Q4 2022 Manulife Financial Corp Earnings Call
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This conference is being recorded.
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Please standby your meeting is ready to begin please be advised that this conference call is being recorded.
Good morning, and welcome to the Manulife financial fourth quarter 2022 financial results call. Your host for today will be Mr. Hong Kong. Please go ahead Mr Ko.
Thank you welcome to minimize earnings conference call to discuss our fourth quarter and year end 2022 financial and operating results our earnings materials, including the webcast slides for today's call are available on the Investor Relations section of our website at Manulife Dot com.
Turning to slide four we will begin today's presentation with an overview of our progress in 2032, and our outlook for 2023 by worried Corey our president and Chief Executive Officer.
Boring voice remarks feel Worthington, our chief financial Officer will discuss the Companys financial and operating results and provide an update on our F. 17. After their prepared remarks, we will move to the Q&A portion of the call.
Ask each participant adhere to a limit of two questions, including follow up questions. If you have if there's no questions. Please requeue and we will do our best to respond to everyone.
Before we start please refer to slide two we caution on forward looking statements in slide 45, we note on a non-GAAP and other financial measures used in this presentation note that certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from what is stated with that I'd like to turn the call over to Roy Gori, our president and COO.
We are expecting officer right.
Thanks, Tom and thank you everyone for joining us today.
Yesterday, we announced our fourth quarter and full year 2022 financial results.
We've made significant progress against our strategic priorities and I'm pleased to have delivered strong results, which are a testament to the resilience and strength of our diverse global franchise.
We're especially pleased with these results against the backdrop of the year that was challenging for businesses broadly with.
With multiple headwinds impacting our industry as well as ongoing market volatility.
On our financial results, we're proud of two record we achieved in 2022.
Our record net income of $7 $3 billion, and the highest EDA remittances of $6 $9 billion.
Meanwhile, we've also driven robust new business value growth in both of our North American segments in 2022 with MBV growth in the U S and Canada of 25% and 18% respectively.
This strong performance demonstrates the power of our diversified franchise, given the impacts of COVID-19 restrictions in Asia.
We also took meaningful actions to significantly reduce the risk profile of our business.
We reinsured more than 80% of our legacy U S variable annuity block through two transactions, the released $2 $5 billion of capital and further reduce our go forward risk profile.
Core earnings from the LTC in VA blocks represent only 18% of total company core earnings in 2022.
Material reduction from 25% just two years ago, and we are on track to deliver on our 2025 is this makes targets.
And our sensitivity to market movements as also greatly reduced since 2009.
At the end of 2022, our sensitivity to interest rate movements was approximately 110th of that in 2009.
I'll now sensitivity to equity markets is more than half during the same period.
We're also growing our scale and market share globally.
In Asia, we are not only at scale, but we were also the fastest growing life insurer among the top three Pan Asian players between 2017 and 2021.
Our global land business recorded $3 $3 billion of net inflows in 2022 against the industry backdrop of net outflows in North America.
This performance extended our remarkable track record of delivering positive net flows in 12 of the past 13 years.
In Canada, we grew our net income core earnings and mbd at double digit growth rates in 2022.
We continue to distribute significant cash returns to our shareholders.
Between 2017, and 2022, we grew our common share dividend by 10% per year on average and I'm pleased to share that our board approved an increase of 11% starting in March of 2023.
In addition to sustained dividend increases in 2022, we enhanced shareholder returns through $1 9 billion of share buybacks, which represents four 1% of outstanding common shares.
We're also strategically deploying capital to invest for the future.
In 2022, we acquired full ownership of Manulife title.
Making us the first foreign company to be given approval to acquire an existing asset management JV in China.
And in Vietnam, We commenced offering insurance solutions under a 16 year exclusive partnership with via 10 Bank one of the largest banks in Vietnam.
Turning to slide seven.
The achievements that Ive mentioned earlier was supported by a strong digital and ESG leadership as well as a winning team.
We've made notable progress on our digital customer centric initiatives as evidenced by the 15 percentage point increase in our global straight through processing metric compared with the 2018 baseline with improvements across all segments.
Our 2022 NPS.
A significant 19 point improvement from the 2017 baseline.
We also led or were on par with the leading peers in 11 of the 16 business lines, where we benchmark.
We have invested $1 billion since 2018 to enhance our digital capabilities to make decisions easier and lives better for our customers.
While at the same time driving significant efficiency improvements in our operations.
As a leader in ESG. We are also achieving strong results and serving our customers and other stakeholders in a socially responsible and sustainable way.
In 2022, we shared our impact agenda.
And articulation of our longstanding commitment to empowering health and wellbeing.
Driving inclusive economic opportunities and accelerating our sustainable future.
While we are already net zero in our scope, one and scope two greenhouse gas emissions, we are committed to further reducing our absolute emissions by 35% by 2035.
And to achieving net zero scope three financed emissions in our general account by 2050.
In recognition of our continued and strengthening commitment to sustainability performance in 2022, we will once again named to the S&P Dow Jones sustainability index.
One of only 70 sure as across North America to be included and within the top 10% of our industry peers globally.
A high performing team and winning culture have been key to our success.
We have achieved a top quartile employee engagement ranking annually since 2020.
And in 2022, we ranked in the top 6% amongst global financial and insurance companies.
In addition, we have been consistently recognized as an employer of choice, including as one of the world's best employers by Forbes for the third consecutive year.
The Canadian insurance industry will adopt <unk> 17 in 2023.
Well. This is a significant endeavor, we are fully prepared for a successful implementation and are looking forward to the improved transparency and stability in our financial results that the new accounting standards will bring.
Throughout 2022, we've been proactive in providing insights into the expected impacts of Viper at 17, both on transition and on our medium term targets.
Let me highlight a few points.
First I first 17 does not impact the fundamental economics of our business.
Second we expect our core earnings book value and like cat to be more stable underlying for 2017.
Third the contractual service margin or CSM for short is a key value metric under <unk> 17.
Growing CSM balance will drive future earnings growth and.
And we have announced the target of growing our CSM balance by eight.
So 10% per year.
Turning to slide eight.
Looking ahead, while we continue to navigate macroeconomic uncertainties in the short term, we see both challenges and opportunities in 2023 and beyond.
