Caution Regarding Forward-Looking Statements · 2020. 5. 23. · Third Quarter 2012 Financial &...
Transcript of Caution Regarding Forward-Looking Statements · 2020. 5. 23. · Third Quarter 2012 Financial &...
Third Quarter 2012Financial & Operating Results
November 8, 2012
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Caution Regarding Forward-Looking Statements
This presentation contains forward-looking statements within the meaning of the “safe harbour” provisions of Canadian provincial securities laws and the U.S. Private Securities Litigation Reform Act of 1995. The forward-looking statements in this presentation include, but are not limited to, statements with respect to our 2015 management objectives for earnings and 2016 management objectives for core earnings, potential future charges related to fixed income URR assumptions if current low interest rates persist, and the estimated impact of new equity calibration parameters, policyholder behaviour assumptions for guaranteed variable annuity and segregated funds, and the impact of hurricane Sandy. The forward-looking statements in this presentation also relate to, among other things, our objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and can generally be identified by the use of words such as “may”, “will”, “could”, “should”, “would”, “likely”, “suspect”, “outlook”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “plan”, “forecast”, “objective”, “seek”, “aim”, “continue”, “goal”, “restore”, “embark” and “endeavour” (or the negative thereof) and words and expressions of similar import, and include statements concerning possible or assumed future results. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements and they should not be interpreted as confirming market or analysts’ expectations in any way. Certain material factors or assumptions are applied in making forward-looking statements, including in the case of our 2015 management objectives for earnings and 2016 management objectives for core earnings, the assumptions described under “Key Planning Assumptions and Uncertainties” in our 2011 Annual Report and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from expectations include but are not limited to: the factors identified in “Key Planning Assumptions and Uncertainties” in our 2011 Annual Report; general business and economic conditions (including but not limited to the performance, volatility and correlation of equity markets, interest rates, credit and swap spreads, currency rates, investment losses and defaults, market liquidity and creditworthiness of guarantors, reinsurers and counterparties); changes in laws and regulations; changes in accounting standards; our ability to execute strategic plans and changes to strategic plans; downgrades in our financial strength or credit ratings; our ability to maintain our reputation; impairments of goodwill or intangible assets or the establishment of valuation allowances against future tax assets; the accuracy of estimates relating to morbidity, mortality and policyholder behavior; the accuracy of other estimates used in applying accounting policies and actuarial methods; our ability to implement effective hedging strategies and unforeseen consequences arising from such strategies; our ability to source appropriate assets to back our long dated liabilities; level of competition and consolidation; our ability to market and distribute products through current and future distribution channels; unforeseen liabilities or asset impairments arising from acquisitions and dispositions of businesses; the realization of losses arising from the sale of investments classified as available for sale; our liquidity, including the availability of financing to satisfy existing financial liabilities on their expected maturity dates when required; obligations to pledge additional collateral; the availability of letters of credit to provide capital management flexibility; accuracy of information received from counterparties and the ability of counterparties to meet their obligations; the availability, affordability and adequacy of reinsurance; legal and regulatory proceedings, including tax audits, tax litigation or similar proceedings; our ability to adapt products and services to the changing market; our ability to attract and retain key executives, employees and agents; the appropriate use and interpretation of complex models or deficiencies in models used; political, legal, operational and other risks associated with our non-North American operations; acquisitions and our ability to complete acquisitions including the availability of equity and debt financing for this purpose; the disruption of or changes to key elements of the Company’s or public infrastructure systems; environmental concerns; and our ability to protect our intellectual property and exposure to claims of infringement. Additional information about material factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in the body of this presentation as well as under “Risk Factors” in our most recent Annual Information Form, under “Risk Management”, “Risk Management and Risk Factors” and “Critical Accounting and Actuarial Policies” in the Management’s Discussion and Analysis in our most recent annual report, under “Risk Management”, “Risk Management and Risk Factors Update” and “Critical Accounting and Actuarial Policies” in the Management’s Discussion and Analysis in our most recent interim report, in the “Risk Management” note to consolidated financial statements in our most recent annual and interim reports and elsewhere in our filings with Canadian and U.S. securities regulators. We do not undertake to update any forward-looking statements except as required by law.
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Donald GuloienPresident & Chief Executive Officer
CEO’s remarks
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3Q12 strategic highlights
Substantive progress against our strategic priorities: Developing our Asian opportunity to the fullest
Growing our wealth and asset management businesses in the U.S., Canada and Asia
Continuing to build our balanced Canadian franchise
Continuing to grow higher ROE1, lower risk U.S. businesses
Achieved 2014 equity market and interest rate hedging targets two years ahead of schedule
3Q12 results impacted by a charge of $1 billion related to basis changes and $200 million goodwill impairment
Introduced core earnings1, a new metric, to help investors better understand our long-term earnings capacity and enterprise value
2015 targets impacted by a number of items since they were set in 2010
We have shifted our goal of $4 billion in net income by 2015 by roughly a year, and are now targeting $4 billion in core earnings in 2016 based on our macro-economic and other assumptions
2016 revised objective uses a core earnings target metric, which is consistent with measuring the underlying profitability of our business
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
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Steve RoderSenior Executive Vice President & Chief Financial Officer
CFO’s remarks
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3Q12 financial highlights
Reported net loss attributed to shareholders of $227 million, largely reflecting a charge of $1 billion for basis changes and a $200 million goodwill write-off in our Canadian Individual Insurance business
Generated core earnings1 of $556 million in 3Q12
Insurance sales1 declined2 eight per cent as expected versus 3Q11, as a result of the non-recurrence of an event in the prior year in the U.S.
