Manulife Financial : Transcription (PDF en anglais)

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Q1 2021 Manulife Financial Corp Earnings Call

EVENT DATE/TIME: MAY 06, 2021 / 12:00PM GMT

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MAY 06, 2021 / 12:00PM GMT, Q1 2021 Manulife Financial Corp Earnings Call

CORPORATE PARTICIPANTS

Adrienne O'Neill Manulife Financial Corporation - Global Head of Investor Relations

Anil Wadhwani Manulife Financial Corporation - General Manager Asia

Naveed Irshad Manulife Financial Corporation - Head of North American Legacy Business

Paul Lorentz Manulife Financial Corporation - President and CEO, Global Wealth & Asset Management

Phil Witherington Manulife Financial Corporation - Chief Financial Officer

Roy Gori Manulife Financial Corporation - President & Chief Executive Officer

Scott Hartz Manulife Financial Corporation - Chief Investment Officer

Steve Finch Manulife Financial Corporation - Chief Actuary

CONFERENCE CALL PARTICIPANTS

Darko Mihelic RBC Capital Markets, Research Division - Equity Analyst

Doug Young Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst Francois Macheras Evercore ISI - Equity Research Vice President, Global Insurance

Gabriel Dechaine National Bank Financial, Research Division - Analyst

Humphrey Lee Dowling & Partners LLC - Equity Research - Head of Life Insurance & Retirement Services Mario Mendonca TD Securities - MD & Research Analyst

Meny Grauman Scotiabank Global Banking and Markets, Research Division - MD of Financial Services Equity Research & Analyst Nigel D'Souza Veritas Investment - Investment Analyst

Paul Holden CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research Scott Chan Canaccord Genuity Group Inc. - Managing Director, Research, Financials

Tom MacKinnon BMO Capital Markets - MD & Analyst

PRESENTATION

Operator

Please be advised that this conference call is being recorded. Good morning, and welcome to the Manulife Financial First Quarter 2021 Financial Results Conference Call. Your host for today will be Ms. Adrienne O'Neill. Please go ahead, Ms. O'Neill.

Adrienne O'Neill Manulife Financial Corporation - Global Head of Investor Relations

Thank you, and good morning. Welcome to Manulife's earnings conference call to discuss our first quarter 2021 results. We are conducting this call virtually. The earnings release, financial statements and related MD&A, embedded value report, statistical information package and webcast slides for today's call are available on the Investor Relations section of our website at manulife.com.

Turning to Slide 2. I want to remind you that we are hosting an Investor Day on June 29, where we will share an update on the company's strategy with an emphasis on accelerating growth in our Asia and Global WAM businesses as well as executing on our digital strategy. To ensure a smooth viewing experience, please register in advance by clicking the link on Slide 2 or through the Investor Relations section of our website.

Turning to Slide 5. We will begin today's presentation with an overview of our first quarter highlights and an update on our strategic priorities by Roy 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 then Steve Finch, our Chief Actuary, will discuss embedded value.

After the prepared remarks, which were recorded in advance to ensure optimal sound quality, we will move to the live question-and-answer portion of the call. We ask each participant to adhere to a limit of two questions. If you have additional questions, please re-queue, and we'll do our best to respond to all questions. Before we start, please refer to Slide 3 for a caution on forward-looking statements and Slide 31 for a note on the use of non-GAAP financial measures 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?

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MAY 06, 2021 / 12:00PM GMT, Q1 2021 Manulife Financial Corp Earnings Call

Roy Gori Manulife Financial Corporation - President & Chief Executive Officer

Thanks, Adrienne. Good morning, everyone, and thank you for joining us today.

Turning to Slide 7. Yesterday, we announced our financial results for the first quarter of 2021. We're off to a strong start with double-digit growth across a number of our key operating metrics compared with the prior year quarter. We delivered record core earnings of $1.6 billion, a 67% increase from the prior year, with double-digit growth across all our operating segments. We reported net income of $783 million, reflecting the immediate impacts of the steeping yield curve and higher risk-free rates. It's worth noting that a higher interest rate environment is beneficial to Manulife's business in the long term.

