Manulife Financial Corporation (MFC) Earnings Call Transcript & Summary

Thanks, Phil. So I'd like to introduce our next guest. Phil Witherington, President and Chief Executive Officer of Manulife Financial.

Well, thank you, Mike. Here we go.

Welcome, Phil.

Thank you so much. Thanks for the invitation. It's great to be here. Where do you want me to sit?

Maybe here.

Sure. And thank you all for joining this session today. It's great to see so many familiar faces among the audience.

Awesome. So with that, maybe kick it off and probably great to start with -- obviously, you've been in the role for a few months now, relatively new still. Congrats on the appointment.

Thank you, Mike.

And obviously, you're a long-time MFCer. So you've been CFO, you run the Asia business. I'm sure that's made it a lot easier, but you've also moved from Hong Kong to Toronto recently. It seems like you've been very busy the last little while. How do you sort of balance all that?

Well, thank you for asking that question. And yet there has been -- I won't describe it as chaos, but what I will say is life has been very full recently from a personal perspective and a work perspective, which is all good. Thankfully, from a personal perspective, the kids are now back in school here in Toronto, first day yesterday, which is good. And then from a professional perspective, the fact that I've worked for Manulife -- I'm now in my 12th year, and I've had roles across the organization, Asia CFO, Asia CEO, sort of twice done that job as interim and then came back a few years later as -- in the official position, but also Group CFO and now Group CEO. Having seen so many different angles, it's really helped with this transition with Roy. So it's been incredibly smooth by way of CEO transitions. And I do want to acknowledge our stakeholders in this process. So I've had tremendous support from our Board of Directors, from our colleagues around the world as well as external stakeholders, and I very much value that. And the fact that it feels as if we're coming home as a family, Manulife is naturally somewhat -- I see it as part of my family, but it feels as we're coming home to the head office. And the fact that the only common citizenship -- we're an international family. The only common citizenship in our household is Canadian. It sort of feels natural that I'm back. So thank you, Mike. It's a great opening question.

Awesome. Maybe on the longer term, I'd love to hear more about -- I'm sure everyone in the room would love to hear more about what excites you, not just in the near term, but say, over the next 5 to 10 years. What are you most excited about? Obviously, you've got a lot going on, a lot of different things you can touch on, but just high level, what do you really love about Manu's position here?

Well, that's a great point. And when I reflect on what I've been through over the past 100 days, and I just celebrated my 100 days as Group CEO, and long may that continue. But I've had the opportunity to travel across Canada to visit our offices in the U.S., back to our offices in Asia. And most recently, I was in London to meet our teams there and the overwhelming common feature across all of our colleagues and markets and offices that I've visited has been the sense of optimism about the future. There is a recognition that, yes, we've been through a transformation since 2017. Now that's been a hugely successful transformation. Manulife is a very different company now to what it was back then. And that lays a fantastic foundation for this next chapter, and that's where the optimism is. But when I reflect on our portfolio, we've got a portfolio of businesses around the world that have at-scale businesses in some of the fastest-growing markets in the world. That's truly an enviable position. And combine that with the fact that we have capital to deploy, capital to deploy in fast-growing markets, which generate high ROEs, it's a great portfolio. And combine that with one of our key differentiators as an organization, our talent and our culture, that -- it's that magic dust that really makes things happen. So all of that comes together to create this remarkable sense of optimism about the future. And if I was to talk about a couple of things that really could impact the next 10 years, I think I would be negligent if I didn't reference AI and Gen AI and digital as being really important drivers of this next chapter. But one thing that I can assure you, as we go through the process of thinking about the strategy, the future of Manulife, the customer will be really important to that future. And of course, all of our stakeholders are important. But if we get things right for our customers, then that will be rewarding to our shareholders. It will be the right thing for our communities, and it will allow our employees and colleagues to thrive. So I'm really excited about putting the customer at the center of our strategy. And I did say on our earnings call, Mike, that the executive leadership team of Manulife is currently in the process of reviewing its strategy, reviewing the strategy for the company. And I look forward to sharing more on that, but it's nothing to worry about. This isn't because we have any doubts about our ability to deliver on our 2027 targets that we released at our Investor Day in 2024. We're fully confident about that. This is about the long-term view -- and you referenced 10 years, but making sure that we are responding to the external environment and all the forces that are evolving to position us to thrive not just for 2027, but for the next decade and beyond. And that long-term high-quality sustainable growth is so important.

