MANULIFE(MFC) - 2023 Q3 - Quarterly Report

Financial and Operational Highlights Results at a Glance Manulife reported strong third-quarter 2023 results, characterized by double-digit growth in core earnings, APE sales, and new business value. Net income attributed to shareholders reached $1,013 million, a significant increase from the previous year. Core earnings rose to $1,743 million, up 28% on a constant currency basis, driven by strong performance in Asia and resilient results in Global Wealth and Asset Management (Global WAM). The company maintained a solid capital position with a LICAT ratio of 137% Q3 2023 Key Financial Metrics | Metric | 3Q23 | 3Q22 | Change (Constant Exchange Rate) | | :--- | :--- | :--- | :--- | | Net Income attributed to shareholders | $1,013M | $491M | 87% | | Core Earnings | $1,743M | $1,339M | 28% | | Core EPS | $0.92 | $0.68 | 35% | | Core ROE | 16.8% | 12.7% | 4.1 pps | | APE sales | $1,657M | $1,347M | 21% | | NBV | $600M | $515M | 15% | | LICAT ratio | 137% | 136% | 1.0 pps | - The strong operating results were supported by a 33% increase in core earnings from Asia and resilient performance in Global WAM, which saw positive net flows of $5.8 billion over the past three quarters[2] - The company continued to enhance shareholder returns through capital deployment, repurchasing nearly $1.3 billion of its common shares since the start of the year[2] Strategic Highlights Manulife advanced its strategic priorities by enhancing customer experience and accelerating digital initiatives. Key developments include launching a unified high net worth platform in Asia, expanding a Personalized Medicine program in Canada, and forming a new distribution relationship with JPMorgan Chase & Co. in the U.S. The company also focused on digital acceleration through partnerships like the one with League in Canada and by automating claims handling in Hong Kong, which significantly improved operational efficiency - Launched a unified high net worth onboarding platform across Bermuda, Hong Kong, and Singapore to streamline processes for international brokers and customers[23] - Expanded the Personalized Medicine program to all Group Benefits extended healthcare plans in Canada, enabling customized treatment plans for better health outcomes[23] - In the U.S., a new distribution relationship was launched with JPMorgan Chase & Co. to sell Manulife's suite of products, including the John Hancock Vitality program, through its network of over 6,900 advisors[25] - Announced a strategic partnership with healthcare technology provider League in Canada to offer more integrated digital healthcare experiences for Group Benefits members[26] - Automated the claims-handling process in Hong Kong, leveraging data to enhance the auto-adjudication engine, which resulted in a nearly twofold increase in straight-through processed claims compared to 3Q22[27] Total Company Performance Implementation of IFRS 17 and IFRS 9 Effective January 1, 2023, Manulife adopted IFRS 17 (Insurance Contracts) and IFRS 9 (Financial Instruments) retrospectively. To aid comparability, 2022 results have been restated. However, as IFRS 9's hedge accounting and expected credit loss (ECL) principles are applied prospectively from 2023, the company has also presented non-GAAP "transitional" 2022 results that simulate the application of these principles for better year-over-year comparison - Manulife adopted IFRS 17 and IFRS 9 effective January 1, 2023, with retrospective application to 2022 results[34] - Due to the prospective application of IFRS 9 hedge accounting and ECL principles, non-GAAP "transitional" measures for 2022 have been introduced for comparability. These will only be reported in 2023 MD&As[36][37] Profitability In Q3 2023, net income attributed to shareholders was $1,013 million, a significant increase from $491 million in Q3 2022. Core earnings grew 28% on a constant currency basis to $1,743 million, driven by the non-recurrence of a large provision in the P&C Reinsurance business, higher investment earnings from rising interest rates, and improved insurance experience. The company's expenditure efficiency ratio improved by 2.7 percentage points to 50.9% compared to Q3 2022 Quarterly Profitability Comparison | Metric | 3Q23 | 3Q22 | Change | | :--- | :--- | :--- | :--- | | Net