Delivered a four per cent increase in wealth sales over 3Q11
Generated New Business Embedded Value (NBEV)1 of $178 million
Reported investment gains of $413 million, $50 million of which is included in core earnings
Ended the quarter with a MLI MCCSR of 204 per cent. Our capital position is further supported by our hedging activities
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below. 2 All sales growth (decline) figures stated on a constant currency basis, a Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
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Introducing core earnings metricCore Earnings1
(C$ million)
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below. 2 Core investment gains are capped on year-to-date experience, i.e. capped at $50 million in Q1, $100 million YTD in Q2, $150 million YTD in Q3 and $200 million YTD in Q4. Floor year-to-date investment gains included in core earnings will be zero.
Introduced core earnings to help investors better understand our long-term earnings capacity and enterprise vale
Core earnings measure the underlying profitability and removes mark-to-market accounting volatility as well as material exceptional items
Core earnings is not insulated from macro-economic factors and will include up to $200 million per annum2 in investment gains.
3Q12 core earnings includes $50 million of investment gains and $150 million year to date
From 1Q07 to 3Q12, we have averaged in excess of $80 million after tax per quarter in investment experience gains
3Q12 core earnings were $556 million, a decrease of $68 million vs. 3Q11, primarily due to higher pension and business development costs within the Corporate & Other division
(227)(69)
3Q122Q12
(300)
1Q12
1,206
4Q113Q11
(1,277)
2Q12
556
3Q12
583
1Q12
511
4Q11
373
3Q11
624
Net Income (loss) attributed to shareholders(C$ million)
8
Core earnings lower mainly due to one-time gains in Asia division and Corporate & Other in 2Q12
Expected macro hedge costs
556
3Q12Core earnings
(6)
Corporate & Other
(34)
U.S.
41
Canada
28
Asia
(56)
2Q12Core earnings
583
Core Earnings1
(C$ million)
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
Asia negatively impacted compared to 2Q12. Ahead of tax and product changes, we experienced record sales in Hong Kong and Japan in 2Q12 which produced significant new business gains that did not recur in 3Q12
Canada improvement due to growth in in-force earnings, more favourable tax gains and improved new business strain
U.S. improvement due to higher in-force earnings, lower new business strain & improved policyholder experience
Corporate & Other impacted primarily due to a one-time 2Q12 policyholder gain from the settlement of accident and health treaties
99
Net income affected by basis changes charge and goodwill impairment charge
(C$ millions)
Core earnings1 $556
Impact of the following items excluded from core earnings:
Income on variable annuity guarantee liabilities that are dynamically hedged 122
Investment related gains 363
Impact of major reinsurance transactions 26
Change in actuarial methods and assumptions, excluding URR (1,006)
Goodwill impairment charge (200)
Net income (loss) excluding the direct impact of equity markets & interest rates1 $(139)
Direct impact of equity markets & interest rates (88)
Net Income (loss) attributed to shareholders $(227)
Preferred share dividends (31)
Common shareholders’ net income (loss) $(258)
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
Reserve strengthening primarily as a result of changes to assumptions for U.S. variable annuities
(C$ millions, after tax)
Updates to assumptions for U.S. VA GMWB lapse and withdrawal, U.S. UL lapses, and bond parameters for segregated fund guarantees
(1,120)
Updates to actuarial standards (early adoption of revisions to calibration requirementsfor equity funds)
(244)
Other annual updates 358
Total changes in actuarial methods and assumptions $(1,006)
Impact from Changes in Actuarial Methods & Assumptions
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Source of Earnings shows impact of lower corporate spreads and basis changes charge
Expected Profit on In-Force rose 6%2 due to the impact of markets on the release of segregated fund PfADs and a small portion related to the basis changes charge
Impact of New Business decreased as expected as a result of lower sales volumes in Japan and Hong Kong after 2Q12 tax changes and product withdrawal. This was partially offset by the benefit of re-pricing and business mix in North America.
Experience Gains reflect the favourable impact of higher equity markets and investment activity, partially offset by the impact of lower corporate spreads
Mgmt Actions and Chgs in Assumptions reflect reserve strengthening from 3Q12 valuation basis changes charge, a write-down of goodwill and the expected cost of the macro hedge program
Core pre tax Earnings on Surplus of $116 million increased by $50 million driven primarily by mark-to-market gains on seed capital and AFS equities of $30 million in 3Q12 vs. a loss of $14 million in 2Q12. 3Q12 also benefited from the release of a tax deficiency interest accrual
Non-core pre tax Earnings on Surplus of $36 million declined by $11 million. Non-core items are primarily mark-to-market gains other than AFS equities and seed money
Income Taxes benefited primarily from income earned in lower tax jurisdictions and losses in higher tax jurisdictions
1 The Source of Earnings (SOE) analysis is prepared following OSFI regulatory guidelines and draft guidelines of the Canadian Institute of Actuaries. The SOE is used to identify the primary sources of gains or losses in each reporting period. Per OSFI instructions, SOE amounts denominated in foreign currencies are translated at the prior quarter's balance sheet exchange rates, with the difference between those rates and the average rates used in the Statement of Income included in Experience gains (losses).2 Expected profit on in-force growth stated on a constant currency basis, a Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
2Q12 3Q12
Expected Profit on In-Force 820 882
Impact of New Business (70) (117)
Experience Gains (Losses) (394) 290
Mgmt Actions & Chgs in Assumptions (933) (1,740)
Earnings on Surplus Funds 113 152
Other (30) (61)
Income Before Taxes (494) (594)
Income Taxes 194 367
Net Income (Loss) (300) (227)
Preferred Dividends (28) (31)
Common Shareholders’ Net Income (Loss) (328) (258)
Currency Adjusted Expected Profit on In-force 834 882
Source of Earnings1
(C$ millions)
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Record S.E. Asia Insurance sales offset by expected decline in Japan & normal variability in Group Benefits
Insurance Sales1,2
(C$ millions)
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.2 All sales growth (decline) figures stated on a constant currency basis, a Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
(8)%
3Q12
596
155
146
295
2Q12
1,001
132
447
422
1Q12
823
140
318
365
4Q11
640
156
172
312
3Q11
645
191
157
297
U.S.