Some of the notable headwinds <unk> first we may see volatility in equity markets and interest rates continuing in 2023.
Higher rates are clearly beneficial to our insurance businesses as we've seen in our 2022 results.
Second while we may see short term disruption related to the transition from Covid zero policies in Asia.
We expect business momentum to strengthen as pandemic restrictions normalize.
Third.
While in North America, we may see GDP growth slowing down many Asian countries are forecast to deliver economic growth of 5% or higher in 2023.
Which is a benefit to our business given our presence at scale in the most attractive growth markets across the region.
Notwithstanding the pandemic and recent macro headwinds the three mega trends that underpin our strategy remain unchanged.
Our business is uniquely positioned to continue to capitalize on these mega trends.
As a top three Pan Asian insurer, we see significant growth opportunities emerging in Asia, including in Hong Kong, where we are a leading insurer and well positioned to benefit from the significant MTV and GVA opportunities following the reopening of the border between mainland China and Hong Kong.
Our global land business is not only a leading global retirement solutions provider with approximately 9 million customers, but.
But we're also a top 10 global retail multi manager.
In our home market of Canada.
We serve wanting for Canadians and we are a leader across many of our business lines.
And globally, we are a leader in our unique behavioral insurance offering.
We are confident that our all where the strategy diverse business model and considerable financial strength and flexibility.
<unk> us well to win and deliver in 2023 and on our 2025 strategic targets.
Thank you.
And I'll hand, it over to Phil Witherington, who will review the highlights of our financial results Phil.
Thanks Roy.
Before we start I would like to recognize that the fourth quarter of 2022 is our last reporting period under iron for us for <unk>.
Starting with the first quarter of 2023 will be reporting under <unk> 17, and <unk> nine.
In the latter part of my presentation I will provide an update on our <unk> 17 transition impacts.
I'll start on slide 10.
We generated core earnings of $1 7 billion, a modest 2% decrease from the prior year quarter.
The results reflect a number of factors, including lower core earnings in global Wham, lower new business gains in Asia, and the U S and lower enforce earnings in the U S juice, the VA reinsurance transactions.
Were largely offset by higher yields on surplus fixed income investments gains on seed money investments and lower withholding taxes in corporate and other improved policyholder experience in North America and in force business growth in Asia and Canada.
Net income attributed to shareholders of $1 $9 billion decreased by $193 million from the prior year quarter, mainly due to losses from investment related experience and a smaller gain from the direct impact of markets, partially offset by the favorable impact of an increase in the Canadian coal.
Tax rate.
Of note investment related experience in the fourth quarter it reflected losses in our older portfolio driven by real estate fair value appraisals, partially offset by the favorable impact of fixed income reinvestment activities and favorable credit experience.
I'll speak more about our older performance in a moment.
We recognized a net loss of $357 million from investment related experience a $100 million gain was included in core earnings and a loss of $457 million.
It was reported outside of core earnings.
On a full year basis overall investment related experience was a gain of $1 2 billion.
Of which $400 million was reported in core earnings.
Our net income in the fourth quarter also included a $297 million gain from the impact of the Canadian corporate tax rate change.
$6 million fair value gain as a result of acquiring the remaining 51% equity interest in our asset management business in mainland, China, and a $35 million gain from the reinsurance of our legacy New York VA block.
Slide 11 shows a recent history of our investment related experience, including a total gain of $1 $2 billion in 2022, but as I noted earlier.
In addition to the continued strong credit experience and gains from fixed income reinvestment activities. In 2022, our older portfolio also achieved higher than expected returns contributing $147 million to investment related experience gains.
The strong performance of our older portfolio is shown on slide 12.
The average annual return of our diversified portfolio since the acquisition of John Hancock 18 years ago was nine 3% outperforming our current best estimate long term return assumption of nine 2%.
Slide 13 shows our source of earnings analysis for the fourth quarter of 2022 compared with the prior year quarter.
Expected profit on in force decreased by 1% driven by lower U S. Annuities enforce earnings due to the two reinsurance transactions completed in 2022, partially offset by in force business growth in Asia and Canada.
Excluding the impacts of the VA reinsurance transactions, our enforce earnings would have grown by 5%.
New business gains decreased by 21%, primarily driven by lower gains in Asia and the U S.
In Asia, the weaker customer sentiment in Hong Kong seen in the third quarter continued into the fourth quarter, leading to lower sales volumes. This was partially offset by higher sales and improved margins in Japan.
Lower new business gains in the U S were primarily due to lower brokerage sales.
Policyholder experience was a net charge of $82 million on a pre tax basis, an improvement of $38 million compared with the prior year quarter, mainly driven by improved policyholder experience in Canada.
Slides 14, and 15 Shaw earnings by segment and return on equity in the fourth quarter and full year 2022.
My remarks will focus on the fourth quarter results.
Core earnings in our global wine business decreased by 34%, primarily driven by a decrease in net fee income from lower average <unk> due to the unfavorable impact of markets.
Core earnings in Asia increased by 1% driven by favorable changes in new business product mix and in force business growth, partially offset by the impact of lower new business volumes, primarily in Hong Kong due to the factors I noted earlier.
We continued to deliver double digit core earnings growth in Canada, with a 22% increase reflecting more favorable experience gains in all business lines.
Manulife Bank earnings and higher enforce earnings.
Core earnings in the U S decreased by 25% largely driven by reduced enforce earnings due to the VA reinsurance transactions and lower new business gains.
The core gain in corporate and other of $86 million was $165 million favorable compared with the prior year quarter, mainly due to higher yields on fixed income investments gains on seed money investments and lower withholding taxes, partially offset by higher <unk>.
First on allocated capital to operating segments.
And we delivered core ROE of 13, 2% an improvement of half a percentage points compared with the fourth quarter of last year.
Turning to slide 16, which shows our AP sales and new business value generation.
In the fourth quarter, we generated sales of $1 3 billion down.
Down 12% from the prior year quarter.
In Asia sales decreased by 9%, reflecting continued weak customer sentiments in Hong Kong.
This was partially offset by higher sales in Japan, and Asia, other and notably mainland China.
In Canada, APE sales decreased 15%, reflecting lower segregated fund and par insurance sales, partially offset by higher group insurance sales.