New business value increased 32%, with double-digit growth in Asia and the U.S. In our Global WAM business, our core EBITDA margin increased 340 basis points as we continued to build scale and benefited from growth in higher-margin markets. And our core ROE increased by 5.5 percentage points to 13.7%. Finally, we reported embedded value of $61.1 billion or $31.49 per share as of December 31, 2020. It's worth noting that embedded value only reflects a portion of the value of our businesses, as it attributes no value to future new business and only tangible book value to our growing Global WAM businesses as well as our P&C reinsurance operations and Manulife Bank.

Turning to Slide 8, and the progress that we've made executing on our five priorities. Our commitment to optimize Manulife's legacy portfolio remains, and we continue to seek opportunities to reduce risk and unlock value. In the first quarter, we freed up $65 million of capital through the ongoing success of our variable annuity buyout program in the U.S. Expense efficiency is deeply embedded in our culture and I'm pleased to see that reflected in our first quarter expense efficiency ratio of 48.5 percent. While there's still work to do in order to consistently achieve a ratio of less than 50%, we're on the right track.

Our third priority is to accelerate growth in our highest potential businesses, and we aspire to have these businesses generate 2/3 of the total company core earnings by 2022. Growth in our highest potential businesses has outpaced other areas for the last few years, and we're on track to achieve our target by next year. Our highest potential businesses accounted for 60% of total company core earnings in the first quarter of 2021, with Asia and Global WAM delivering exceptional results. In fact, the combined contribution from our Asia and Global WAM businesses to Manulife's core earnings was 54% in the first quarter of 2021.

Sustainability is a priority for Manulife, and our Global WAM business expanded its ESG offerings with the launch of our Sustainable Asia Bond Fund in Europe, and our Global Climate Pooled Fund in Canada, our first climate-change-themed fund developed in alignment with the principles of the Paris Agreement on climate change.

Our fourth priority is about our customers and how we're using technology to attract, engage and retain customers by delivering an outstanding experience. We have continued to make progress on our digital journey across all our operating segments to better engage with our customers. In Canada, we completed the migration of our Group Benefit clients to one administration system and launched a new adviser portal across our businesses to improve the adviser experience. In the U.S., we piloted a new portal for distributors to submit forms and client information for our international products and streamlined our U.S. life insurance customer onboarding process, reducing the account opening time by as much as 80 percent.

Through our Vitality offering, we announced programs to reward customers in North America who received the COVID-19 vaccine. In Vietnam, we launched a digital sales platform that enables customers to purchase health insurance online. And in Global WAM, we launched a money market fund with OVO, Indonesia's leading digital payments platform and its strategic partner, Bareksa, Indonesia's first online mutual fund marketplace. The result combines digital money and online investment to reach a younger generation of investor in a growing and important market for us.

Our final priority is around building a high-performing team and culture. Our target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022, and we're proud to have achieved this ranking in 2020. We continue to invest in our team and in April, we launched the Pursuit Learning Hub with LinkedIn Learning. This hub is a world-class online resource with courses taught by internationally respected subject-matter experts. This unified learning and development platform

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MAY 06, 2021 / 12:00PM GMT, Q1 2021 Manulife Financial Corp Earnings Call

provides our team with the opportunity to learn new skills, capabilities and ways of working, which will enable us to further accelerate our digital customer-obsessed culture.

To conclude, we have the right strategy and continue to demonstrate great progress against it. We delivered strong results to start the year, despite ongoing headwinds and remain committed to our medium-term financial targets, including our dividend payout ratio. I'm optimistic for the future and confident that Manulife is well positioned to outperform as the global economy transitions to recovery.