income attributed to shareholders | $1,013M | $491M | +$522M | | Core earnings | $1,743M | $1,339M | +$404M | | Diluted EPS ($) | $0.52 | $0.23 | +$0.29 | | Core EPS ($) | $0.92 | $0.68 | +$0.24 | | Core ROE | 16.8% | 12.7% | +4.1 pps | - The increase in Q3 2023 core earnings was primarily driven by the non-recurrence of a $256 million provision for Hurricane Ian in Q3 2022, higher expected investment earnings, and improved insurance experience in the U.S. and Canada[44] - Items excluded from core earnings resulted in a net charge of $730 million in Q3 2023, mainly due to market experience losses on alternative long-duration assets (ALDA), public equity, and derivatives[41][42][54] - The expenditure efficiency ratio improved to 50.9% in Q3 2023 from 53.6% in Q3 2022, driven by a 25% increase in pre-tax core earnings that outpaced a 12% rise in core expenditures[61] Business Performance Business performance in Q3 2023 was strong, with Annualized Premium Equivalent (APE) sales increasing 21% to $1.7 billion, driven by robust growth in Asia, particularly Hong Kong. New Business Value (NBV) rose 15% to $600 million. The Contractual Service Margin (CSM) stood at $17.4 billion. However, Global Wealth and Asset Management (Global WAM) experienced net outflows of $0.8 billion, a reversal from the $3.0 billion net inflows in Q3 2022, primarily due to a large pension plan redemption in the U.S. Q3 2023 Business Performance Metrics | Metric | 3Q23 | 3Q22 | Change (Constant Exchange Rate) | | :--- | :--- | :--- | :--- | | Total APE sales | $1,657M | $1,347M | 21% | | Total new business value (NBV) | $600M | $515M | 15% | | Total new business CSM | $507M | $470M | 6% | | Global WAM net flows | ($0.8B) | $3.0B | nm | - APE sales growth was led by Asia, which increased 20%, fueled by a 57% surge in Hong Kong sales due to demand from mainland Chinese visitors. Canada APE sales grew 51%, while U.S. APE sales decreased 31%[71] - Global WAM net outflows of $0.8 billion were driven by a $3.4 billion outflow in Retirement from a large U.S. pension plan redemption. This was partially offset by $2.8 billion of net inflows in Institutional Asset Management[78] - The Contractual Service Margin (CSM) net of NCI was $17,369 million as of September 30, 2023, an increase of $86 million from year-end 2022[77] Financial Strength Manulife maintained a robust financial position in Q3 2023. The Life Insurance Capital Adequacy Test (LICAT) ratio for its main subsidiary, MLI, increased to 137%. The financial leverage ratio improved to 25.2%, down from 25.8% at the end of Q2 2023. Both book value per common share and adjusted book value per common share saw increases, rising to $22.42 and $30.67 respectively Financial Strength Indicators | Metric | As at Sep 30, 2023 | As at Jun 30, 2023 | As at Sep 30, 2022 | | :--- | :--- | :--- | :--- | | MLI's LICAT ratio | 137% | 136% | 136% | | Financial leverage ratio | 25.2% | 25.8% | 25.8% | | Book value per common share ($) | $22.42 | $21.30 | $21.78 | | Adjusted book value per common share ($) | $30.67 | $29.42 | $29.49 | - The MLI LICAT ratio increased by one percentage point from Q2 2023 to 137%, reflecting the impact of core earnings and market movements, partly offset by dividends and share buybacks[82] - The financial leverage ratio decreased by 0.6 percentage points from Q2 2023, driven by an increase in total equity from AOCI gains, retained earnings growth, and the impact of a weaker Canadian dollar[84] Assets Under Management and Administration (AUMA) As of September 30, 2023, Manulife's total Assets Under Management and Administration (AUMA) reached $1.3 trillion. This represents a 2% increase compared to December 31, 2022, primarily driven by favorable market impacts and net inflows during the year - Total AUMA was $1.3 trillion as at September 30, 2023, up 2% from December 31, 2022[89] - The increase in AUMA was mainly due to the favourable impact of markets and net inflows[89] Impact of Foreign Currency Exchange Rates Changes in foreign currency exchange rates had a positive effect on Manulife's earnings in the third quarter and year-to-date 2023. A weaker Canadian dollar, particularly against the U.S. dollar, increased core earnings by $29 million for the quarter and $136 million for the nine months ended September 30, 2023, compared