Canada
Asia
3Q12 insurance sales of $596 million, down 8%versus 3Q11:
± Record South East Asia insurance sales were offset by expected declines in Japan and Hong Kong due to product and tax changes in 2Q12
- Insurance sales in Canada declined largely due to a decrease in Group Benefits sales reflecting normal business variability
± A 14% increase in JH Life sales was more than offset by LTC sales declines due to the expected non-recurrence of an open enrollment period in 3Q11
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Solid wealth sales growth driven by mutual fund sales in the U.S. and CanadaWealth Sales1,2
(C$ millions)
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.2 All sales growth (decline) figures stated on a constant currency basis, a Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
+4%
3Q12
8,229
4,831
2,314
1,084
2Q12
8,548
4,710
2,440
1,398
1Q12
8,724
4,834
2,796
1,094
4Q11
8,141
4,578
2,624
939
3Q11
7,839
4,520
2,419
900
Canada
U.S.
Asia
3Q12 wealth sales were $8.2 billion, up 4% versus 3Q11:
+ Asia wealth sales increased on the continued success of fixed annuity products in Japan and increased bond fund sales from Manulife-TEDA in China
± In Canada, strong mutual fund and Group Retirement Solutions sales were more than offset by lower sales of variable and fixed annuities
+ Strong growth in mutual fund and Retirement Plan Services sales
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Premiums and deposits rose 7% due to strong contributions from Asia and wealth productsPremiums & Deposits1,2
(C$ millions)
Premiums and Deposits of $16.7 billion in 3Q12, were 7% higher than 3Q11:
+ Insurance P&D of $5.6 billion, were up 1% over 3Q11, reflecting strong in-force growth in Asia and Affinity in Canada, partially offset by a decrease at John Hancock Life (largely related to a reinsurance transaction)
+ Wealth P&D of $11.1 billion, up 10% over 3Q11, driven by growth in Asia as well as mutual fund and retirement businesses in North America
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.2 All P&D growth (decline) figures stated on a constant currency basis, a Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
+7%
3Q12
16,746
11,149
5,597
2Q12
17,487
11,179
6,308
1Q12
17,140
11,453
5,687
4Q11
15,917
10,168
5,749
3Q11
15,545
10,041
5,504
Insurance Products
Wealth Products
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New Business Embedded Value (NBEV) of $178 million in 3Q12, was in-line with 3Q11:
+ Insurance NBEV increased 36% to $120 million, due to re-pricing as well as higher volumes and improved business mix at JH Life
- Wealth NBEV declined 35% to $58 million, primarily due to the impact of lower margins at Manulife Bank and lower sales of variable annuities
NBEV declined sequentially due to the reduction in insurance sales in Asia driven by product and tax changes in the 2Q12
Insurance NBEV growth offset by decline in Wealth NBEV, overall in-line with 3Q11New Business Embedded Value1
(C$ million)
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
+1%
3Q12
178
58
120
2Q12
296
90
206
1Q12
305
112
193
4Q11
143
73
70
3Q11
177
89
88
Insurance Products
Wealth Products
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Asia Total Weighted Premium Income up 13% due to strong persistency of our in-force business
Core earnings1 were US$231 million in 3Q12, up US$7 million over 3Q11: Growth in in-force earnings largely offset by
expenses related to expansion initiatives
Insurance sales1 of US$296 million in 3Q12, in-line2 with 3Q11 results: Record Indonesia sales offset by expected lower
sales in Japan due to product changes in 2Q12
Wealth sales of US$1.1 billion in 3Q12 were up 22% vs. 3Q11: Continued success of fixed annuity products in
Japan and increased bond fund sales from Manulife-TEDA in China
APE (ex. VA) up 6% over 3Q11 due to strong wealth sales, down sequentially primarily due to lower insurance sales in Japan and Hong Kong
TWPI (ex. VA) increased 13% over 3Q11 due to strong persistency of our in-force business
Further enhanced our distribution network with additional bank distributors in Malaysia and Japan
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below. See also “Segment Reconciliation” below.2 All sales, TWPI, APE growth (decline) figures stated on a constant currency basis, a Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
Asia Annualized Premiums Equivalent (APE)1,2
(Excludes variable annuities, US$ million)
399
+6%
3Q12
417
2Q12
560
1Q12
478
4Q11
422
3Q11
Asia Total Weighted Premium Income (TWPI)1,2
(Excludes variable annuities, US$ million)
+13%
3Q12
1,955
2Q12
1,939
1Q12
1,851
4Q11
1,725
3Q11
1,751
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Generated strong mutual fund and Group Retirement Solutions sales in Canada
Core earnings1 were $229 million in 3Q12, down $30 million from 3Q11: Improved new business strain in 3Q12 was more
than offset by normal variability in claims experience
Insurance sales1 of $146 million in 3Q12 declined 7% vs. 3Q11: Lower overall sales reflect normal variability in the
group benefits market; Group Benefits led the market in sales in 1H122
Individual Insurance sales of non-guaranteed long duration products increased by 10%, while sales of guaranteed products declined
Wealth sales of $2.3 billion in 3Q12 down 4% vs. 3Q11: MMF gross sales increased 18% from 3Q11; MMF
was the fastest growing mutual fund complex over the past year as measured by AUM3
Group Retirement Solutions (GRS) sales increased 17% from 3Q11; as at 2Q12, GRS has led the defined contribution market in sales for 10 consecutive quarters2
Record assets of over $21 billion in Manulife Bank
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below. See also “Segment Reconciliation” below. 2 Based on industry sales reporting from LIMRA. 3 Based on the top 10 mutual fund companies reporting to the Investment Funds Institute of Canada (IFIC) at September 30th, 2012.
Manulife Mutual Funds (MMF) Gross Sales(C$ million)
+18%
3Q12
854
2Q12
844
1Q12
1,030
4Q11
748
3Q11
722
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U.S. Division delivered solid wealth results, led by retirement plans and Mutual Funds
U.S. Wealth Sales(US$ million) Core earnings1 were US$289 million in 3Q12
up US$24 million from 3Q11: Increase primarily due to lower new business strain,
favourable sales mix, and partially offset by unfavourable policyholder experience
Insurance sales1 of US$155 million in 3Q12 declined 20% vs. 3Q11: LTC sales down 81%, due to the expected non-
recurrence of an open enrollment period in 3Q11
JH Life sales up 14% vs. 3Q11 with newly launched products contributing to the sales success
Wealth sales1 of US$4.9 billion in 3Q12, up 5% vs. 3Q11 despite a 59% decrease in annuity sales over the same period: JH Mutual Funds sales increased 9% since 3Q11
driven by a strong product line; designated a Preferred Fund Family by Edward Jones
Retirement Plan Services sales up 29% vs. 3Q11. JH launched “TotalCare” products to expand sales opportunities in the large case market
JH Funds posted positive net sales of US$971 million
+5%
3Q12
4,857
3,103
239
1,515
2Q12
4,662
3,073
383
1,206
1Q12
4,827
3,115
384
1,328
4Q11
4,473
2,413
677
1,383
3Q11
4,611
2,853
588
1,170
JH Retirement Plan Services
JH Annuities
JH Mutual Funds
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below. See also “Segment Reconciliation” below.
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Record Funds under Management benefited from positive flows and strong net investment income
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.2 Funds under management growth figures stated on a constant currency basis, a Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.3 Administrative Services Only premium equivalents excluded.
Funds Under Management1
(C$ billions)
Record funds under management of $515 billion, up 3%2 from 2Q12: Net policy cash flows of $2 billion
Investment gains of $15 billion
Currency impact of $(13) billion
514
FUM (9/30/2012)
515
Currency & Other
(16)
Investment Income
15
Policy Payments
(13)
P&D ex. ASO
15
FUM (6/30/2012) 3
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Private Placement Debt8%
Mortgages15%
Cash & Short-Term Securities5%
Bank Loans1%
Corporate Bonds26%
Government Bonds26%
Fixed IncomeNon-Fixed Income
Carrying Value as at September 30, 20121 Net Exposure excludes par and pass-through and reflects the impact of downgrades on reserves. Presented based on location of issuer.
Real Estate4%
Stocks5%
Other5%
Policy Loans3%
Securitized MBS/ABS2%
Diversified, high quality portfolio: 86% of the total portfolio is Fixed Income, of which
96% is Investment Grade
14% Non-Fixed Income, well diversified by asset class and geography; majority of alternative assets are managed in-house
Limited Net Exposure1 to:
Greece, Italy, Ireland, Portugal, and Spain: No direct sovereign or financial sector exposure
to Greece, Portugal or Spain
Banks and financials (C$24 million)
Sovereign debt (C$13 million)
Total Invested Assets(C$224.8 billion)
Diversified high quality asset mix avoids risk concentrations
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Credit experience in 3Q12 continued to be strong
(C$ millions, post-tax)
Credit (impairments) / recoveries $(29)
Credit (downgrades) / upgrades $(1)
Total Credit Impacts $(30)
Assumed in policy liabilities $30
Net Credit Experience Gain (Loss) $ -
Net Credit Experience (C$ millions)
Impact on 3Q12 Earnings:
(3)
9
(32)
34
0
3Q122Q121Q124Q113Q11
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Achieved interest rate and equity market hedging targets two years ahead of schedule
Equity Market Sensitivity1
(C$ millions)
1 Earnings sensitivity to equity markets is defined by the impact of a 10 per cent decline in the market value of equity funds on the net income attributed to shareholders. Earnings sensitivity to interest rates is defined by the impact of a one per cent parallel decline in interest rates on the net income attributed to shareholders. Please refer to “Caution related to sensitivities” in section D4 of the third quarter 2012 press release.
Estimated impact of 10% equity market decline: Range of $(410) to $(580) million to earnings (6) pts to MLI’s MCCSR
69% - 78% of underlying earnings sensitivity to equity market changes now hedged: Achieved our 2014 goal to hedge 75% two years ahead
of schedule
Interest Rate Sensitivity1
(C$ billions)
Estimated impact of 1% parallel decline in interest rates (excluding AFS bond offset): $(600) million impact to earnings (17) pts to MLI’s MCCSR
Achieved our 2014 goal of reducing interest rate sensitivity to $1.1 billion over two years ahead of schedule
As expected, interest rate sensitivity increased sequentially, primarily due to the anticipated change to a more conservative reinvestment scenario
2Q12
(0.6)
3Q12
(0.3)
1Q12
(0.9)
4Q11
(1.0)
3Q11
(1.0)2014 goal:
>75% hedged
78% hedged
22%
78%
Offset by hedging programs
Net unhedged
2014 goal:< $1.1 billion
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Capital position is further supported by our significant hedging programs
MLI ended 3Q12 with an MCCSR ratio of 204%, largely due to the net loss in the quarter and an increase in required capital for asset and segregated fund guarantees risks
Our capital position is further supported by our significant hedging programs
Minimum Continuing Capital and Surplus Requirements Ratio (MLI)1
(%)
1 MLI refers to The Manufacturers Life Insurance Company.
3Q122Q12
213
1Q12
225
4Q11
216
3Q11
219204
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Macro-economic factors continue to impact our financial results
First Order Impacts
Fixed Income Initial Reinvestment Rate (“IRR”): Manulife has already recognized the current environment and would not expect to book further material IRR charges if rates remained constant
Fixed Income Ultimate Reinvestment Rate (“URR”): A prolonged low interest rate environment could result in additional reserve strengthening for the next several years. The potential future cumulative URR charge if rates remained constant with September 30, 2012 for the next ten years is estimated to be approximately $1.5 to $2.5 billion (after-tax); and approximately $1 to $1.5 billion for the three year period ending 2015
New Business Strain: Lower rates result in higher new business strain until products are re-priced
Second Order Impacts
Potential changes to reserve scenarios
Could negatively impact sales
Could put pressure on operating expense
Lower rates may result in higher hedging costs
Could lead to lower Earnings on Surplus
Lower volumes and margins could negatively impact Expected Profit from In-Force
Prolonged low interest rates could lead to the impairment of goodwill
Further declines in interest rates could lead to reserve increases on VA guarantees related to future return expectations on underlying bond funds
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Key questions
Impact of Hurricane Sandy
Actuarial Guideline 38
Credit spread sensitivity
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Summary
In 3Q12, Manulife:
Generated core earnings of $556 million under our new disclosure
Achieved equity market and interest rate hedging targets two years ahead of schedule
Strengthened reserves as part of our annual review of our actuarial methods and assumptions
Manulife Financial cordially invites you to our Institutional Investor Day 2012
Thursday, November 15, 2012 - Toronto10 a.m. ET to approximately 3 p.m. ET
Webcast details:
Please access the live webcast at: www.manulife.com/presentations
Manulife Financial is pleased to invite you to its Institutional Investor Day 2012 in Toronto. Please join our Senior Management team as they present an overview of the company’s operations and strategies for growth
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Question & Answer Session
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Appendix Segment Reconciliation Investment-related gains Additional Risk Disclosures C-IFRS vs. U.S. GAAP differences
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Segment Reconciliation
(C$ millions) Asia Canada U.S. Corp & Other3
MFC Total
Core earnings (losses)1,3 $230 $229 $288 $(191) $556
Total items excluded from core earnings other than the direct impact of equity markets and interest rates 23 58 445 (1,221) (695)
Net income (loss) excluding the direct impact of equity markets & interest rates1 $253 $287 $733 $(1,412) $(139)
Direct impact of equity markets and interest rates 238 91 (297) (120) (88)
Net income (loss) attributed to shareholders $491 $378 $436 $(1,532) $(227)
3Q12 reconciliation of net income to core earnings by division1,2
1 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.2 Please refer to “Performance by Division” in section C of the third quarter 2012 press release for Asia Division and U.S. Division results on a U.S. dollar basis.3 Corporate & Other segment includes Reinsurance business, Corporate & Other segment includes $50 million of core investment gains.
