Manulife Financial Corp (MFC)

MFC 
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Manulife Financial (MFC)

Q4 2010 Earnings Call

February 10, 2011 2:00 pm ET

Executives

Donald Guloien - Chief Executive Officer, President and Director

Scott Hartz - Executive Vice President of General Account Investments

Beverly Margolian - Chief Risk Officer and Executive Vice President

Warren Thomson - Chief Investment Officer, Senior Executive Vice President and Chairman of MFC Global Investment Management

Michael Bell - Chief Financial Officer and Senior Executive Vice President

Anthony Ostler - Senior Vice President of Investor Relations

Paul Rooney - Senior Executive Vice President, Chief Executive Officer of Financial’s Canadian Division, President of Financial's Canadian Division and General Manager of Canada

Analysts

Joanne Smith - Scotia Capital Inc.

Michael Goldberg - Desjardins Securities Inc.

Doug Young - TD Newcrest Capital Inc.

Tom MacKinnon - Scotia Capital

Mario Mendonca - Canaccord Genuity

Robert Sedran - National Bank Financial

Darko Mihelic - Cormark Securities Inc.

Gabriel Dechaine - Crédit Suisse AG

Steve Theriault - BofA Merrill Lynch

John Aiken - Barclays Capital

Peter Routledge - National Bank Financial, Inc.

Andre-Philippe Hardy - RBC Capital Markets, LLC

Presentation

Operator

[Operator Instructions] Good afternoon, ladies and gentlemen, and welcome to the Manulife Financial Q4 2010 Financial Results Conference Call for February 10, 2011. Your host for today will be Mr. Anthony Osler. Mr. Osler, please go ahead.

Anthony Ostler

Thank you, and good afternoon. Welcome to Manulife's conference call to discuss our fourth quarter 2010 financial and operating results. Today's call we'll reference our earnings announcement, statistical package and conference call 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 will 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'd like to turn the call over to Donald Guloien, our President and Chief Executive Officer. Donald?

Donald Guloien

Thank you, Anthony. Good afternoon, everyone, and thank you for joining us today. Our fourth quarter and full year 2010 financial results were announced this morning. As you know, we made substantial progress, delivering on our business strategy. This is reflected in significant sales growth, reduced risk profile and strong capital levels. We have record quarterly income of $1.794 million (sic) [$1.794 billion].

I'm joined today on the call -- it's at $1.794 billion, I should say. Joined in the call today by our CFO, Michael Bell; as well as several members of our senior management, including our General Manager in the United States, Jim Boyle; Canadian GM, Paul Rooney; our Asian GM, Bob Cook; Warren Thomson for Investments; and Bev Margolian, our Chief Risk Officer.

I'm pleased to report that we're seeing solid progress on all fronts. Our fourth quarter sales of Insurance products targeted for growth were up 34%. Wealth products targeted for growth were up 28%, Insurance sales in Asia were up 56%, reflecting both the growing diversification of products and the expansion of our distribution channels.

Sales in Canada reflected the value of our diversified franchise. Strong fourth quarter momentum contributed to record sales in individual life and travel insurance, and a number of successes in the Wealth Management businesses.

Our U.S. Division continued at solid progress, repositioning their businesses. John Hancock Mutual Funds achieved record sales levels of U.S. $9.7 billion, 48% higher than the previous year. John Hancock Retirement Plan Services ended the year with full year sales of an additional U.S. $5.1 billion, up 16% over the prior year. Total wealth funds under management in our U.S. business reached a record level of U.S. $188 billion.

Across the company, we saw our funds under management grow at a $475 billion. These are strong operational result that highlight the strength of our franchises and the shift of our business mix.

Now turning to Slide 6. We took advantage of rising equity markets and interest rates to increase our hedging of both equity and interest rate risk. As you know, as at December 31, 2009, we had 35% of our variable annuity guarantee value hedged or reinsured. That number at the end of 2010 was 55%. Beyond that, we have added $5 billion of macro hedges. As a result, through hedging of all types, we have now hedged 50% of our equity sensitivity, up from 25% at the end of third quarter 2010.

Since the end of the quarter, we have witnessed improving equity markets and interest rates in 2011. We have taken further advantage of this opportunity to return to dynamic hedging. In the last few weeks, we have added approximately $8.5 billion towards our dynamic hedging program, and now have 63% of VA guarantee value, hedged or reinsured.

This amount, in combination with the macro hedges, means we now have approximately 55% of our equity market sensitivity hedged. And to be clear, this estimate includes an allowance, a substantial allowance, for hedged inefficiency. Therefore, with the dynamic hedging actions we've taken in the first quarter of 2011, we continue to make substantial advances towards our goal to hedge 60% of our underlying earnings sensitivity to equity markets by the end of 2012 and 75% by the end of 2014.

We also reduced our sensitivity to interest rates. At the end of the year, our sensitivity to a 1% decrease in interest rates have declined to $1.8 billion from $2.2 billion at the end of the previous year. This is a solid movement towards our interest rate to sensitivity goal of $1.65 billion and $1.1 billion by 2012 and 2014, respectively.

Manulife's capital remained strong. We increased our MCCSR [Minimum Continuing Capital and Surplus Requirements] ratio by 15 points to 249%, and this key ratio is now accompanied by a lower risk profile as a result of the aforementioned hedging actions.

This quarter, we reported net earnings attributable to shareholders of $1.8 billion. As I said earlier, that was a record. This equates to a fully diluted earnings per share of $1.

Fourth quarter net income, excluding the direct impacts of equity markets and interest rates, was $933 million. With the $1 billion goodwill impairment and the $2 billion strengthening of reserves, that we undertook in the third quarter, we recorded a full year loss of $391 million. But for these items, we would have recorded a gain of $2.7 billion.

In summary, we have made important progress on reducing our equity and interest rate sensitivities, and will continue to do so. Our capital is strong, our asset quality is superior and we're seeing strong results from our strategy that will position Manulife for future earnings growth and ROE expansion.

So with that, I'll turn it over to Michael Bell, who will highlight our the financial results and then open the call to your questions. Thank you. Michael?

Michael Bell

Thank you, Donald. Hello, everybody. Throughout 2010, we made significant progress, relative to our strategic priorities. We have driven a change in our business mix towards targeted higher return businesses. And as we discussed at our investor day, we expect this mix change to contribute to an increase in our ROE over the next several years.

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