to the same periods in 2022 - A weaker Canadian dollar relative to the U.S. dollar increased Q3 2023 core earnings by $29 million compared to Q3 2022[90] - Year-to-date, the favorable currency impact on core earnings was $136 million compared to the same period in 2022[90] Performance by Segment Asia The Asia segment delivered strong growth in Q3 2023, with core earnings increasing 33% to US$390 million, driven by higher investment income and business growth. APE sales grew 20% to US$835 million, led by a 57% surge in Hong Kong due to returning mainland Chinese visitor demand. New Business Value (NBV) increased 7% to US$310 million, reflecting higher sales volumes partially offset by a shift in business mix Asia Segment Performance (US$) | Metric | 3Q23 | 3Q22 | Change | | :--- | :--- | :--- | :--- | | Core Earnings | $390M | $296M | 33% | | APE sales | $835M | $699M | 20% | | New business value (NBV) | $310M | $291M | 7% | | New business CSM | $300M | $261M | 16% | - Hong Kong APE sales increased 57% to US$209 million, driven by strong growth in broker and bancassurance channels following the border reopening with mainland China[108] - Japan APE sales decreased 6% to US$67 million due to lower sales of corporate-owned life insurance products[108] - Asia Other APE sales grew 14% to US$559 million, with strong performance in mainland China and the International High Net Worth business, partially offset by lower sales in Vietnam[109] Canada The Canada segment reported a 4% increase in core earnings to $408 million in Q3 2023, reflecting favorable insurance experience and business growth, particularly in Group Insurance. APE sales saw a significant 51% increase to $431 million, primarily driven by a large affinity markets sale. Manulife Bank's average net lending assets grew 1% compared to year-end 2022 Canada Segment Performance (C$) | Metric | 3Q23 | 3Q22 | Change | | :--- | :--- | :--- | :--- | | Core Earnings | $408M | $391M | 4% | | APE sales | $431M | $285M | 51% | | Manulife Bank avg. net lending assets | $25.1B | $24.6B | 2% | - Core earnings growth was driven by more favourable insurance experience, business growth in Group Insurance, and higher expected investment earnings[116] - Individual insurance APE sales surged 145% to $250 million, mainly due to a large affinity markets sale[123] - Annuities APE sales decreased 8% to $46 million, primarily due to lower sales of segregated fund products[123] U.S. The U.S. segment's core earnings decreased slightly by 2% to US$329 million in Q3 2023, as an increased provision for expected credit losses and lower CSM amortization offset higher investment earnings and improved insurance experience. APE sales declined 31% to US$79 million, impacted by higher short-term interest rates affecting demand for accumulation insurance products U.S. Segment Performance (US$) | Metric | 3Q23 | 3Q22 | Change | | :--- | :--- | :--- | :--- | | Core Earnings | $329M | $335M | (2)% | | APE sales | $79M | $115M | (31)% | - Core earnings were impacted by a higher ECL provision, primarily for electric utility bonds and private placements, and lower CSM amortization[130] - The decline in APE sales was attributed to the adverse impact of higher short-term interest rates on accumulation insurance products, particularly for affluent customers[132] - Products featuring the John Hancock Vitality PLUS feature constituted 71% of total U.S. sales in Q3 2023[132] Global Wealth and Asset Management The Global Wealth and Asset Management (Global WAM) segment reported stable core earnings of $361 million in Q3 2023, in line with the prior year. Higher net fee income and performance fees were offset by increased performance-related costs, leading to a 200 basis point decline in the core EBITDA margin to 26.9%. The segment experienced net outflows of $0.8 billion, a sharp contrast to the $3.0 billion of net inflows in Q3 2022, driven entirely by a large-case pension plan redemption in the U.S. Retirement business Global WAM Segment Performance (C$) | Metric | 3Q23 | 3Q22 | Change | | :--- | :--- | :--- | :--- | | Core Earnings | $361M | $354M | 0% | | Gross flows | $34.3B | $32.0B | 5% | | Net flows | ($0.8B) | $3.0B | nm | | Core EBITDA margin | 26.9% | 28.9% | (200) bps | - Net outflows in Retirement were $3.4 billion, driven by a single large-case pension plan redemption in the U.S.[147][151] - Retail net outflows were $0.2 billion as investors favored short-term cash instruments, though this was partially offset by the launch of a Global Semiconductors strategy in Japan[147][151] - Institutional Asset Management saw strong net inflows of $2.8 billion, up from $0.6 billion in Q3 2022, driven by fixed income, equity, and agriculture mandates[147][151] Corporate and Other The Corporate and Other segment reported core earnings of $10 million in Q3 2023, a significant improvement from a core loss of $230 million in Q3 2022. This $240 million increase was primarily due to the non-recurrence of a $256 million charge in the P&C Reinsurance business related to Hurricane Ian in the prior year, coupled with higher yields on debt instruments Corporate and Other Performance (C$) | Metric | 3Q23 | 3Q22 | Change | | :--- | :--- | :--- | :--- | | Net income (loss) attributed to shareholders | $249M | ($482M) | +$731M | | Core earnings (loss) | $10M | ($230M) | +$240M | - The improvement in core earnings was mainly driven by the non-recurrence of a $256 million charge for Hurricane Ian in Q3 2022[156] - Higher yields on debt instruments, net of higher debt financing costs, also contributed to the positive result. This was partially offset by increased performance-related costs and technology investments[156] Risk Management and Risk Factors Update Variable Annuity and Segregated Fund Guarantees Manulife's exposure to variable annuity and segregated fund guarantees is managed through dynamic and macro hedging strategies. As of September 30, 2023, the total amount at risk, net of reinsurance, was $3.5 billion, a decrease from $3.8 billion at year-end 2022. This amount represents the excess of guarantee values over fund values for policies where guarantees are in-the-money Variable Annuity and Segregated Fund Guarantees, Net of Reinsurance | ($ millions) | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Guarantee value | $39,969 | $42,254 | | Fund value | $44,533 | $46,323 | | Amount at risk | $3,467 | $3,829 | - The company mitigates a portion of the risks from its retained variable annuity and segregated fund guarantee business through a combination of dynamic and macro hedging strategies[160] Publicly Traded Equity Performance Risk Manulife has net exposure to equity risk, which it manages through dynamic and macro hedging programs. The company provides sensitivity analysis on the potential impact of equity market movements. As of September 30, 2023, a 10% decline in public equity markets is estimated to have a negative impact of $400 million on net income attributed to shareholders, after hedging and reinsurance Potential Impact on Net Income from Public Equity Changes (Sep 30, 2023) | Equity Market Change | Net Potential Impact on Net Income ($ millions) | | :--- | :--- | | -30% | $(1,310) | | -20% | $(840) | | -10% | $(400) | | +10% | $390 | | +20% | $790 | | +30% | $1,170 | - The company's hedging strategies are not designed to completely offset sensitivity to all risks associated with guarantees. The macro hedging strategy is designed to mitigate public equity risk from unhedged exposures[167] Interest Rate and Spread Risk Sensitivities Manulife's net income is sensitive to changes in interest rates. As of September 30, 2023, a 50 basis point parallel increase in interest rates is estimated to result in a $100 million charge to net income, while a 50 basis point decline would result in a $100 million benefit. Changes in corporate and swap spreads also impact earnings and capital, with a 50 basis point increase in corporate spreads estimated to improve the MLI LICAT ratio by 2 percentage points Potential Impact of Interest Rate and Spread Changes (Sep 30, 2023) | Scenario | Impact on Net Income ($M) | Impact on OCI ($M) | Impact on MLI's LICAT ratio (pps) | | :--- | :--- | :--- | :--- | | Interest rates +50bp | $(100) | $400 | 1 | | Interest rates -50bp | $100 | $(400) | (1) | | Corporate spreads +50bp | – | $200 | 2 | | Corporate spreads -50bp | – | $(200) | (3) | - The probability of a LICAT scenario switch that could materially impact the LICAT ratio is considered low at the current level of interest rates[204] Alternative Long-Duration Asset (ALDA) Performance Risk The company has exposure to alternative