Earnings Call Transcript - MFC Q2 2022

Operator, Operator

Good morning, and welcome to the Manulife Financial Second Quarter 2022 Financial Results Conference Call. Your host for today will be Mr. Hung Ko. Please go ahead, Mr. Ko. Thank you. Welcome to Manulife's earnings conference call to discuss our second quarter financial and operating results. Our earnings material including the webcast slides 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 second quarter highlights by Roy Gori, our President and Chief Executive Officer. Roy will also discuss our EBITDA performance and how we are well-positioned in the current uncertain environment. Following Roy's remarks, Damien Green, our new President and CEO of Manulife Asia will provide a brief update on our Asia Pacific and opportunities. Phil Witherington, our CFO, will discuss the Company's financial and operating results. After the prepared remarks, we will move on to the live question-and-answer portion of the call. We ask each participant to adhere to a limit of two questions including follow-ups. If you have additional questions, please re-queue and we will do our best to respond to everybody. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 35, we 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, President and CEO

Thanks, Hung. And thank you, everyone, for joining us today. I'm pleased to have two new members of our executive leadership team joining the call today including Marc Costantini who returned to Manulife as Global Head of Import Management. Marc was with Manulife for twenty years in various executive roles and rejoined us after holding senior executive positions at other insurance and reinsurance companies, and Damian Green who has started in his new position as the CEO of Asia. Most recently, Damian led our Hong Kong business, which is our largest operating market in Asia and has delivered very impressive performance. In addition, Naveed Irshad, who was our Global Head of Inforce Management has assumed the role of CEO of Canada, succeeding Mike Dowdy, who retired in September following more than 30 years of service. Mike is a tremendous leader, who embodies our values, pursues excellence every day and does it with a deep sense of care for our colleagues, customers and communities. I'd like to thank him for his many contributions and wish him all the very best in his retirement. I'd also like to thank Anil Wadhwani, our former CEO of Asia for his significant contribution to the success of our Asia franchise over the past few years, and left Manulife this past May, and I wish him all the best in his future endeavors. I'm very excited about this leadership team, which I'm confident will continue to drive the success of our global franchise and execute on our strategic priorities. Yesterday, we announced our second quarter 2022 financial results. We continue to operate in an increasingly complex and challenging environment. A combination of lingering pandemic effects in most of Asia, elevated inflation, uncertain macroeconomic and geopolitical conditions have significantly impacted markets globally with increased volatility and resulted in negative consumer sentiment. That said, despite these challenges, we continue to be resilient and delivered solid results in the second quarter and on a year-to-date basis. And we remain strongly capitalized and continue to execute against our strategic priorities and medium-term targets. Turning to Slide 6. We delivered solid core earnings of $1.6 billion as growth in our Canada and U.S. insurance businesses reduced the impact of the headwinds that we faced in Global WAM and Asia. And we reported net income attributed to shareholders of $1.1 billion, reflecting charges from the direct impact of markets as a result of significant equity market declines and volatile interest rate movements. While our net income for the second quarter was impacted by market volatilities, on a year-to-date basis, we delivered net income of $4.1 billion, which was $600 million higher than the same period in 2021 and close to $1 billion higher than our year-to-date 2022 core earnings. I would like to highlight our very strong investment-related experience that more than offset the unfavorable direct impact of markets in the first half of 2022. We achieved new business value of $511 million; lower sales in certain markets in Asia due to continued COVID containment measures impacted NBV this quarter. This was partially offset by strong growth in both Canada and the U.S. exemplifying the benefit of our business and geographic diversification. In fact, on a year-to-date basis, our Canada and U.S. segments delivered double-digit NBV growth, driven by higher sales and improved margins. Global WAM delivered another quarter of positive net inflows, generating $1.7 billion with positive contributions from retirement and institutional asset management. On a year-to-date basis, net inflows were an impressive $8.6 billion. Our capital remains strong with a LICAT ratio of 137%, and we continued to achieve an expense efficiency ratio of less than 50%. Bill will elaborate more later on our success in expense management. We are laser focused on delivering on our strategic priorities. Slide 7 and 8 highlight our progress and some of our achievements in each of these five strategic priorities during the quarter. Turning to Slide 9, I'm pleased with the strong performance we've achieved year-to-date. In Asia, we ranked top five positions in six of our insurance markets and our market ranking and share have grown from pre-pandemic levels in four markets. In Global WAM, we generated net inflows of $8.6 billion year-to-date with positive contributions across all geographies and business lines. We remain number one in Hong Kong NPS both on AUM and net flows. In Canada, we delivered double-digit growth in core earnings, APE sales and NBV on a year-to-date basis. And in the U.S. international sales were at a record level in the second quarter and up 43% on a year-to-date basis. These are examples of our continued strong operating performance despite the various macro headwinds. Slide 10 provides a clear view of our strength and how we are well-positioned to succeed in an uncertain environment facing the industry and Manulife. Just to give you a few highlights, we continue to make progress on our digital journey and our strong digital capabilities and investments, which were more than $850 million since 2018, have mitigated impacts of COVID containment measures. Our Inforce block represents approximately three-quarters of our insurance core earnings, providing earnings stability in different growth scenarios. Our diversified order portfolio includes real assets, which provides protection in an inflationary environment. And we further reduced our sensitivity to equity markets by reinsuring more than 75% of our USDA business earlier this year. Overall, our global footprint, diversified business mix, focused on operational resilience and proven digital capabilities uniquely positions us to continue to deliver strong performance in the long-term. Turning to Slide 11. To summarize, we delivered solid results in the second quarter despite the challenges posed by the macro environment. Each of our operating segments continued to deliver strong performance in the first half of the year. Expense efficiency continues to be an important strategic priority. And we maintained an expense efficiency ratio of less than 50% during the quarter despite top-line pressures. We remain committed to generating shareholder value, and repurchased approximately 2% of outstanding common shares so far this year, and we will continue to effectively weather the current macro and pandemic uncertainties and remain confident in our ability to execute on our long-term strategy, capitalizing on the attractive opportunities and mega trends in the markets in which we operate. Thank you, and I'll hand over to Damien to talk about our strong performance and the exciting opportunity that he is seeing in Asia.

Damien Green, President and CEO of Manulife Asia

Thanks, Roy. Look, I'm really proud to have become the CEO of our strong and resilient franchise in Asia, which has delivered growth during the pandemic, demonstrating the success of our strategy and the diversity of our portfolio. Whilst impacted in the short term by COVID-19 and facing the same set of challenges and constraints as our competitors, such as economic slowdown, tapered consumer sentiment, and waves of regulatory changes, earnings have exceeded pre-pandemic levels and value metrics remained strong year-to-date. This is a testament to Manulife's leading position and diverse geographic footprint in Asia. And we've been continuously operating in Asia for 125 years, and we hold top five positions in six of our insurance markets. Our strategy remains focused on capturing the compelling secular trends Asia presents, by growing and digitizing our agency, maximizing potential with our bancassurance partners, leveraging Manulife Investment Management, and accelerating our growth in China and Southeast Asia. Our distribution mix is a competitive advantage. And through the pandemic, we've made strong progress in strengthening our agency force. Across Asia, compared to pre-pandemic levels, we've grown our MDR team members by 23%. In Hong Kong, we're number one for court of the table membership. We've deepened our bancassurance partnerships, which have extended our customer reach, and our 10 exclusive bancassurance partnerships now provide us access to over 30 million customers. Addressing the growing needs of Asia's aging population presents a significant opportunity for Manulife Investment Management. Against this backdrop, we've delivered a 24% increase in retirement net flows, contributing to solidifying our number one position in the Hong Kong MPF market. Finally, China and Southeast Asia represent the largest and fastest-growing economies in Asia, and we're well positioned to capture the emerging opportunities. Our focus and strong execution track record have led to improved share and ranking in key markets. We're the outright number one insurer in Vietnam and Cambodia, number two in Singapore, and number four in the Philippines. The Greater Bay Area opportunity provides us access to over 85 million people. And Manulife is well positioned to participate in this compelling growth story, with a presence in 9 of the 11 cities, including advanced capabilities and leadership positions in Hong Kong and Macau. Now our strong position and focused strategy will continue to drive profitable growth and value across our diverse markets in Asia. Thank you. And I'll now hand over to Phil Witherington, who will review the highlights of our financial results.

