C$ unless otherwise stated
TSX/NYSE/PSE: MFC
SEHK:945
Substantive progress made on growth strategies in the third quarter of 2014:
Developing our Asian opportunity to the fullest – Achieved record insurance sales on a constant currency basis, with double digit growth in Hong Kong, Indonesia and our Asia Other businesses as well as continued success in Japan; continued to build momentum in wealth sales reflecting successful product launches and marketing campaigns; delivered strong growth in core earnings, driven by higher sales volumes and favourable policyholder experience.
Growing our wealth and asset management businesses around the world – Achieved our 24th consecutive quarter of record funds under management, driven by solid net flows in our asset management and group retirement businesses; delivered continued robust mutual fund sales around the world; Manulife Asset Management achieved record assets under management for external clients.
Building on our balanced Canadian business – Announced our agreement to acquire the Canadian operations of Standard Life plc; achieved solid sales and record funds under management in our mutual fund and group retirement businesses; competitive pressures continued to challenge both large case sales in Group Benefits and growth in Manulife Bank; continued to build momentum in Retail Insurance sales, driven by the success of our recently launched simplified universal life product
Continuing to drive sustainable earnings and opportunistic growth in the U.S. – