All right, welcome back to the stage here, and I'd like to welcome Colin Simpson, Manulife's Chief Financial Officer, who's been in the job for almost a year.
See you, sir.
It's gotten really exciting over the past three months or so. So
Bit longer than that, it's felt like.
Then that's helped the question coming up with questions for this. So thanks for joining us today.
No, awesome, Gabriel, it's great to be here. Great conference, really great. Great schedule of investors.
Good to know. Long-term care, let's start with that, the big, big topic that's been a game changer, as far as Manulife stock price is concerned. A big transaction announced in, in December, I guess.
Yeah.
One thing that popped to mind was... I mean, it's an issue that, you know, I'd always feel the pulse with management over the years, and others have. The comment was, you know, there's some interest, but the bid-ask spread is still quite wide. You know, what changed?
So a number of things happened, really, and, you know, you can link them all, but I think higher interest rates have certainly helped. It's helped bring more capital into the life insurance space, and we transacted with a private equity-backed insurer, reinsurer. And so obviously, their sources of capital were comfortable putting money to work into the life sector. And so with higher interest rates, you can imagine more capital has flown into the LTC space. But that's, you know, that's a macro perspective. I think from a much more company-specific space, our books have got more mature. So the funnel of doubt for all the things that people are potentially worried about with life insurance has narrowed.
So when you think about, you know, how much older our policyholders are, for instance, you know, the book that we transacted on, the average age was over 80 years old. So I think counterparties feel much more comfortable transacting with more mature books, and we're able to demonstrate our track record of experience, which is really good in LTC, and our track record of getting rate increases through. So I think that, associated with the fact that we were able to package long-term care up with some attractive businesses for other companies, made a perfect opportunity for this to be pretty much the, You know, it is the largest deal, but also quite an inaugural deal in this period for life insurance.
Well, certainly the, you know, expectation was it'd be sold at a big loss, and it was transacted at no loss. So, that was a, you know, another positive aspect of that announcement. How quickly did the deal come together?
It took most of last year. I mean, this is a deal that, because we packaged the business up with two blocks in Japan, obviously, it spanned different geographies. We were talking to multiple counterparties, certainly at the beginning of the process. So it was also important for us to whittle it down to a counterparty that, you know, where we could see that the chemistry worked. And so that had to happen very early on because once you do that, then it's really opening the books. Because the most important thing is getting the purchasing reinsurer comfortable with the assumptions that we have.
And obviously, the asset side of things is really straightforward, but when you look at the biometric risk associated with long-term care, i.e., you know, how often are people becoming in need of care, and how often are they recovering, and what's the mortality rate? You know, we basically opened our books up, and it was a case of, "Come and take a look at our assumptions and challenge them, and see where you're different and see where you're the same." And the good news is that the third-party reinsurer that ended up taking the biometric risk, we were the same on all those risks. And that, You know, if you look at the share price reaction, you can take your view on why it reacted, why it reacted.
But our fundamental belief is that by doing this transaction was a major step towards validating our assumptions in our reserves, which we've been saying, you know, are current and appropriate. We think that at least, you know, having a third party validate it has been the biggest part of this transaction. So long story short, it took a long time and most of last year.
And as you touched upon a couple things here that, you know, I guess conditions of sale, if you will. You did include a whole life business in Japan and another, structured settlement
Structured settlement
in the U.S., I believe that one, but-
Two Whole-of-Life blocks in Japan, and then one Structured Settlements
Okay
in the US.
Is that a necessary condition, possibly, that to transact some LTC, you need to throw in something else?
I think so. I mean, let's be honest, yeah, it's, and the reason why I say that is, we led with this is the largest LTC, you know, deal in history.
Mm-hmm.
Global Atlantic led with, "This is the largest Japanese deal in history." And so they found that Japan was really attractive to them, and, you know, if you look at the combined ROE of the books that we transacted in, it was 10%. So it's not like we gave away the crown jewels in order to do the LTC transaction.
Mm-hmm.
You know, we transacted on a business that was, you know, combined 10% ROE. So we feel very comfortable, but I don't believe the market is quite there for a standalone LTC deal just yet.
Of that size.