Phil Witherington, CFO

Thanks, Damien. I'll start on Slide 15. During the second quarter, we continued to perform well despite a challenging macro environment. We generated core earnings of $1.6 billion, with a year-over-year decrease of 9%, reflecting several factors: the unfavorable impact of markets on seed money investments, lower new business gains, lower in-force earnings in U.S. annuities related to the variable annuity reinsurance transaction that closed in February of this year, as well as lower net fee income from lower fee spread and lower average AUMA in Global WAM. These were partially offset by in-force business growth in Asia, Canada, and U.S. insurance, higher yield on fixed income investments, and gains on available-for-sale equities in corporate and other, and improved policyholder experience in the U.S. Of note, the unfavorable impact of markets on seed money investments was $93 million, and consisted of approximately $65 million from equity funds and approximately $28 million from fixed income funds. The VA reinsurance transaction contributed three percentage points of the decrease in core earnings. Net income attributed to shareholders of $1.1 billion decreased by $1.6 billion from the prior year quarter, reflecting charges from the direct impact of markets, smaller gains from investment-related experience and lower core earnings. Of note, we recognized a gain of $691 million from investment-related experience, $100 million of which was included in core earnings as core investment gains, with the remaining $591 million reported outside of core earnings. Strong investment-related experience reflected higher-than-expected returns on alternative long-duration assets, primarily driven by fair value gains on private equity investments, the favorable impact of fixed income reinvestment activities, and favorable credit experience. The charge from the direct impact of markets was mainly driven by unfavorable equity market performance, interest rate hedge ineffectiveness due to significant rate movements across several markets of differing magnitudes and curve shape changes, foreign exchange movements, realization of losses from the sale of AFS bonds, and losses from nonparallel movements in swap spreads. Slide 16 shows our source of earnings analysis for the second quarter of 2022 compared with the prior year quarter. Expected profit on in-force increased 1%. Excluding the impact of the U.S. VA reinsurance transaction, the increase was a strong 7%. New business gains decreased by 25%, primarily driven by lower sales in Asia resulting from continued COVID-related containment measures and lower contributions from insurance segments in the U.S. and Canada. Policyholder experience was a net favorable $5 million on a pretax basis. In Canada, we recorded net favorable experience, and we saw favorable mortality experience in U.S. Life, partially offset by unfavorable lapse experience, while LTC was neutral. These were partially offset by unfavorable experience in Mainland China and Vietnam. In the third quarter, we will complete our annual review of actuarial methods and assumptions. This year's review includes a comprehensive study of our U.S. long-term care experience. Although work is still ongoing, preliminary indications suggest that the net impact to net income attributed to shareholders will be approximately neutral, both in total and for LTC. In addition to LTC, other assumptions being reviewed this year include mortality and certain lapse assumptions for Canada Life Insurance as well as lapse and mortality assumptions for certain Asian markets. I would note, given the moderate impacts from these reviews in recent years and the upcoming accounting regime change, we do not intend to provide a preview of our annual review of actuarial methods and we do not intend to years. Slide 17 shows our earnings by segment and return on equity. Core earnings in our Global WAM business decreased by 16%, reflecting lower fee spread and lower average AUMA due to lower equity markets and higher interest rates. Core earnings in Asia decreased by 3%, driven by lower new business volumes reflecting COVID-19 containment measures in Hong Kong and several markets in Asia; Other, unfavorable policyholder experience in Mainland China and Vietnam; and unfavorable product mix in Mainland China. We delivered core earnings growth of 8% in Canada, primarily reflecting favorable experience gains in individual insurance and annuities and higher in-force earnings in our insurance businesses. Core earnings in the U.S. decreased by 8%, largely due to the VA reinsurance transaction, excluding the impact of the transaction, core earnings in the U.S. would have increased 2%. The core loss in corporate and other increased by $61 million, primarily driven by the unfavorable impact of markets on seed money investments, and we delivered core ROE of 