Manulife Financial Corporation (NYSE:MFC) Q4 2023 Earnings Call Transcript February 15, 2024
Manulife Financial Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. Welcome to the Manulife Financial Fourth Quarter and Full Year 2023 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Ko. Please go ahead, Mr. Ko.
Hung Ko: Thank you. Welcome to Manulife’s earnings conference call to discuss our fourth quarter and full year 2023 financial and operating results. Our earnings materials, including webcast slide for today’s call, are available on the Investor Relations section of our website at manulife.com. Turning to Slide 4. We’ll begin today’s presentation with a highlight of our full year results and strategic update by Roy Gori, our President and Chief Executive Officer. Following Roy’s remarks, Colin Simpson, our Chief Financial Officer, will discuss the company’s financial and operating results in more detail. After the prepared remarks, we’ll move to the live Q&A portion of the call. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 43 for a note on the non-GAAP and other financial measures used in this presentation.
Note that certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from what is stated. With that, I’d like to turn the call over to Roy Gori, our President and Chief Executive Officer. Roy?
Roy Gori: Thanks, Hung, and thank you, everyone, for joining us today. Yesterday, we announced our fourth quarter and full year 2023 financial results. As you can see, our strategy and disciplined focus on execution are delivering even in uncertain market conditions. We generated double-digit top line growth with a record APE sales during the year. While Global WAM delivered another year of positive net inflows despite challenges in the retail fund market, that is the 13th year of positive inflows in the past 14 years. Core EPS grew 17%, supported by strong core earnings growth and the impact of share buybacks. Our core ROE increased to 15.9%, achieving our medium-term target. We delivered robust growth of 9% in adjusted book value per share, and our strong LICAT ratio of 137% and low leverage ratio provides ample financial flexibility.
Turning to Slide 7. Today, we’re a very different company from when we began our efforts to reshape our portfolio towards lower risk and higher returns and 2023 was also a milestone year in that transformation journey. As part of that agenda, we further grew our highest potential businesses. In Asia, we saw double-digit growth across key new business metrics. We are a high-growth top 3 Pan-Asian life insurer. In Global WAM, we acquired CQS whose multisector alternative credit capabilities complement our existing fixed income and multi-asset solutions business and are a powerful addition to our global credit offering. We also generated remittances of $5.5 billion and returned $4.3 billion of capital to shareholders through dividends and share buybacks.
And I’m pleased to tell you that yesterday, our Board approved a 9.6% increase in our common share dividend beginning in March. But first, it goes without saying that meeting our customers’ needs and expectations is at the core of what we do. We’ve sped up our processing times, reduced costs and improved the customer experience. As a result of these and other actions, we’ve seen a 22-point increase in our Net Promoter Score since 2017, and we are leading or on par with our peers across the majority of our business lines. And none of this would be possible without our winning team and culture, and I’m proud that for the fourth consecutive year, we achieved top quartile employee engagement results. Finally, we ended the year with a significant milestone in our transformation journey, the announcement of the largest ever LTC reinsurance deal, which I’ll touch on in the following slide.
You’ll remember that in December, we announced the milestone LTC transaction. We transacted at attractive terms, derisked our business and it will be accretive to core EPS and core ROE after deploying the capital released to share buybacks. The transaction, which we expect will close by the end of February, also contributes to establishing an active LTC reinsurance market. It’s another example of the value we continue to unlock for shareholders as we reshape our portfolio to focus on lower risk and higher return businesses, and we aren’t stopping here. We continue to work on opportunities to create shareholder value through organic and inorganic actions across our legacy and low ROE businesses. Moving to Slide 9. Our transformation journey began in 2018 when we started reshaping our businesses by reducing risk, improving ROE, strengthening capital and growing high-return businesses.
Thanks to disciplined execution, today, our high-return businesses represent a larger share of our earnings. These are impressive results considering that the transition to IFRS 17, which defers the recognition of new business gains into CSM resulted in a 2 percentage point reduction in 2022. In fact, Asia already represents over 60% of our CSM balance and 70% of our new business CSM, indicating its immense future earnings potential. And as we’ve changed our business mix over this time, we’ve significantly expanded our core ROE by almost 5 percentage points. We’ve also taken significant actions to reduce risk, including our US variable annuity reinsurance transactions in 2022. Our portfolio optimization actions, along with growth in our highest potential businesses, has reduced the core earnings contribution from LTC and VA significantly from 24% in 2017.
