Manulife Financial Corporation (MFC) Earnings Call Transcript & Summary

Awesome. So we'll get started here again. My pleasure to introduce our next guest speaker, Phil Witherington, Chief Executive Officer of Manulife Financial. Hey, Phil.

Hi, Mike. Good to see you as always. Thank you for hosting us. It's great to be back a year on.

Thank you for joining us today. And I'd love to start with maybe just your sort of high-level reflections. I think you've been the CEO for about a year and a few months now. I know it's been an interesting journey for you for sure, a lot of changes. Maybe just talk about some of the ups and downs and as you reflect back on that sort of 18 months.

Well, the ups and downs. It has been an action-packed year. I mean it was a year ago, we were here. I was 3 months into the role. And reflecting back on what we have achieved since then, one of the milestones was the release of a refreshed enterprise strategy, and that was very deliberate. It's a strategy that is right up to date with what's happening in the external environment, where Manulife is today. And it really emphasizes priorities such as being AI-powered, empowering customer health, wealth and longevity. So right up to date. And a year in from the release of that strategy, we are already seeing the emergence of strong financial and operating results. So just look at this year, for example, year-to-date, core EPS up 14%. Year-to-date, contractual service margin, the value we generate from new insurance sales, up 16%. This year, we've already returned $2.6 billion of capital to shareholders through dividends and share buybacks. So really strong financial performance. But the strategic milestones alongside that have been really important. We announced the entry into the India life insurance market through a joint venture with Mahindra. That's a really important big strategic milestone. We announced and completed our largest acquisition in a decade with the acquisition of Comvest Credit Partners, and that's already accretive to our earnings and a material contributor to net flows of the organization. And more recently, and the list could go on, but I'll just give one for example, last month, when we released our second quarter results, we announced our third long-term care transaction. And that was an innovative transaction. It's good for shareholders. It's good for Manulife and actually a very limited impact on ongoing future earnings. So that's all positive. But I think you were asking me to be balanced in my perspective and what's gone right, what's not gone to expectations. And one area that in the interest of balance that I will call out and own is that relative to where I was a year ago, when I sat on this stage, I am less -- or we are, as an organization, less far down the line on our progress towards 18% plus core ROE than I would like to have been at this stage. Now our base scenario is still that we get to ROE of 18% in 2027. But there are certain things, certain headwinds that we had not anticipated when we set that target. We've had some long-term disability experience in our Canada segment. We've seen a weakening of the Canadian dollar relative to the U.S. dollar, and we have more capital in U.S. dollars. So that's increased the denominator. And we've seen some variability in U.S. life experience as well. But to get to 18% over the course of the next 12 to 18 months, it's reasonable. I believe we can get there. It's a base scenario. And we essentially need Asia and Global Wealth and Asset Management to continue to grow at mid-teens growth rates. We need to see a normalization of disability experience in Canada. And we need to continue our deployment of capital, which share buybacks alongside dividends are important elements of that.

That's very helpful. Maybe switching gears to the segments, and I'd love to start with the Asia business, obviously very topical for investors these days. The segment's performed very well. Can you maybe talk about some of the larger trends and where you're most optimistic in your Asia business?