<unk> sales in the U S decreased 21%, reflecting lower customer demand amid volatile equity markets and on a full year basis.
Sales decreased 7% compared with the prior year.
In the fourth quarter, we delivered new business value of $525 million, a decrease of 9% from the prior year quarter.
In Asia, MBV decreased 17%, reflecting lower sales in Hong Kong and unfavorable changes in product mix in Asia, other partially offset by the benefit of higher interest rates and higher individual protection and other wealth sales in Japan.
NPV increased 6% in Canada, primarily due to higher margins in our insurance businesses, partially offset by lower volumes in annuities.
In the U S and B, the increased 12% driven by higher interest rates higher international sales volumes and product actions, partially offset by lower brokerage sales volumes for.
For the full year, we delivered new business value of $2 $1 billion.
Turning to slide 17, our global wine business recorded net outflows in the fourth quarter. After eight consecutive quarters of positive net inflows the net outflow of $8 3 billion.
Reflects weak investor sentiment amid record industry fund outflows in North America amid market volatility.
On a full year basis, we delivered net inflows of $3 3 billion.
And retail net outflows were $4 7 billion compared with net inflows of seven 5 billion in the prior year quarter the.
The decrease reflects higher mutual fund redemptions, and lower investor demand amid higher interest rates and equity market declines.
In retirement net outflows were $4 6 billion compared with net outflows of $1 billion in the prior year quarter, primarily driven by higher planned redemptions in the U S.
Our institutional asset management business recorded net inflows of <unk> 9 billion compared with net inflows of $1 6 billion in the prior year quarter, driven by lower net flows in real estate timberland in the infrastructure products, partially offset by higher sales of fixed income mandates.
Overall 2022 global <unk> average <unk> decreased by 12% compared with the prior year quarter, driven by unfavorable market movements in the earlier parts of 2022.
Turning to slide 18, net fee income yield of 43 seven basis points was modestly lower than the prior year quarter, driven by lower fee spread.
Our core EBITDA margin of 27, 3% was four percentage points lower than the prior year quarter, reflecting lower fee revenue from lower average <unk>.
For the full year, our core EBITDA margin was resilient at 34% enabled by our substantial scale and disciplined approach to managing operating expenses.
Moving to slide 19.
We have achieved a remarkable track record of generating positive net flows in 12 of the past 13 years, a demonstration of a strong and diverse global one franchise across retail retirement, and institutional business lines and across geographies.
Turning to slide 20, our strategic focus on Digitization and efficiency and disciplined approach to managing operating expenses enabled us to contain core general expense growth to 5% in the fourth quarter and remain in line with 2021 on a full year basis.
We achieved an expense efficiency ratio of 59% for both the fourth quarter and full year 2022, despite the inflationary environment.
We're committed to the targets efficiency ratio of below 50% and see it as an important strategic priority to deliver sustainable shareholder value.
Slide 21, reinforces our strong balance sheet and capital position.
Our <unk> ratio of 131% remains strong and represents approximately $20 billion of capital above the supervisory target.
The five percentage points decrease compared to the third quarter was driven by a capital redemption continued common share buybacks and the unfavorable impact of market movements on capital primarily due to the narrowing of corporate spreads are.
Our financial leverage ratio declined by one one percentage points from the prior quarter, reflecting the redemption of $1 billion of subordinated debt.
Share buybacks and retained earnings growth.
We delivered record remittances of $6 9 billion in 2022, an increase of $2 5 billion compared with 2021 supported by two VA reinsurance transactions completed in 2022.
Turning to slide 22.
We are committed to creating value to shareholders, including through the use of regular dividends and share buybacks as Troy mentioned earlier, we have increased our dividend per common share by 10% on an annualized basis since 2017 and.
And we announced yesterday, a three five or 11% increase to the quarterly dividend per common share.
In addition, we repurchased four 1% of the company's outstanding common shares for $1 9 billion in 2022, demonstrating our strong conviction to execute on buybacks.
For the five year period from 2018 to 2022, we returned a total of $14 7 billion of cash to our shareholders, which represents approximately 33% of our market capitalization is at the.
End of 2022.
Slide 23 shows the summary of our financial performance for the fourth quarter and the full year 2022, and slide 24 outlines our medium term financial targets and recent performance.
Our performance reflects the resilience of our business against the backdrop of a challenging macro and operating environment in 2022.
Turning to slide 25, which provides additional information on our <unk> 17 opening balance sheet as of January one 2022.
Our opening total equity under <unk> 17 was $46 9 billion, 20% lower than reported under IR for us for and in line with our previous guidance.
The main driver of the decrease is the establishment of the CSM, partially offset by other measurement changes, including two provisions held for non economic risks and changes to discount rates.
Just a quick recap one of the key impacts of <unk> 17 is the requirement to set up a new insurance liability component.
<unk>, which represents expected future profits and its treated as available capital under light cat.
For these reasons, we believe the CSM is an important metric for measuring future earnings capacity and value of the business.
Noted previously we expect the new business CSM balance to grow at 15% per annum and the CSM amortization into core earnings to be approximately 8% to 10% per annum.
The difference in discount rates used for <unk> 17, compared with <unk> four as a modestly negative impact.
Under Ifr 17 liability discount rates reflect the characteristics of the liability not the expected returns of assets supporting the liabilities.
As such the weighted average liability discount rate has decreased overall, but the impact varies between segments and business lines.
Turning to slide 26.
Just on the preliminary results from our <unk> parallel runs for 2022, which is still underway and not yet complete I would like to provide an update on our estimated transition impacts.
<unk> core earnings for the 2022 comparative year are expected to be lower than <unk> for 2022 core earnings by 5% to 10% compared with the previous estimate of approximately 10%.
As I noted earlier opening balance sheet total equity declined 20% on January one 2022 in line with the guidance that we provided.
With respect to January one 2023, we expect total equity to be approximately 15% lower on an <unk> 17 basis compared with <unk> four.
Book value per common share to be approximately 20% lower on an ias 17 basis compared with <unk> four.
Along with our second quarter results and with reference to the final 2023, Leichhardt guideline that was released by <unk> in July 2022.