12.1%. Turning to Slide 18, which shows our APE sales and new business value generation. In the second quarter, we generated APE sales of $1.4 billion, down 1% from the prior year quarter as growth in North America was more than offset by a decline in Asia. In Asia, APE sales decreased 12% due to continued adverse impacts from COVID-19 in Hong Kong, lower COLI product sales in Japan, and lower sales in Asia Other. APE sales increased 32% in Canada and 6% in the U.S., respectively. We delivered new business value of $511 million, a decrease of 9% from the prior year quarter. In Asia, NBV decreased due to the factors I noted earlier and a less favorable product mix in Asia Other. This was partially offset by strong new business value growth in Canada, driven as well as improved margins, higher international sales, and higher interest rates in the U.S. Turning to Slide 19. Our Global WAM business continued to benefit from our geographic and line of business diversification. Despite a challenging macro environment, we delivered positive net flows of $1.7 billion. In Retail, net outflows were $1.9 billion compared with net inflows of $7.3 billion in the prior year quarter. The decrease was driven by higher mutual fund redemption rates and lower gross flows due to reduced investor demand with equity market declines and higher interest rates. Institutional Asset Management net inflows were $2.5 billion compared with net inflows of $1.9 billion in the prior year quarter. In Retirement, net inflows were $1.1 billion compared with net outflows of $0.6 billion in the prior year quarter, driven by growth in member contributions and lower planned redemptions. Overall, Global WAM's average AUMA decreased by 3%, driven by the unfavorable impact of markets in 2022, partially offset by net inflows over the past 12 months. Net fee income yield decreased by 1.6 basis points, reflecting a decline in fee spreads. We delivered a core EBITDA margin of 30.7% despite market headwinds and modestly higher general expenses. Turning to Slide 20. Our continued cost discipline is delivering meaningful benefits, providing further support to offset the impact of the macro environment on top-line growth. We contained growth in core expenses to a modest 2% in the second quarter and 1% for the year-to-date. As a result, our expense efficiency ratio for the second quarter and year-to-date were in line with our target of below 50%. Expense management, including initiatives to improve productivity, remains an important strategic priority as we aim to maintain an expense efficiency ratio of less than 50%. Turning to Slide 21. We continued to maintain a strong balance sheet and capital position. Our LICAT ratio of 137% is strong and represents $23 billion of capital above the supervisory target. The three percentage point decrease from the first quarter was mainly driven by an increase in risk-free rates, partly offset by the favorable impact of a net capital issuance. I would note that we expect the impact of IFRS 17 to be approximately neutral for the LICAT ratio based on markets as of 30th of June and calibration adjustments that OSFI reflected in the recently released LICAT guideline for 2023. While the actual impact at transition will depend on macroeconomic conditions on January 1, 2023, our capital position will continue to be strong under IFRS 17. Our financial leverage ratio increased by 2.1 percentage points from the prior quarter, driven by the issuance of securities and the impacts of higher interest rates on AFS bonds. We are committed to delivering value to shareholders. And so far this year, we have repurchased approximately 2% of our common shares. Slide 22 shows the summary of our financial performance for the quarter. While the performance of our profitability and growth metrics was impacted by a challenging macro environment, our global strength and diversity continue to provide notable offsets. Our balance sheet remains strong and provides us with financial flexibility to deliver on our strategic and capital deployment priorities. Slide 23 outlines our medium-term financial targets and recent performance. While some of these metrics are tracking below our targets year-to-date, we're pleased with the performance and resilience of our business given the continued disruption caused by the impact of COVID-19 and global market volatility. We remain confident in our ability to continue to deliver on our targets over the medium term. 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. This will help to ensure that everyone will have an opportunity to ask a question.

Operator, Operator

Thank you, operator. We'll be available after the call if there are any follow-up questions. Have a good day, everyone.

Operator, Operator

Thank you. The conference call has ended. Please disconnect your lines at this time, and we thank you for your participation.