Thanks for that thoughtful response. Maybe to talk about the Comvest acquisition a little bit just because it seems like it's like the first stamp of your tenure here. You're sort of making your mark. And maybe talk a bit about Comvest, what you like about it, what your long-term vision there is. Obviously, it's a pretty sizable deal. It gives you enhanced capabilities. And combined with your existing capabilities, it looks like you're going to move the needle on what you can offer your clients.

That's right. And when I came into the role, actually, I was appointed CEO, our Group Chairman, Don Lindsay, spent quite a bit of time with me. And one piece of advice that he gave to me was, don't be afraid to take the shot. And it's really interesting. When I watch sports games and I see people passing back and forth, nobody wants to take the risk sometimes to take that shot. It's a bit different with hockey here in Canada. But when I watch soccer, it can go back and forth. And that resonated with me. And as we go through this first -- went through that first 100 days, we've been looking for a long time at opportunities to fill one of the gaps we had identified in our Global Wealth and Asset Management business. So we've identified GWAM as a high opportunity growth business. Within GWAM, we've publicly talked about for years, private markets being a huge opportunity for the organization. And then within private markets, private credit. We've done all the work to look at the portfolio of potential targets, and we found one that was in the sweet spot. Not too big, not too small, with a very close strategic fit, and we have the confidence to take the shot, and it worked. So when I think about the impact that this deal has on the organization, yes, it's highly strategically relevant. But I don't think of Comvest as just a standalone entity. I think of Comvest as a capability that we can bring. So it's a profitable, immediately accretive capability that we can bring into Manulife and leverage it across both our lines of business, institutional, retail and retirement, and we're all keeping track of the developments in the U.S. about potentially bringing private assets and private credit into retirement funds. But then also thinking, okay, this is a U.S. business, how do we take this capability outside the U.S. to fulfill the demands for this type of strategy world? And we have this presence around the world. And even for U.S. dollar business, there is huge demand across Asia. So I think this is -- it's one of the reasons why Comvest like Manulife, one of the reasons why we like Comvest and brought it into the Manulife family.

Okay. Maybe looking at some of your different business lines. The U.S., a little bit less of a performer last quarter. You had some noise on credit. You had a bit of noise on mortality. Maybe talk about those 2 factors. And then as a follow-up, maybe talk about the U.S. more broadly. Like what do you like about the U.S.? Where do you focus? Obviously, the business has gone through quite significant changes over that longer term. So a 2-part question.