The estimated impact of <unk> 17 on a light cat ratio was approximately neutral based on 30 of June market conditions.
We also said that we expected the <unk> 17 light cat ratio to be more stable and on the <unk> four and in particular less sensitive to changes in interest rates.
Changes in market conditions, specifically rate movements in the second half of 2022 have reduced ally cat ratio under IR for us for given the greater stability of a light cat ratio under Ias 17, we expect a low single digit increase in a light cat ratio as of January one.
2023.
There is no change to our medium term financial targets, including the new CSM related targets that were communicated last year.
This concludes our prepared remarks before we move to the Q&A session I would like to remind each participant to adhere to a limit of two questions including follow ups.
Operator, we will now open the call to questions.
Thank you we will now take questions from the telephone lines. If you have a question and using a speaker phone. Please lift your handset before making your selection.
If you have a question. Please press star one on your devices keypad to cancel the question. Please press star two.
Press Star one at this time, if you have a question there'll be a brief pause while participants register thank you for your patience.
And the first question is from many Robyn from Scotiabank. Please go ahead.
Hi, Good morning, I, just wanted to ask about investments related to returns for your reference.
Fair value changes on real estate, just wanted to get some more details on that in terms of the asset class geography is it something concentrated.
So I'll start that.
Sure Matt This is Scott here. Thanks for the question. So yes, when we look at investment related returns as Phil pointed out it's been a very strong year with $1 2 billion of investment gains $800 million above what we would've put into core earnings and <unk>.
All of the portfolio in particular, we had gains of $147 million for the year meeting, we slightly exceeded our long term return expectations, but.
So those returns will vary quarter to quarter, particularly the all the returns given the mark to market flows through earnings and in the fourth quarter, we did see lower investment returns.
That was largely driven by our real estate portfolio most of our other five all of the categories performed in line with our long term expectations. So the loss you see the $357 million for total investment gains was driven by the real estate portfolio now.
Now it's important to note that our real estate portfolio is almost entirely mark to market by external appraisers, each quarter over 95% of the portfolio. So maybe a few small properties that are not and what we saw in the fourth quarter is that external appraisers raised their discount rates on real.
Estate and that was really across the board so it.
Really hit all categories, not just office, which office has been weaker over the last couple of years, but in the fourth quarter, we saw that weakness extend across all categories, particularly in North America Asia held up a little bit better.
It is important to note that these were mark to market losses based on higher discount rates and given the higher discount rates, we would expect to recover those losses in the future through through higher returns. So that was that was really the driver.
Okay, Yes.
It answers the question I mean everyone's worried about office values in particular so the question is are we seeing.
Part of that's downward.
Revaluation of office properties.
So you are saying.
As more broad based than that in terms of what we're seeing this quarter.
Yes, that's correct and I think we've seen weakness in office for a couple of years now.
And we've got a highly diversified all the portfolio of the things we're doing well so that didn't really show much.
But in the fourth quarter, it really did extend to all categories of real estate.
Thank you.
Thank you.
The next question is from.
Gabriel Duchaine from National Bank Financial Please go ahead.
Alright, good morning, I've got a couple questions one is on the.
The reopening in Asia, specifically Hong Kong.
Things don't turn on a dime Im just wondering what sort of lag you would expect.
From now until your sales hit.
What you consider a normal run rate or something above where they are today.
Thanks, Gabriel it's Damien here I appreciate the question.
We are seeing so firstly, we saw an uptick in <unk>.
CV mainland Chinese visitor sales.
In the fourth quarter of 2022, which is very positive we registered strong double digit growth in mainland.
Visit yourselves for quarter on quarter and year on year in Macau, which was a very positive sign as we go into the first quarter. We are seeing a step change in mainland Chinese visitors sales.
Into Hong Kong, albeit off a low base.
Bill.
Each signs so boss.
But clearly the recovery is happening here clearly the inflows there.
The pace of that recovery.
Coming months is clearly got to be determined but positive signs so far and the last thing I'd say here, we're very well positioned to capitalize.
On the mainland Chinese visitor opportunity as it returns to Hong Kong, We've got 12000 agents, we've been focusing very very hard over the course of the pandemic and beefing up.
Chinese visitor sales capabilities as well as partnership channels, including DBS Bank. Thank you.
They're more like back half, where do you expect that to ramp up.
Or.
Definitely what I would say is we're expecting a significant recovery over the course of 2023 with a ramp up in Q1.
But.
Thanks.
Okay and then.
The second question on the policyholder experience.
You can break that number down for us we've just got the one number which.
<unk> itself is fine, but how.
How much of it was their mortality gains in LTV, how much of it was.
I am assuming group.
Canada was positive and then on the other side how much of it was negative lapses and mortality in the U S.
That lapses issue was or.
The experience was tied to the.
No lapse guarantee business.
Thanks, Gabriel it's Steve here I'll tackle that and I guess I'll speak broadly about what we saw and then try to answer your questions on some of the specifics so.
Q4 policyholder experience in total as Phil noted was just over $80 million pre tax and improvement from Q3 and from Q4 prior year.
I would categorize it as the broad driver of the result was.
Unfavorable lapse experience in our U S life business in terms of mortality and morbidity claims results that varied across businesses and geographies.
And but it was but it was neutral overall for the quarter and that was driven by a couple of the things that you noted we had favorable experience in group benefits in Canada, which has been a trend for the full year are very positive.
Results there in the Canadian group benefits, we saw gain in LTC. We saw in Q4, what I would consider normal large case variability that was a charge in the U S. So that's sort of the claims side of things in terms of lack.
Lapse.
A little bit of context, so yes.
What we're seeing in terms of the lapsed results, we had updated our experience in the U S updated the assumptions in 2021 fully reflecting pre pandemic experience and what we're seeing now is.
Really a shock to the system caused by health concerns from the pandemic as well as more recently.
The variability in markets and the uncertain economic outlook.
That's impacting more than just the guaranteed UL product lines. So it's across a number of product lines, but my expectation is that these impacts are expected to moderate going forward and revert back to pre pandemic levels as the pandemic subsides and the economic uncertainty abates and what.
Really matters is our long term assumptions and I continue to have.
<unk> in our in the Prudence of our long term assumptions and reserves and some of what is informing that.