Thank you. And I'll hand over to Phil Witherington, who will review the highlights of our financial results. Phil.

Phil Witherington Manulife Financial Corporation - Chief Financial Officer

Thank you, Roy, and good morning, everyone. Turning to Slide 10 and our financial performance for the first quarter of 2021. We started the year with the delivery of strong results, including a 14% rebound in APE sales and the highest new business value in any quarter of our company's history. And, double-digit core earnings growth across all of our operating segments resulted in core earnings of $1.6 billion, which is also a quarterly record. I will highlight the key drivers of our first quarter performance with reference to the next few slides.

Turning to Slide 11, we generated core earnings of $1.6 billion in the first quarter of 2021, up 67% from the prior year on a constant exchange rate basis. This was driven by the favourable impact of markets on seed money investments, higher new business gains in Asia and the U.S., the recognition of core investment gains in the quarter, favourable net policyholder experience, fee income from higher average AUMA in our Global WAM business and in-force business growth across all operating segments.

Net income attributed to shareholders was $783 million in the first quarter, reflecting strong core earnings and investment-related experience gains, partially offset by a net charge from the direct impact of markets as well as a restructuring charge. Of note, we delivered investment-related experience gains of $177 million in the quarter, reflecting higher-than-expected returns on ALDA, primarily driven by fair value gains on private equity investments; the favourable impact of fixed income reinvestment activities and favourable credit experience; partially offset by lower-than-expected returns on real estate. This allowed us to report $100 million of investment-related experience gains in core earnings and $77 million outside of core earnings.

The direct impact of markets in the quarter was a net charge of $835 million, reflecting the impact of non-parallel yield curve movements, primarily driven by the steepening of the yield curve in the U.S. and Canada as well as higher risk-free rates and narrowing corporate spreads. It's important to recognize that the 80 basis point steepening of the curve was an unusual event and by far the greatest steepening we have seen since we implemented our hedging programs in 2012. While net income was adversely impacted by interest rates in the first quarter, higher interest rates are a positive for Manulife in the long term, and Steve will elaborate on this when he presents our 2020 embedded value results in a few minutes.

As we've stated in the past, getting our expenses into fighting shape is an integral component of our strategy and one that we must execute on in order to achieve our ambition. This includes delivering on our target of consistently achieving an expense efficiency ratio of less than 50% by 2022. To that end, we monitor and evaluate our expense base continuously and take action where we see opportunities to operate more efficiently. The restructuring charge of $150 million pre-tax or $115 million post-tax relates to actions that are expected to result in recurring annual expense savings of $250 million pre-tax by 2023. $100 million of these savings are expected to emerge in 2021, growing to $200 million in 2022. These actions pertain to a wide variety of Manulife's businesses and functions, including the U.S. and Japan.

Slide 12 shows our source of earnings analysis. Expected profit on in-force increased by 11% on a constant exchange rate basis, driven by in-force business growth in Canada, the U.S., Japan, Hong Kong and Vietnam. The year-over-year increase reflects business growth in Asia as well as Canadian group insurance and a modest benefit from the impact of the annual actuarial review. We continue to view six percent as a reasonable annual growth rate for our expected profit on in-force with high single-digit growth in Asia being balanced out by low to mid-single-digit growth in North America.

New business almost doubled compared with the prior year quarter, reflecting higher sales and favourable product mix in Mainland

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MAY 06, 2021 / 12:00PM GMT, Q1 2021 Manulife Financial Corp Earnings Call

China, Vietnam, Hong Kong, the U.S. and Singapore. Net policyholder experience in the first quarter was favourable, reflecting the impact of higher claims terminations in U.S. long-term care, partially offset by mortality losses in U.S. life and Canada individual insurance. Core earnings on surplus increased compared with the prior year quarter, largely due to favourable returns on seed money investments, partially offset by lower investment income due to lower fixed income yields.

