Manulife Financial Corp (MFC)

MFC 
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Manulife Financial Corporation (MFC)

Q1 2010 Earnings Conference Call

May 6, 2010 2:00 PM ET

Executives

Amir Gorgi – IR

Donald Guloien – President and CEO

Michael Bell – Senior EVP and CFO

Jim Boyle – President, John Hancock Financial Services

Bev Margolian – EVP and Chief Risk Officer

Simon Curtis – EVP and Chief Actuary

Scott Hartz – EVP, General Account Investments

Analysts

Steve Theriault – Bank of America-Merrill Lynch

Colin Devine – Citi

Andre-Philippe Hardy – RBC Capital Markets

Tom Mackinnon – BMO Capital Markets

Mario Mendonca – Genuity Capital Markets

Darko Mihelic – Cormark Securities

Doug Young – TD Newcrest

Michael Goldberg – Desjardins Securities

Eric Berg – Barclays Capital

Presentation

Operator

Good afternoon and welcome to the Manulife Financial Q1 2010 financial results conference call for May 5, 2010. Your host for today will be Mr. Amir Gorgi. Mr. Gorgi, please go ahead.

Amir Gorgi

Thank you and good afternoon. Welcome to Manulife’s conference call to discuss our first quarter 2010 financial and operating results. Today’s call will reference our earnings announcement, statistical package, and webcast slides, which are available on 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 apply, 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 the conference call, we would ask each participant to adhere to a limit of one or two questions. If you have additional questions, please requeue and we will do our best to respond to all questions.

With that I would like to turn the call over to Donald Guloien, our President and Chief Executive Officer. Donald?

Donald Guloien

Thank you, Amir and good afternoon ladies and gentlemen. At our annual meeting this morning, Michael Bell and I talked about efforts to strengthen ROE and generate long-term value for our shareholders by balancing business the allocating capital, earnings solid margins, innovating, extending our product reach, and making disciplined acquisitions. We also spoke from the perspective of a strong successful Canadian company concerning global financial reform and the leadership that Canada has been showing on these ongoing developments.

I also want to mention a few of the personnel changes we announced in our press release this morning. You all have noted that we have decided to eliminate the Chief Operating Officer role. We felt the time is right to have leaders of our divisions report directly to me, the CEO and I will provide direct support to these divisions as we grow the businesses.

Most of you know John DesPrez very well. He accomplished a great deal in his Chief Operating Officer role and was incredibly helpful to me in my first year as CEO and indeed through his entire career at Manulife. John is a talented leader and will now move on to new career challenges with our thanks and appreciation.

We also know that Simon Curtis, who is with us today on the call, has decided he wants to return to corporate development, which is an improvement area for Manulife’s next stages of growth. Our CFO for Asia Cindy Forbes will (inaudible) Simon in the role of Chief Actuary. I think this reflects a great talent and bench strength that we have at Manulife. Cindy will work very closely with Simon over the transition period and Simon will be deployed in some very exciting activities in the future.

This afternoon we are pleased to take you through our first quarter results in more detail. I will make a few openings remarks before turning it over to Michael to discuss our financials.

This morning we reported a high satisfactory first quarter. We delivered sales growth in our targeted business lines, managed expenses effectively, maintained strong capital, reduced risk, and achieved strong earnings and ROE for our shareholders.

Net income for the first quarter rose significantly from a year before to CAD$1.14 billion or CAD$0.64 per share and we generated a solid return on shareholders’ equity, 16.8%. Our capital remained strong with an MCCSR ratio at Manulife Insurance of 250%. In our investments, credit experience was positive relative to market conditions. We also made significant progress hedging our variable annuity position at opportune times during the quarter.

While we are keeping an eye on the long game, I don’t like to focus too much on any single quarter. It was pleasing to report our sales in new business embedded value results for the first quarter. We demonstrated solid growth in our targeted business line. Our strong brands and distribution networks enabled us to expand our sales of quality products, good margins.

This quarter our insurance sales were up 35% in Asia with China and Taiwan leading the way with a strong collective increase of 45% in those countries. Our U.S. retirement plan services grew by 66% and our mutual fund sales increased 105% in the United States and over 260% in Canada. That’s close to CAD$3 billion in mutual fund sales in the first quarter of this year.

New business embedded value increased 22%. Notably we reduced our reliance on variable annuity products where sales were in fact down 39%. But the corresponding new business embedded value increased 37%. So overall a good quarter. We remain focused on executing against our plans and we are cautiously optimistic about future economic trends.

With that, let me turn it over to our CFO Michael Bell to provide you with more details. Michael?

Michael Bell

Thank you, Donald. Hello everybody. Today we reported first quarter shareholders’ net income of CAD$1.14 billion, which equates to CAD$0.64 a share on a fully diluted basis. Our results in the first quarter included strong topline and net income results. Net income included solid underline earnings and the benefits of the positive equity market performance and the favorable impact that this quarter’s investing activities had on the valuation of policy liabilities. These benefits were partially offset by additional tax related provisions on leveraged lease investments, changes in currency rates and unfavorable policy holder experience.

Slide eight provides a summary breakdown of the notable items included in this quarter’s after tax earnings. As noted on the slide, the quarter’s equity market performance resulted in a net gain of approximately CAD$350 million. We also experienced a CAD$195 million in net gains related to investing activities and other investment related items. The majority of these net gains related to our fixed income investing activities which had a favorable impact on the valuation of our policy liabilities. Specifically while our valuation model makes certain assumptions about our expected investment of positive cash flow, recent actual investment activity was favorable relative to those assumptions.

The remaining investment amounts related to net mark to market gain of CAD$83 million on our oil and gas and private equity investments mostly offset by a mark to market loss on our real estate timber and ag properties of CAD$67 million. Net credit charges of CAD$17 million and downgrades of CAD$15 million were only slightly higher than the long-term expected assumptions built into our valuation of our policy liabilities. In addition, as noted in our 2009 annual report, we increased our tax related provisions on leverage lease investments by CAD$99 million and this was partially offset by a release of CAD$24 million of other tax provisions. Net policyholder experience resulted in a charge of CAD$31 million after tax. This largely was due to the unfavorable U.S. long-term care morbidity experience and the unfavorable lapse experienced in U.S. life.

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