That view and that expectation is looking back to another shock to the system, which we saw in the global financial crisis, and I lived through that in the U S life business and we saw a similar phenomenon discontinuity across multiple product lines and.
That experience did it took some time, but it did revert back to pre pandemic levels and that's informing my views on the MLG.
Lapse rates bottomed out in the middle of 2021, and we have seen some brand or reversion back, but not fully at this point so I'll stop there. Thanks.
Alright.
Thanks.
The call.
Thank you. The next question is from Doug Young from Desjardins Capital markets. Please go ahead.
Hi, Good morning, So I wanted to go back to slide 26.
Yes, just a few things I wanted to clarify here you say the equity hit from transitioning to <unk> 17.
But the book value is 20% just trying to understand the difference between.
The moves.
10% to 20% between those two why the difference in equity and book value.
And then can you also kind of delve into a little bit on why the impact on core earnings in 2022 comp went down from roughly 10% to 5% to 10% that you can get maybe a little bit of detail as to what drove that.
Sure. Thank you Doug for the question I'm happy to elaborate.
Starts with.
First components to your question on the balance sheet impact.
The guidance, we provided it was along with our Q1 results in 2022 was a 20% impact to an estimated 20% impact to total equity that's actually what has happened we published our opening balance sheets, along with our results yesterday the impact is 20 <unk>.
But the the additional guidance we provided yesterday was over the course of 2022, what we have seen is a more stable <unk> 17 book value relative to IR for us for and therefore by the by the end of 2022, we expect see.
Total equity impact to be lower than approximately 15% youre.
Your question on why the book value common common shareholder book value per share is approximately 20% impacted by the end of 2022, that's really the what I would describe as the denominator impact when you strip out the preference shares LLC yen as well as policy holder.
Participating policyholder impacts.
The impact is approximately 20% by the end of 2022.
The second question relating to the expected impact on 2022 core earnings when we provided the guidance earlier earlier last year, we were expecting 2022 to be a more normal year. A typical year I think is the language we used at the time.
Actually transpired in 2022, it's very challenging backdrop and for that reason new.
New business gains on NII for us full basis were lower than we had anticipated in fact, approximately 20% lower year on year and that's really the key driver of the reduced impact of we're now expecting somewhere between five and 10%.
Okay. So just to clarify.
The total equity includes par includes perhaps all of those things that's different than the book value per share is that.
Where is that correct to monthly shareholder equity okay.
Spot on.
Okay. Thank you very much.
Thanks, Doug.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you.
So.
Sticking with the <unk> team one of your peers highlighted that there is more of an interest rate benefit under <unk> 17 versus IRS for I E. It flows through into.
Core results faster under <unk> 17 wondering if that's also true in your case you suggest that there is less rate sensitivity.
So maybe you can just address that and help us out.
Sure. Thanks, Paul This is Phil the main benefit that we see from interest rates on an Ias 17 basis is actually closer matched.
Matching of the economics of the assets and liabilities. So what we have observed during the 2022 ongoing parallel runs.
Me.
Is that.
The.
A greater stability in our book value as a result of the largely offsetting movements.
<unk>.
Assets and liabilities as a result of movements in interest rates and that really reflects the fact that when we manage our asset portfolio, we hedge our liability movements on an economic basis for 2017 is a closer representation of the economics. So when you.
Translate all back to the what we see on in an <unk> environment, we see greater stability in book value and why.
When you compare that greater stability on an Ias 17 basis to <unk>. During the course of 2022, we've seen rising interest rates that has had a lowering impact of an adverse impact on <unk> equity, but very stable <unk> 17 equity including.
Most stable light cat ratio, which I think is a very positive factor for the future.
And Phil I'll, just jump in there in terms of interest the impact of interest rates flowing into earnings.
Same benefits that we've seen under our <unk> in 2022 from higher rates, particularly earnings on surplus that will flow through as well under Ias 17.
Okay, that's helpful and that kind of leads me.
The second question, which is yes.
Earnings on surplus was obviously very positive this quarter.
And a significant outlier versus recent quarters, and even going back over history. So just wondering.
If you can help us breakdown to what extent, that's attributable to higher bond yields and how much might be sort of two abnormal gains on seed capital and other factors.
Got it thanks, Paul Great question and.
Earlier this year for the first three quarters I think some of the benefits of higher interest rates have been less visible.
Because of declines in seed capital and the absence of <unk> equity gains being recognized in core earnings because of market conditions, but when we look at Q4, a more normal market environment, we do see the benefits of higher interest rates showing through in earnings on surplus.
And to give you a sense of the.
Magnitude.
When you look at our after tax earnings on surplus in the fourth quarter $295 million.
$260 million of that is coming from yield on fixed income instruments, that's an $18 million increase after tax compared to the fourth quarter of last year and what that reflects is the sustainable impact of higher interest rates that currently prevail. So if rates stay where they are we would.
We expect not only back to remain stable, but also to increase over time as we continue to invest in higher yielding instruments now the pure points on to what extent is the seed capital gains and gains from <unk> equities included within that.
That's.
The dollar amount in the fourth quarter in aggregate <unk> equity gains in seed capital is just over $100 million.
Typically I would expect somewhere between 80 and $100 million a.
Quarter. So this is I just think.
Just above the typical range that we would expect may be in the order of $10 million or so.
But.
I would emphasize this is a normalization I think in the fourth quarter of what we would typically expect to see on an IR for us full basis.
And the first three quarters of the year, we're not not what I would typically expect to have experienced.
Well I might just add a couple of other points if I may.
Phil covered the question quite well, but if you think about higher rates, we have been in an environment of lower rates of more than a decade, which has been a headwind for our industry and quite frankly for us and probably all disclosures.
Sure that a 50 basis points, increasing rates equates to $1 6 billion PV of future earnings. So higher right is certainly something which is a positive and a tailwind for us in 'twenty. Two we saw rights up approximately about 150 points and.
The run rate benefit to earnings of those higher rates are approximately 170 mill, that's pre tax and that doesn't include other benefits such as margin improvements in our group benefits business or new business value improvements as well.
And on top of that obviously right stay higher at the at the Thailand than there are possibly you are all benefits as well so I would just sort of add that.
