Manulife Financial Corp (MFC)

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Manulife Financial Corporation (MFC)

November 15, 2012 10:00 am ET


Anthony G. Ostler - Senior Vice President of Investor Relations

Donald A. Guloien - Chief Executive Officer, President and Director

Cindy L. Forbes - Chief Actuary and Executive Vice President

Stephen Bernard Roder - Chief Financial Officer and Senior Executive Vice President

Robert Allen Cook - Senior Executive Vice President and General Manager of Asia

Paul L. Rooney - Chief Executive Officer of Manulife Canada Ltd. and President of Manulife Canada Ltd.

Craig Richard Bromley - Executive Vice President of Japan Operations and General Manager of Japan Operations

Warren Alfred Thomson - Senior Executive Vice President and Chief Investment Officer

Jean-Francois Michel Courville - President, Member of Management Committee, Chairman of Executive Committee, and Chief Executive Officer

Rahim Badrudin Hassanali Hirji - Chief Risk Officer and Executive Vice President


Tom MacKinnon - BMO Capital Markets Canada

Michael Goldberg - Desjardins Securities Inc., Research Division

Mario Mendonca - Canaccord Genuity, Research Division

Robert Sedran - CIBC World Markets Inc., Research Division

Peter D. Routledge - National Bank Financial, Inc., Research Division

Gabriel Dechaine - Cr├ędit Suisse AG, Research Division

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Steve Theriault - BofA Merrill Lynch, Research Division

Ohad Lederer - Veritas Investment Research Corporation

Joseph Sirdevan

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Doug Young - TD Securities Equity Research


Anthony G. Ostler

All right. Good morning, everyone. Welcome to Manulife Financial's Investor Day 2012, where we will be presenting our strategic direction and financial targets. My name is Anthony Ostler, I am the Head of Investor Relations of Manulife Financial, and I'll be your emcee for today.

For those of you that regularly listen to our earnings calls, you'll be familiar with this next slide. On behalf of the speakers that follow, I wish to note that they will make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are applied in making forward 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 important factors that may cause actual results to differ from expectations, please consult the slide presentation for this event and webcast available on our website, as well as the securities filings referred to in the slide entitled, "Caution Regarding Forward-looking Statements".

We've also included a "Note to Users" slide that sets out the performance to non-GAAP measures used in today's presentation. It is there for your reference. Furthermore, I would like to note that for those of you in attendance today, we issued a press release this morning regarding our Investor Day and the financial targets that are to be presented today.

Turning to today's agenda. You will note that we have a comprehensive day with a target finish time of approximately 3:30 p.m. Our President and CEO, Mr. Donald Guloien, will start off the day, with a reflection of Manulife's significant repositioning over the last few years and will discuss our strategies for disciplined growth. Following this, our Chief Actuary, Cindy Forbes, will provide an actuarial and regulatory update. And Steve Roder, our CFO, will close the morning's formal presentation with Manulife's path to its updated 2016 financial targets.

In the afternoon session, there will be presentations from each of our business heads, Bob Cook, Paul Rooney, Craig Bromley, Warren Thomson and finally, J-F Courville. They will provide insight into their businesses and how their businesses are individually driving growth. A question-and-answer session will follow at the end of the morning and afternoon presentations.

We ask that participants withhold their questions until the Q&A sessions and to limit themselves to one or 2 questions in an effort to respond to as many questions as possible. When we reach the question-and-answer portion of the session, kindly raise your hand and wait for a microphone before proceeding with your question. Please state your name and company prior to asking your question.

Before we get started, I would like to make a few administrative announcements. Each of you should have a package at your place setting, which includes copies of today's presentation, as well as biographies of today's speakers.

For those joining us via webcast, this information is also available in the Investor Relations section of our website at In the case of emergency, fire exits are located at the back of the room and to the north side, leading to the rotunda. Washrooms are located through the back doors, and then to your left, just pass the elevators.

Finally, please turn your cellphones to silent or vibrate, if you have not done so already. We will pause for a one-hour lunch at approximately noon, and we ask that everyone be punctual returning to this room after lunch so that we can resume in a timely fashion at 1:00 p.m. I would ask that at the end of today's formal presentation, you take the time to fill out an evaluation of our Investor Day presentations. We will have hard copies and an electronic version will be e-mailed to you next week. Please assist us in continuing to improve our Investor Day by participating in the short survey. With that, I'd like to introduce Donald Guloien, our President and Chief Executive Officer. Donald?

Donald A. Guloien

Thank you, Anthony, and good morning, ladies and gentlemen, I'm looking forward to this day and, particularly, of conversing with you over lunch and in the question-and-answer sessions, as well as, of course, some of the prepared remarks. To our Chinese friends in the audience [Chinese].

