Manulife Financial Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 16 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Manulife Financial Third Quarter 2024 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Koh. Please go ahead, sir.

Speaker 1

Thank you. Welcome to Manulife's earnings conference call to discuss our Q3 year to date 2024 financial and operating results. Our earnings materials, including the 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 34 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.

Speaker 1

Turning to Slide 4. Roy Gory, our President and Chief Executive Officer, will begin today's presentation with a highlight of our Q3 year to date 2020 results and a 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 and A portion of the call. With that, I'd like to turn the call over to Roy Gory, our President and Chief Executive Officer.

Speaker 1

Roy?

Speaker 2

Thanks, Hung, and thank you, everyone, for joining us today. Yesterday, we announced our Q3 2024 financial results. These strong results are a testament to the benefits of our unique business mix and geographic footprint and the tremendous momentum that we have in the franchise. We are executing on our strategy and delivering strong financial performance, while making great progress towards our goal of being the digital customer leader in our industry. In the Q3 of 2024, we delivered record financial and operating results, including core earnings, APE sales, new business CSM, new business value, our customer Net Promoter Score or MPS and straight through processing or STP.

Speaker 2

We generated significant top line growth, including 40% growth in APE sales, led by broad based growth in Asia, which delivered record levels of APE sales, new business CSM and new business value. I'm also very pleased with the contributions from our businesses in North America. Global WAM also delivered another strong quarter with over $5,000,000,000 of net flows and positive contributions from each business line and geography. We've now generated positive net flows in 13 of the past 14 calendar years. And on a year to date basis, we've delivered over $12,000,000,000 of net flows in 2024.

Speaker 2

We generated solid core earnings growth of 4%, which was led by 17% growth in Asia and 37% growth in Global WAM. Excluding the impact of global minimum taxes or GMT, core earnings growth would have been 7%. On a per share basis, core EPS grew 7% year over year or 11% if adjusted for the impact of GMT. We delivered an attractive core ROE of 16.6 percent demonstrating that we're on our path towards our 18% plus goal. Finally, we maintained a strong balance sheet and ample financial flexibility with a strong LICAT ratio of 137 percent and leverage ratio of 23.5%.

Speaker 2

As we made clear at our Investor Day in June, Manulife is well positioned to continue delivering strong results like these and outperform peers, thanks to our unique geographic footprint and attractive business mix, our scale and ability to capture global megatrends and a clear path to deliver against our strategic priorities. Moving to Slide 7. As you can see, our disciplined execution continued to drive strong growth in key metrics on a year to date basis. Asia and Global WAM continue to demonstrate strong contributions to our year to date growth. In Asia, we have a diversified high quality distribution platform and our ambition is to be the number one choice for customers.

Speaker 2

We generated strong sales throughout the year, driven by growth across distribution channels. In Global WAM, our scale, unique footprint and business mix, along with expense discipline, is driving operating leverage with our year to date core EBITDA margin up 190 basis points. We delivered 12% core EPS growth on a year to date basis, at the top end of our medium term target range, driven by sustained strong performance in our high growth segments, coupled with share buybacks. This is an excellent result as year to date core EPS would have grown 14% without the impact of GMT. Similarly, our core ROE continue to expand and improved 0.6 points year over year.

Speaker 2

We've also delivered robust book value growth over this period with 14% growth in adjusted book value per share and 9% growth in book value per share. It's worth noting that we've delivered this growth net of returning close to $5,000,000,000 of capital to shareholders over the past year. We have repurchased 58,000,000 common shares so far this year. And as a reminder, we're committed to fully executing the remaining 32,000,000 shares of our current NCIB program, which expires in February 2025. Based on our current share price, our share buybacks have generated a benefit of more than $2,500,000,000 since 2021, and we continue to view these as a good tool to generate value for shareholders.

Speaker 2

Turning to Slide 8. In addition to capitalizing on our strong operating momentum, we remain focused on execution and on investing for the future, and we continue to make progress towards our goal of being the digital customer leader in our industry. To that end, we're leveraging our advanced Gen AI capabilities across the franchise. We've already launched 11 use cases into production with another 13 to be launched before year end, an additional 16 in development. These encompass all areas of our business and are being ambitiously scaled to maximize business value.

Speaker 2

For example, the Singapore Gen AI sales tool that we showcased at Investor Day has achieved a successful pilot result of more than 5% higher repurchase rate, and we've since extended the tool to all agents in Singapore. We plan to further expand the tool to other markets before year end. We've also extended AI powered call summarization and contract lookup tools to 15% of our North American contact center agents in the past 6 months. These are 2 significant drivers of efficiency and have already delivered a 12% reduction in average handle time so far this year. We plan to continue rapidly rolling this out globally and enhancing these capabilities to drive even greater efficiencies.

Speaker 2

Our mission is decisions made easier, lives made better, and our digital priorities are all about optimizing the customer experience. Our relationship NPS score is now at an all time high of 25, and our STP has now exceeded our 2025 target of 88%. We also continue to invest in helping our customers' health and well-being. We hold our 2nd longevity symposium in Boston in October, where we gathered over 500 industry leaders, distribution partners, academics and government officials to discuss the latest developments to help our customers live longer, healthier, better lives. This event generated overwhelming positive feedback from the participants and preliminary results of our post event survey saw an NPS of over 92.

