Manulife Financial Corporation (MFC) National Bank Financial 22nd Annual Financial Services Conference (Transcript)

Manulife Financial Corporation (NYSE:MFC) National Bank Financial 22nd Annual Financial Services Conference March 27, 2024 11:05 AM ET

Company Participants

Colin Simpson – CFO

Conference Call Participants

Gabriel Dechaine – National Bank Financial

Gabriel Dechaine

All right. Welcome back to the stage here. And I’d like to welcome Colin Simpson, Manulife’s Chief Financial Officer, who has been in the job for almost a year. And it’s gotten really exciting over the past three months or so…

Colin Simpson

It’s more than that it’s felt like.

Gabriel Dechaine

And that’s helped the question — coming up with questions for this. So thanks for joining us today.

Colin Simpson

No, awesome, Gabe. And it’s great to be here. Great conference and really great — great schedule of investors.

Question-and-Answer Session

Q – Gabriel Dechaine

Good to know. Long term care, let’s start with that, the big topic that’s been a game changer as far as Manulife stock price is concerned, big transaction announced in December, I guess. One thing that popped the mind was it’s an issue that I’d always feel the pulse with management over the years and others have, and the comment was there’s some interest but the bid ask spread is still quite wide. What changed?

Colin Simpson

So a number of things happened really. And you can link them all, but I think higher interest rates have certainly helped. It’s helped bring more capital into the life insurance space. And we transacted with a private equity backed insurer, reinsurer. And so obviously, their sources of capital were comfortable putting money to work into the life sector. And so with higher interest rates, you can imagine more capital is flowing into the LTC space, but that’s a macro perspective. I think from a much more company specific space, our books have got more mature. So the funnel of doubt for all the things that people are potentially worried about with life insurance has narrowed. So when you think about how much older our policyholders are, for instance, the book that we transacted on, the average age was over 80 years old. So I think counterparties feel much more comfortable transacting with more mature books. And we’re able to demonstrate our track record of experience, which is really good in LTC and our track record of getting rate increases through. So I think that associated with the fact that we were able to package long term care up with some attractive businesses for other companies made a perfect opportunity for this to be pretty much the — it is the largest deal, but also quite an [inaugural] deal in this period for life insurance.

Gabriel Dechaine

Well, certainly, the expectation was it would be sold at a big loss and it was transacted at no loss. So that was another positive aspect of that announcement. How quickly did the deal come together?

Colin Simpson

It took most of last year. I mean, this is a deal that, because we packaged the business up with two blocks in Japan, obviously, it spanned different geographies. We were talking to multiple counterparties certainly at the beginning of the process. So it was also important for us to with it down to a counterparty that where we could see that the chemistry worked. And so that had to happen very early on because once you do that then it’s really opening the books, because the most important thing is getting the purchasing reinsurer comfortable with the assumptions that we have. And obviously, the asset side of things is really straightforward. But when you look at the biometric risk associated with long term care, i. e., how often are people — how often are they becoming in need of care and how often are they recovering and what’s the mortality rate, we basically opened our books up and it was a case of come and take a look at our assumptions and challenge them and see where you’re different and see where you’re the same. And the good news is that the third party reinsurer that ended up taking the biometric risk, we were the same on all those risks. And that if you look at the share price reaction, you can take your view on why it reacted why it reacted. But our fundamental belief is that by doing this transaction was a major step towards validating our assumptions in our reserves, which we’ve been saying are current and appropriate, we think that at least having a third party validated has been the biggest part of this transaction. So long story short, it took a long time and most of last year.

Gabriel Dechaine

And as you touched upon a couple of things here that, I guess, conditions of sale, if you will, you did include a whole life business in Japan and another structured settlement in the US, I believe that one…

Colin Simpson

Two whole of life blocks in Japan and then one structured settlements in the US.

Gabriel Dechaine

Okay. Is that a necessary condition possibly that to transact some LTC you need to throw in something else?

