, which has changed Asia’s earnings profile, has led us to extend our target for Asia region to make up 50% of total core earnings by 2025 by two years. Moving over to Global WAM’s results on Slide 17. We recorded modest net outflows of $1.3 billion for the quarter. This was due to a large client redemption in US retirement. We also saw elevated retail mutual fund redemption rates in Canada, but this was offset by continued strong inflows in our institutional business. Excluding the large case redemption during the quarter, we generated net inflows of $1 billion. The business also delivered strong core earnings supported by higher average AUMA, which increased 5% year-on-year, along with higher fee spreads and a lower effective tax rate.

Also of note, severance costs related to restructuring announced during the quarter are excluded from core earnings and will generate expense saves beginning in 2024. Heading over to Canada on Slide 18. We delivered another strong quarter of new business and profit metrics. APE sales increased 44% year-on-year, primarily due to higher large and also might add the highest on record mid-case sales in our group insurance business, which were also the main contributors to our growth in new business value of 60%. Core earnings increased 19%, mostly driven by business growth and a lower ECL provision as well as more favorable insurance experience in our group benefits business. Moving to Slide 19 on our US segment’s results. In the US, higher APE sales were driven by a rebound in demand from our affluent customers, which contributed to strong NBV and new business CSM results.

Our US business delivered strong core earnings, which increased 16% year-on-year, mainly reflecting higher yields and business growth as well as improved insurance experience. On to Slide 20 and our balance sheet. We ended the year with a strong LICAT ratio of 137%, which was $22 billion above the supervisory target ratio. Our financial leverage ratio declined by 0.9 percentage points from prior quarter and is within our target ratio of 25%, adding to our ample financial flexibility. Remittances of $5.5 billion in 2023 were a result of strong operating cash generation and favorable market moves. With remittances in excess of dividend and interest payments, we were able to return capital to shareholders even after organic investments in our business and bolt-on M&A such as the CQS acquisition.

Over the last three years, our remittances have averaged over 85% of core earnings. While this percentage is somewhat flattered by the favorable market moves in 2023 and the US variable annuity transactions in 2022, it’s a testament to our ability to generate strong cash flow. In aggregate, we have returned approximately $8.7 billion of capital to shareholders through dividends and share buybacks since we resumed our buyback program in 2022. As previously announced, we plan to launch a new program in the early 2024 that would allow us to purchase up to 2.8% of our common shares. And as Roy mentioned, yesterday, our Board approved a 9.6% increase in our quarterly common share dividend. Moving to Slide 21, which summarizes how we are tracking against our medium-term targets.

Our new business CSM grew 12% in 2023, modestly below our target. We generated CSM balance growth of 21%. While this was flattered by the basis change, we still generated a solid 5% growth in organic CSM. Our core EPS growth and core ROE was strong in 2023, exceeding our target ranges. All in, we are pleased with our progress and delivered strong results with focused execution. 2023 was a milestone year. And while we continue to face an uncertain macroeconomic environment, I’m confident that we are uniquely positioned to drive and execute on our transformation agenda in 2024 and beyond. And finally, turning to Slide 22, we’re hosting an Investor Day in Hong Kong and Jakarta from Tuesday, June 25, to Thursday, June 27, 2024. It has been some time since we hosted an Investor Day in Asia, and we’re excited to showcase our quality franchise.

Please save the date, registration details will follow shortly. This concludes our prepared remarks. Before we move to the Q&A session, I’d 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.

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Q&A Session

Operator: [Operator Instructions] And your first question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman: Hi, good morning. I wanted to ask about the global minimum tax and whether it will have a material impact on you if you could provide us any sort of guidance in terms of how big that impact would be?

Colin Simpson: Yeah. Thanks, Meny. It’s Colin here. So we’ve looked at the draft legislation in Canada, and we’re participating in the consultation progress — process. There’s really a lot to be done before the draft rules are fully integrated within existing Canadian tax law. But saying that, should the legislation become substantially enacted, we would expect to incur higher taxes just from the nature of some of the jurisdictions we operate in. We think it’s going to add about 2 to 3 percentage points to our effective tax rate. And we’ll start incurring that once the legislation becomes substantially enacted potentially Q2, maybe Q3 this year.