Speaker 2

Our digital efforts have not only enhanced customer experience, but also drove improved financial outcomes. To that end, we are well positioned to extract maximum value from our digital investments, and we're on track to exceed the $500,000,000 in benefits we expected to generate in 2024, representing more than 2.5 times growth from 2023. We have our clear line of sight to generating additional value and look forward to updating you on our progress going forward. In summary, our strong execution this year is driving quality growth in new business and earnings and generating significant value for shareholders. We're delivering strong operating and customer satisfaction metrics, and we are well positioned to deliver on the ambitious but achievable new targets that we announced at Investor Day.

Speaker 2

With that, I'll hand it over to Colin to review the highlights of our financial results. Colin? Thanks, Roy. It has

Speaker 3

been another strong quarter for Manulife. Let me dive into a little more detail on the results before the Q and A. I'll start with our top line on Slide 10, where we delivered record levels of APE sales, new business CSM and new business value. Our APE sales increased 40% from the prior year, reflecting very strong growth in Asia and despite the prior year results, including a large affinity market sale in Canada. Asia generated high volume across multiple markets, most notably in Hong Kong, supported by our high quality, diversified distribution capabilities and our differentiated product offerings.

Speaker 3

Our strong sales contributed to substantial increases in new business CSM of 47% and new business value of 39%. Global WAM saw solid net inflows of $5,200,000,000 with contributions from all business lines and real strength in our retail business. The continued strength in our top line is encouraging, particularly in our Asia and Global WAM segments as we reshape our earnings profile towards higher return businesses. On our core earnings results on Slide 11, 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 that we continue to see the benefits of growth in our Insurance businesses as well as an improved change in the ECL, but this was partially offset by lower investment spreads.

Speaker 3

The core net insurance service result has once again grown faster than the core net investment results and made up 48% of pretax core earnings in the quarter. In the bottom half of the table, you'll see that Global WAN significantly increases contribution to pretax earnings supported by average AUMA growth and margin expansion. The impact of GMT on our core earnings was a $61,000,000 charge for the quarter. And as Roy mentioned, this reduced our core earnings growth by approximately 3 percentage points. In addition, the reinsurance transactions with Global Atlantic and RGA that closed earlier this year reduced core earnings by $23,000,000 across multiple lines of the DOE.

Speaker 3

On to Slide 12. Core EPS increased 7% as we grew core earnings and continued buying back shares. You normalize for the impact of GMT, core EPS would have grown 11% in line with our medium term target of 10% to 12%. Net income was higher than core earnings this quarter with a few largely offsetting non core items driving a modest net positive impact. Let me expand on the notable items.

Speaker 3

We reported an approximate $100,000,000 realized gain from the disposal of fixed income assets this quarter, which included trading activity in Mainland China, where we have seen interest rates decreasing as well as core premiums on bond prepayments. Our Alder portfolio resulted in a $167,000,000 non core charge. Our portfolio remains well diversified and reflects current valuations and our experience this quarter marked a significant improvement from recent quarters with commercial real estate contributing to the majority of this charge. During the quarter, we also completed our annual review of actuarial models and assumptions or basis change, which resulted in an overall reduction of $174,000,000 in pretax fulfillment cash flows, which comprised of a net $816,000,000 increase in OCI, partially offset by decreases in CSM and a $199,000,000 post tax adverse impact to net income shown here. Overall, the net impact from the base exchange was modest and further illustrates the stability of our reserve development.

Speaker 3

More information on the actuarial review is available in the appendix of this presentation. Bringing you to our book value on Slide 13. You can see we grew our adjusted book value per share by 14% from the prior year quarter to $34.97 even after returning nearly $5,000,000,000 of capital to shareholders via dividend and our NCIB program over the past year. It's worth reiterating that we expected much steadier growth in adjusted book value under IFRS 17, and you can see from this chart that this is playing out. Now we'll cover the segment view of our results in the next few slides, starting with Asia on Slide 14.

Speaker 3

Our Asia segment generated strong growth in both top and bottom line metrics. APE sales increased by 64% from the prior year quarter, driven by growth across most markets, led by Hong Kong, which saw growth across all sales channels, including from both MCB and domestic customers. The overall increase in sales contributed to 45% 55% growth in our value metrics, new business CSM and MBV, respectively. Our 3 top line metrics highlighted here reached record levels for the quarter. We delivered 17% core earnings growth in Asia as we benefited from higher expected earnings on insurance contracts and higher expected investment earnings with notable growth from our largest in force business, Hong Kong.

Speaker 3

These results demonstrate why we showcased Asia at our Investor Day in June. Moving over to Global WAM's results on Slide 15. It really was a fantastic quarter for Global WAM, delivering record core earnings for the quarter with growth of 37% supported by higher average AUMA along with favorable tax true ups and tax benefits of approximately $70,000,000 Even excluding the impact of these tax items, the segment still generated record core earnings for the Q3. We reported $5,200,000,000 of net inflows for the quarter with positive flows across all business lines and regions. Notably, we generated strong net inflows in our retail business, benefiting from strong equity markets, which helped drive investor demand and we saw advisor growth in our Canada Wealth business.