But then, you know, the reality is, as Manulife, we're fantastically positioned to package deals because I think there's a lot of demand from reinsurers to expand into Asia. And, you know, we have that unique opportunity to give reinsurers exposure to Asia, as well as Canada and the US. So I really feel that we are, we remain the best positioned to do more deals in this space through our ability to package, execute, and also the culture of Manulife. You know, we're known to work really well with counterparties and partners and who we share the same values with.
And the other condition, I guess, there was Global Atlantic, but I believe there was a global reinsurer that was-
That's right
part of the transaction that took on the Biometric Risk. Is that another, like, necessity that to do deals?
I don't think it's a necessity. I think, you know, when you look at the deal we announced on Monday, Universal Life in Canada, I mean, that was with RGA, and RGA
Mm-hmm
is taking both biometric and asset risk. So I don't think that's a necessity. It just worked out really well. It added a little bit of complication, certainly at sort of 2:00 A.M., you know, on certain nights when you've got three sets of lawyers negotiating various clauses. But at the same time, you know, the cultural fit worked really well, and it was on the whole a very smooth transaction.
Just to wrap it up, you know, the deal garnered a lot of fanfare and attention, certainly, and, you know, in our circles, but the counterparty circles, have you been receiving, you know, new inbounds from interested parties after seeing that deal?
Yeah, I think
Sorry, what, You know, having transacted at an attractive valuation, how does that affect the overall marketplace? Because there are other companies that are looking to do big deals.
Yeah, and we have received lots of inbound. And I think, you know, there were people who didn't who passed on the opportunity to transact, and they see this transaction happen, and they certainly wanna understand how others made it happen and how it didn't work for them. So that's one area of inbound. I think other people have just lived by a rule whereby, oh, no, LTC's off the table. But that's really based on information that's 10 years out of date. You know, we've got experience that's 10 years on, that suggests that the book is actually, You know, some of the risks are quite controlled. And on top of that, we're able to get lots of rate through the business. So I feel like the market has moved on.
You know, my opening point about higher interest rates bringing capital into the space, higher interest rates have made it more attractive for companies to transact. So, you know, they, as opposed to five, seven years ago, they're now receiving a whole bunch of assets that they're able to redeploy into quite attractive conditions. So that in itself has also helped. So yeah, it's definitely, I think we've definitely fired the starting pistol for more transactions. We've definitely had lots of interest. We've been quite active ourselves because we don't want, you know, the market to open up and then for all our competitors to do deals.
So, you know, we're quite active as well, and we believe we know we're able to demonstrate that we can pull these transactions off, and that's certainly our case is not to stop yet.
Okay, perfect. Let's switch over to Asia. This was not as, you know, ballyhooed, I guess, but the change in your Hong Kong strategy to go after more MCV, Mainland Chinese Visitor, sales has been a notable one. I guess, well, my starting question very simply is, what are the products that you're selling primarily?
Yeah.
Are they savings products?
Yeah, I think. And for people in the room who might not be aware of MCV or Mainland China Visitor business, these are affluent Chinese residents coming to Hong Kong and purchasing a product from us. And when you look at what their needs are, their needs are not necessarily protection, because they can get protection from their local insurer. Their needs are much more around diversification of their financial wealth. You know, they're able to invest in a different, you know, into a different currency, and also with an international brand that might be attractive. But also, education savings, estate planning, and then really importantly is healthcare. They'll have access to, We sell a product where they get access to the Hong Kong Hospital Network. And so that is
Mmmh
again, slightly different. The margin on that will be, will be different. But where I think you're going with the question is, is the MCV business is lower margin than our domestic, Hong Kong business, because most of the products are really savings related. And you see that with our margin if you track it over time. But still, our overall Hong Kong margin is, is north of 70% on a, what we call an APE. Sorry to throw acronyms at you, Annual Premium Equivalent basis, which basically means it's still very attractive business. And the boost in volume that we've been able to report has come from this, the reopening of the border post-COVID, the formalization of the Greater Bay Area, and that's really opened the door for more business to come through.