<unk> 22 was an environment with a lot of volatility we have seen higher rates, we do expect that as central banks around the world continue to raise rates to fight inflation that we are going to be in an environment of higher rates and we see that as a positive clearly.
All those numbers are helpful. Thank you for that.
Thanks, Paul.
Thank you. The next question is from Tom Mackinnon from BMO capital. Please go ahead.
Yes, thanks very much.
Continuing on this seed capital gains guide that you gave.
Phil.
It was over 100 in the quarter and you expect kind of a run rate of 80 to 100.
Seed capital gains and Asf's equity gains are largely driven by increases in the equity markets. The fourth quarter the equity market was up 7%.
From September 30 to December 31, So I think you're generally.
Assume the market would be up about 2% each quarter. So why would the number not be like $2 seven of that.
Over $100 million why wouldn't the guidance like significantly less than the $100 million going forward and I have a follow up thanks.
Thanks, Tom.
Pickle quarter normal environment, we'd expect somewhere between 50 and $100 million of aggregates seed capital and Iff's equity gains.
There is clearly some discretion as to the timing of equity.
Equity gains so it is not entirely dependent upon what happens in any particular quarter what happened in the fourth quarter. The aggregate gain was $110 million post tax so I would say thats.
$10 million above the sort of typical range that you could expect in any particular quarter Tom.
Yes, and yes.
So Scott I might add to that I think you're right that so that that math doesn't work because of the timing as well as in the seed capital. There are a bunch of bond funds and rates were up in the fourth quarter so that that.
Did did not create the gains you might have otherwise expected.
Okay. So the wildcard seems to be the timing of the FX gains.
Okay. Thanks for that.
A question with respect to the global wealth and asset management business.
Even if I just look quarter over quarter the assets were higher.
But.
Core earnings were significantly less than the margins were significantly less now is there anything particular to the fourth quarter like in terms of higher opex any other kind of.
Expenses that would be.
To be one timers, how should we be looking at.
Yeah.
Core earnings and margin potential for this business going forward because.
I think the fourth quarter G Wham disappointed in terms of margins.
And in terms of flows, but if you can give us any kind of guide us to how we should be thinking about this business going forward and how.
Anything that was unique to the fourth quarter that drove that margin down. Thanks.
Yes, Thanks, Tom It's Paul here. So you are right. We did have some onetime items in Q4 as well as Q3, and so quarter over quarter. All kind of just go through that with you and then give you a kind of perspective of how to maybe look at it in Q3. There are two items that were favorable to the core earnings one was the tax benefit we tend to see every Q.
Three particularly in our U S retirement business and then we also had an adjustment.
Our compensation expense in Q3 that was lower so a negative adjustment the combination of those two in Q3 was about 70 $37 million of Koreans. If I look at Q4. There was also some onetime items in Q4, but they were going the other way we tend to see seasonal higher seasonal expenses in our retirement business as we gear up for the next year and again that typically have.
Every Q4, but we also had higher incurred as a restructuring charge in the quarter as we made some changes within <unk> AUM to drive efficiencies go forward. The combination of those two was about $34 million. So if you look at the quarter over quarter Thats about $71 million of the $86 million change. The rest is really the average <unk> movement.
The fee income on that so the way I would look at it is is really look at full year 2022 versus 2021 that will automatically adjust for the seasonality of the tax benefit in Q3 and the seasonality.
<unk> expenses in Q4.
And just to smooth out any one time that may happen from quarter to quarter. If you look at that I would really look to the overall <unk> is the driver the core EBITDA margin and then the stability of our net interest fee our yield on the assets as well as our expense management over time. So if you look at the EBIT margin. An example, 2022.
There was a little bit of compression from 2021, and that's really the average au may movement in fee income and while we were able to manage expenses and keep them flat, including that restructuring charge, we cant completely offset the total decline in down markets, but the opposite is true in up markets and you would've seen that historically over the last three years as we've driven margin expansion as markets improve.
We manage our expenses. So that's how I would think about the business and I wouldn't look to Q4 is really an indication of any change in terms of the underlying earnings power of the franchise.
So we had 30% in 2022 or 29, 9% and that was it down.
Down market. If you will and then 2021 upmarket we had 31, 5% in terms of core EBITDA margin should we be thinking that going forward it would be somewhere between those two if we got more stable markets.
Yes, it's really dependent on the markets and average annual may what I, what I can say, which I reiterated before is what we try and manage our expenses to about 50% of revenue growth over the long term to help drive that expansion. So I would just look at what's typically happened and again you would've thought about 110 basis point last year decline based on that market and again, we would see the.
Opposite if we saw markets improve we would expect some leverage on our fixed expense base.
Okay. Thanks.
Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning, maybe going back to Asia Damian.
I'd say that core expenses were up in Q4, and I assume that's because of the <unk>.
Ramp up and then you called out agents, but I noticed your agents were increased a lot and I say that with peers.
As you head into 2023 from the ground level can you give us a sense of competition that you see as kind of more or less or if there's any certain asia regions.
That <unk> referred to that that might have that dynamic.
Yeah. Thanks, Thanks, Scott for the question Firstly on the question of expenses.
That briefly.
We remain tightly focused on expense discipline.
Continue to track within <unk>.
Capital expense efficiency ratio target of 50% and decide on the full year of 2022 and for the fourth quarter, you will see some seasonality there.
Which which we did see in the fourth quarter associated with.
Us driving.
Driving some business crusty, but generally we were hanging on fairly well lift in terms of competition.
Across.
Across markets.
The first thing I'd say is I mean.
Our macro view on competitive performance through the pandemic, we demonstrated we've demonstrated considerable resilience through the pandemic and in comparison to peers.
Our core earnings at a CAGR of 4% between 2019 being the immediate.
Pre pandemic year end to the end of last year's reporting period 2022.
Pretty positive we remain a top three Pan Asian insurer and we're scaled player.
Operating in 11 markets typically in terms of competitive dynamics.
And broadly every market in Asia, whether it's emerged and emerging market or.
A more mature market like Hong Kong or Japan.
Has it has considerable com.
Competition in quite intense competition.
But our scaled franchise, particularly in cornerstone markets like Hong Kong, where we're a leader Singapore, where we're number two in the market Vietnam, where we have the leading franchise by far it gives us scale advantages and comparative scale advantages.