Speaker 3

We continued to generate positive operating leverage, driving another quarter of core EBITDA margin expansion, which increased 90 basis points from the prior year to 27.8%. Bringing you over to Canada on Slide 16, we delivered solid results across our Insurance businesses during the quarter. APE sales decreased 20% from the prior year quarter, but this was attributable to the non recurrence of the large affinity market sale in the same quarter last year. Excluding this, we generated strong sales growth of 27%, driven by higher retail sales in individual insurance, mid and large case sales in Group Insurance and segregated fund sales in our annuities business. Core earnings grew modestly in Canada, primarily driven by business growth in Group Insurance, neutral ECL experience compared with the charge in the prior year, but this was mostly offset by positive, but less favorable claims experience in our Group Insurance business.

Speaker 3

On to Slide 17, which shows our U. S. Segment's results. In the U. S, we saw a rebound in demand for our accumulation insurance products from affluent customers, which drove up APE sales and contributed to the growth in new business CSM and new business value.

Speaker 3

Core earnings decreased 8% from the prior year quarter as a lower charge in the ECL and more favorable claims experience in our U. S. Life business was more than offset by lower investment spreads. Lower earnings from the Global Atlantic Reinsurance transaction that closed earlier this year as well as the net impact of the basis change. Let's now move to our balance sheet on Slide 18.

Speaker 3

In the Q3, our LICAT ratio remained strong at 137%, which was $23,000,000,000 above the supervisory target ratio. Our financial leverage ratio reduced further and continues to provide ample financial flexibility at 23.5% or 23%, including the impact of the announced redemption of subordinated debentures. This puts us comfortably below our target ratio of 25%. During the Q3, we accelerated the pace of our share buybacks and together with dividends, we returned close to $1,700,000,000 of capital to shareholders. Our accelerated share buyback pace is reflective of our intention to fully execute our current NCIB program of 90,000,000 shares as we announced last quarter.

Speaker 3

And as Roy mentioned, as at October 31, there remained approximately 32,000,000 shares capacity until the expiry of the program in February 2025. And finally, moving to Slide 19, which summarizes how we're tracking against our 2027 and medium term targets. As you can see from our year to date results, we are showing momentum towards our new core ROE target with an attractive 16.3%, reflecting strong business performance and disciplined capital allocation. The discrete quarter's ROE was 16.6%. And we are continuing to deliver on our remaining medium term targets, which includes expense efficiency, where our disciplined expense management together with core earnings growth has brought our year to date ratio down to 45%, in line with our target.

Speaker 3

This concludes our prepared remarks. Before we move to the Q and A session, I would like to remind each participant to adhere to a limit of 2 questions, including follow ups and to re queue if they have additional questions. Operator, we will now open the call to questions.

Operator

Thank you. We will now take questions from the telephone lines. Our first question is from Meny Grauman from Scotiabank. Please go ahead.

Speaker 4

Hi, good morning. Question on ALDA, whether this is an inflection point for your PE portfolio. Obviously, you mentioned the sort of the moderating impact from commercial real estate, but you didn't talk about PE. So just wondering what the outlook is there based on what you saw in Q3.

Speaker 5

Manny, thanks for the question. It's Trevor. So obviously, very happy to see the strong older performance in the quarter. Still a little bit below target, but as you noted, I think substantially better than we've seen recently and actually the best over the last 9 quarters. The main driver of the loss, as Colin mentioned, was real estate.

Speaker 5

The experience was actually similar to Q2 and just really reflected flat performance for the asset class. In terms of the remaining classes, which I think was your question, it was really a mix of gains and losses. Infrastructure was substantially better than it had been in Q2 and Private Equity as well was also materially better than in the Q2. In terms of the outlook, it's obviously difficult to say. We do expect, I think, a continued improvement in, I think, the overall portfolio and Private Equity as well.

Speaker 5

We do still think that we will get back to our long term assumptions around the middle of 2025. And so remain confident in the long term performance of the strategy and the portfolio.

Speaker 4

Thanks. And then maybe just another question, maybe for Roy. We saw the stock react quite favorably to the U. S. Election yesterday.

Speaker 4

Just wondering from your perspective, how you see the impact from

Speaker 6

the U.

Speaker 4

S. Election across your business? Sometimes we get questions about people trying to think through the impact for your Asia business specifically, but more broadly, if you have any thoughts on that.

Speaker 2

Yes. Good morning, Manny. Look, at a very macro level, I would say that we don't really see that the U. S. Election would be a major factor on our performance of our business.

Speaker 2

And that's really a large function of the fact that we're a very diversified business across 3 broad geographies, which has really helped us whether a whole lot of different weathers and storms. If you look at yesterday's market reaction, obviously, the U. S. Dollar reacted very positively and we saw equities rally. They are positives, but we wouldn't be banking those as big wins that we should be celebrating.

Speaker 2

We think that we're going to see a little bit of volatility off the back of the announcement, but that will normalize. And really, the underlying performance of the business that you see come through in our Q3 results, we expect to show the resilience of our business for not only the rest

Speaker 3

of the year, but for the following year.

Speaker 4

Great. Thank you.

Operator

Thank you. Our following question is from Tom Gallagher from Evercore ISI. Please go ahead.

Speaker 7

Good morning. I had a few questions on the actuarial review. Given the SGUL charge, would you expect a related U. S. Statutory impact?

Speaker 7

And would you expect this to impact your remittance plans for 2025? And I guess the same question in reverse for Asia. Does the positive release have any cash flow impacts when you think about Asian cash flows?