And together with December’s LTC transaction, this contribution is expected to further decrease to 11%. Returning capital to shareholders remains a priority. And since 2018, we’ve returned $18.9 billion through dividends and share buybacks. Those buybacks have generated a benefit of more than $1.3 billion as our average repurchase costs were well below our recent share price levels. In closing, I’m excited by the progress that we’ve made and by our momentum heading into 2024. Our unique and diverse geographic footprint, all-weather strategy and focused execution position us well to continue delivering superior value. Given our strong capital position and cash generation, we will continue to look at opportunities to unlock shareholder value, including inorganic opportunities to deploy capital.
I’ll now hand it over to Colin to review the highlights of our financial results. Colin?
Colin Simpson: Thanks, Roy. 2023 was indeed a milestone year for Manulife, marked not only by strong business performance and the announcement of a major reinsurance transaction but also a smooth transition to IFRS 17. We continue to deliver strong growth in new business metrics, earnings and adjusted book value, and the fourth quarter contributed to that momentum. I’ll go into a little more detail on the quarter’s results before the Q&A. I’ll start with our top line on Slide 11. Our fourth quarter APE sales increased 20% from the prior year with double-digit growth across each of our insurance segments. This increase was supported by the ongoing benefit of the return of demand across various markets in Asia, high large and midsized group insurance sales in Canada and a rebound in demand from affluent customers in the US.
The momentum in our sales growth contributed to strong increases in new business CSM and new business value of 41% and 20% respectively. Global WAM saw modest net outflows of $1.3 billion due to a large case pension plan redemption in our US retirement business. On a full year basis, we generated net inflows of $4.5 billion, which is creditable in a year in which investors kept money on the sidelines, benefiting from higher short-term interest rates. I’m proud of the growth we’ve achieved across our new business metrics compared to 2022 despite the uncertain economic conditions, which is testament to the strength of our global and diverse portfolio of businesses. Turning to Slide 12, which shows the growth in our profit metrics. Core EPS increased 20% as we grew core earnings and reduced share count.
Looking at this quarter’s results, we delivered a core ROE of 16.4%, above our medium-term target of 15% plus for the third consecutive quarter. Driving up ROE is a key priority, and our recent milestone reinsurance transaction did exactly that. You should expect us to continue evaluating in-force opportunities to improve our return on equity. When we transition to IFRS 17, we noted we expect to see more stable growth in our adjusted book value per share as it better aligns with the economics of our business. And Slide 13 demonstrates just that. A 9% increase over the year or 13% after excluding the effect of foreign exchange rate movements in adjusted book value per share to $32.19. A key driver of the CSM growth this quarter was an update to actuarial methods and assumptions.
We targeted a risk adjustment for non-financial risk that is calibrated to a 90% to 95% confidence range, which is conservative relative to peers. We have been trending towards exceeding the top end of this range. And so during the quarter, we recalibrated our risk adjustment towards the midpoint of this range. This had the impact of increase in the CSM and reducing the risk adjustment, which still sits at $18.5 billion. We will continue to monitor risk adjustment target levels across the industry and expect these to converge over time. More information is available in the appendix of this presentation. Bringing you back to our core earnings results on Slide 14, I’d like to call out some of the highlights of the drivers of earnings analysis, focusing on the quarter relative to the prior year.
There were three main drivers of the increase in core net insurance service results. Expected earnings on insurance contracts increased across each insurance segment, led by Asia, which benefited from the impact of basis changes in the third and fourth quarters. Secondly, business growth in our group insurance and affinity markets businesses in Canada improved our net insurance results. And lastly, our insurance experience was favorable due to a nearly $60 million release of provisions held in our P&C reinsurance business for catastrophes from prior years, mainly relating to Hurricane Ian. These factors contributed to a 25% increase in core net insurance service result. In terms of our core net investment results, we continue to see the benefits of higher interest rates and business growth year-on-year.
We reported no increase in our expected credit loss provision over the quarter, which has improved investment results somewhat. Towards the bottom of the table, you’ll see that Global WAM was a notable contributor to the results, supported by higher average AUMA. These factors were partially offset by higher performance-related costs included in other core earnings, along with an increase in certain corporate costs. Our market experience for the quarter saw offsetting impacts that resulted in a modest net charge and $114 million gap between core earnings and net income. We reported a $381 million charge from lower-than-expected returns on ALDA, largely reflecting the ongoing pressure on commercial real estate due to increasing cap rates, but this was partially offset by $182 million gain due to higher-than-expected public equity returns during the quarter.