Meny Grauman: Thanks so much. And then just on the risk adjustment, the change that you made. I just wanted to better understand what’s driving that. So the risk adjustment is trending to the upper end of the target range. And just want to understand how — what’s the process that drives that? Is that, that you’re being overly conservative in terms of your assumptions or is there something else going on here that’s making it track higher than you expect?

Steve Finch: Thanks, Meny. It’s Steve here. So yes, our disclosed confidence level range for the risk adjustment is $90 million to $95 million. And we are trending to go higher. And in fact, without the change, we would have reported over that confidence level range in Q4, which is really driving the decision. We’re comfortable with the range that we selected at transition. And the move was simply to move back closer to within that range. What we saw was relative to peers, we included in the appendix, you can see some of the benchmarking versus peers, and we are more conservative than global peers here and particularly in Asia. That’s where — that’s what was driving the growth above that target end of the range. So we made the adjustment primarily in Asia was the largest impact. And that leaves Asia actually at the high end of that disclosed $90 million to $95 million range. So fairly simple in terms of just moving back towards the midpoint of the range.

Meny Grauman: And then does that have any implications for core earnings going forward, just thinking through the change, how it impact results on a look-ahead basis in terms of the core results?

Steve Finch: Yes. Modest impact in core. So while we reduced the risk adjustment by just over CAD2.8 billion, that mostly largely went to the — an increase in the CSM. And because the CSM amortizes slightly faster than the risk adjustment releases, we see a modest, just a hair under $20 million of benefit to run rate core earnings, and that was in our Q4 results as well.

Meny Grauman: Got it. Thanks so much.

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

Gabriel Dechaine: Actually, that was the question I was going to — that $20 million, is that a quarter, annual or what?

Steve Finch: It’s a quarter, $20 million per quarter, Gabe.

Gabriel Dechaine: Okay. Great. And just really dumb it down, I mean, just throwing out, we’re exceeding our 90% to 95% range. What does that mean? What was going on in the business, in the Asia business in particular, that created this variation and then caused the reshuffling of one liability category to another because it could happen again, right?

Steve Finch: Yeah. And if we back up the risk adjustment, you can think of it as the non-economics or the non-investment PFADs under the old IFRS 4, that’s what it is.

Gabriel Dechaine: Okay.

Steve Finch: Under IFRS 17, we calibrate and we’re required to disclose the confidence level range of that. And we based it off LICAT shocks and then calibrate from there. So it’s a fairly straightforward process. what was driving it was for Asia, we were actually above that top end of the range. And as you know, we write a lot of profitable business in Asia, that was driving because Asia was higher than the high end of the range. That was [Technical Difficulty] the total company. So we’ve calibrated down, as I said, primarily in Asia, and we would expect more stability going forward in terms of where we sit within the range.

Roy Gori: Gabriel, Roy here. I might just add that, obviously, with the transition to IFRS 17, we had to make a whole lot of assumptions as did everyone else in the industry. And it’s only through 2023 that we started to see where the industry started to land with their risk adjustment confidence levels and so on. We’re quite pleased that we are very conservative relative to our peers. And the calibration that Steve talked to was just to bring it back into the range, which was, as he highlights and is articulated in the document that we published, very conservative relative to others. We’re happy that that’s where we typically land at the conservative end.

Gabriel Dechaine: No, no. I get that. I’m just trying to conceptualize this thing. So noneconomic risks, like mortality was exceeding your worst-case assumptions or something like that in Asia, it might be something — probably something else. So you moved it from risk adjustment to CSM, you’re able to release those reserves sooner because it’s I guess, more confidence in that assumption? I know this sounds hugely convoluted, but I’m trying to get this for the layman like, you know what I mean?

Steve Finch: Yeah. What I’d explain to you is we hold the risk adjustment, which is like the old PFADs and we’ve calibrated it based on the standard to say, hey, this is at the 90 to 95th percentile in terms of confidence. We think that should — the takeaways are, I think that should give you high confidence in the quality of the CSM because you set up CSM after you set up all the risk adjustment. And this is a fairly modest shift. Risk adjustment releases into income as well, which is why you see a modest impact on core earnings. So this is just a fairly simple recalibration.