My slides are going to open up with a little summary of the key messages that I hope you'll get out of today's presentations. Number one, that we have, in fact, accomplished our 2009 strategic objectives. Number two, that we are pursuing disciplined growth that will see the company to a very, very strong state in 2016, that we expect to see less volatile and far more sustainable earnings than the earnings of the past, and that we're now targeting $4 billion of core earnings and 13% ROE on core earnings in 2016 and a leverage ratio, that long-term, will come in around 25%.

I probably erred on the side of too much history, but I think it's important to revisit certain objectives by giving you some idea of credibility and our willingness to attain them going forward. When I took over as CEO in May of 2009, I set out 5 core objectives for the company. Number one was to re-balance products with unfavorable risk profiles; number two, to accelerate growth; number three, to systematically hedge to reduce earnings and capital volatility; four, to diversify our business mix; number five, to manage our capital appropriately; and number six, to actively manage and promote our brand. And I'm happy to report that we have done all of those things.

Take them in sequence, you know this story very well, but we are, in fact, very proud of the fact that we were one of the first companies to recognize the issues that bedeviled certain parts of our insurance and annuity markets around the world. So one of the first things we did was dramatically reduce or eliminate sales of things like variable annuities, Universal Life with No-Lapse Guarantees, booked value Fixed Deferred Annuities and Single Premium Deferred Annuities. And we substantially raised prices on both new and in-force long term care and many forms of guaranteed life insurance across the world. But you can't shrink a company to greatness. At the same time, we pressed on the accelerator to rapidly grow other parts of the business that showed more promise, in terms of the risk profile, they offer to the company and ultimately to our investors, their usage of capital and the narrow fan of outcomes in terms of what they can achieve for the company.

These are just some of your initiatives, Steve will be talking about these in more detail, as will our business heads later in the presentation. But we've made very, very substantial investments. Investing in our bancassurance relationships in Asia, investing in the expansion of our agency force throughout Asia, investing in wealth management capabilities through our TEDA acquisition and investing in wealth management throughout Asia.

In the Canadian division, we invested in Affinity markets through the acquisition of Pottruff & Smith. We invested our mutual fund distribution and manufacturing very, very significantly, and the results of that are showing up every quarter. We invested in AIC Funds and more recently, the Wellington West Financial Services. And we invested in a strain of rapid new business growth, particularly in the mutual fund business, that actually, with success, generates losses in the early years.

In our U.S. operation, we invested in next generation distribution and technology to enable us to participate in the larger-case 401(k) business. We already had a leadership position in the small-case market, we are moving upscale with a very significant administrative and distribution platform, and that was very, very expensive to put in place. We invested in mutual fund distribution and manufacturing capabilities and, again, we invested in a strain of rapid new business growth in wealth management products.

In our Corporate and Investment divisions, we invested in asset management platforms and distribution systems around the world, and we invested in a variety of very important infrastructure projects.

As a result of these investments and as a result of good execution, we will -- these things will substantially add to core earnings in 2013 and beyond, and create a much more sustainable, reliable and less volatile stream of earnings far beyond that.

We achieved our 2014 interest rate and equity market risk reduction targets, in fact, 2 years ahead of schedule. And this is a good and bad news story. The good news is, we reduced the volatility faster than we expected, as a result of markets being positive over certain parts of our journey. The bad news associated with that hedging has a cost, and it means that the cost associated with the hedging have accelerated faster. So that has had an impact, a negative impact on core earnings. But overall, it's a very positive story. We got there at targeted prices for execution and we got there 2 years earlier than expected. When I spoke to most of you back in 2009, we set these targets. People were wondering if we'd ever achieve them. The fact that we've achieved them 2 years ahead of target is, in fact, unassailable good news.

As you can see, the interest rate targets, the sensitivity has been reduced by 73%, from $2.2 billion per 100 basis point decline in interest rates, to close to $0.5 billion, and that is before taking into account the AFS bond offset that we have the ability to trigger should we need it.

In terms of equity market sensitivity -- sorry, if you can go back, and turn it -- on the right-hand side of that slide, as you can see, we've reduced 78% of the equity sensitivity, and we have again achieved our target of, 2014 goal, of 75%.

This next slide illustrates the earnings volatility that would be -- earning sensitivity that would be exhibited at any point in time, and it shows how, from first quarter -- second quarter of 2010 to the third quarter of 2012, how dramatically we have attenuated, both the upside and the downside associated with equity and interest rate risk.

As promised, we've diversified our business mix. We now have a very healthy 3-way balance in terms of the contribution to core earnings from Asia, Canada and the United States and as the right-hand side illustrates, a very nice balance of core earnings contribution from Wealth Management and Insurance.