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(C$ millions, unless otherwise stated) 1Q11 2Q11 3Q11 4Q11 2011 1Q12 2Q12 3Q122011 YTD
2012 YTD
Asia Division 252 253 220 213 938 267 286 230 725 783
Canada Division 215 233 259 142 849 172 201 229 707 602
U.S. Division 290 266 260 189 1,005 257 247 288 816 792
Corporate & Other2 (225) (8) (58) (124) (415) (128) (83) (117) (291) (328)
Expected cost of macro equity hedges (100) (104) (107) (97) (408) (107) (118) (124) (311) (349)
Investment gains 50 50 50 50 200 50 50 50 150 150
Core earnings1 482 690 624 373 2,169 511 583 556 1,796 1,650Diluted core earnings per share, (excluding convertible instruments)1 $0.26 $0.37 $0.34 $0.20 $1.17 $0.27 $0.31 $0.29 $0.97 $0.87
Core ROE1 8.3% 11.7% 10.4% 6.1% 9.3% 8.7% 9.8% 9.3% 10.2% 9.2%
Items excluded from core earnings:
Income (charges) on VA dynamically hedged (8) (52) (900) (193) (1,153) 223 (269) 122 (960) 76
Other investment gains (ex. core investment gains) 470 323 236 261 1,290 205 51 363 1,029 619
Actuarial methods/assumptions (ex. URR changes) (70) (32) (651) 2 (751) 12 - (1,006) (753) (994)
Goodwill impairment charges - - - (665) (665) - - (200) - (200)
Impact of reinsurance transactions, product changes, dispositions & other - - 303 - 303 180 62 26 303 268
Net income (loss) excluding the direct impact of equity markets and interest rates1 874 929 (388) (222) 1,193 1,131 427 (139) 1,415 1,419
Direct impact of equity markets and interest rates:
Income (charges) on VA not dynamically hedged 102 (217) (1,211) 234 (1,092) 982 (758) 298 (1,326) 522
General fund equity investments and fee income 30 (73) (227) 56 (214) 121 (116) 55 (270) 60
Macro hedge costs relative to expectations (138) 142 882 (250) 636 (556) 423 (86) 886 (219)
Fixed income reinvestment rates (ex. URR) 192 (28) (567) 122 (281) (425) 305 (330) (403) (450)
Sale of AFS bonds and derivatives (75) 107 301 (9) 324 (47) 96 (25) 333 24
Charges due to URR - (370) (67) - (437) - (677) - (437) (677)
Total direct impact of equity markets and interest rates 111 (439) (889) 153 (1,064) 75 (727) (88) (1,217) (740)
Net income (loss) attributed to shareholders 985 490 (1,277) (69) 129 1,206 (300) (227) 198 679
Preferred share dividends (20) (22) (22) (21) (85) (24) (28) (31) (64) (83)
Common shareholders’ net income (loss) 965 468 (1,299) (90) 44 1,182 (328) (258) 134 5961 Non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below. 2 Corporate & Other division includes reinsurance business.
Earnings reconciliation history (2011 – present)
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Core earnings
Core earnings is a non-GAAP profitability measure. It shows what the net income (loss) attributed to shareholders would have been assuming that interest rates and equity markets performed as assumed in our policy valuation and the items excluded from core earnings other than the direct impact of equity markets and interest rates indicated in our press release announcing our 2012 third quarter results had not occurred
Items included in core earnings:1. Expected earnings on in-force, including expected release of provision for adverse deviation, fee income, margins on group business
and on spread business such as Manulife Bank and asset fund management2. Macro hedging costs based on expected market returns3. New business strain4. Policyholder experience gains or losses5. Acquisition and operating expenses compared to expense assumptions used in the measurement of policy liabilities6. Up to $200 million of investment gains reported in a single year 2
7. Earnings on surplus other than mark-to-market items. Gains on AFS equities and seed money investments are included in core earnings
8. Routine or non-material legal settlements9. Tax on the above items10. All tax related items except the impact of enacted or substantially enacted income tax rate changes11. All other items not specifically excluded1
Core EPS: Core earnings (as described above) divided by the diluted weighted average shares outstanding (excluding convertible instruments)
Core Return on Equity (ROE): Calculated by dividing core earnings by weighted average total equity attributed to common shareholders excluding average Accumulated Other Comprehensive Income adjustment (and annualized)
1 See section A1 in the third quarter press release for more information. 2 Core investment gains are capped on year-to-date experience, i.e. capped at $50 million in Q1, $100 million YTD in Q2, $150 million YTD in Q3 and $200 million YTD in Q4. Floor year-to-date investment gains included in core earnings will be zero.
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Increased sensitivity to rates largely due to anticipated change to a more conservative reinvestment scenario
Potential Impact1 of an immediate parallel change in “all rates” on: 3Q12 2Q12
(C$ millions) -100 bps +100 bps -100 bps +100 bps
Excluding change in market value of AFS bonds held in the surplus $(600) $200 $(300) $400
From fair value changes in AFS bonds held in surplus, if realized2 $900 $(800) $900 $(800)
MCCSR Impact:
- Excluding change in market value of AFS bonds held in surplus (17) pts +9 pts (13) pts +12 pts
- From fair value changes in AFS bonds held in surplus, if realized +5 pts (5) pts +6 pts (5) pts
Potential Impact1 of a parallel change in corporate bond spreads: 3Q12 2Q12
(C$ millions) -50 bps +50 bps -50 bps +50 bps
Corporate Spreads $(1,200) $600 $(600) $600
Potential Impact1 of a parallel change in swap spreads: 3Q12 2Q12
(C$ millions) -20 bps +20 bps -20 bps +20 bps
Swap Spreads $700 $(700) $600 $(600)
1 All estimated sensitivities are approximate and based on a single parameter. No simple formula can accurately estimate ultimate future impact.2 The amount of gain or loss that can be realized on AFS fixed income assets held in the surplus segment will depend on the amount of unrealized gain or loss. The table above
only shows the change in the unrealized position, as the total unrealized position will depend upon the unrealized position at the beginning of the period.