Speaker 8

Sure, Tom. It's Steve here. So with respect to the review, the impact in the U. S, we do not expect any negative impact immediate impact on remittances. There's no impact on the RBC ratio.

Speaker 8

It remains very strong and does not impact our remittance for 2025. I'd say overall, the results of the review don't have an impact in terms of our commitment to the target the new target remittances that we set out at Investor Day. So yes, no significant impact there at all.

Speaker 7

Great. And then I guess my follow-up is, does taking this size of a reserve addition on SGUL make it more affordable when you think about considering potential risk transfer? Is that a risk in a block that you're considering?

Speaker 9

Hey, good morning, Tom. It's Mark Costantini here. Thanks for the question. I guess I'll start by saying that if you look at our track record of execution on our legacy businesses and optimizing, I think you will see a very strong track record there of execution there and delivering value to our shareholders. And I think last time we took a look at it, it was over $11,000,000,000 over the last number of years.

Speaker 9

And most notably, obviously, the last couple of transactions over the last 12 months, which were very referable and solidifying our balance sheet. So having said that, we'll never talk about ongoing transactions until they take place, but we will look to continue to manage and actively manage our legacy portfolio as we move forward. Obviously, we have a focus on some of these U. S. Liabilities you mentioned, including LTC as well.

Speaker 9

So more to come as we work through all those files. But I would say the basis change itself does not necessarily impact because any buyer counterpart would factor in some of the current experience. So what Steve alluded to earlier does not necessarily impact how we would approach transacting on a block like this. So thanks.

Speaker 7

Thank you.

Operator

Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Speaker 10

Good morning. Similar line of questioning, I guess, but more on the Asia business. I saw there was some negative experience there insurance experience. I assume that's lapse related. And when I read the actuarial review details, it says you did strengthen reserves for lapse in the U.

Speaker 10

S. And in Asia, but not like the Vietnam stuff that's been a problem in the past. A, is that kind of dealt with now? And B, do you think that the actions they took this quarter will simmer down those lapse trends in the P and L?

Speaker 11

Thanks, Gabriel. This is Phil. Maybe I make a start on that Asia question and hand over to Steve to supplement. What you see in the drivers of earnings analysis in terms of experience, an $18 charge, I would say that's within the range of normal variability quarter to quarter and policyholder experience. When you look at it on a year to date basis, it's a negative $6,000,000 So there are positives, there are negatives and it will move around from quarter to quarter.

Speaker 11

There were a couple of larger claims this quarter relating to some of the high net worth business across our high net worth markets, but nothing beyond that, that I would particularly highlight. You referenced Vietnam. I think it's important to note that some of the headwinds that we had seen from an experience perspective in Vietnam flowing through the CSM in prior quarters. That's now normalized, so substantially less and you can see an approximately neutral experience in the CSM for Asia. Steve, is there anything you'd like to supplement?

Speaker 1

Yes. I would just add

Speaker 8

a little bit, Phil, that particularly the point on Vietnam. If you look at prior year, that was driving the negative experience. And as we said, we expected normalization there, and that's what we've seen in the quarter, which Phil highlighted.

Speaker 10

Okay. And my next question also a bit of a connecting dots here, but just so I understand it, the reinsurance assumption, you're assuming higher costs for old age mortality reinsurance in the future and that's where there was a reserve strengthening? That's the gist of it?

Speaker 8

Yes. Thanks, Gabe. And maybe I'll start with reminding people the point Colin said. So overall, the assumption review was a release of reserve of about $174,000,000 Moving on to the item that you're asking about specifically. Yes, so as part of our review, the reinsurance and risk adjustment review, we recalibrated our risk adjustment in North America to a similar approach to what we did in Asia the prior year.

Speaker 8

And we also updated our reinsurance reserves. It was a regular review that we did and really updated to reflect true up our current views on current market conditions. And it was, as you noted, it's on older mortality reinsurance.

Speaker 10

I guess my point on this is not the labor, the details of the actuarial review, there's a lot of moving pieces, is that if reinsurers are charging more for old age mortality risk, just does that maybe suggest that there is more demand for products that benefit from higher mortality in legacy business like long term care? Does that make any sense at all that because that trend is happening, it might enhance the appeal of your long term care legacy blocks and make them easier to transact?

Speaker 8

I'll start and I'll hand it over to Mark. And just sort of reemphasize what you said is we have seen and you saw through the pandemic that we had fantastic offsets between mortality and longevity. So when mortality is really low, we see gains in life, we see losses in LTC and vice versa. But Mark, you can add. Steve, you alluded to the strong point I was going

Speaker 9

to make is that we have a natural balance in our portfolio. And as we look to transact on any type of business, the counterparties obviously factor that in as well. And it's we try to aim and have achieved win win outcomes for both ourselves and the counterparties, which is the strength of the execution of this team and our counterparts.

Speaker 10

All righty then. Thanks.

Operator

Thank you. Our following question is from Alex Scott from Barclays Capital. Please go ahead.

Speaker 6

Hi, good morning. First one I'll ask is on the sales in Hong Kong. I was just hoping you could unpack some of the success you're having both in the domestic market and elsewhere. Thank you.

Speaker 11

Great. Thank you, Alex. Good morning. This is Phil. It has been a fantastic quarter in many respects across Asia, including sales as you highlight.