We are very well equipped to continue to compete for for the share of growth and value.
Thanks, and then maybe one follow up for Roy just on capital deployment.
Talk to bed.
100% ownership, but not up I saw that you did a minority stake.
Private equity firm in Asia.
So it seems like the theme of deployment in Asia as you talked about in the past is as important.
And then just curious within your maybe current JV owner ships or outside of that looking at other asset management and banking insurance and maybe if you can kind of maybe talk about the pipeline now that Asia is reopening there.
Yes. Thanks for the question Scott a couple of thoughts I would leave you with firstly, we are in a strong capital position with like a ratio of 131, we have $20 billion in excess of the supervisory minimum so that really gives us certainly a lot of confidence, especially as we've navigated through challenging years through the pandemic and its still an answer.
Economic environment, as we look to 'twenty, three and beyond but despite that I think that capital strength has put us in a position to create value through the deployment of capital.
And 'twenty two we do we basically bought back $4, 1% of outstanding shares.
Deployed $1 $9 billion to share buybacks, which again, we felt was a very prudent way to create value for shareholders and our dividend increase the CAGR of 10% from 2017 to 22 again was the source of value and we're proud to announce that the board approved an 11% increase effective March of 'twenty, three so dividend buybacks.
Dividend increases and share buybacks have been really a large part of our focus from a capital deployment perspective.
We think that Opportunistically.
There might be M&A opportunities for us to consider although one of value unique opportunities that we can grow and deliver against our targets without M&A, which I think is really meant that we can be more judicious and less reckless quite honestly with a deployment of capital to M&A, but despite that we have deployed.
These initiatives, including the Empire the JV.
Acquisition that you referenced which is something we're really excited about in fact, we were the first foreign company to receive approval to acquire full ownership of the JV asset management company, we've been with our JV partner for 10 years. It has performed incredibly well and that opportunity in China is a phenomenal 138 trillion.
Market.
Basically opportunity with incredibly low penetration rates.
It's a market that's growing at a CAGR of 20% over the last 10 years. So that obviously is very exciting for us.
We did the JV with.
Mahindra in India again, we think that's a tremendous opportunity given the growth and scale of the India market.
We started our bank partnership with <unk> Bank in Q1 of 'twenty, two which again gives us access to 40 million customers.
So we're feeling pretty good about the capital that we've deployed.
We do believe that there may be more opportunities that may emerge in a strong capital position will actually equip us with the opportunity to possibly opportunistically look at those.
We recently filed for a new NCI for 2023 with the TSA. So again capital strength I think is something thats been.
Foresight for our company and it's allowed us to create shareholder value and quite frankly, we will continue to allow us to create shareholder value in 'twenty three.
Thank you.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning.
We could go to the CSM balance.
That bounce can you give us an indication of.
How.
You were clear that the balanced growth at 8% to 10% would it be fair to say then the amortization would also grow by 8% to 10% and sort of related to that.
How quickly does that ameren that CSM amortize. It over 10 years 20 years can you give us an outlook on those two.
Sure Mario Thanks for the question. This is Phil your.
<unk> is right there we expect the amortization of the CSM can be.
About 8% to 10% per year, so over a 12 year period. It would it would emerge into income based on that math, but the reality is that we expect the CSM balance to not only remain stable as a result of the new business generation, but grow biosimilar magnitude at 8% to 10% I'm not really reflects the growth.
The growth opportunity in our global franchise in particular in Asia.
Okay. So the 8% to 10% you said in your opening comments that was the that was the 12 years you were referring to I thought you said that was the growth in the balance.
It's both so 8% to 10% growth in the balance, but also 8%, 10% amortization of that balance of the year.
Okay, and then my second question and this might be more appropriate for our steam.
Looking at the changes in assumptions and I'm not talking about the non economic so I'll talk about the economic assumptions.
Changes in <unk>.
Assumptions for public equities and all of the going forward under <unk> or that would have been immediately reflected in your lie cat I would've been immediately reflected in net income may be taken out of core it would have been reflected immediately in book value and book value, excluding OCI, but under Ias 17.
My understanding is that changes in things like public equity assumptions and all that will flow through all of those things net income core book value like Cat first do I have that right.
Mary Yes, you have that right under <unk> four we capitalized.
Full of present value of all the future impacts if we change in ALDA assumption under <unk> 17.
Because of the de linking between the assets and the liabilities it does not impact the valuation.
And.
If the assumption has changed presumably that reflects what will actually occur that will come in over time.
And now because it's going to come in over time in all areas core earnings net income book value like cat.
Does that change your perspective.
On making changes to assumptions because it was such that it could be half such a dramatic effect on our efforts for its much more I'm going to call. It sensible under <unk> 17 does that change your perspective on making changes to those assumptions.
I think it changes the amount of attention it gets in the spotlight because the capitalized impacts could be quite large as you've seen from our sensitivities, but in terms of the rigor that we apply those assumptions are important for pricing. They are important for setting the right expectations for projections of earnings and for embedded.
Value.
And it will continue to get the same level of rigor and attention from Scott's group in <unk> and <unk>.
You saw in the prepared remarks that over the last 18 years since the acquisition we've been Bang on effectively just a little higher than the current assumptions. So it'll continue to get the same focus, but probably less of a spotlight.
Yes understood.
Thanks Mario.
Thank you. The next question is from Lamar Prasad from <unk> Securities. Please go ahead.
Thanks, I'll be really quick because most of my questions have been asked and answered, but just starting off here I wanted to come back to.
Paul and Tom's questioning on earnings on surplus. So I just wanted to be clear here bottom line are you guys, suggesting that.
This quarter is over $300 million in earnings on surplus is indicative of what should we should expect moving forward or perhaps even some upside from that number from higher rates.
Thanks Shlomo for the question. This is Phil I think what we're seeing this quarter is a reasonable baseline the.
The benefits that are included this quarter from.
The seed capital and available for sale equity gains are at the higher end of our typical range. In fact, just over the higher end of the typical range, but only by about $10 million $10 million post tax as I said earlier. The main benefit is actually the the impact of higher interest rates, which is showing through.
Our fixed income portfolio within surplus.