long-duration assets (ALDA), including commercial real estate, timber, farmland, infrastructure, and private equities. A 10% change in the market value of these assets would have a significant impact on earnings. As of September 30, 2023, a 10% decline in ALDA market values is estimated to result in a $2.5 billion negative impact on net income attributed to shareholders Potential Impact of ALDA Market Value Changes (Sep 30, 2023) | ALDA Market Value Change | Impact on Net Income ($ millions) | Impact on MLI's LICAT ratio (pps) | | :--- | :--- | :--- | | -10% | $(2,500) | (3) | | +10% | $2,500 | 3 | Risk Factors – Strategic Risk from Changes in Tax Laws Manulife is monitoring potential strategic risks from changes in tax laws. The OECD/G20's two-pillar solution, particularly the Pillar Two global minimum tax rate of 15%, is expected to be implemented by December 31, 2023, and would apply to the company's 2024 fiscal year. If enacted, this is expected to increase the company's effective tax rate. Additionally, Canada's 2023 Budget proposes to deny tax deductions on dividends from certain shares, which would also increase tax expenses on investment income starting in 2024 - The OECD/G20 Pillar Two global minimum tax, targeted for implementation by year-end 2023, is expected to increase Manulife's effective tax rate starting in fiscal year 2024[220] - Proposed changes in Canada's 2023 Budget to deny deductions for dividends on mark-to-market shares held by financial institutions would increase tax expense on investment income from 2024[221] Critical Actuarial and Accounting Policies Actuarial Methods and Assumptions The 2023 annual review of actuarial methods and assumptions resulted in a net favorable impact, decreasing pre-tax fulfilment cash flows by $347 million. This led to a $27 million increase in pre-tax net income attributed to shareholders. Key updates included a review of Canada variable annuity products, mortality and morbidity updates in the U.S. and Asia, and changes to lapse assumptions for Canadian universal life products. The 2022 review, for comparison, had resulted in an increase in pre-tax fulfilment cash flows of $192 million, largely influenced by a triennial review of U.S. long-term care Impact of 2023 Changes in Actuarial Methods and Assumptions | Area of Update | Impact on Pre-tax Fulfilment Cash Flows ($M) | | :--- | :--- | | Canada variable annuity product review | $(133) | | Mortality and morbidity updates | $265 | | Lapse and policyholder behaviour updates | $98 | | Methodology and other updates | $(577) | | Total Impact | $(347) | - The 2023 review resulted in a $27 million increase in pre-tax net income attributed to shareholders, a $116 million increase in CSM, and a $146 million increase in pre-tax other comprehensive income[225] - The 2022 review included a comprehensive U.S. long-term care (LTC) experience study, which increased pre-tax fulfilment cash flows by $118 million[243][245] Sensitivity of Earnings to Changes in Assumptions Manulife's earnings and capital are sensitive to changes in non-economic and certain economic assumptions. A 5% adverse change in future morbidity rates is estimated to have the largest impact, with a potential negative effect of $3.6 billion on net income attributed to shareholders. Changes in mortality and policy termination rates also have material, though smaller, impacts. Among economic assumptions, a 10 basis point reduction in the ultimate spot rate would negatively impact CSM and OCI by $300 million each Sensitivity to Changes in Non-Economic Assumptions (Net of Reinsurance) | Assumption Change | Impact on CSM net of NCI ($M) | Impact on Net Income ($M) | | :--- | :--- | :--- | | 2% adverse change in mortality | $(600) / (500) | $0 / $0 | | 5% adverse change in morbidity | $(1,000) | $(3,600) | | 10% adverse change in policy termination | $(400) / (1,200) | $(100) / (100) | Sensitivity to Changes in Economic Assumptions | Assumption Change | Impact on CSM net of NCI ($M) | Impact on Net Income ($M) | | :--- | :--- | :--- | | 10 bp reduction in ultimate spot rate | $(300) | $0 | | 50 bp increase in non-fixed income return volatility | $(100) | $0 | Other Information Non-GAAP and Other Financial Measures This section provides detailed definitions and reconciliations for the non-GAAP and other