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Financial results benefited from public equity market gains in 3Q12(C$ millions)
388
VA guaranteeliabilities not
dynamically hedged
General fundequities & asset
based fees
Other Hedged VAImpacts
Experience gain onhedged VA block
Loss on dynamichedge assets
Experience loss onmacro hedge
assets
Earnings impact ofunhedged items &
ineffectiveness
Absent hedging programs, changes in equity markets and VA-related risks would have increased earnings by $767 million in 3Q12
Hedging programs offset $378 million of the benefit of equity markets and VA-risks in 3Q12
The dynamic hedging program result of 120% vs. experience gains on the hedged VA block
$122 million income from dynamically hedged VA
298
38955
49
365
(292)
(86)
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Sensitivity to equity markets
As at September 30, 2012
(C$ millions) -30% -20% -10% +10% +20% +30%
Variable annuity guarantees $(5,950) $(3,730) $(1,690) $1,360 $2,450 $3,300
Asset based fees (270) (180) (90) 90 180 270
General fund equity investments (320) (210) (110) 100 200 300
Total underlying sensitivity $(6,540) $(4,120) $(1,890) $1,550 $2,830 $3,870
Impact of Hedging Programs:
Impact of macro hedge assets $1,860 $1,240 $620 $(620) $(1,240) $(1,860)
Impact of dynamic hedge assets (100% hedge offset) 3,180 1,960 860 (620) (1,060) (1,380)
Assumed partial hedge asset offset (960) (490) (170) (120) (270) (420)
Net impact of hedging programs $4,080 $2,710 $1,310 $(1,360) $(2,570) $(3,660)
Net income impact (full hedge offset) $(1,500) $(920) $(410) $310 $530 $630
Net income impact (partial hedge offset) $(2,460) $(1,410) $(580) $190 $260 $210
Underlying sensitivity hedged (full hedge offset) 77% 78% 78% 80% 81% 84%
Underlying sensitivity hedged (partial hedge offset) 62% 66% 69% 88% 91% 95%
Potential impact on MLI’s MCCSR ratio (20) pts (12) pts (6) pts +1 pts +1 pts +1 pts
1 All estimated sensitivities are approximate and based on a single parameter. No simple formula can accurately estimate ultimate future impact.2 Please note the Company’s disclosures which describe risk factors for hedging and reinsurance strategies.
Potential impact on net income attributed to shareholders arising from changes in public equity returns1,2
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Exposure by market
(C$ millions)2Q12 3Q12
S&P (190) (160)
TSX (60) (70)
TOPIX (130) (110)
Europe, Australasia & Far East (ex. Japan) (110) (70)
Net income impact assuming full hedge offset (490) (410)
Assumed partial hedge offset (180) (170)
Net income impact assuming partial hedge offset (670) (580)
MLI MCCSR impact (6) pts (6) pts
Achieved equity risk reduction goal two years ahead of schedule
After the impact of dynamic and macro hedging programs, we remain most sensitive to changes in the S&P and TOPIX
Potential impact on net income attributed to shareholders arising from a 10% decline in public equity returns1,2
1 All estimated sensitivities are approximate and based on a single parameter. No simple formula can accurately estimate ultimate future impact.2 Please note the Company’s disclosures which describe risk factors for hedging and reinsurance strategies.
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Notional hedging exposures
Exposure Index
Notional Value (C$ billions)
Approximate Long-Term
Annual Return Assumption2Q12 3Q12
U.S. Equities S&P 500 $(3.5) $(4.0) ~9.5%
Canadian Equities S&P/TSX (0.3) (0.3) ~9.5%
Japanese Equities TOPIX (1.2) (1.4) ~6.25%
Europe & Other Equities Various (1.2) (1.6) ~7.75% - 9.75%
Macro hedges $(6.2) $(7.3)
Dynamic hedges (10.7) (9.8)
Notional value of hedges $(16.9) $(17.1)
Continued progress in managing sensitivity of earnings to equity markets: Added approximately $1.1 billion of equity futures to the macro hedging program in 3Q12
Additionally added ~$700 million of guarantee value to our dynamic hedging program in 3Q12
Macro hedging costs will vary depending on a number of factors, including: Notional amount of futures sold short, including changes during the period
Swap and currency rates
Tax rates of legal entities
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Net Income in accordance with IFRS and U.S. GAAP
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12
IFRS
U.S. GAAP
Net income(C$ billions)
IFRS net income is typically more volatile compared to U.S. GAAP in periods of market dislocation due to more extensive use of mark-to-market accounting
Because our hedging strategies for equity risk (dynamic and macro) are more closely aligned with the exposure as measured by IFRS, we are over hedged on a U.S. GAAP accounting basis. Therefore: On a U.S. GAAP basis, in rising equity markets we will likely incur losses on our variable annuity book Conversely, in declining equity markets we will likely report gains on our VA book on a U.S. GAAP basis
(1)
1 Net income in accordance with U.S. GAAP is a non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
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Equity (Book Value)(C$ billions)
Total equity in accordance with IFRS and U.S. GAAP
“Mark-to-market" accounting approach of IFRS, which recognizes the current low interest rates and updated actuarial assumptions, is not generally reflected in U.S. GAAP results
Differences in accounting methods result in C$17.2 billion higher equity under U.S. GAAP than IFRS at 3Q12
1 Total equity in accordance with U.S. GAAP is a non-GAAP measure. See “Note to Users – Performance and Non-GAAP Measures” below.