Colin Simpson

I think so. I mean, let’s be honest we — it’s we — and the reason why I say that is we led with this is the largest LTC deal in history and Global Atlantic led with this is the largest Japanese deal in history. And so they found that Japan was really attractive to them. And if you look at the combined ROE of the books that we transacted in, it was 10%. So it’s not like we gave away the crown jewels in order to do the LTC transaction. We transacted on a business that was combined 10% ROE. So we feel very comfortable. But I don’t believe the market is quite there for a standalone LTC deal just yet. But then the reality is, as Manulife, we’re fantastically positioned to package deals, because I think there’s a lot of demand for — from reinsurers to expand into Asia and we have that unique opportunity to give reinsurers exposure to Asia, as long as — as well as Canada and the US. So I really feel that we remain the best positioned to do more deals in the space through our ability to package, execute and also the culture of Manulife. We do — we’re known to work really well with counterparties and partners and who we share the same values with.

Gabriel Dechaine

And the other condition, I guess, there was Global Atlantic, but I believe there was a global reinsurer that was part of the transaction that took on the biometric risk, is that another necessity of that to do deals?

Colin Simpson

I don’t think it’s a necessity. I think, when you look at the deal we announced on Monday, Universal Life in Canada, I mean, that was with RGA and RGA is taking both biometric and asset risk. So I don’t think that’s a necessity, it just worked out really well. It added a little bit of complications certainly at sort of 2:00 AM uncertain live, when you got three sets of lawyers negotiating various causes. But at the same time, the cultural fit worked really well and it was on the whole a very smooth transaction.

Gabriel Dechaine

And just to wrap it up, the deal garnered a lot of fanfare and attention certainly in our circles. But the counterparty circles, have you been receiving new inbounds from interested parties after seeing that deal?

Colin Simpson

Yes. I think…

Gabriel Dechaine

And what — having transacted at an attractive valuation, how does that affect the overall marketplace, because there are other companies that are looking to do big deals?

Colin Simpson

Yes. And we have received lots of inbound. And I think there were people who didn’t — who passed on the opportunity to transact and they see this transaction happen and they certainly want to understand how others made it happen and how it didn’t work for them. So that’s one area of inbound. I think other people have just lived by a rule whereby LTC is off the table. But that’s really based on information that’s 10 years out of date. We’ve got experience that’s 10 years on that suggests that the book is actually — some of the risks are quite controlled. And on top of that, we’re able to get lots of rates through the business. So I feel like the market has moved on. My opening point about higher interest rates, bringing capital into the space, higher interest rates have made it more attractive for companies to transact. And so they — as opposed to five, seven years ago, they’re now receiving a whole bunch of assets that they’re able to redeploy into quite attractive conditions. So that in itself has also helped. So yes, it’s definitely — I think, we’ve definitely fired the starting pistol for more transactions. We’ve definitely had lots of interest. We’ve been quite active ourselves, because we don’t want the market to open up and then for all our competitors to do deals. So we’re quite active as well and we believe we’re able to demonstrate that we can pull these transactions off and that’s certainly our case is not to stop here.

Gabriel Dechaine

Okay, perfect. Let’s switch over to Asia. This was not as ballyhooed, I guess, but the change in your Hong Kong strategy to go after more MCV, Mainland Chinese Visitor sales has been a notable one. I guess — well, my starting question very simply is, what are the products that you’re selling primarily, are they saving products?

Colin Simpson

Yes. I think — and the people in the room who might not be aware of MCV or Mainland China Visitor business. These are affluent Chinese residents coming to Hong Kong and purchasing a product from us. And when you look at what their needs are, their needs are not necessarily protection because they can get protection from their local insurer. Their needs are much more around diversification of their financial wealth. They’re able to invest into different currency and also with an international brand that might be attractive, but also education savings, estate planning and then really importantly is healthcare. They will have access to resell a product where they get access to the Hong Kong hospital network. And so that is again, slightly different. The margin on that will be different. But where I think you’re going with the question is the MCV business is lower margin than our domestic Hong Kong business, because most of the products are really savings related. And you see that with our margin if you track it over time. But still, our overall Hong Kong margin is north of 70% on what we call an APE, sorry to throw acronyms at you, annual premium equivalent basis, which basically means it’s still very attractive business. And the boost in volume that we’ve been able to report has come from this — the reopening of the border post-COVID, the formalization of the Greater Bay Area, and that’s really opened the door for more business to come through. I mean, you talked about a change in strategy. I think the way we would categorize it is we feel so comfortable now writing Mainland China Visitor business and our market share — the proportion of MCV business on our sales has doubled from when it was in 2019, when we were just — the Greater Bay Area wasn’t formalized at that point in time. And so we were just more prudent than — much more prudent than the competition.

