q4 2023 earnings call transcript
REFINITIV STREETEVENTS
EDITED TRANSCRIPT
MFC.TO - Q4 2023 Manulife Financial Corp Earnings Call
EVENT DATE/TIME:
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C O R P O R A T E P A R T I C I P A N T S
C O N F E R E N C E C A L L P A R T I C I P A N T S
P R E S E N T A T I O N
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 tuthe meeting over to
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 slides for today's call, are available on the Investor Relations section of our website at manulife.com.
Turning to Slide 4. We will begin today's presentation with a highlight of our full year results and strategic update by
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 would like to tuthe call over to
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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 provide ample financial flexibility.
Turning to Slide 7. Today, we are 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
But first, it goes without saying that meeting our customers' needs and expectations is at the core of what we do. We have sped up our processing times, reduced costs and improved the customer experience. As a result of these and other actions, we have 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 am 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 will remember that in December, we announced the milestone LTC transaction. We transacted at attractive terms, de-risked 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 is another example of the value we continue to unlock for shareholders as we reshape our portfolio to focus on lower risk and higher retubusinesses, and we are not 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-retubusinesses. Thanks to disciplined execution, today, our high-retubusinesses 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,
We have also taken significant actions to reduce risk, including our
In closing, I am excited by the progress that we have 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 will now hand it over to Colin, to review the highlights of our financial results. Colin?
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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 continued to deliver strong growth in new business metrics, earnings and adjusted book value in the fourth quarter contributed to that momentum. I will go into a little more detail on the quarter's results before the Q&A.
I will 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 retuof demand across various markets in
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 retuon equity.
When we transitioned 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
A key driver of the CSM growth this quarter was an update to actuarial methods and assumptions. We target a risk adjustment for nonfinancial risk that is calibrated to a 90% to 95% confidence range, which is conservative relative to peers. We had 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 increasing the CSM and reducing the risk adjustment, which still sits at
Bringing you back to our core earnings results on Slide 14. I would 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 3 main drivers of the increase in core net insurance service result. Expected earnings on insurance contracts increased across each insurance segment, led by
In terms of our core net investment results, we continued 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 will 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
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The next few slides will cover the segment view of our results, starting with
Moving over to Global WAM's results on Slide 17. We recorded modest net outflows of
Heading over to
Moving to Slide 19 on our
On to Slide 20 and our balance sheet. We ended the year with a strong LICAT ratio of 137%, which was
Over the last 3 years, our remittances have averaged over 85% of core earnings. While this percentage is somewhat flattered by the favourable market moves in 2023 and the
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 are hosting an Investor Day in
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
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two questions, including follow-ups, and to re-queue if they have additional questions.
(Operator Instructions) Operator, we will now open the call to questions.
Q U E S T I O N S A N D A N S W E R S
Operator
(Operator Instructions) And your first question is from
I wanted to ask about the global minimum tax and whether it will have a material impact on you if you could provide us, any sort of guidance in terms of how big that impact would be?
Yes. Thanks Meny, it is Colin here. We have looked at the draft legislation in
Thanks. And then just on the risk adjustment, the change that you made. I just wanted to better understand what is driving that. The risk adjustment is trending to the upper end of the target range. And I just want to understand what is the process that drives that? Is that, that you are being overly conservative in terms of your assumptions? Or is there something else going on here that is making it track higher than you expect?
Thanks Meny, it is Steve here. Yes, our disclosed confidence level range for the risk adjustment is 90 to 95. And we are trending to go higher. And in fact, without the change, we would have reported over that confidence level range in Q4, which is really driving the decision. We are comfortable with the range that we selected at transition. And the move was simply to move back closer to within that range. What we saw was, relative to peers, we included in the appendix, you can see some of the benchmarking versus peers, and we are more conservative than global peers here and particularly in
And then does that have any implications for core earnings going forward, just thinking through the change, how it impacts results on a look-ahead basis in terms of the core results?
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Yes. Modest impact in core. While we reduced the risk adjustment by just over CAD
Operator
The next question is from
Actually, that was the question I was going to ask -- that
It is a quarter,
Okay. Great, and just really dumb it down. I mean, just throwing out, we are exceeding our 90 to 95% range. What does that mean? What was going on in the business, in the
Yes. And if we back up, the risk adjustment, you can think of it as the non-economic or the non-investment PFADs under the old IFRS 4, that is what it is. Under IFRS 17, we calibrate and we are required to disclose the confidence level range of that. And we base it off LICAT shocks and then calibrate from there. It is a fairly straightforward process. What was driving it was for
Gabriel, Roy here. I might just add that, obviously, with the transition to IFRS 17, we had to make a whole lot of assumptions as did everyone else in the industry. And it's only through 2023 that we started to see where the industry started to land with their risk adjustment confidence levels and so on. We are quite pleased that we are very conservative relative to our peers. And the calibration that Steve talks to was just to bring it back into the range, which was, as he highlights and as articulated in the document that we published, very conservative relative to others. We are happy that that is where we typically land at the conservative end.
No, no. I get that. I am just trying to conceptualize this thing. Non-economic risks, like mortality was exceeding --worst-case assumptions or something like that in
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Yes. What I would explain to you is we hold the risk adjustment, which is like the old PFADs, and we have calibrated it based on the standard to say, hey, this is at the 90 to 95th percentile in terms of confidence. We think that should -- the takeaways are, I think that should give you high confidence in the quality of the CSM because you set up CSM after you set up all the risk adjustment. And this is a fairly modest shift, risk adjustment releases into income as well, which is why you see a modest impact on core earnings. So this is just a fairly simple recalibration.