Turning to Slide 13. We delivered core earnings growth of 29% in our Global WAM business, reflecting higher fees from higher average AUMA as a result of strong market performance and net inflows. Core earnings in Asia increased by 21%, driven by higher new business volumes, favourable product mix in Hong Kong and Asia Other and in-force business growth across Asia, partially offset by less favourable policyholder experience and lower investment income on allocated capital. Core earnings in Canada increased by 11%, primarily reflecting improved policyholder experience, including the nonrecurrence of the first quarter 2020 COVID-19-related travel insurance claims provision and higher in-force business earnings, partially offset by lower investment income on allocated capital and unfavourable policyholder experience in retail insurance.

Core earnings in the U.S. increased by 28%, primarily driven by the impact of COVID-19 on policyholder experience. Higher in-force earnings increased new business gains from higher sales volumes and improved product mix; and gains from the GMWB Annuities Offer program were offset by lower investment income on allocated capital. Core losses in corporate and other decreased by $348 million, primarily driven by the favourable impact of markets on seed money investments and core investment gains, partially offset by lower investment income due to lower fixed income yields.

Slide 14 shows our new business value generation and APE sales. Our insurance business delivered very strong new business value of $599 million in the first quarter of 2021, an increase of 32% versus the prior year quarter, driven by double-digit growth in Asia and the U.S. In Asia, new business value increased 39% from the prior year quarter, driven by higher sales volumes and product management actions in Hong Kong and higher sales volumes and favourable product mix in Asia Other, partially offset by lower sales volumes and unfavourable product mix in Japan due to a shift to lower margin COLI products.

In Canada, NBV was consistent with the prior year quarter as a more favourable product mix offset the impact of lower APE sales in individual insurance. In the U.S., NBV increased 30% from the prior year quarter, resulting in the strongest first quarter result in over a decade, driven by higher sales volumes and a more favourable product mix. In the first quarter of 2021, we delivered APE sales of $1.8 billion, a 14% increase from the prior year quarter. In Asia, APE sales increased by 22%, driven by strong growth in our Hong Kong bank channel and double-digit growth in both bancassurance and agency channels in Singapore, Mainland China, Vietnam and Indonesia, partially offset by lower sales in Japan as a result of the adverse impact of COVID-19.

In Canada, APE sales decreased by six percent, reflecting the nonrecurrence of a large affinity markets sale in the first quarter of 2020, partially offset by robust sales of lower-risk segregated fund products. In the U.S., APE sales increased by 13%, driven by domestic indexed universal life products and a recently launched international savings plan product. Additionally, sales of customer solutions with the John Hancock Vitality PLUS feature increased 20% compared with the first quarter of 2020, as this offering continues to be a key differentiator for us.

Turning to Slide 15. Our Global Wealth and Asset Management business benefited from the favourable impact of market performance and delivered net inflows of $1.4 billion with gross flows of nearly $40 billion during the first quarter. In Asia, net outflows of $7.4 billion compares to net inflows of $0.6 billion in the prior year quarter. This decrease was driven by a $9.4 billion redemption in institutional asset management, partially offset by higher gross flows across all business lines. In Canada, net inflows were $4.5 billion compared with net inflows of $2.8 billion in the prior year quarter. The increase was driven by higher net inflows across our retail products, partially offset by the nonrecurrence of several large equity mandate sales in institutional asset management in the first quarter of 2020.

In the U.S., net inflows were $4.2 billion in the first quarter of 2021 compared with net outflows of $0.2 billion in the prior year quarter, driven by retail inflows from strong intermediary sales and lower mutual fund redemptions as well as lower redemptions in institutional asset management. Lower net inflows in retirement were a partial offset. Overall, Global WAM's average AUMA increased by 18% compared with the prior year quarter, driven by the favourable impact of markets and higher net inflows. And, our core EBITDA margin was 30.7% in the first quarter of 2021, up 340 basis points from the prior year quarter.

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