Gabriel Dechaine

Okay. And is there an expectation — the margin profile of your sales mix, is there an expectation over time they start buying different products or is it pretty steadily towards savings type products?

Colin Simpson

I think it’s quite unlikely that they will come to Hong Kong and buy a life insurance or maybe even a critical illness product is quite easily done onshore. And so it’s most likely going to retain that savings characteristic. But where we give up in margin, I think we’re going to definitely make up in volume, because increasingly now it’s been seen as a real status symbol, come to Hong Kong and you’ll see posted pictures of people meeting with their adviser and buying an insurance product and we want to see that happen. And certainly, the concept of diversification of financial wealth is really important.

Gabriel Dechaine

Moving over to Japan, because we did talk about it in the LTC discussion, of course. Is it reasonable to think of that one as a legacy business? I think that your response might be that it’s — I don’t want to put words in your mouth, but I’ve heard the company talk about the scale it provides and allows you to spread your cost base around the region more effectively, but it’s had growth challenges certainly. And I’m wondering if there’s any different way of thinking about Japan?

Colin Simpson

Yes, I think, I like Japan. I think as a business and not for the point that you mentioned on that as a good cost player, like hopefully we do better as a management team than just have businesses that can absorb costs. I think where — if you look at how we sell our products in Japan, we focus very much on the regional bank level. And what we’re seeing in Japan right now with the wealth, the demographic boosting the sort of the wealth opportunity in Japan and the money coming back onshore is creating a pent up demand for wealth products. And at the same time, you’ve got the stock market on fire there and real excitement around the Japanese opportunity. And I think our business has had periods of — we haven’t been able to sell as much business for various reasons as we had hoped. Now this year, we are opening up to more product opportunities. I think we’ve got our business right sized, we’ve done big cost cutting opportunities, but — that cost cutting opportunity, I’m bullish on Japan as a — in a relative context, right? We’re not talking about Indonesia type growth opportunities here, but really attractive way for us to grow in a market that’s got some quite unique opportunities. And it’s a well run business for us. This concept of legacy versus non legacy, and I’m relatively new to Manulife, so it’s not something I’m overly familiar with, but it’s not something — I wouldn’t classify Japan as a as a legacy business for Manulife.

Gabriel Dechaine

Okay. So broader Asia, and this is tying into an announcement that you pushed — you push back the objective for 50% of the earnings to come from the Asia segment to 2027. With the legacy transactions shrinking the US pie to a degree and then emerging growth coming out of Asia, like post-pandemic stuff, what are some of the headwinds that prompted the decision to delay that target?

Colin Simpson

Yes. And just to fill anyone in, we had a target to save 50% of earnings are likely to come to Asia by 2025. And at this last results announcement, we’ve pushed that back two years to 2027. The rough contribution now is about 37%. The main reason is really the uneven recovery post-COVID. Take Vietnam for instance, that’s an area whose market — the market AP shrunk by 40%. And so the growth out of Vietnam has certainly not come at the same pace that we expected when we set the target for 50%. I could extend that to a couple of other markets, but the main reason for pushing it out two years is really the uneven recovery from COVID. But in truth, the target was also set at a time when we were under an IFRS 4 regime and under IFRS 4, you were able to use a lot of your new business to come through earnings, that’s not the case in IFRS 17. So a lot of what you see, the growth in Asia that you referred to is going through to our CSM and I feel for the interpreters on this call, but it’s going through to our CSM, the contractual service margin and that’s future profits, but that doesn’t get recorded in P&L. So effectively, a large store of our future profits is coming as a result of this growth in Asia and that’s not reflected in actual P&L earnings. And then, we’re a bit of a victim of our own success in the US and Canada. The group business has been going really well in Canada. And so, that’s probably — we’ve grown our North American businesses faster than we anticipated when we set the target. So a few things, it’s very difficult to manage a P&L by pie charts type thing. So if there was a target to miss, I’m okay missing that target.