Speaker 11

And Hong Kong has been an important part of that as have other markets and I'll come on to that in a moment. But in Hong Kong, we've seen an 80% 83% increase in new business value. That is a record level of NBV in Hong Kong and we're seeing strong growth. As Colin said in his remarks, across all of our distribution channels, agency, bank and broker, but notably as well strong demand from both the domestic customer segments in Hong Kong, which is our core business in Hong Kong, the majority of our business, as well as the Mainland Chinese Visitor customer segment, which is growing and reflecting the investments that we have made in MCV, the MCV segments in order to deliberate actions in order to increase our market share, though, although it does remain the it's not the majority of our business, the domestic segment is. Now what's driving the demand in Hong Kong is a combination of things.

Speaker 11

One is we are seeing favorable macro conditions and that is in particular driving customer interest and demand in savings solutions. And that's coincided with the fact that in the quarter across Asia and in Hong Kong, we have taken certain management actions that include earlier this year, we launched a new competitive participating savings product. So the timing of that has worked well with the favorable macro conditions. We've also held a brand campaign across the region. And in Hong Kong, it's been the Q3 is when we hold our annual sales campaign within our agency channel.

Speaker 11

So a lot of good things have happened at the same time. Now of course, there can be variability quarter to quarter in sales levels, but I think the direction of travel is clear that we are growing and fulfilling a greater share of customer needs. And I think that's consistent with the thesis that we had articulated at our Investor Day in June. And just to emphasize, we're not only seeing growth in Hong Kong, we're seeing similar levels of growth in NBV across Japan, Singapore, strong growth in the Philippines, Indonesia and other markets across Asia, including Mainland China.

Speaker 6

That's really helpful. As a follow-up, I wanted to come back to the conversation around the actuarial impacts. And I know it's overall net favorable. I guess on the CSM margin specifically, it was a bit unfavorable overall. And I think it was noted in the presentation that it was a net neutral impact on earnings.

Speaker 6

I would think the U. S. Segment probably has a headwind. And I just wanted to see if you could help us out with how to think through the impact on go forward earnings in U. S.

Speaker 6

And sort of where that's offset in Asia, if there's a little in Canada and just how to think about the mix and how it's changing here.

Speaker 8

Sure, Alex. It's Steve. Yes, so the way the basis change works under IFRS 17 is we calculate the change in reserves and then we have to record it in different places in our financial statements. And as you note, there was a reduction in the CSM, a reduction in the U. S.

Speaker 8

And that was partially offset by an increase in Asia. So you're right in terms of we expect a neutral impact overall in run rate core earnings. And you're absolutely right, we'll see a reduction in the U. S. Offset by an increase in Asia.

Speaker 8

So overall, roughly neutral.

Speaker 6

Got it. But any way to think about like how much U. S. Comes down, I guess, is the crux of what I was wondering?

Speaker 8

Yes. We've broadly speaking of think of $15,000,000 a quarter roughly post tax Canadian.

Speaker 6

Got it. Okay. Very helpful. Thank you.

Operator

Thank you. Our following question is from Paul Holden from CIBC. Please go ahead.

Speaker 12

Thanks. Good morning. Another question related to the ACMA update. I guess on the lapse assumption change, you highlighted that you changed sort of, let's call it, near to medium term assumptions only and left the terminal lapse assumption unchanged. So I guess first part of the question like why not change the terminal assumptions?

Speaker 12

Maybe you can explain that. And then 2, if you had changed the terminal assumption by a similar magnitude to the change in near to medium term lapse, how big would that impact have been relative to the $620,000,000 charge you took? Thank you.

Speaker 8

Yes. Thanks, Paul. And just a bit of context. So our U. S.

Speaker 8

Lapse rates and all of our assumptions get trued up regularly, we were fully up to date heading into COVID. And then we you'll recall, we saw disconnects in lapse rates as we got into COVID across multiple product lines. In most of those product lines, including Canada U. L. Seg funds, lapse rates have reverted back to pre pandemic levels.

Speaker 8

But in the U. S, we've seen some trend back, but not in all products. So part of this review was prudently we reflected the experience that we're seeing post COVID, including those trends. And we looked closely at we've got additional data in the ultimate. And the simple answer is the data confirmed that we're comfortable we do not need to change the ultimate lapse rates.

Speaker 8

We had already strengthened those materially in prior reviews. Your question about a little bit theoretical in terms, I don't have that handy in terms of what an assumption change would have done. In our annual disclosures, there are sensitivities provided on lapse rates, but I would tell you the data confirmed

Speaker 3

we don't need to change those assumptions.

Speaker 12

Okay. Okay. I'm assuming based on the duration of the product, though, there's probably a little bit more sensitivity to the terminal lapse assumption. Is that fair?

Speaker 8

There is, but a little bit. But remember, we about half the changes on Guaranteed UL, we stopped writing that business well over 10 years ago. So we're into that getting into that ultimate period.

Speaker 12

Okay, okay. Got it. That's helpful. And then for Phil, I want to circle back to the Hong Kong sales. You've given me a little bit of a challenge here just given how strong it was in the quarter like I looked historically going back a long way and this quarter really stands out.

