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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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