Manulife Financial Corp (MFC)

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Manulife Financial (MFC)

Q2 2011 Earnings Call

August 11, 2011 2:00 pm ET

Executives

James Boyle - Senior Executive Vice President of U S Division and President of John Hancock Financial Services

Michael Bell - Chief Financial Officer, Senior Executive Vice President and Member of Risk Disclosure Committee

Donald Guloien - Chief Executive Officer, President, Director and Member of Risk Disclosure Committee

Craig Bromley -

Anthony Ostler - Senior Vice President of Investor Relations

Cindy Forbes - Chief Actuary, Executive Vice President and Member of Risk Disclosure Committee

Beverly Margolian - Chief Risk Officer, Executive Vice President and Member of Risk Disclosure Committee

Analysts

Joanne Smith - Scotia Capital Inc.

Doug Young - TD Newcrest Capital Inc.

Michael Goldberg - Desjardins Securities Inc.

Tom MacKinnon - BMO Capital Markets Canada

Mario Mendonca - Canaccord Genuity

Darko Mihelic - Cormark Securities Inc.

Robert Sedran - CIBC World Markets Inc.

Sumit Malhotra

Gabriel Dechaine - Crédit Suisse AG

Steve Theriault - BofA Merrill Lynch

Unknown Analyst -

Peter Routledge - National Bank Financial, Inc.

Andre-Philippe Hardy - RBC Capital Markets, LLC

Presentation

Operator

Please be advised that this conference call is being recorded. Good afternoon and welcome to the Manulife Financial Q2 2011 Financial Results Conference Call for August 11, 2011. Your host for today will be Mr. Anthony Ostler. Mr. Ostler, please go ahead.

Anthony Ostler

Thank you, Jenny, and good afternoon. Welcome to Manulife's conference call to discuss our second quarter 2011 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. Available to answer these questions about their businesses are the Heads of Asia, Japan, the U.S., Canada and general account investments.

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 important 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.

[Operator Instructions]

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. Joined on this call by our CFO, Michael Bell, as well as several members of our senior management team including our United States General Manager, Jim Boyle; our Canadian General Manager, Paul Rooney; our Asian General Manager, Bob Cook; our Japan General Manager, Craig Bromley, it's great to have you here, Craig; Scott Hartz for General Account and Investments; Bev Margolian, our former Chief Risk Officer and our new Chief Strategy Officer; Cindy Forbes, our Chief Actuary; and Rahim Hirji, our new Chief Risk Officer.

Our second quarter 2011 financial results were announced this morning. We are making excellent progress on a number of fronts. We delivered strong underlying sales growth, including record sales, in a number of our businesses. We expanded our distribution in Asia through both agency and bank channels. And we produced excellent investment results. I'm very pleased with the progress we have made in executing our strategy.

Given the volatility of markets around the world both during the quarter and particularly over the last 2 weeks, I am very pleased that both the amount and the effectiveness of our hedging to date, which is significantly dampening the impact of the decline in equity markets and interest rates on earnings and capital ratios. Hedging does have a cost, but at times like these, it is clearly beneficial. It also allows investors to focus more and more on our core business, which is developing very positively.

In the second quarter, we had quarterly earnings of $490 million, which is after the $370 million charge for changes in our fixed income ultimate reinvestment rate assumptions that in the past normally occurred in the third quarter.

In terms of net income attributable to shareholders, excluding the direct impact of equity markets and interest rates, we delivered $929 million, over double that of last year. And in fact, our U.S. GAAP numbers are similar to those. Our progress in the second quarter aligns perfectly with our strategic priorities, namely sales of wealth and insurance products targeted for growth were up 27% and 28%, respectively.

We expanded and diversified our distribution in Asia with several new important bank distribution agreements. In Canada, we generated record mutual fund sales while in the U.S., we delivered a 50% increase in Mutual Fund deposits, $3.5 billion for the quarter, a nontrivial number. We achieved a record $481 billion in funds under management, despite movements in currency and stock markets. Our hedging program successfully dampened the impact of the second quarter's low equity markets and interest rates.

We reduced to $1.2 billion the sensitivity

to 100 basis-point drop in interest rates, $600 million if you include 100% of the available-for-sale bond offset. This surpasses our 2012 year end target and brings us 90% of our year end 2014 target of $1.1 billion. The Manulife's MCCSR ratio at 241%, our capital level continued to be strong. We've also reduced our capital sensitivity to changes in interest rates. And finally, we continue to offer a high-quality proposition to clients with 27 new or enhanced products launched to the market. This includes an offshore renminbi bond fund in Asia, synergy in Canada, income plus for life with auto portfolio rebalancing feature in the United States.

In summary, our capital remained strong, our asset quality is superior. We're seeing strong underlying sales growth. And we delivered $929 million of net income attributable to shareholders, excluding the direct impacts of equity markets and interest rates. I hope you agree that our strategy of delivering results that will position Manulife extremely well for future earnings growth and ROE expansion.

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

Michael Bell

Thank you, Donald. Hello, everyone. Our second quarter results demonstrated strong execution of our strategic priorities, as we grew our targeted businesses and benefited from our reduced risk profile. We continue to be ahead of our original timetable on reducing both interest rate and equity market sensitivities. And we took additional actions to further reduce our interest rate exposure in the second quarter.

Overall, we delivered net income of $490 million in the quarter despite underperforming equity markets and a low interest rate environment. And these results reflect our improved ability to mitigate much of the impact of the unfavorable financial markets.

MLI ended second quarter with a strong capital position, with an MCCSR ratio of 241%, which provides a substantial cushion against the risk of adverse market conditions, particularly in light of the expanded hedging. In the second quarter, we also completed our annual update to our fixed income ultimate reinvestment rate assumptions, referred to as the URR. This resulted in a $370 million charge to earnings, which I'll discuss further in a few minutes. And I'd also note that we announced the sale of our life retro business, which is expected to release capital in the third quarter 2011.

So turning to Slide 7, you'll note that there were a number of notable items impacting the second quarter after-tax earnings. There was a $69 million net loss due to the direct impact of equity markets and interest rates declining in the quarter. And this excludes the $370 million charge for the annual URR update caused by the current interest rate environment. The direct impact of equity markets resulted in a loss of $148 million, as we benefited substantially from the expanded hedging program relative to a year ago. The direct impact of changes in interest rates in the quarter generated a $79 million gain, as we benefited from favorable changes in both bond and swap spreads, as well as realized capital gains on the sale of our AFS bonds and the favorable impact of additional de-risking actions taken in 2011.

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