Speaker 12

So I guess the question is how sustainable or not sort of is this as a run rate number? I don't expect you to quantify it for me, but maybe any kind of guidance on what we should expect going forward relative to the really strong Q3 result in Hong Kong?

Speaker 11

Thanks, Paul. This is Phil. You're right. It's been a really strong quarter and a lot of things have gone well, as I referenced earlier. The timing of the management actions we had taken with, I suppose, the favorable macro conditions.

Speaker 11

And specifically there, I'm thinking about the fact that interest rates, short term interest rates turned over the course of the last few months and that has prompted customers to think more long term rather than short term in terms of their strategies. So while we are in that interest rate downward cycle, I think that is a tailwind in terms of consumer sentiment. I think it's really important to note that while there can be variability in sales from quarter to quarter, what's very clear from our results is that we're generating value and the CSM accretion that we're seeing and when you look at the CSM balance year on year, it's up 10%. That supports stable earnings growth in the quarters years to come. And that really is our focus.

Speaker 11

In terms of sustainability, I do expect stable growth in new business from our exclusive channels, agency and bank. For our 3rd party channels and notably broker, that can vary from quarter to quarter and we'll call that out as and when it happens. I'm going to have a question.

Speaker 2

Paul, I just want to add a couple of comments to Phil's, which I think were excellent summaries. The quarter was really solid for sales in Asia, quite frankly, across the entire business. But our year to date results are also really very strong and that's what gives me a lot of confidence, the momentum that we've got across our franchise. And the thing that's particularly exciting for me about our Asia momentum is that it's not any one particular market in isolation or any one particular channel. So we're seeing, as I think Phil noted, good broad based growth across our channels, whether that's banker, agency, broker and affiliated.

Speaker 2

But we're also seeing our markets across Asia also performing really well. So that momentum, I think, bodes well. But again, I'd caution folks to not expect 30% to 40% growth in sales across all of those metrics on an ongoing basis. We've got a good baseline here. We think that momentum is our friend.

Speaker 2

But obviously, we wouldn't expect 30% growth every quarter.

Speaker 6

Got it. Got it.

Speaker 12

I agree. The diversification is a positive. So anyways, thank you.

Operator

Thank you. The following question is from Mario Mendonca from TD Securities. Please go ahead.

Speaker 13

Roy, can I take you back

Speaker 14

a few years? It was November 2007, so 17 years ago, almost to the day that Manulife was a $43 stock and it's back there today. And when I look at how you got there is a great combination of growth and wealth in Asia, but also the company has been shrinking for some time now as you reinsure books and buy back stock. So when you meet with your board and you speak to your executive team, how do you think about the next 5 years or so? Like is this is it more of the same, like focus on what you're good at Wealth Asia, buy back stock when you can?

Speaker 14

Or is the company going to become a little more ambitious in its growth outlook? How would you describe that?

Speaker 2

Yes. Good morning, Mario. Thanks for the question. I think you're absolutely right. When we sort of looked at our performance over a number of years and certainly looking back to where we were pre global financial crisis, we really had to appreciate that for us to succeed in the long run, we needed sustainable growth, but also quality growth.

Speaker 2

So in 2018, when we established our transformation agenda, we said that we clearly wanted to improve our returns, reduce our risk and volatility, and then also focus much more on customer and digital. And the progress that we've made is something that we're very proud of. But we think that we've really transformed the company in terms

Speaker 3

of fixing some of the

Speaker 2

things that were less strong. But at the same time, we feel like we've built a platform for sustainable future growth. And whilst Asia and GWAM are tremendous platforms, and I think quite frankly, if you stack up our businesses, both Asia and GWAM across many of our competitors, we would be quite enviable. But it's not just Asia and GWAN that really drives our success. I think we've got a really solid business in the U.

Speaker 2

S. That provides great remittances, great returns on our new business as we highlighted at our Investor Day. And our Canada business where we're a strong leader across individual insurance as well as group benefits really positions us well. So to get to the crux of your question, in terms of ambition, at our Investor Day, we declared quite an ambitious agenda for where we want to go. And our 10% to 12% earnings per share growth target is what we reaffirmed.

Speaker 2

We believe that we've got the footprint to continue to deliver that. Our 18% plus ROE, we think is quite ambitious, but very achievable. So I think with a lot of the hard yards to basically fix our platform and transform our business, we think that we've largely completed that chapter. And now the next chapter is all about building on that platform and accelerating our growth momentum so that it can be sustainable and continuous.

Speaker 14

So that's helpful. Let me sort of push this a little further. What I'm getting at is, does this company like are you content with everything you've got now and there's no need to add the capabilities and distribution through consolidation through acquisitions, M and A? There's you just don't see a need for that because the business got so much runway anyway. Is that right?

Speaker 2

What I would say is that we are very pleased with our platform. We don't think that we're lacking any key components that are going to allow us to deliver on the ambition that we have, certainly the ambition that we established at our Investor Day. However, and I think this is the crux of where you're getting to in your question, we're in a very, very strong capital position. We've got $10,000,000,000 of capital in excess of our upper operating range. Our leverage ratio now is at an all time well, almost an all time low, certainly for many, many years at 23 plus percent.

Speaker 2

So we have at our disposal the opportunity to look at M and A. And clearly, we will transact if we see opportunities that allow us to continue to expand our capabilities, but at the same time give us further scale. But we're going to be very disciplined there, Mario. You've seen as much as I have a whole lot of not so great M and A in our industry. And we certainly don't want to do that.