(1)
25.4
1Q11
30.0
25.1
4Q10
32.2
24.7
3Q10
34.9
23.7
42.2
25.025.3
31.4
2Q11 3Q122Q12
42.7
26.1
1Q12
38.0
25.8
4Q11
39.6
24.9
3Q11
39.8
U.S. GAAP Equity
IFRS Equity
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Note to users -Performance and Non-GAAP Measures
We use a number of non-GAAP financial measures to measure overall performance and to assess each of our businesses. A financial measure is considered a non-GAAP measure for Canadian securities law purposes if it is presented other than in accordance with generally accepted accounting principles used for the Company’s audited historical financial statements which is prior Canadian GAAP for 2010 and earlier and IFRS for 2011 and beyond. Non-GAAP measures include: Core Earnings (Losses); Net Income (Loss) Excluding the Direct Impact of Equity Markets and Interest Rates; Net Income in Accordance with U.S. GAAP; Total Equity in Accordance with U.S. GAAP; Constant Currency Basis; Total Weighted Premium Income (TWPI); Premiums and Deposits; Funds under Management; New Business Embedded Value; Total Annual Premium Equivalent (APE) Sales and Sales. Non-GAAP financial measures are not defined terms under GAAP and, therefore, with the exception of Net Income in Accordance with U.S. GAAP (which is comparable to the equivalent measure of issuers whose financial statements are prepared in accordance with U.S. GAAP), are unlikely to be comparable to similar terms used by other issuers. Therefore, they should not be considered in isolation or as a substitute for any other financial information prepared in accordance with GAAP. Core earnings (losses) is a non-GAAP measure to help investors better understand the long-term earnings capacity and valuation of the business. Core earnings excludes the direct impact of equity markets and interest rates as well as a number of other items that are considered material and exceptional in nature. While this metric is relevant to how we manage our business and offers a consistent methodology, it is not insulated from macro-economic factors which can have a significant impact. Net income (loss) excluding the direct impact of equity markets and interest rates is a non-GAAP profitability measure. It shows what the net income (loss) attributed to shareholders would have been assuming that interest rates and equity markets performed as assumed in our policy valuation. The direct impact of equity markets and interest rates is relative to our policy liability valuation assumptions and includes changes to the interest rate assumptions. We also include gains and losses on the sale of AFS bonds as management may have the ability to partially offset the direct impacts of changes in interest rates reported in the liability segments. We consider the gains or losses on the variable annuity business that is dynamically hedged to be an indirect impact, not a direct impact, of changes in equity markets and interest rates and accordingly, such gains and losses are reflected in this measure. Net income in accordance with U.S. GAAP is a non-GAAP profitability measure. It shows what the net income would have been if the Company had applied U.S. GAAP as its primary financial reporting basis. We consider this to be a relevant profitability measure given our large U.S. domiciled investor base and for comparability to our U.S. peers who report under U.S. GAAP. Total equity in accordance with U.S. GAAP is a non-GAAP measure. It shows what the total equity would have been if the Company had applied U.S. GAAP as its primary financial reporting basis. We consider this to be a relevant measure given our large U.S. domiciled investor base and for comparability to our U.S. peers who report under U.S. GAAP. The Company uses financial performance measures that are prepared on a constant currency basis, which exclude the impact of currency fluctuations and which are non-GAAP measures. Quarterly amounts stated on a constant currency basis in this presentation are calculated, as appropriate, using the income statement and balance sheet exchange rates effective for the third quarter of 2012. Total Weighted Premium Income (TWPI) includes 10 percent of single premiums/deposits, plus 100 percent of first year and renewal premiums/deposits. This applies to general funds, segregated funds and mutual funds. Premiums and deposits is a non-GAAP measure of top line growth. The Company calculates premiums and deposits as the aggregate of (i) general fund premiums, net of reinsurance, reported as premiums on the Consolidated Statement of Income, (ii) premium equivalents for administration only group benefit contracts, (iii) premiums in the Canadian Group Benefits reinsurance ceded agreement, (iv) segregated fund deposits, excluding seed money, (v) mutual fund deposits, (vi) deposits into institutional advisory accounts, and (vii) other deposits in other managed funds. Funds under management is a non-GAAP measure of the size of the Company. It represents the total of the invested asset base that the Company and its customers invest in. New business embedded value (“NBEV”) is the change in shareholders’ economic value as a result of sales in the reporting period. NBEV is calculated as the present value of expected future earnings, after the cost of capital, on actual new business sold in the period using future mortality, morbidity, policyholder behaviour, expense and investment assumptions that are consistent with the assumptions used in the valuation of our policy liabilities. Total APE Sales comprise of 100 per cent of regular premiums and 10 per cent of single premiums, for both insurance and wealth management products. Sales are measured according to product type. (i) For total individual insurance, sales include 100 per cent of new annualized premiums and 10 per cent of both excess and single premiums. For individual insurance, new annualized premiums reflect the annualized premium expected in the first year of a policy that requires premium payments for more than one year. Sales are reported gross before the impact of reinsurance. Single premium is the lump sum premium from the sale of a single premium product, e.g. travel insurance. (ii) For group insurance, sales include new annualized premiums and administrative services only premium equivalents on new cases, as well as the addition of new coverages and amendments to contracts, excluding rate increases. (iii) For individual wealth management contracts, all new deposits are reported as sales. This includes individual annuities, both fixed and variable; variable annuity products; mutual funds; college savings 529 plans; and authorized bank loans and mortgages. (iv) For group pensions/retirement savings, sales of new regular premiums and deposits reflect an estimate of expected deposits in the first year of the plan with the Company. Single premium sales reflect the assets transferred from the previous plan provider. Sales include the impact of the addition of a new division or of a new product to an existing client. Total sales include both new regular and single premiums and deposits. For further information regarding these subjects, see our press release announcing our 2012 third quarter results.
41414141
Anthony Ostler, MBA, CFA, FRMSenior Vice President, Investor Relations
[email protected](416) 926-5471
Anique Asher, MBA, CAVice President
[email protected](416) 852-9580
Robert Veloso, MBA, CFAAssistant Vice President
[email protected](416) 852-8982
Investor Relations contacts
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