Yes. We've seen very strong performance in our Asia business, and it's coming from multiple markets, and it's driving strong double-digit earnings growth actually above 20%. And I would expect typically mid-teens for our Asia segment. So that's been very strong. But that's been supported by consistent new business growth, again, across multiple markets. The trends in the region, I think, are important in contributing to that growth. And when I reflect on the trends, maybe I'll just highlight 3. The first is the aging populations of Asia and the impact that, that has in driving demand for the products and services that we offer. So driving demand for protection, driving demand for retirement solutions, driving demand for health solutions, wealth management solutions. So that demand is really important, that aging population dynamic. The second trend that I will call out is the rise of Asia regional financial centers on the world stage. So Hong Kong and Singapore and the role that they play in global wealth management and capturing wealth flows is incredible. And actually, just this year, Hong Kong has overtaken Switzerland as the largest cross-border wealth hub in the world. That's an incredible milestone. The third trend that I will highlight that we are seeing across Asia is the emergence of third-party distribution channels, more strongly than we have seen before. So we have, as an organization, very well-established channels in proprietary agency, in exclusive bancassurance. We've seen third-party channels become more relevant. And that's built, if you like, a third leg of the stool that we have balanced distribution across agency, bancassurance, and third-party channels. And that actually creates more opportunity because it provides more access to a wider range of customer segments. So I actually see that as a positive and a strategic opportunity. So they are the key trends that I will highlight. When I think about what's happening in some of the key markets, Hong Kong is doing incredibly well. There's strong domestic demand. And that's the majority of our business in Hong Kong. The strong demand from Mainland Chinese visitors to Hong Kong. It's about 25% of our business. That's a stat that we gave on our recent earnings call. But Hong Kong remains a very attractive market because it has become this global financial hub on the world stage. If we think about Japan, we have a big business in Japan, hugely successful. The Japan outlook has become more positive over the course of the last year. The macro factors from interest rate yield curve to equity markets, public policy encouraging the people of Japan to not just hold cash, but invest for the long term, that's favorable to our business. We doubled new business in Japan. You look at our Q2 results, doubled over the course of the past year. Mainland China, an interesting market, huge potential in Mainland China. I referenced earlier the emergence of third-party distribution channels. We have expanded over the course of the past 5 years from agency distribution channels into nonexclusive bank channels. That's a big opportunity, can create some variability in new business from quarter-to-quarter, but the long-term trends remain intact. And Singapore, really important financial hub in Asia. We're a market leader in Singapore, generates significant value. And just to give an indication of the pace of growth that we are seeing in Singapore at the moment, in the second quarter, if you look at this year, we've seen new business CSM growth close to 40%. So really strong momentum in these businesses. And they're just examples of what we're seeing across the region. Asia is a key driver of growth.

Okay. And Phil, how should investors think about the megatrends that are clearly favorable for Manulife and all your peers in that region versus what Manulife is doing specifically differently than peers, winning market share. And it's not an easily quantifiable dynamic, but between megatrends and what you're doing specifically, what's the balance there?

This is actually something I feel very strongly about that just being present in Asia is not the key to success. It is necessary to differentiate ourselves and actively unlock the opportunity that exists. So when you look at the refreshed strategy that we have, we -- a new strategic priority that we called out is superior distribution. We are investing in our distribution, not only to get access to a broader range of customers, but to help make our distributors more productive, we can actually sell more business as well as being able to, of course, satisfy our customers, please customers, get them to a decision more quickly. And that's in their interest and it's in our interest. So I think that's one important strategic unlock. Another example of a strategic unlock is our AI-powered priority. Again, one of our 5 enterprise-wide strategic priorities, investing in AI enables us to make decisions more quickly, say, underwriting decisions. If we can get back to our customers with an underwriting decision instantly, they are much more likely to buy a Manulife policy than either forget about the whole thing or go with a competitor. So I think these factors are investments that we're making that will help drive value to our Asia business and win in a region that is naturally growing from those megatrends we discussed.

And then maybe if you can just sticking to Asia, just touch on the MCV business in Hong Kong. And I think you guys were clear on the call that it's structurally -- the demand is there. This is not going to get derailed because of the tax dynamic that's happening now. And that was never the driver of why these sales were happening in the first place. I feel like the markets treated Manulife better than some of your nondomestic peers on that specific dynamic. And I think a large part of that is the message that was clear on the Q3 call -- or Q2 call, sorry. Maybe just remind investors what are the structural dynamics that will keep that business growing in the long term?

Yes. So where I will start is actually Hong Kong. Hong Kong in total, you look at our business, we're well diversified across channels. The majority of our business is our domestic business. And the Mainland Chinese visitor component, the stat we gave on the call was approximately 25% of sales in 2026. So I think all of that provides for robust resilience. Now just for clarification, the tax that we had seen -- tax enforcement news we had seen being reported early in August, that was reports of Mainland tax authorities pursuing tax enforcement for individuals that held assets internationally. I think some of the clarifications since then have been very helpful. Clarification that there are no new tax rules. This is about enforcement of existing rules, and it's not targeted at Hong Kong, and it's not targeted at insurance. And for reference, that is exactly what we see in other jurisdictions such as here at home in Canada. The tax authority is pursuing enforcement of tax collection where individuals hold international assets. So I actually think that is a good example of what we should expect to see as markets continue to develop and the regulatory environment becomes more robust. When I think about the fundamentals that will drive future demand for insurance solutions by Mainland Chinese visitors to Hong Kong, I think the drivers of demand remain intact, and they are compelling when you reflect on them. So the opportunity to invest in and find protection in U.S. dollars, which comes with it higher yields than RMB yields in Mainland China. The opportunity to deploy that capital into long-term savings solutions that are supported by diversified participating portfolios that have access to real estate, other categories of private assets such as private equity, public equities, international bonds, the sophistication of the products in the Hong Kong market that enable generational wealth transfer of accumulated wealth. Policies can pass from one generation to the next in a simple and efficient manner. Currency denomination of policies can be switched at policy anniversary dates. So Hong Kong is a very sophisticated insurance market. And therefore, it's a natural pull not only for Mainland Chinese, but for other international wealthy individuals as well.