financial measures used by Manulife to evaluate performance, such as core earnings, core EPS, core ROE, APE sales, and NBV. Core earnings is a key metric that excludes market-related volatility and other specific items to better reflect the underlying long-term earnings capacity of the business. The report includes extensive tables reconciling core earnings to net income for each segment and for various periods, including adjustments for constant exchange rates and the transition to IFRS 9 - Core earnings is a non-GAAP measure used to focus on the company's operating performance by excluding market-related gains/losses, changes in actuarial methods, and other items not reflective of underlying earnings capacity[279] - To aid comparability following the adoption of IFRS 9, "transitional" non-GAAP measures are presented for 2022 comparative periods, which include the effects of IFRS 9 hedge accounting and ECL principles[290][291] - The report provides detailed reconciliations of core earnings to net income attributed to shareholders for the total company and by segment (Asia, Canada, U.S., Global WAM, Corporate & Other) for Q3 2023, prior quarters, and year-to-date periods[293][309][313] Revenue Total revenue for Q3 2023 was $9.3 billion, a slight decrease from $9.5 billion in Q3 2022. The decline was primarily due to lower net investment income, which was partially offset by an increase in insurance revenue. On a year-to-date basis, total revenue was $35.0 billion in 2023, a significant increase from $20.4 billion in the same period of 2022 Revenue by Segment (in millions) | Segment | 3Q23 | 3Q22 | | :--- | :--- | :--- | | Asia | $1,547 | $1,872 | | Canada | $2,643 | $3,599 | | U.S. | $3,478 | $2,854 | | Global Wealth and Asset Management | $1,382 | $1,270 | | Corporate and Other | $272 | $(49) | | Total Revenue | $9,322 | $9,546 | - The decrease in quarterly revenue was driven by lower net investment income, particularly in the Asia and Canada segments, due to net realized and unrealized losses on derivatives and bonds[480][482] Financial Statements and Notes Consolidated Financial Statements The consolidated financial statements present Manulife's financial position as of September 30, 2023, and its performance for the three and nine months then ended. Total assets stood at $835.9 billion, with total equity of $49.0 billion. For the nine-month period, the company generated net income of $3.8 billion and cash flow from operations of $14.3 billion. These statements reflect the adoption of IFRS 17 and IFRS 9, with comparative 2022 figures restated accordingly Key Financial Statement Figures (as at Sep 30, 2023) | Item | Amount (in billions) | | :--- | :--- | | Total Assets | $835.9 | | Total Liabilities | $786.8 | | Total Equity | $49.0 | | For the nine months ended Sep 30, 2023 | | | Total Revenue | $34.0 | | Net Income | $3.8 | | Cash from Operating Activities | $14.3 | Condensed Notes to Interim Consolidated Financial Statements The notes provide detailed information supplementing the consolidated financial statements, prepared under IAS 34. Key notes cover the significant accounting policy changes due to the adoption of IFRS 17 and IFRS 9, detailed breakdowns of invested assets, derivative instruments, insurance contract liabilities, and segment reporting. Note 5 details the annual review of actuarial methods and assumptions, which resulted in a net favorable impact on 2023 earnings. Note 7 provides extensive disclosures on risk management, including credit risk exposures and sensitivities - Note 2 details the adoption of IFRS 17 and IFRS 9, which materially changed the recognition, measurement, and presentation of insurance contracts and financial instruments. The impact of adopting IFRS 9's ECL impairment methodology resulted in a net reduction to retained earnings of $409 million on January 1, 2023[500][513] - Note 5 outlines the 2023 annual review of actuarial methods and assumptions, which resulted in a net decrease in pre-tax fulfilment cash flows of $347 million and an increase in pre-tax net income attributed to shareholders of $27 million[653] - Note 10 provides details on the Normal Course Issuer Bid (NCIB), under which the company purchased 49.5 million common shares for $1,262 million during the nine months ended September 30, 2023[740][741]