Operator
The next question is from
I apologize, but I do have to kind of just dig into the risk adjustment. And maybe, Steve, what I am more wondering is, why was it set originally at 90 to 95 because it does seem high as a confidence interval. And there must have been a reason that it was set in that range. And why would it differ versus peers? Is this just an interplay between capital and risk adjustment? Is this mix of business related? Like I know it is easy enough just to compare Manulife relative to the peers as you did on the slide, but I am just trying to dig a little deeper. Like why was it set there? Why would there be differences?
Yes. I think under the standard, it is principles based. You have a range of judgments, and Manulife has typically been conservative in terms of setting our risk margins. I should be really clear. If you look at
The other thing is it is such a significant change in accounting, right? And there is a lot of policy decisions. There is a lot of disclosure under IFRS
17. I would expect, over time, you might see a convergence of practice on this subject and perhaps other policy decisions as the results are digested and analysed.
I guess this is more of a statement. I am just surprised that there is such a variance, or such variances allowed between players, but I will move on. Roy, maybe I am just -- uber sensitive this morning, but in your comments, you seem to emphasize looking at all options for capital deployment, including inorganic -- I mean has M&A moved up your priority list when you think of the capital position? You got IFRS 17 mostly done, you got the excess capital, you are doing reinsurance transactions. Is M&A now moving up the priority list and not just smaller deals like you did, but more bigger type of transactions?
Yes, Doug, thanks for the question. And you are right. We have been very focused on our capital. Our capital position is very strong. Our LICAT ratio is 137. And obviously, as we transition to IFRS 17, we are still trying to figure out, as was the industry how LICAT would move and how the transition would work. It was obviously very sensible for us to be prudent in that environment. But with a LICAT ratio of 137%, we have
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When we talk about our priorities for capital, obviously, #1 for us has always been dividends and organic growth. We announced the dividend increase yesterday, which again further consolidates our position that dividend should be a way that we create value for shareholders. But given our unique footprint, the organic growth for us is a huge priority, and it is an area for significant growth. The second tier of priorities for us from a capital deployment perspective has always been buybacks and M&A. And we have been judicious about M&A and we will continue to be.
For us, the focus areas that we will look at when it comes to M&A is, a) is it strategic? and b) is it financially valuable for the franchise? We do not want to do anything that obviously does not create value. And as we see the uncertainty start to decrease, then obviously, our appetite for M&A will increase as well. We are pretty optimistic about the outlook organically to grow our franchise. And having the financial flexibility through our strong capital ratio and low leverage. I think really makes the M&A option one that is available to us, but we are going to be disciplined. I just want to again, reassure you that we would not be reckless.
Yes. Maybe a follow-up. Are you seeing more opportunities these days?
Look, again, we have got a good scan of what is available. And I think in the higher rate environment, it has put some pressure on certain businesses. I think we obviously stand to benefit in a higher rate environment. Again, we do not think that necessarily we are going to see a massive increase in the longer end of the curve. But it does place opportunities for us, and we will continue to look at them. So yes, I think that the opportunities have perhaps increased in recent years, which means it is perhaps more interesting for us to focus in this space.
Operator
The next question is from
Going back to the risk adjustment discussion. I just want to understand if there are any potential implications for insurance experience going forward? Is there now a potential for more negative experience because of the lower risk adjustment?
Paul, it is Steve. No, this does not impact the insurance experience going forward at all. You should not expect any impact there.
Okay. Got it, thanks for that. And then second question is related to
Paul, this is Phil. Thanks for the question. And it has been a strong year for our results in
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sales. It is about the quality of those sales as well, and that is something that we have made substantial progress on, as we've moved through 2023. And you can see that in the improvements in value metrics that we have reported, the 14% growth in earnings, the 27% growth in new business CSM. And you rightly point out that
But what I have said throughout 2023 is that the recovery from the pandemic has been uneven across
Now as we look forward into 2024, I am encouraged by a number of tailwinds that exist. And we do expect the continuation of the MCV customer segment. I think we will see a normalized rate of growth as we go into 2024 one year after the reopening of the borders. But I am also optimistic that the domestic segment in
And I take the second part of your question. I might take the second part of your question, Paul. I will just add to Phil's comments that despite that uneven recovery that Phil mentioned, in Other Asia, we did grow core earnings for the full year by 18% in Other Asia, which again just talks to the strength of our diverse franchise. So really proud of our
And to your second question, obviously, we are really proud of our
Firstly, it is the short-term headwinds related to COVID that Phil sort of highlighted. The second factor was IFRS 17. Obviously, the transition to IFRS 17 means that new business gains that were in core earnings are now no longer reported in earnings and go to CSM instead. And that obviously is a bit of a headwind in the short term. But the third factor is we have had tremendous growth in
Operator
The next question is from
I want to go to this basis change start there. Is this creep above the risk adjustment target range something that could reoccur? It sounds like it is. Or should we kind of think of this as a one and done? And then at what frequency could we see this kind of adjustment? Like is this -- could this potentially be an annual thing? Any thoughts would be helpful?
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