Gabriel Dechaine

So you’re hosting an Investor Day in Hong Kong and Jakarta in June. I forgot when the last one was, certainly pre-COVID and they’ve taken place every three, four years, so at that pace. If I go back a long time, there was the issue with Asia was subscale in most markets than the last investor update in Asia was, I think eight out of 10 were at scale or above whatever. Is it possible — or just can someone go in the other direction or once you’re at scale, you’re at scale?

Colin Simpson

No, I think there’s definitely…

Gabriel Dechaine

We’ve got, because like Vietnam, for instance, with APE sales…

Colin Simpson

Yes, that’s the obvious one that certainly shrunk. The market shrunk, we shrunk with it. But when I look at Asia, what the benefit of investing in Asia through Manulife is that we are a cash generative Asian insurer. We had a $1.7 billion remittance come out of that business last year and our entities remain really well capitalized. So it is great to have the scale that we have and the ability for us to remit cash to the holdco, because as far as I’m concerned, as a CFO, cash flow is absolute paramount importance. So — but we’re not at scale everywhere. We have — Hong Kong is by far our dominant business and so it would be nice to see the markets of Indonesia and Philippines, China take up some of the slack. But again, talking about victim of your own success, Hong Kong keeps growing like crazy. So it keeps being a big part of our business and that’s great. It sets the standard, because that’s the bar that the other businesses need to be held against. But we’ve certainly got more to grow in the Asian markets. We’re number one now in Singapore, thanks to our DBS agreement. So some great performance there. But the sky is the limit as far as I’m concerned on Asia and hopefully, we get to show you that when you come in June.

Gabriel Dechaine

The remittances, you brought that up and I might get the numbers wrong. But several years ago, the number was closer to 2 to 2.5 and now it’s around 4. So aside from legacy transactions, because once they’re concluded, there’s a cash uplift, what’s been behind the up step in remittances?

Colin Simpson

Yes. And the number we reported actually is 5.5 and that’s well in excess of a normalized run rate. We generally remit about 60% to 70% of our post tax earnings, which is a great remittance ratio as far as I’m concerned for a life company. We over exceeded it last year. Some of it was a bit more focused. I’m super focused on cash. And when we have cash at the holdco, that’s just easier to control and gives you much more strategic flexibility. But in part, the markets also helped us out quite a lot. Some of the surplus asset that we have in Canada really benefited by the market and interest rate moves. We’ve seen that in at least one of our competitors as well. So it’s not unique to us. But my commitment to you is that we will continue to focus on this remittance piece. We will scour all over Manulife and make sure that there’s not lazy capital. Some of the — we took out about $300 million in remittances from two entities that just haven’t remitted in the past, and it was great opportunity to sort of ask for more capital without it impacting the performance of the business. So rest assured, it’s busy times at Manulife and we’ll continue to boost — to look to improve remittances.

Gabriel Dechaine

And the interest rates have helped as you indicated. Can we just maybe walk through your income statement or however you look at it, and — because I get this question a lot and it’s long term uplift from higher interest rates. Where do you see the biggest benefit? I mean, in the recent years, it’s been on the — in the surplus accounts, but then if we get rate cuts that might go in the other direction, because I assume you keep a shorter term profile on those assets. So what are the puts and takes on the rate trajectory?

