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Manulife Financial Corporation (MFC)
Q3 2010 Earnings Call
November 4, 2010; 02:00 pm ET
Donald Guloien - President & Chief Executive Officer
Michael Bell - Chief Financial Officer
Beverly S. Margolian - Executive Vice President & Chief Risk Officer
Warren Thomson - Senior Executive Vice President & Chief Investment Officer
Anthony Ostler - Senior Vice President of Investor Relations
Jim Boyle - U.S. General Manager
Paul Rooney - Canadian General Manager
Scott Hartz - Executive Vice President, General Account Investments
Cindy Forbe - Executive Vice President & Chief Actuary
Tom MacKinnon - BMO Capital Markets
Andre-Philippe Hardy - RBC Capital Markets
Michael Goldberg - Desjardins Securities
Darko Mihelic - Cormark Securities
Steve Theriault - Banc of America/Merrill Lynch
Doug Young - TD Newcrest
Robert Sedran - CIBC
Mario Mendonca - Canaccord Genuity
Colin Devine - Citi Group
Peter Routledge - National Bank Financial
Previous Statements by MFC
» Manulife Financial Corporation Q2 2010 Earnings Call Transcript
» Manulife Financial Corporation Q1 2010 Earnings Call Transcript
» Manulife Financial Corporation Q4 2009 Earnings Call Transcript
» Manulife Financial Corporation Q3 2009 Earnings Call Transcript
Thank you, and good afternoon. Welcome to Manulife's conference call to discuss our third 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 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 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 Guloien, our President and Chief Executive Officer. Donald?
Thank you, Antony. Good afternoon everyone and thank you for joining us today. Our third quarter 2010 financial results announced this morning reflect a quarter in which we made considerable headway executing our business plan, both in terms of repositioning our business, reducing our equity and interest rate sensitivities.
I’m joined on the call today by our CFO, Michael Bell, as well as several members of our senior management team including our U.S. General Manager, Jim Boyle; Canadian General Manager, Paul Rooney; Warren Thomson for Investments and our accountant, the finance team.
Let me start with my assessment of our progress this quarter. We had a net loss attributed to shareholders of $947 million equating to a fully diluted loss per share of $0.55. Despite the reported results, it’s important to note that we generated strong underlying earnings from operations. Adjusted earnings from operations were $779 million in the quarter within the $700 million to $800 million range we estimated for fiscal 2010 in our 2009 annual report.
The operational contributions were more than offset by a $2 billion reserve strengthening and $1 billion goodwill impairment related to the current economic climate and the repositioning of our U.S. business. Manulife’s capital position remained strong in the quarter. Manulife increased its MCCSR ratio to 234%.
We achieved a 19% reduction in interest rate income sensitivity by lengthening the duration of our fixed income investments through swaps and other initiatives in both the liability and the surplus segments. Furthermore, we reduced equity exposure by hedging an additional $3.3 billion of inforce variable annuity guaranteed value and also lowered our equity holdings by almost $450 million.
With the actions taken, the total amount of guaranteed value hedged or reinsured was 54% as of September 30. As you’ve seen in our press release, we have adopted revised targets for hedging both interest rates and equities. Fortunately, equity markets have moved once again in our favor. The S&P 500 is almost up almost 20% since the July too low and in fact it’s pretty much on the yearly high.
We also hedged another $800 million just today. Our goal is to execute additional hedges so that approximately 60% of our underlying earning sensitivity equity market movement is hedged by the end of 2012. You will note that this is a more relevant standard than the notional standard we used before, the 70% notional amount hedged, now we are using a standard of earnings sensitivity and the goal is to have 60% hedged by the end of 2012.
And to go further than that through to 2014, we plan to use a combination of macro and dynamic hedging and other techniques until we are well within our targets. With the basis changes and interest rate moves in the quarter, our interest rate sensitivity was going to increase beyond levels that we would find tolerable.
In addition, the outlook seems to be for lower rates for a longer period of time. As a result, we are ranging our fair; so that we do not expect to see an increase in interest sensitivity and through a variety of measures, plan to decrease that sensitivity over the next four years. To the extent rates continue to decline, we would also except to generate additional gains on sale of bonds in surplus.
During the quarter, we saw positive results globally from our efforts to reallocate capital and resources to those products targeted for growth. Our repositioning is indeed working. In Asia, for example, sales of insurance products increased 50%. I am also particularly proud of our U.S. business, where adjusted earnings from operations increased 72% over the third quarter of 2009. This was driven by reducing strain, changing product mix and price changes.
In Canada, mutual fund sales increased 181% with deposits almost triple 2009 levels. Manulife Bank sales increased by 13% year-over-year and life insurance sales were up 11% in individual insurance. In fact, as of last night, our U.S. mutual fund business recorded $8 billion in sales year-to-date. Our credit experience remains strong, which is a reflection of the continued strength of our investment division.
Now we know a number of analysts like to compare our results with those of our U.S. peers, the basis of earnings and shareholders equity. On the U.S. GAAP, we are estimating that we will report a net loss of $212 million, which is approximately $700 million lower than that recorded under Canadian GAAP.
In addition, our total equity is about $9 billion difference. During the quarter, we also added to the highly successful John Hancock brand campaign in the United States by launching campaigns to tell our stories to Asian and Canadian audiences. These investments are helping to grow the value of our global brand.
In summary, we are successfully reducing our equity and interest rate sensitivities, also positioning our business for future earnings growth ROE [ph] expansion. I am also pleased to say that Manulife’s board recently had a board meeting in China, where we met with our many wonderful partners in China, signifying the strategic importance of Asia to Manulife’s future plans.
At that time, the board also reviewed and reaffirmed its support of the company’s strategic direction and plans. We are enormously pleased to be able to share those plans with you at an Investor Day planned for November 19. With that, I will turn the podium over to Michael Bell, who will highlight our financial results and then open the call to your questions. Thank you.
Thank you, Don. Hello everybody. Today, we reported a third quarter shareholders net loss of $947 million, which equates to a loss of $0.55 per share on a fully diluted basis. I’ll first refer to slide 7, which provides a summary of the quarter’s results. Excluding notable items, our adjusted earnings from operations were $779 million and at the upper end of our previously stated range. And we knew these underlying business results to be strong.
We completed our annual review of actuarial methods and assumptions in the third quarter and this resulted in a total net charge of just over $2 billion after tax. And I’ll review these items in a few minutes. On a Canadian GAAP basis, we recorded an impairment of goodwill of just over $1 billion related to our revised outlook for our U.S. insurance business. This review of goodwill was necessitated by current economic conditions and our recent decisions to reposition that business. And as we’ve discussed, this goodwill impairment is a non-cash item, which does not impact regulatory capital.
During the quarter, we took important fixed income investment actions, which reduced our sensitivity to interest rate changes and increased our capital levels. We ended the third quarter with a strong capital position as MLI’s MCCSR was 234% at September 30, up 13 points from last quarter despite the impact of the annual actuarial basis changes. We also did a good job continuing to generate strong top-line growth in our targeted growth areas or effectively limiting sales of our other products by design.
Our credit performance continue to be strong, which is a testament to our investment discipline. We also significantly reduced our interest rate sensitivity and we have plans to continue to reduce both interest rate and equity market exposures over the medium-term. We expect to report a net loss of $212 million on the U.S. GAAP basis in the third quarter. And this results continue to be better than our C GAAP net result even though the U.S. GAAP result includes a larger goodwill impairment. So overall, we’re pleased with our progress on several key priorities in the quarter, although obviously not satisfied with our net income result.