Manulife Financial Corp (MFC)

MFC 
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Manulife Financial (MFC)

Q4 2011 Earnings Call

February 09, 2012 2:00 pm ET

Executives

Anthony Ostler -

Michael W. Bell - Chief Financial Officer, Senior Executive Vice President and Member of Executive Committee

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

Cindy L. Forbes - Chief Actuary, Executive Vice President and Member of Executive Committee

James R. Boyle - Member of Executive Committee and President John Hancock Financial Services

Warren Alfred Thomson - Chief Investment Officer, Senior Executive Vice President, Member of Executive Committee, Chairman of Manulife Asset Management

Scott Sears Hartz - Executive Vice President of General Account Investments and Member of Executive Committee

Analysts

Tom MacKinnon - BMO Capital Markets Canada

Michael Goldberg - Desjardins Securities Inc., Research Division

Doug Young - TD Securities Equity Research

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

John Aiken - Barclays Capital, Research Division

Darko Mihelic - Cormark Securities Inc., Research Division

Robert Sedran - CIBC World Markets Inc., Research Division

Mario Mendonca - Canaccord Genuity, Research Division

Steve Theriault - BofA Merrill Lynch, Research Division

Ohad Lederer - Veritas Investment Research Corporation

Gabriel Dechaine - Crédit Suisse AG, Research Division

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

Sumit Malhotra - Macquarie Research

Presentation

Operator

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the Manulife Financial Q4 2011 Financial Results Conference Call for February 9, 2012. Your host for today will be Mr. Anthony Ostler. Mr. Ostler, please go ahead.

Anthony Ostler

Thank you, Anne, and good afternoon. Welcome to Manulife's conference call to discuss our fourth year 2011 and full year 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 questions about their businesses are the Heads of Japan, the U.S., Canada, Investments 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 Mr. Donald Guloien, our President and Chief Executive Officer. Donald?

Michael W. Bell

Thank you, Donald. Hello, everyone. First of all, I'd like to thank you, Donald, for those very kind words and support. It has been a tremendous pleasure and privilege to work with the great people at Manulife and to live here in Canada. We've made tremendous progress as a company in the last 3 years under Donald's leadership and I am confident that we'll have even more success in the future. Since my transition timetable is open-ended, it just reinforced that I'll be fully engaged for as long as I'm here and will likely have plenty of time for goodbyes at a later date.

So in terms of our full year results, we are net income of $129 million in 2011, and that compares to a $1.66 billion loss in 2010. Included in the 2011 results are the impact of unfavorable interest rates and equity markets, the charges related to our actuarial basis changes and a goodwill impairment charge that we had discussed last quarter. Due to these notable items, I'd like to stress that our 2011 reported earnings are not indicative of our view of our expected run rate earnings going forward.

We ended the year with MLI's MCCSR at 216% and we view this level as comfortable, particularly in light of our expanded hedging programs. Our earnings and capital in 2011 benefited materially from the significant hedging actions over the last 5 quarters.

As of yearend 2011, we've exceeded our 2014 goal for reduced interest rate sensitivity, and we continue to be ahead of our timeline for reducing sensitivity to equity markets. We are pleased to have benefited significantly in 2011 from our decisions and actions in this area.

And turning to Slide 8, you'll note that there were a number of notable items impacting the fourth quarter results. In the fourth quarter, we experienced a $40 million net gain due to the direct impact of equity markets and $113 million net gain due to changes in interest rates. Higher realized equity market and interest rate volatility were the primary cause of a $193 million charge related to the VA block that's dynamically hedge. Tracking error and items not hedged also contributed to the amount.

The expected cost of our macro equity hedging program based on our long-term valuation assumptions was $97 million after tax in the quarter. And the pretax amount was $116 million for the quarter. In the fourth quarter, we also recorded investment-related gains that amounted to $279 million. And finally, there was a $665 million goodwill impairment charge for the John Hancock Life Insurance business, primarily resulting from the low interest rate environment and our de-risking activities.

Slide 9 is our source of earnings. Expected profit on in-force increased relative to the third quarter of 2011. Fee income from asset-based businesses was lower in the fourth quarter, but was more than offset by favorable currency impacts.

The impact of new business strain increased due to the lower interest rates and increased sales of business with higher new business strain in reaction to our announced price increases. Experience gains in the fourth quarter primarily reflect favorable investment gains and seg fund experience partially offset by losses from expenses and macro hedges.

Management actions and changes in assumptions include the impact of the goodwill impairment and the expected cost of macro hedging. Earnings on surplus increased sequentially, reflecting a favorable currency impact and the non-recurrence of losses on alternative assets in the third quarter of 2011.

On Slide 10, you'll see our insurance sales. For the full year 2011, sales of our targeted insurance products grew by 11% compared to 2010 on a constant currency basis. In Asia, we delivered record insurance sales in 2011, which were 13% higher than 2010. And this was driven by record performance in 6 of our 10 businesses. Our expanded distribution capacity contributed to the sales growth in Asia. As of year-end 2011, the number of contracted agents was 18% greater than 2010. And we also expanded our bancassurance arrangements in 6 of our businesses.

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