I mean, you talked about a change in strategy. I think where we would, how we would categorize it is we feel so comfortable now writing Mainland Chinese Visitor business, and our market share, the proportion of MCV business on our sales is doubled from when it was in 2019, when we were just, you know, the Greater Bay Area wasn't formalized at that point in time. And so, you know, we were just more prudent than much more prudent than the competition.
Okay. And, is there an expectation the margin profile of your sales mix, is there an expectation that over time they start buying different products, or is it pretty steadily towards, you know, savings-type products?
I think it's quite unlikely that they will come to Hong Kong and buy a life insurance or, you know
Mm
maybe, you know, even a critical illness product is quite easily done, onshore. And so it's, it's most likely gonna retain that savings characteristic. But where we give up in margin, I think we're gonna definitely make up in volume.
Yeah.
Because increasingly, now it's been seen as a real status symbol. Come to Hong Kong, and you know, yeah, you'll see posted pictures of people meeting with their advisor and buying an insurance product, and we wanna see that happen. And certainly, the concept of diversification of financial wealth is really important.
Moving over to Japan, 'cause we did, you know, talk about it in the LTC discussion, of course. Is it reasonable to think of that one as a legacy business? I think your response might be that it's, I don't wanna put words in your mouth, but I've heard the company talk about the scale that it provides, and allows you to spread your cost base around-
Mm
the region more effectively. But it's had growth challenges-
Mm
certainly, and I'm wondering if there's any different way of thinking about Japan.
Yeah, I think I like Japan. I think as a business, and not for the point that you mentioned on, that, you know, it's a good cost play. I agree with that, but hopefully, we do better as a management team than just have businesses that can absorb costs. I think where, if you look at how we sell our products in Japan, we focus very much on the regional bank level. And what we're seeing in Japan right now with the wealth, the demographic boosting, the sort of, the wealth opportunity in Japan and the money coming back onshore, is creating a pent-up demand for wealth products. And at the same time, you've got the stock market on fire there, and real excitement around the Japanese opportunity.
And I think our business had periods of, you know, we haven't been able to sell as much business for various reasons as we had hoped. Now, this year, we're opening up to more product opportunities. I think we've got our business right sized. We've done a big cost-cutting opportunities, but a cost-cutting opportunity. I'm bullish on Japan in a relative context, right? We're not talking about Indonesia-type growth multiple growth opportunities here, but really attractive way for us to grow in a market that's got some quite unique opportunities, and it's a well-run business for us. This concept of legacy versus non-legacy, and you know, I'm relatively new to Manulife, so it's not something I'm overly familiar with, but it's not something
I wouldn't classify Japan as a legacy business for Manulife.
Okay, so broader Asia, and this is tying into, you know, an announcement that you pushed... You pushed back the objective for, you know, 50% of the earnings to come from the Asia segment to 2027. You know, with the, you know, legacy transactions shrinking the US pie to a degree, and then, you know, emerging growth coming out of Asia, you know, like post-pandemic stuff. You know, what are some of the headwinds that prompted the decision to delay that target?
Yeah, and just to fill anyone in, we had a target to say 50% of earnings are likely to come to Asia by 2025, and at this last results announcement, we've pushed that back two years to 2027. The rough contribution now is about 37%. The main reason is really the uneven recovery post COVID. You know, Take Vietnam, for instance. That's an area whose market, you know, the market APE shrunk by 40%, and so the growth out of Vietnam has certainly not come at the same pace that we expected when we set the target for 50%. I could extend that to a couple of other markets, but the main reason for pushing it out two years is really the uneven recovery from COVID.
But, you know, in truth, the target was also set at a time when we were under an IFRS 4 regime, and under IFRS 4, you were able to use a lot of your new business to come through earnings. That's not the case in IFRS 17. So a lot of what you see, the growth in Asia that you referred to, is going through to our CSM, and I feel for the interpreters on this call. Is going through to our CSM, the contractual service margin, and that's future profits, but that doesn't get recorded in P&L. So effectively, a large store of our future profits is coming as a result of this growth in Asia, and that's not reflected in actual P&L earnings.
And then we're a bit of a victim of our own success in the U.S. and Canada. The group business has been going, you know, really well-
Mm-hmm
... in Canada, and so that's probably... We've grown our North American businesses faster than we anticipated when we set the target. So a few things, it's very difficult to manage, you know, a P&L by pie charts type thing, so-
Yeah
... if there was a target to miss, I'm okay missing that target.
