Manulife Financial Corporation (MFC)
Q2 2010 Earnings Call Transcript
August 5, 2010 2:00 pm ET
Shad Ansari – IR
Donald Guloien – President and CEO
Mike Bell – Senior EVP and CFO
Simon Curtis – EVP and Chief Actuary
Jim Boyle – President, John Hancock Financial Services
Beverly Margolian – EVP and Chief Risk Officer
Doug Young – TD Newcrest
Michael Goldberg – Desjardins Securities
Darko Mihelic – Cormark Securities
Tom MacKinnon – BMO Capital Markets
Mario Mendonca – Canaccord Genuity
Andre-Philippe Hardy – RBC Capital Markets
Steve Theriault – Banc of America
John Aiken – Barclays Capital
Colin Devine – Citi
Robert Sedran – CIBC
Previous Statements by MFC
» Manulife Financial Corporation Q1 2010 Earnings Call Transcript
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Thank you, and good afternoon. Welcome to Manulife's conference call to discuss our second quarter 2010 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investor Relations section of our website at Manulife.com.
As in prior quarters, our executives will be making some introductory comments. We will then follow with a question-and-answer session.
Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied.
For additional information about the material factors or assumptions applied and about the material factors that may cause actual results to differ, please consult the slide presentation for this conference call and webcast, available on our website, as well as the securities filings referred to in the slide entitled Caution Regarding Forward-Looking Statements.
When we reach the question-and-answer portion of our conference call, we would ask each participant to adhere to a limit of one or two questions. If you have additional questions, please re-queue, as we will do our best to respond to all questions. With that, I would like to turn the call over to Donald Guloein, our President and Chief Executive Officer. Donald.
Thank you, Shad. And I like to say good afternoon, but it certainly doesn't feel like a good afternoon. Our second-quarter results announced this morning were extremely disappointing. I want to take a few minutes at the outset to address this, coming as it did after the much stronger results of the past two quarters. I also want to focus on our underlying business, which performed very well this quarter, and underscore our desire to reduce more of our equity and interest rate sensitivities, moving Manulife towards more consistent, growing earnings and ROE.
Our CFO, Mike Bell, will then address our results in more detail. We have most of the members of our senior management team on the call, including our general managers Bob Cook for Asia, Paul Rooney for Canada, Jim Boyle for the United States and Warren Thomson for Investments. We look forward to their taking your questions as well.
So first, let's put today's results into perspective. The main story this quarter was the impact of lower equity markets and historic low interest rates, which resulted on a Canadian GAAP basis, in large, non-cash charges in the form of mark-to-market increases to our reserves for policyholder liabilities.
Under our Canadian GAAP reporting, we took $1.7 billion in charges related to equity market declines and $1.5 billion related to interest rate declines. We would expect that most of these charges eventually reverse if the interest rates rise or returns on equity markets recover faster than the long-term growth rates used in evaluation of our policyholder liabilities.
Under Canadian, GAAP Manulife's earnings and balance sheet capitalizes the impact of today's low interest rates. Therefore, if rates stay the same, other than any new businesses strain, if any, there would be no further material negative impact on earnings. But if rates increase, earnings will increase.
We would also expect reserves to reverse if equity markets recover faster than the long-term growth rate used in the valuation of our policy liabilities. In fact, the turnaround in equity markets in July alone, if sustained, should reverse a substantial portion of these losses. Our interest-rate sensitivity is higher than other Canadian companies, primarily because we have more of this long-term guaranteed business. And our interest-rate sensitivity is higher than other US life-insurance companies, both because of the quantity of our business and the different accounting regimes.
As a point of comparison, under US GAAP, we would expect to report a small profit for the second quarter. It is a very substantial difference. It is also interesting to note that on a US GAAP basis, our US GAAP shareholders' equity would be about $7 billion higher than on a Canadian GAAP basis.
Our press release has provided more details on our equity and interest rate sensitivities, the effectiveness of our hedging activities in the quarter and the expected costs and potential fee revenue upsides of our hedging when markets once again rise, all items that will be of interest for analysts and investors.
There is, however, more to be done to get Manulife back onto a consistent track that shareholders expect and deserve. Our approach has been to hedge equity risk when it is of economic benefit to our shareholders. That is, when the guaranteed value is close to the account value, truly minimizing the impact to present and future earnings and capital.
As you know, in the spring of 2009, we had about 20% of our in-force variable annuity business reinsured. But the remainder of the block was almost totally unhedged.
Now 51% is hedged or reinsured. Some would criticize us for moving too slowly on hedging the in-force. Others, in fact, worried that it was too fast. But we have stuck to a plan. We intend to have hedged or reinsured at least 70% of our business – variable annuity guaranteed value – by the end of 2012.
With the expected market volatility, we believe we have a very good chance of achieving this target. And if we are offered the opportunity, we will proceed to hedge even more of our VA-related equity risk.
Financial strength remains a positive differentiator for Manulife, and in that regard, I will comment briefly on an announcement from Standard & Poor's today. Our Standard & Poor's rating has most recently been higher than almost any other publicly-traded financial company globally. We've been very proud of that. The one-notch change announced by Standard & Poor's today takes our key operating life insurance companies to an AA rating. This is still a higher rating than any of our public lifeco competitors in North America, with the exception of one company that shares the AA rating. Some mutual companies in the United States may have higher ratings, but in fact none of our public lifeco competitors globally has a higher rating from Standard & Poor's.
Our financial strength remains solid, with a strong capital base and a very strong set of investment management results. I also want to emphasize that our sales and business performance remains strong. Over several quarters, we have been making progress on rebalancing our business mix, repricing and redesigning products – some products to reduce risk. As I've said many times before, we are emphasizing margins over market share. We are cutting back significantly on products that give rise to the interest, equity exposure, where repricing could give us substantially more downside protection.
We are also dramatically accelerating the growth of other products. We are building positive sales momentum, particularly in Asia and Canada, and the retirement plan services and mutual fund businesses in the United States, none of which give rise to exceptional interest rate or equity sensitivity. This is a dramatic reformation for our company.
This quarter, insurance sales were up 30% in Asia. Non-variable annuity wealth sales increased 38% in Asia as well. Mutual funds increased 50% in the United States, and 175% in Canada. New business embedded value increased 10% on insurance products and 6% in wealth products, excluding variable annuities and US book value fixed deferred annuities, sales of which we attempted to discontinue.
We are successfully repositioning the business. Capital and credit both remain strong. We're deploying our capital to increase long-term shareholder value. And we are confident that demographic and other trends favor the long-term growth of our business. As I said at our annual meeting in May, I believe that investors in companies such as ours should be able to expect an ROE of 14% over the long-term. That is not guidance. That is what I think a reasonable expectation of capital markets would be.
The ongoing volatility of the macro environment, coupled with our open-risk position, leaves us with considerable volatility until such time as we are able to hedge or otherwise mitigate more of the risks. We are taking difficult decisions over the course of this year to better position the company for the future. I believe we are taking the right actions to improve earnings to highly satisfactory levels over the coming years, even assuming today's low interest rates and no more than normal equity market returns. We expect to share more details on those plans to grow our business, to improve our earnings stability, increase our ROE, with investors in the fall. With that, let me turn it over to Michael Bell.