Speaker 2

So yes, we are well capitalized. We believe that we can execute on M and A. We think that there are some key areas that would certainly be complementary to our business, but we're not certainly not desperate and we're going to be very disciplined.

Speaker 14

Thank

Operator

you. Our following question is from Lamar Persaud from Cormark Securities. Please go ahead.

Speaker 13

Yes, hopefully, 2 relatively quick modeling questions for me. Just there's a sharp drop in the impact of new business on the consolidated DOE. It looks like this is related to a lower charge from Asia. Is this really because of the change in sales mix in the quarter? I guess lower sales of owners contract products.

Speaker 13

Is this something we can expect going forward?

Speaker 11

Lamar, this is Phil. Thanks for the question. Given that it's driven by Asia, let me take that and ask Steve whether he would like to supplement. So you have seen a lowering of the impact of new business in the drivers of earnings analysis. And a reminder that this reflects a couple of things.

Speaker 11

It reflects what we call onerous losses as well as any acquisition expense variance. And so in the Q3, that's fallen to $7,000,000 and it's been at a run rate of around $20,000,000 negative in prior quarters. And a couple of things happening there. One is that as part of the basis change, the expense loadings were updated and that's had a favorable impact on this line as well as it's been a particularly strong new business quarter. And when we have strong volumes, that reduces the expense per unit and has a favorable impact on this line item.

Speaker 11

At $7,000,000 this is U. S, dollars 7,000,000 I think that's at the low end of the range of what you would typically expect. And it will vary from quarter to quarter. But Steve, is there anything that you'd like to supplement there?

Speaker 8

I'd just add that this has been an area of focus since we started reporting under IFRS 17. It's an opportunity we directly see improvement in margins coming through this line. So it has been an area of focus.

Speaker 13

Okay. That's helpful. And then just my next question here. I'm looking at the negative impacts of the reinsurance transaction, so RGA and Globe. It looks like those are lower again this quarter.

Speaker 13

Can you guys talk about what's driving that? And should we think of the negative impacts as being less than originally anticipated?

Speaker 3

Yes. Thanks, Lamar. It's Colin here. So when you look at the $23,000,000 negative impact, there's a couple of things factoring in here, not completely sold on the old completed the sale of the older associated with the transactions, but almost there. There's a few things associated with experience that come into play on a one off basis.

Speaker 3

But when you strip those out, the run rate, the quarterly run rate is bang in line with the annual guidance that we gave, which was €130,000,000 for Global Atlantic €50,000,000 for the RGA transaction in Canada.

Speaker 15

Okay. Thanks. That's it for me.

Operator

Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Speaker 13

Hi, good morning. Steve, maybe just back to you. Long term U. S. Long Term Care Insurance, I think there was negative experience this quarter in both the P and L and the CSM.

Speaker 13

Can you talk a bit about what drove this? Because not too long ago, they were kind of offset neutral, and I think the last two quarters, it's been net negative. And just wondering if it's the same as last quarter, how material it was this? Is this a trend that's developing that we should keep an eye on?

Speaker 8

Sure, Doug. Thanks. Yes, maybe I'll take a step back and just sort of remind people that if we look at the LTC experience over the last many years, so if we go back to even 2017, the LTC experience has been slightly positive even if you include the gains that we booked through COVID. So in this quarter, the LTC did generate a loss. It was really driven by we saw very low mortality.

Speaker 8

And that impacted the Life business in terms of claims gains going through the P and L. And LTC, we saw losses. It was sort of it was at a very low level of mortality. And as I had noted earlier, we saw this during the pandemic, this kind of dynamic. We also saw, as we had in previous quarters, higher costs for those on claim.

Speaker 8

We don't see this 1 quarter of experience as a trend. It's what I would say is normal variability.

Speaker 13

And was it the same as last quarter? Like or is this a new mortality?

Speaker 8

No, the mortality was a

Speaker 13

very noticeable difference just this quarter. Okay. And then maybe, Phil, just on Asia, on Hong Kong in particular, I mean, you can all agree sales, new business value, CSM, new business CSM growth was strong. But new business value margins are down over the last year and it's been a steady decline. And just is this mix that's going through?

Speaker 13

Is this not just product mix, but distribution mix? Is the goal really just to drive sales and drive earnings growth and focus maybe less on the margins going forward? Just trying to get a sense of how to think about that.

Speaker 11

Doug, thanks for the question. It's a good question. This is Phil. Our overall margin for Asia in the Q3 was 39%, and that's down 3 percentage points year on year and down 5 percentage points quarter on quarter. As you highlight in your question, Hong Kong is the driver of that.

Speaker 11

We've seen a margin in Hong Kong 42% in Q3. And we would typically see in Hong Kong a margin of about 60%. So what's going on there is that, as I referenced earlier, we are seeing consumer demand for savings, Savings Solutions. And while we're seeing growth in both Savings and Health and Protection Solutions, the growth in Savings has outpaced Health and Protection in the quarter and that has given rise to an overall margin decline. However, the absolute value that's generated has been strongly accretive, and you see the 80% increase in 83% increase in NBV in Hong Kong.