Gabriel Dechaine: All right. Well, thanks.

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

Doug Young: I apologize, but I do have to kind of just dig into the risk adjustment. And maybe, Steve, what I’m more wondering is, why was it sat originally at 90 to 95 because it does seem high and [as a confidence integral] (ph). And there must have been a reason that it was set in that range. And why would it differ versus peers? Is this just an interplay between capital than risk adjustment? Is this mix of business related? Like, I know it’s easy enough just to compare Manulife relative to the peers as you did on the slide, but I’m just trying to dig a little deeper. Like why was it set there? Why would there be differences?

Steve Finch: Yeah. I think under the standard, it’s principles based. So you’ve got a range of judgments, and Manulife has typically been conservative in terms of setting our risk margins. I should be really clear. If you look at Asia peers, because we hold a higher risk adjustment does not mean we take more risk. We write very, very similar profile of business. So you should actually look at it as we’re holding higher risk adjustment for similar risks. The other thing is it’s such a significant change in accounting, right? And there’s a lot of policy decisions. There’s a lot of disclosure under IFRS 17. So I would expect, over time, you might see a convergence of practice on this subject and perhaps other policy decisions as the results are digested and analyzed.

Doug Young: I guess this is more of a statement. I’m just surprised that there is such a variance or such variances allowed between players, but I’ll move on. Roy, maybe — and maybe I’m just uber sensitive this morning, but any of your comments, you seem to emphasize looking at all options for capital deployment, including inorganic — I mean has M&A moved up your priority list when you think of the capital position? You’ve got IFRS 17 mostly done. You’ve got the excess capital, you’re doing reinsurance transactions. Is M&A now moving up the priority list and not just smaller deals like you did, but more bigger type of transactions?

Roy Gori: Yeah, Doug, thanks for the question. And you’re right. We have been very focused on our capital. Our capital position is very strong. Our LICAT ratio is 137. And obviously, as we transition to IFRS 17, we’re still trying to figure out, as was the industry how LICAT would move and how the transition would work? So it was obviously very sensible for us to be prudent in that environment. But with a LICAT ratio of 137%, we have $22 billion above our supervisory minimum, $10 billion above our internal operating range. And we have been very actively buying back shares. In fact, since 2018, in fact, $5.5 billion, which has generated $1.5 billion of shareholder value. When we talk about our priorities for capital, obviously, number one for us has always been dividends and organic growth.

We announced the dividend increase yesterday, which again further consolidates our position that dividend should be a way that we create value for shareholders. But given our unique footprint, the organic growth for us is a huge priority, and it’s an area for significant growth. The second tier of priorities for us from a capital deployment perspective has always been buybacks and M&A. And we have been judicious about M&A and we’ll continue to be. So for us, the focus areas that we’ll look at when it comes to M&A is, a, is it strategic? And b, is it financially valuable for the franchise? We don’t want to do anything that obviously doesn’t create value. And as we see the uncertainty starts to decrease, then obviously, our appetite for M&A will increase as well.

So we’re pretty optimistic about the outlook organically to grow our franchise. And having the financial flexibility through our strong capital ratio and low leverage, I think really makes the M&A option one that’s available to us, but we’re going to be disciplined. So I just want to again reassure you that we would not be reckless.

Doug Young: Yes. Maybe a follow-up. Are you seeing more opportunities these days?

Roy Gori: Look, again, we’ve got a good scan of what is available. And I think in the higher rate environment, it has put some pressure on certain businesses. I think we obviously stand to benefit in a higher rate environment. Again, we don’t think that necessarily we’re going to see a massive increase in the longer end of the curve. But it does place opportunities for us, and we’ll continue to look at them. So yeah, I think that the opportunities have perhaps increased in recent years, which means it’s perhaps more interesting for us to focus in this space.

Doug Young: Appreciate the color. Thank you.

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

Paul Holden: Thank you. Good morning. Going back to the risk adjustment discussion. I just want to understand if there are any potential implications for insurance experience going forward? Is there now a potential for more negative experience because of the lower risk adjustment?

Steve Finch: Paul, it’s Steve. No, this does not impact the insurance experience going forward at all. You shouldn’t expect any impact there.