Maybe just on the LTC transaction with Munich Re, obviously, structured differently than the previous 2. Just maybe walk investors through why that was the right structure. And then you can maybe sort of dovetail that into some of the organic initiatives that you're taking to reduce risk in the LTC historical legacy blocks and maybe what the upside is on those initiatives?

Yes, I'm happy to touch on that, Mike. And for us, it was actually important to have a third LTC transaction within 3 years, but we didn't want it to be something that simply does what we had done with the first 2. So this is different because it is a stand-alone long-term care transaction of biometric risk only. And what that means is that we've reinsured the morbidity risk to Munich Re, but we have retained the asset portfolio that attaches to those liabilities. And so when we think about the earnings impact of this transaction, yes, there is $30 million of forfeited earnings of forfeited earnings that reduces over time as the portfolio runs off. But naturally, that effectively goes to Munich Re. But the earnings on the assets we retain, the capital release that will come from the maturity of the asset portfolio we retain and the margin uplift or the yield uplift opportunity through the potential opportunity to look at how we manage that portfolio stays with Manulife. So I think this is a really good deal for Manulife shareholders, and it demonstrates that we can derisk or reduce risk in our portfolio with actually very modest earnings implications for shareholders. And you think about the impact of retaining those assets, we continue to generate earnings on the assets. We continue to generate capital and capital release on those assets as the portfolio matures. That's a great scenario in the context of our strategy, which is to deliver long-term growth for Manulife shareholders and sustainable growth for Manulife shareholders.

That's helpful. Maybe switching to GWAM. Just in terms of the flows, you had net inflows last quarter, mostly on institutional strength, obviously, some pickup with Comvest and CQS. And then when you think about going forward, like the segment has taken a little bit of a step down in earnings a couple of quarters ago, a bit of a rebound last quarter. What's the trajectory from here? I know there were some onetime-ish items in Q1 that impact the results. But just getting back to that $500 million plus and then resuming that strong growth trajectory that you had previously, what gets you back there?

Yes. Thank you for listening so carefully to our messaging. I appreciate that, Mike. And the performance in GWAM has been very strong. And I think Q2 is a good run rate indicator for where we go from here. There was a slight dip in Q1 for various reasons. As expected, that came back in Q2. Year-on-year earnings growth, 6%. That is after the impact of the transition to eMPF in Hong Kong, which was a onetime reduction in earnings. So I think shows tremendous resilience. And the -- we're coming up to the 1-year anniversary of that. So soon that will drop out of the run rate, which has depressed the year-on-year growth rate, but performance has been good. And I'll highlight that we have already achieved our Investor Day target of 30% plus EBITDA margin. So that's a measure of efficiency in the portfolio and it's naturally a margin measure. So I think that's a positive move. And then in the second quarter, positive net flows. And I think that's a really important milestone. I do expect variability in net flows from quarter-to-quarter. But to your point, when I look at the overall portfolio, global wealth and asset management portfolio that we have across different lines of business, retirement, retail and institutional as well as the geographical mix, I do see a portfolio that supports medium-term generation of positive net flows. And why is that the case? We consistently see positive net flows from Asia. We consistently see positive net flows from our institutional business. A nd it's -- look back over the past 21 quarters, 20 of those quarters have delivered positive institutional net flows. The Canadian wealth business consistently delivers positive net flows. The areas of the Global Wealth and Asset Management portfolio where flows are negative or offset some of that positive flow. If we look at the North American retirement businesses, given where demographics are, retirement schemes are in outflow mode. The nature of the aging population, the maturity of the pension schemes, withdrawals are a real thing. We still have contributions, but withdrawals and redemptions are where we are in that life cycle. And I don't think any of us would deny that the active management, retail active management has been facing pressures in recent years. And I think what will define success is our ability to innovate. And for example, the shift away from mutual funds to ETFs, the second quarter was our highest ETF flow quarter on record. And I think that does illustrate that it's necessary to be innovative, creative and some of the emerging developments, the shift to tokenization are ways in which it's possible to win in North America retail.