So, you know, you're hosting an Investor Day in Hong Kong and Jakarta in June. I forget when the last one was. Certainly pre-COVID, and they
Yeah
... they've taken place every three, four years.
Yeah.
So, at that pace, if I go back a long time, there was, the issue with Asia was subscale in most markets, and the last investor update in Asia was, I think, eight out of ten were-
Yeah
at scale or
Yeah
you know, above, whatever. Is it possible, or does, can some go in the other direction, or once you're at scale, you're at scale?
No, I think there's definitely, We've got
Cause like Vietnam, for instance, with APE sales.
Yeah. That's the obvious one that certainly shrunk. The market shrunk, we shrunk with it. But when I look at Asia, what the benefit of investing in Asia through Manulife is that we are a cash-generative Asian insurer. You know, we had a CAD 1.7 billion remittance come out of that business last year, and our entities remain really well capitalized. So it is great to have the scale that we have and the ability for us to remit cash to the Holdco , because as far as I'm concerned, as a CFO, cash flow is absolute paramount importance. So but we, we're not at scale everywhere. We have,
Hong Kong is by far our dominant business, and so it would be nice to see the markets of Indonesia and Philippines, China, you know, take up some of the slack. But, you know, again, talking about victim of your own success, Hong Kong keeps growing like crazy, so it's, you know-
Mm-hmm
it keeps being a big part of our business, and that's great. It sets the standard because that's the bar that the other businesses need to be held against. But we've certainly got more to grow in the Asian markets. We're number one now in Singapore, thanks to our DBS agreement, so some great performance there. But, you know, the sky's the limit as far as I'm concerned on Asia, and hopefully, we get to show you that when you come in June.
The remittances, you brought that up, and I might get the numbers wrong, but several years ago, the number was closer to two.
Yeah.
two, two and a half, and now it's around four. So aside from legacy transactions, 'cause once they're concluded, there's a, you know, cash uplift, what's been behind the, you know, the upstep in remittances?
Yeah, the number we reported actually is CAD 5.5 billion, and that's well in excess of a normalized run rate. We generally remit about 60%-70% of our post-tax earnings, which is a great remittance ratio as far as I'm concerned, for a life company. We over-exceeded it last year. Some of it was a bit more focused. I'm super focused on cash, and when we have cash at the whole co, that's just easier to control and gives you much more strategic flexibility. But in part, the markets also helped us out quite a lot. Some of the surplus asset that we have in Canada really benefited by the market and interest rate moves. We've seen that in at least one of our competitors as well, so it's not unique to us.
But, you know, my commitment to you is that we will continue to focus on this remittance piece. We will scour, you know, all over Manulife and make sure that there's not lazy capital.
Mm.
Some of the, You know, we took out about CAD 300 million in remittances from two entities that just haven't remitted in the past, and it was a great opportunity to sort of ask for more capital without it impacting the performance of the business. So, you know, rest assured, it's busy times at Manulife, and we'll continue to boost, to look to improve remittances.
The interest rates have helped, as you indicated. You know, can we just maybe walk through your income statement or however you look at it, and, you know, just because I get this question a lot, and it's, you know, it's long-term uplift from higher interest rates. Where do you see, you know, the biggest benefit? I mean, in recent years, it's been in the surplus accounts.
Yeah.
But then if we get rate cuts, that might go in the other direction, 'cause, you know, I assume you keep a shorter-term profile on those assets. So where, where, where are the puts and takes on, on, on, on the rate trajectory?
Yeah, I think as a fundamental concept, we don't try and take interest rate risk. It's just Forex and interest rate risk is not for our appetite. We've certainly learned that lesson the hard way. So very limited actual interest rates. Where you get the big pickup, and where you'll hear, you know, why life insurers, because of, yeah, rising interest rates, and that's in the long end of the curve. Higher interest rates really does allow us to offer more attractive guarantees to our customers. It allows us to invest in the long term, earn a better spread. What's really attractive is when you get a steep, high and a steep interest rate curve, because then we're not competing with short-term savings products.