Our multiyear track record in ALDA as shown in the appendix is a testament to our strong capabilities in managing these assets and supports our long-term return assumptions. You will also see a positive contribution to net income from the basis change that I mentioned on the previous slide. The next few slides will cover the segment view of our results, starting with Asia on Slide 16. Both top and bottom line performance were once again strong. APE sales increased 11% from the prior year quarter as we continue to capitalize on the return of demand from MCV customers. The increase in sales contributed to a 27% and 5% growth in new business CSM and NBV, respectively. We delivered strong core earnings growth of 14% year-on-year with a meaningful increase in the contribution from Hong Kong, our largest in-force business.
We have made great progress shifting our portfolio towards our higher potential businesses of Asia and Global WAM, but the combination of the pandemic in IFRS 17, which has changed Asia’s earnings profile, has led us to extend our target for Asia region to make up 50% of total core earnings by 2025 by two years. Moving over to Global WAM’s results on Slide 17. We recorded modest net outflows of $1.3 billion for the quarter. This was due to a large client redemption in US retirement. We also saw elevated retail mutual fund redemption rates in Canada, but this was offset by continued strong inflows in our institutional business. Excluding the large case redemption during the quarter, we generated net inflows of $1 billion. The business also delivered strong core earnings supported by higher average AUMA, which increased 5% year-on-year, along with higher fee spreads and a lower effective tax rate.
Also of note, severance costs related to restructuring announced during the quarter are excluded from core earnings and will generate expense saves beginning in 2024. Heading over to Canada on Slide 18. We delivered another strong quarter of new business and profit metrics. APE sales increased 44% year-on-year, primarily due to higher large and also might add the highest on record mid-case sales in our group insurance business, which were also the main contributors to our growth in new business value of 60%. Core earnings increased 19%, mostly driven by business growth and a lower ECL provision as well as more favorable insurance experience in our group benefits business. Moving to Slide 19 on our US segment’s results. In the US, higher APE sales were driven by a rebound in demand from our affluent customers, which contributed to strong NBV and new business CSM results.
Our US business delivered strong core earnings, which increased 16% year-on-year, mainly reflecting higher yields and business growth as well as improved insurance experience. On to Slide 20 and our balance sheet. We ended the year with a strong LICAT ratio of 137%, which was $22 billion above the supervisory target ratio. Our financial leverage ratio declined by 0.9 percentage points from prior quarter and is within our target ratio of 25%, adding to our ample financial flexibility. Remittances of $5.5 billion in 2023 were a result of strong operating cash generation and favorable market moves. With remittances in excess of dividend and interest payments, we were able to return capital to shareholders even after organic investments in our business and bolt-on M&A such as the CQS acquisition.
Over the last three years, our remittances have averaged over 85% of core earnings. While this percentage is somewhat flattered by the favorable market moves in 2023 and the US variable annuity transactions in 2022, it’s a testament to our ability to generate strong cash flow. In aggregate, we have returned approximately $8.7 billion of capital to shareholders through dividends and share buybacks since we resumed our buyback program in 2022. As previously announced, we plan to launch a new program in the early 2024 that would allow us to purchase up to 2.8% of our common shares. And as Roy mentioned, yesterday, our Board approved a 9.6% increase in our quarterly common share dividend. Moving to Slide 21, which summarizes how we are tracking against our medium-term targets.
Our new business CSM grew 12% in 2023, modestly below our target. We generated CSM balance growth of 21%. While this was flattered by the basis change, we still generated a solid 5% growth in organic CSM. Our core EPS growth and core ROE was strong in 2023, exceeding our target ranges. All in, we are pleased with our progress and delivered strong results with focused execution. 2023 was a milestone year. And while we continue to face an uncertain macroeconomic environment, I’m confident that we are uniquely positioned to drive and execute on our transformation agenda in 2024 and beyond. And finally, turning to Slide 22, we’re hosting an Investor Day in Hong Kong and Jakarta from Tuesday, June 25, to Thursday, June 27, 2024. It has been some time since we hosted an Investor Day in Asia, and we’re excited to showcase our quality franchise.
Please save the date, registration details will follow shortly. This concludes our prepared remarks. Before we move to the Q&A session, I’d like to remind each participant to adhere to a limit of two questions, including follow-ups, and to re-queue if they have additional questions. Operator, we will now open the call to questions.
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