Speaker 11

Now to your point on whether we're just driving sales or whether we're managing to value, we're absolutely managing to value. And that will be achieved through a combination of sales volume growth as well as margin. And one thing we spoke about at our recent Investor Day was our ambition for margins on average across Asia, and we spoke to a 50% ambition. That remains valid now as it did back in June. So it will vary from quarter to quarter, but overall, it's been a very strong NBV generation in the Q3.

Speaker 11

Thanks for the question, Doug.

Speaker 13

And then just maybe a follow-up while I have you. So Asia Other core earnings dropped versus Q2 and Q1. What region drove that? And is there anything in particular to note in Asia Other?

Speaker 11

So Asia Other so year on year, Asia Other is up 9% core earnings, but there is some variability quarter on quarter. What I would highlight with Asia Other is that this is a collection of smaller markets with less mature in force portfolios. So you will see some variation between quarters. Nothing in particular that I'd like to call out on that, but just expect in those smaller markets variability quarter to quarter.

Speaker 15

Okay. Thanks for the color.

Operator

Thank you. Our last question is from Tom MacKinnon from BMO Capital. Please go ahead.

Speaker 15

Yes. Thanks and good morning. First question just on the CSM hit in the U. S. Was any of that was it primarily SGUL?

Speaker 15

Was any of that related to any new business that you're writing? Was any of it related to Vitality or any other kind of new business that you actually are still writing in the U. S?

Speaker 8

Yes. Thanks, Tom. It's Steve. And just a reminder for people of where we book the basis changes in the financial statements because I'll come back to your CSM. So the financial related items or discount rates go through OCI, then the rest of our non economic assumptions go through CSM.

Speaker 8

And if the CSM is depleted, it goes through P and L. So in terms of the U. S, the CSM move, that was really driven in part by the update to the lapse assumptions and the net impact of the risk adjustment and reinsurance reviews, primarily related to older business, not on new business, not on vitality.

Speaker 15

Okay, good. And follow-up questions with respect to the line that you have expected investment earnings. I kind of think of that as being the yield on your invested asset portfolio, including the old less the impact of the discount rate movements as well. So you'd think that thing would be generally kind of stable and would grow to some extent as your invested assets grow. That was sort of the case we saw in 2023, but in 2024, we haven't seen this number really grow.

Speaker 15

And I assume some of it's due to the fact that you transacted and businesses left the company through some of those reinsurance transactions. But how should we be looking at that number when we go forward now? Should that kind of just not grow at the same level as the expected insurance earnings?

Speaker 3

Hey, Tom, it's Colin here. I'll give Steve a break and answer this one. When you look at the year on year growth and well, reduction in expected investment spread, it's $43,000,000 And you're right, we would expect this line to grow with the growth in our business. And you can actually see this in the Asia number. Asia is up $29,000,000 But really when you start looking at the U.

Speaker 3

S. And Canada, you see declines. And the declines are for the reasons you mentioned. Canada is clearly with the RGA transaction. So when you look at the U.

Speaker 3

S, that's where we've seen the biggest decline, dollars 54,000,000 year on year and $24,000,000 dollars quarter on quarter. The 2 obvious ones are the transaction with Global Atlantic and actually the basis change has impacted this number going forward. The other item relates to a collection of small items that add up, but one of the examples of that is just the composition of assets backing our guaranteed fund. The important point and this is really getting to the crux of your question is, I would use the 3rd quarter number as a good basis from which to go from here, but you would expect us to grow with growth in our earnings.

Speaker 15

Okay. So kind of once we lap the impact of that of the reinsurance transactions you did, we would in Canada, we should expect that number to sort of start to grow almost consistent with what we would see growth in earnings or expected insurance earnings

Speaker 7

for those segments. Is that right?

Speaker 3

Yes. I wouldn't consider it too much of a lapping impact. As soon as the assets leave the organization as they do with the transaction, then you should see lower expected investment earnings from those assets backing that used to back the reinsurance liabilities.

Speaker 15

Okay. All right. Okay. Thanks for that. All right.

Speaker 15

That's good. Good for me. Thanks.

Operator

Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Koh.

Speaker 1

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

Operator

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

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Key Takeaways

  • Record Q3 results: Manulife delivered 40% growth in annualized premium equivalent (APE) sales, 4% core earnings growth (7% excluding global minimum tax), and core EPS up 7% (11% adjusted), achieving a core ROE of 16.6%.
  • Asia franchise momentum: Asia posted record APE sales, new business CSM and value, led by Hong Kong’s 80% NBV increase, and core earnings in the region grew 17% driven by diverse distribution and new savings product launches.
  • Global Wealth & Asset Management strength: Global WAM generated over US$5 billion of net flows (13 of 14 years positive), delivered 37% core earnings growth, and expanded its core EBITDA margin by 90 basis points to 27.8%.
  • Digital and AI investments: Manulife has 11 Gen AI use cases in production (13 more by year-end), including a sales tool in Singapore that boosted repurchase rates by 5% and AI call summarization that cut handle time by 12%, with straight-through processing above the 88% 2025 target.
  • Strong capital position and shareholder returns: The LICAT ratio stood at 137% and leverage at 23.5%, with nearly CA$5 billion returned via dividends and buybacks (58 million shares repurchased), and 32 million shares remaining under the NCIB program.
AI Generated. May Contain Errors.
Earnings Conference Call
Manulife Financial Q3 2024
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