In terms of our capital, it's in great shape. We are better reserved. That's the first defense. We have more stable capital, and then we have a much more conservatively calculated MCCSR ratio. And needless to say, we have lots of hedging in place. Manulife's capital ratio stands at 204% at the end of the third quarter of 2012. As we've mentioned many times before, that is equivalent of a much higher ratio if measured with the same yardstick and methodology as prior periods. We estimate that using the methodology that was in place 3 or 4 years ago, that capital ratio would be somewhere on the order of 40 percentage points higher. The outlook over 2013 to 2016 is for the ratio to steadily improve. The ratio still does not include adequate credit for hedging. And having achieved our hedging targets and extensive reserve strengthening, the MCCSR ratio does not need to be nearly as high as it was in the past.

We've invested in branding efforts around the world, in Canada, the United States and in Asia. And branding is now part, a fundamental part, of our marketing mix in all of those places. And I've said before, there's no sense in spending a lot of money in branding unless you're charging a premium price for your product. And we are in fact doing that.

2010, we set financial targets for 2015, consistent with the environment as we saw it at that time. And the goals were for net income, and I stress, net income, $4 billion in 2015, 13% return on equity and a long-term leverage ratio of 25%. And we did not attain those goals. We are not on track for achieving those goals. And why?

Now a lot of you in your write-ups, if you're an external buy side analyst or sell side analyst, they talk about the fact that the macroeconomic headwinds, and I think we've done injustice to ourselves in talking about macroeconomic headwinds as the principal reason, it is in fact one of the big reasons, but not the only reason. The reasons are lower interest rates; volatile equity markets; changes in the regulatory and accounting requirements which have forced us to add more capital; global economic uncertainty that has impact, not only on the bottom line, but in terms of top line sales; faster progress than expected on hedging that, while positive, resulted in significant impact on earnings; and significant basis changes over the last 4 years. In fact, Cindy will categorize them in detail, $5 billion after-tax in basis changes over the last 4 years. That has had a huge impact on earnings. Not only the first order impact, in terms of not missing the target in the year with the basis change, but obviously, by basis changes eroding the capital base are forcing the substitution of new forms of capital, adding to the capital burden of the company. We do not expect these factors to continue going on towards 2016. Although we cannot promise any one of these things, we do not expect that pattern to continue.

As a result, we've refreshed our core earnings target. It is now core earnings. We've listened to the analysts and investors, and what they want to understand is the underlying earnings capacity of the organization. They understand that earnings will be buffeted around the Insurance business by a variety of exogenous factors, what investors want to understand, is what is the earnings capacity and the price and we're shifting to a core earnings measure. The core earnings measure now, the goal is $4 billion in 2016, with a core ROE of 13% and a long-term leverage ratio. A number of you observed that it's a slightly different measure. Now we're measuring on core versus net income and it's quite true that if everything else were equal, you would expect core to be something lower -- something higher than net income as a result of certain fixed charges and so on. But as Steve Roder has so capably pointed out, our investment income is quite volatile and tends to be on the positive side if we included more in core earnings with respect to investment income, or if we have slightly positive equity markets or interest rates, a whole variety of reasons. The slight difference between core and net income is rather attributable relative to the volatility of those factors alone. So this is not leisure domain, accounting leisure domain, where we're shifting to core in order to make the target a little bit more achievable. We've been quite honest, that in our call in the second -- the last quarter call, I was right upfront in my remarks about saying it's not shifting forward a year, on average, probably shifting forward by something a little bit more than a year, because we're in fact shifting to a core earnings target.

Our businesses have very strong aspirational goals. In Asia, we want to build a premier pan-Asian insurance franchise that is well positioned to satisfy the protection and retirement needs of a fast-growing consumer base in that region. We want to grow a world-class asset management operation, worldwide, providing simple innovative investment solutions to retail and institutional investors, recognized globally for simple, effective asset allocation solutions to the retirement needs. We want to build a broad-based Canadian diversified financial services company that develops and delivers integrated solutions to address our customer protection and retirement needs. And we want to build a leading company in the United States that helps our American friends plan for their retirement, long-term care and estate planning needs.

We also want to pursue operational excellence and efficiency in all that we do. We have a project underway that we call Organizational Redesign Project, designed to broaden the spans of control and reduce the number of layers in the organization.

The first step in that process, the appointment of Paul Rooney as our Chief Operating Officer, which was also announced this morning. Now the use of Chief Operating Officer is different in a variety of companies and, in fact, we've used it in the past in a slightly different way. In this instance, Paul's role will be -- to be responsible for our Corporate Strategy, Corporate Development, Capital Solutions, Human Resources, Branding & Communication, Information Services, Procurement, Global Resources and driving efficiency and effectiveness throughout the organization.