What's been slightly difficult is we've had higher interest rates, but the short end has gone up quite a bit as well. You know, people have thought, "Well, you know, why do I buy a long-term life insurance policy when I can just park the money in, in money market funds?" So you alluded to a potential rate cut. Well, maybe that steepening of the yield curve might help the attractiveness of, of selling our policies. Fundamentally, economically, higher interest rates mean that we, we discount our, our liabilities, what we pay out to our customers, what we've promised our customers at a higher rate, and that's economically better. But you're not gonna see that through the P&L. You talked about the P&L, you know, what would happen if, if there's an interest rate change? Well, we have surplus assets.
Some of those surplus assets are invested short. If, you know, if we get, say, a 25 basis point cut, we get, you know, it's a CAD 7 million pre-tax hit to our income statement, so it's de minimis. You, you won't actually see the impact. We're still rolling forward our long duration surplus assets into higher yielding investments. So really, our P&L is gonna be very insensitive to interest rate movements. Economically, it's great for us if the long end goes up, but, you know, really what we wanna show is just consistent, sustainable earnings growth year after year, and a decent return on equity, and interest rates is not gonna derail that.
I have a few minutes left. You were worried we'd get through them too fast, but we're doing well. The legacy transaction, and you announced one on Monday as well.
Mm-hmm.
So another slice of ALDA assets that you'll be disposing of over time. I don't know if there's been any progress on the ALDA associated with the first transaction, but just generally speaking, what is the, You know, the P&L impact would be, I say P&L, but ROE, another acronym. Expected investment income would go down. Is that-
That's right.
That's really it?
So, again, just to take a step back, ALDA is Alternative Long Duration Assets of Manulife. You know, we like our acronyms, but we're also really good at ALDA, long duration, illiquid assets, and so we've got just over CAD 50 billion of these illiquid assets, which have, over the cycle, generated a 9% return. And that's what we expect them to return, and within our core earnings, we record a 9%. But what really matters to me is what we actually earn on the assets, and that gets trued up below the core earnings line. So to your point, when we sell assets, it affects our expected return. When we sell assets earning 9%, you know, it affects our expected return.
But what we've done with both transactions, the transaction in December and the transaction that we announced on Monday, is we're buying back stock at the same time. So any reduction in earnings that are coming from less of these illiquid assets is completely offset on a per share basis by buying back stock. So again, nothing for us to really be worried about, and you know, we're quite happy to have a slightly smaller ALDA book, to be honest, even though it's performed really well.
Personally, I'm a fan of the forest and the farmland, but it's another
I agree with you there. Yeah. No, we're certainly not selling any of the forest, the timber and ag, but a little bit less private equity. But that's actually going quite well. Sales are going well.
So we talked a lot about legacy and dispositions. On the last call, Roy did talk, you know, a little bit about potential acquisitions. And I know it's hard to go into specifics, that's normal, but what is, w hat are you contemplating? Where could we see Manulife be active potentially, and what areas? Would it be wealth? Would it be more in Asia? What, what's the-
Yeah, M&A is
what's the approach?
Like any company, M&A is always an option that we need to consider, but it is the fourth out of the four capital options we consider. First is investing in the business, then it's the dividend, then it's the buybacks, and then it's M&A in that order. Now, we have got a lot of capital at our disposal. We're roughly CAD 10 billion above our internal operating range. And so, you know, M&A is certainly an option for us to consider, but it, You know, as we've shown with the in-force transactions that we've done, we have to be judicious, and we'll be very disciplined in any transaction. You asked about where? Well, you know, it makes most sense to grow through M&A in our Asian and our wealth management businesses, our growth areas.
Mm-hmm.
But, you know, I think we all appreciate that the multiples on those businesses are high. And so it is. Nothing is, you know, immediately apparent and obvious. We've got an abundance of opportunity internally, but it's great to have the capital and the wherewithal to consider options.
Well, we hit the zero. Colin, great talking to you.
Okay, likewise.
Nice to meet you. Nice to meet you in person, and
Likewise. Thanks so much.
Enjoy the rest of your day.
See you next year.
You bet. And in June.
And June.