Sounds good. And if I forget any of that, I'm getting old. If I forget any of that, bring me back to it. But let me hit the -- your first point head on. Q2 was a weaker quarter for us in the U.S. Now that's not necessarily as visible from our group results because we have a diversified organization. And that diversification factor really helps us to be resilient to particular headwinds that may emerge. But in the second quarter, there were 2 notable headwinds in the U.S. One was elevated mortality rates. And that was a small number of wealthy individuals with high-value policies that happen to pass away earlier than we would typically expect. That's highly unusual, but a function of timing that it happened -- a handful of lives that happened in the same quarter. So that created a bit of a headwind. I don't expect that to recur. The other element was the credit charges, the ECL charges. And we have a full IFRS 9 ECL charge that we recognize in core earnings. It's quite distinctive for Manulife in the insurance peer group. And there were a handful of names in our small portfolio of below-investment-grade names that we took charges for. But again, when I look to the future, I don't expect those items to recur. I expect typical ECL to be $30 million to $50 million per quarter. Last quarter was more in the sort of $80 million to $100 million range. So I think if I look to the future, a better run rate for the U.S. than Q2 would be looking back to Q1, which is about USD 100 million higher than Q2. So maybe a 1 quarter anomaly is what I would expect. But then you ask the strategy in the U.S. and a lot has changed. And if you look at the transformation over the course of the past 7 or so years, we've been really focused on reducing risk in the U.S. as part -- a number of reinsurance transactions. We started off with fixed annuity back in 2019 and variable annuity. I think it's the back end of 2020, 2021. Then we moved into -- so you have fixed annuity, variable annuity. There are some other universal life transactions along the way. Then long-term care, and we've done a couple of long-term care transactions. And what all of those transactions have in common is that they have demonstrated the appropriateness of the reserves on our balance sheet, and that confidence has clearly come through in the market's perception of Manulife and the multiple improvement that we've seen in the past 2, 3 years. So that's very important. But alongside all of that derisking and in-force management exercise, we have been transforming our new business footprint in the U.S. So embracing a wellness-oriented behavioral insurance program jointly with Vitality, so John Hancock Vitality, that provides true differentiation in the U.S. market. We are the only insurance player that does this. And what that's meant is that the profitability of our new business in the U.S. has gone from being something that delivered -- essentially delivered the discount rate, so it would have new business value of 0, to being something that delivers a very similar margin to Asia. So it's sort of a niche strategy. We're selective about what products that we write, but we create differentiation. And where you have that attractive product with differentiation, we can command higher margin. And I think that now raises the question, how do we scale it? We've got a competitive edge. How do we scale that in the U.S? And the U.S., to the last part of your question, it's a really important part of our portfolio. It's an important -- it's got a scale portfolio, it generates capital, and it's the largest economy in the world. So I just want to be clear, while our biggest businesses are Asia and Global Wealth and Asset Management, both the U.S. and Canada are also important.

Okay. And I do have to ask at the risk of annoying you, but I'm sure you hear it all the time, the LTC. Anything there in terms of additional reinsurance optionality? I know investors love to see that capital release. So just any updates you can offer. I know there was some discussion on the last call, but anything...

Right. Right. So we -- on the Long-Term Care portfolio, we are constantly challenging ourselves as to what more we can do from an organic management perspective to improve the outcomes for that line of business. And that can range from embracing the concept of wellness for our long-term care customers, help avoid those customers needing to go into care either at home or in care facilities. It can include -- and it does include digital solutions to identify fraud, prevent fraud, detect fraud. It does include preferred provider arrangements to make the provision of care for customers that need care much more efficient, reducing the cost of claims. And of course, really maximizing the opportunity that we have to achieve premium adjustments, premium rerates. So that's all organic. And it feeds into the inorganic component, the possibility of transactions. And we do feel a responsibility to look at the possibility of transacting on more long-term care components of the portfolio. But our threshold is it has to make financial sense to do so. So there is interest in those blocks from various external counterparties. If it makes financial sense relative to managing the block organically, we will transact.

Maybe switching over to GWAM. Obviously, something you're very excited about. First off, the performance has been really strong. Q2 was really strong. Maybe talk about what's working in the business and then dovetail that into the dynamic between the geographic parts of the portfolio of the business.

So GWAM is -- it's a great business. It's at scale, and it has a global footprint with many markets that we have leading positions at scale. But what's distinctive about Manulife is that when you look at our portfolio, about half of it is retirement around the world, half of the AUM is retirement. The other half is split between retail and institutional. What I really like about retirement asset management is that each month, employees of those schemes make contributions. So it tends to be a much more stable, longer-term investment management platform than some other lines of business. So I think that's a key differentiating factor for our business. In terms of what's driving the performance, steady net flows. So 14 of the past 15 years, Global Wealth and Asset Management has delivered positive net flows. Q2 was a really difficult quarter for the industry. We delivered $1 billion of positive net flows. So maybe $1 billion is fairly modest, but it's positive relative to most of the industry that saw outflows in Q2. So that's one driver. The other driver is when you look at the margins that we generate from our business, we've just hit -- in the second quarter, we reported 30% EBITDA margin. Go back to Investor Day 2024, we said our target was to deliver 30% EBITDA margin. Now that will go back down. It will go down a little bit with the eMPF development in Asia, but we expect to get that back up to 30% for 2027, in line with our targets. But that makes -- it demonstrates that it's profitable business. And that EBITDA margin is supported by a combination of AUM growth as well as our cost efficiency programs. And we've been very disciplined from an expense management perspective over the past couple of years, and that's paying dividends now.