I have a lot of confidence in Paul. I expect that Paul, in this role, will be able to make 85% of the decisions in these areas without even consulting me. I will only be consulted on areas that involve very substantial change or great capital or other resource allocations. Paul will continue to oversee the Canadian Division, but a successor has been identified. He's a very capable person and will be announced shortly.

Steve Roder, of course, will continue to report to me. J-P Bisnaire will continue to report to me. Rahim Hirji will continue to report to me. The business heads, Bob Cook, the successor to Paul McPhee [ph] in Division, Craig Bromley in the United States and Warren Thomson in Investments, will continue to report to me, as will certain people like the internal auditor and other functional roles in the organization.

So the end message is growth with discipline. We expect this to result in $4 billion in core earnings in 2016, and you'll see measurable progress against those goals in the intervening years. Less volatile earnings, more sustainable earnings, a lower risk in the product suite, core ROE of 13% in 2016 and a leverage ratio of 25% over the long term and we intend to achieve all of those objectives. Thank you.

Cindy L. Forbes

Thank you, Donald, and good morning to everyone. Thank you for joining us today. My presentation this morning will cover an actuarial and regulatory update. And as part of this, I will touch on how our assumptions are set, and I'll outline the main components of our basis changes over the last number of years, including the impact of macroeconomic events, or climate, on our assumptions. I would like to emphasize that our annual review of our assumptions is very thorough. And as a result, I believe that our current reserves are our best view of our policyholder liabilities in the current economic environment. I will also provide some additional details on the progress we're making in terms of our LTC repricing, our premium approvals. And I will close with a high-level regulatory update.

So turning to Slide 3, first an overview of how we set our assumptions. Our reserve assumptions are based on both historic experience, as well as our outlook for future experience development. They include -- they are based on best estimate and they include a margin for uncertainty. Actual reserves reflect a long-term view of our expected experience from all contingencies, often 50 years or more into the future. Yes, obviously, it takes some time for experience to develop on very late durations of the policies. And as a result, actual judgment is required in setting those assumptions. We keep our assumptions current to our annual review of actuarial assumptions. We look at emerging experience, both our own and in the industry and emerging practices. We do in-depth experience studies every 3 years from material actuarial assumptions, and we look at experiences -- industry experience as well, where relevant and available.

In addition, the Actuarial Standards of Practice in Canada give guidance on the level of margins that we should hold for each assumption, each risk.

Turning to Slide 4, you will see -- probably to Slide 5. That explains how we looked at our experience, in terms of basis changes, over the last 4 years. We divided them up into 3 main categories of drivers. The first is the macroeconomic environment, which includes policy -- changes to policyholder assumptions, our long duration, long-term life insurance products, as well as variable annuities, updates to the Ultimate Reinvestment Rate, and updates to stochastic bonds and equity parameters that underlie the valuation of our variable annuity business.

We've also, as a second category, isolated the impact of changes to actuarial standards over this period, and that includes for the most recent basis change, the update to equity parameters for variable annuities.

And in the final category, we've isolated all the other changes to our assumptions over the last 4 years, which are a regular update.

Turning to Slide 5, you'll see our basis changes for the past 4 years. Each year, we go through an objective and unbiased process of setting our reserves and reviewing our assumptions. And just so as an example to give you some idea of what we've done in the -- what our assumptions are today, and what we've done in the past review. Well we looked at our U.S. variable annuity GMWB assumptions in the past review. We looked only at experience since the financial crisis, even though we don't have a lot of data since the financial crisis, because we thought that, that would give us the best view of where experience might go in the future. And on a basis with margins or on a padded basis, we now assume, post that review, that, for example, 96% of the policyholders utilize 96% of their available withdrawal benefit, so very close to 100%.

In addition, when we looked at our loss assumption for policies that are deep-in-the-money, we reduced that on a padded basis to 1% from over 2%, prior to the basis change. Again, a very conservative view of where lapses might be on those policies. We did compare our assumptions, post the basis change, to competitors in the U.S. And we found that our assumptions were at the conservative end of the range.

Another example is our ultimate lapse experience or assumptions on lapse-supported long-duration life insurance products in North America. And for these products, we generally have a lapse assumption, an ultimate lapse assumption of between 0% and 1%, again, at the conservative end of the range. I'd also note, if you look at the blue parts of those bars, which is the other experience review, that if you exclude the impact of the update that we did to LTC, morbidity, mortality and policyholder behavior assumptions, that that's a pretty natural outcome. Basically a release of $100 million of reserves post-tax over the last 4 years. I'd also note, it's also important to understand that our actuarial assumptions are reviewed every year by an external peer reviewer and actuarial reviewer, as well as being reviewed by our external auditors.

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