When we break that down as to whats driving that increase in the fixed income yield there are a couple of things one is the <unk>.
The impact of higher rates on the shorter term instruments that we.
That we include in that portfolio, but then also the impact of trading within the portfolio and Roy earlier referenced $117 million pretax of benefit that we've seen in 2022 from higher rates. So that's the benefit through the year on our interest on surplus.
The fixed income elements of our earnings on surplus about $18 million, if that 170 was coming from the impact of higher rates on the shorter term instruments.
And then the $120 million of it was coming from trading longer term instruments, therefore locking in a higher yield and offsetting that was a slight increase naturally in the cost of debt and a higher interest rate environments and subtle in that soft to the $170 million pre tax that will be referenced.
Okay, Great and then just my second question here you guys talked about how Manulife has returned a significant amount of capital to shareholders over time I just wanted to try this one again because I think it's come up in the past how should we think about excess capital for deployment under Ifr 17, maybe in terms of dollars and Directionally is it higher.
And under <unk> for I know you guys had referenced at $20 billion over the supervisory target for presumably not all of that is deployable. So how should we think about that.
Yes.
So a couple of thoughts I mean again I would just go back to my earlier points and that is that we're clearly in a very strong capital position. This has been a big focus for the company over the last five years, we've freed up $9 billion worth of capital and that's put us in a position of strength, which has given us a lot of flexibility and Optionality, which is why we deploy.
Capital, not only organically, but inorganically as well as against dividend increases and share buybacks.
Obviously as we transition to <unk> 2017, we've been closely looking at what that means to ally cat ratios.
<unk> and our surplus and as we shared in our presentation, we see that out like that ratio based on rates as at the end of the U P to be put it put a putting us in a position where we will have a higher <unk> ratio slightly higher like that ratio a couple of percentage points.
So we're not really.
Really going to share much more than that at this point I'd sort of.
Hold out until we are able to really share much more details at our next earnings call on more data on that front.
Okay. Thanks.
Thank you Emma.
The next question is from Nigel D'souza from very tough investment research. Please go ahead.
Thank you good morning, I wanted to circle back on Asia, and get a better sense of the underlying <unk>.
When I look at the last four quarters premiums.
Lower but it looks like that is offset by higher profitability.
Wondering if you could speak to how much of the trend. We've seen in 2022, you can attribute to mobility restrictions how much you would attribute to sentiment from.
Market volatility and economic uncertainty and how much you attribute to just changes in product mix and how do you see those factors playing out.
Thank you.
Yes.
Thanks for the question.
I think it's all of those things are pushing it.
Not necessarily.
Easy to do but I would say predominantly what's impacted our results in Asia.
Over the course of 2022 was the extended a lingering COVID-19 containment measures in China.
And Hong Kong.
Both core businesses for us and I think we saw those containment niches linger on.
Willing to 2022 in both Hong Kong, and China that impacted consumer sentiment economic growth and further constrained our growth opportunity in those markets in the year generally, though I would say that we we did through our focus on execution and resilience we were able to post.
As you know year on year and quarter on quarter core earnings core earnings growth in the fourth quarter. Despite the uneven kind of post pandemic recovery there.
Underpinning that momentum.
With Hong Kong, where we saw quarter on quarter improvement in all key metrics in the fourth quarter core earnings and MBV, Japan continues its terrific turnaround delivering high double digit growth in core earnings quarter on quarter.
And for the full year in the Asia. Other grouping, we delivered robust core earnings growth result also.
Just to circle back and summarize.
I think.
Much of.
The constraint philosophy were driven by the <unk>.
Sentiment.
External factors sentiment capital market volatility <unk> product mix is concerned.
<unk> only in China that was irrelevant factor.
You can see our core earnings and NPV results in China, whilst we've got some resilience coming through we registered 4% growth in EBITDA for the full year in China, which is extraordinary given the difficulties across the economy Watkins.
What constrained us in terms of product mix, where some one off changes to the regulatory environment around critical illness product.
Key point there is those changes are probably good for the long term of the industry in terms of sustainability in China, They do not preclude us from undertaking margin enhancement and indeed.
That's underway for us and we feel quite.
Optimistic about that in the first quarter and the first half of 2023. Thanks Nigel.
Mike just add a couple of points 22 was a challenging year for Asia, specifically as it relates to COVID-19 with the restrictions that Damian referenced and referred to and we saw in North America, Canada, and the U S actually more of a normalization of return to normal from a sales perspective as it relates to Covid. There are clearly still some lingering impacts, but we had.
Strong growth from a sales perspective in North America, with 25% and 18% MBV growth respectively.
Midol back to 'twenty, one it was almost the opposite in 'twenty. One we saw North America really significantly negatively impacted by Covid restrictions in Asia actually did quite well there.
So we did see the balance of our portfolio actually whether those environments quite well and that was the strength of our diversity and again as we look to 'twenty three we're actually quite optimistic notwithstanding the comments that Damien mentioned around will take some time for that zero COVID-19 policy to really transition on unfold.
But we feeling quite optimistic about 23 being a year, where we will see more of a return to normalization specifically as it relates to COVID-19 restrictions and the impact on sentiment and therefore on sales.
Okay. Thank you that's a very helpful answer and my second question was on your like a sensitivity when I look at your interest rate sensitivity disclosure.
All our amount from.
A 50 basis point increase is the same.
But the percentage point in fact come down two percentage points I assume.
That's rounding, but I wanted to get a sense of.
The convexity of the portfolio is there a level of rates, where the percentage point impact could fall to 1% and does any of the interest rate sensitivity change under <unk> 17.
Yes, Thanks, Nigel it's Steve.
You got that right. What we've seen is some convexity here as rates have risen we've seen less sensitivity in the.
In the light cat ratio under <unk>, four and that same phenomenon will be there under ifr 17, but as Phil pointed out earlier overall, the light cat ratio under <unk> 17 will be less sensitive to interest rates, which we view as a positive increases the stability. So we will see that sensitivity drop further under.
<unk> 2017.
<unk>.
Okay I'll leave it there thank you.
Thank you.
No further questions registered at this time I would like to turn the call back over to you Mr. <unk>.
Thank you operator will be available after the call. If there are any follow up questions have a good day everyone.
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