Colin Simpson

Yes. I think as a fundamental concept, we don’t try and take interest rate risk. It’s just ForEx and interest rate risk is not for our appetite. We we’ve certainly learned that lesson the hard way. So very limited actual interest rates, where you get the big pickup and where you’ll hear, you know, by life insurance because of rising interest rates, and that’s in the long end of the curve. Higher interest rates really does allow us to offer more attractive guarantees to our customers, it allows us to invest in the long term, earn a better spread. What’s really attractive is when you get a steep, high and a steep interest rates because then interest rate curve, because then we’re not competing with short term savings products. What’s been slightly difficult is we’ve had higher interest rates, but the short end has gone up quite a bit as well. So we’ve — people have thought, well, why do I buy a long term life insurance policy when I can just park the money at money market funds. So you alluded to a potential rate cut, well, maybe that steepening of the yield curve might help the attractiveness of selling our policies. Fundamentally, economically, higher interest rates mean that we discount our liabilities, what we pay out to our customers, what we’ve promised our customers at a higher rate and that’s economically better. But you’re not going to see that through the P&L. You talked about the P&L, what would happen if there’s an interest rate change. Well, we have surplus assets. Some of those surplus assets are invested short. If we get say a 25 basis point cut, we get — it’s a $7 million pretax hit to our income statement. So it’s de minimis. You won’t actually see the impact. We’re still rolling forward our long duration surplus assets into high yielding investments. So really our P&L is going to be very insensitive to interest rate movements. Economically, it’s great for us if the long end goes up, but really what we want to show is just consistent sustainable earnings growth year-after-year and a decent return on equity and interest rates is not going to [derail] that.

Gabriel Dechaine

I have a few minutes left, you were worried we’d get through them too fast, but we’re doing well. The legacy transaction and you announced one on Monday as well. So another slice of ALDA assets that you’ll be disposing of over time. I don’t know if there’s been any progress on the ALDA associated with the first transaction. But just generally speaking, what is the P&L impact would be, I say P&L, but DOE, another acronym, expected investment income would go down? Is that’s really it?

Colin Simpson

That’s right. So — and again, just to take a step back. ALDA’s alternative long duration assets at Manulife, we like our acronyms, but we’re also really good at ALDA long duration illiquid assets. And so we’ve got just over 50 billion of these illiquid assets, which over the cycle generated a 9% return. And that’s what we expect them to return. And within our core earnings, we record a 9%. But what really matters to me is what we actually earn on the assets and that gets trued up below the core earnings line. So to your point, when we sell assets, it affects our expected return. When we sell assets earning 9%, it affects our expected return. But what we’ve done with both transactions, the transaction in December and the transaction that we announced on Monday is we’re buying back stock at the same time. So any reduction in earnings that are coming from less of these illiquid assets is completely offset on a per share basis by buying back stock. So again, nothing for us to really be worried about. And we’re quite happy to have a slightly smaller order book, to be honest, even that’s performed really well.

Gabriel Dechaine

Personally, I’m a fan of the forests and the farmland, but it’s another…

Colin Simpson

I agree with you there. Yes, we’re certainly not selling any of the forest, the timber and ag, but a little bit less private equity. But that’s actually going quite well, sales are going well.

Gabriel Dechaine

So we talked a lot about legacy and dispositions. On the last call, Roy did talk a little bit about potential acquisitions. And I know it’s hard to go into specifics, that’s normal. But what are you contemplating, where could we see Manulife be active potentially and what areas? Would it be wealth, would it be more in Asia? What’s the approach?

Colin Simpson

Yes. Like any company, M&A is always an option that we need to consider, but it is the fourth out of the four capital options we consider. First is investing in the business, then it’s the dividend, then it’s the buybacks and then it’s M&A in that order. Now, we have got a lot of capital at our disposal. We’re roughly $10 billion above our internal operating range. And so M&A isn’t certainly an option for us to consider, but as we’ve shown with the in force transactions that we’ve done. We have to be judicious and we’ll be very disciplined in any transaction. You asked about where will — it makes most sense to grow through M&A in our Asian and our Wealth Management businesses, our growth areas, but I think we’ll all appreciate that the multiples in those businesses are high. And so it is nothing is immediately apparent and obvious. We’ve got an abundance of opportunity internally but it’s great to have the capital, the wherewithal to consider options.

Gabriel Dechaine

Well, we hit the zero. Colin, great talking to you. Nice to meet you in person.

Colin Simpson

Likewise. Thanks so much.

Gabriel Dechaine

And enjoy the rest of your day.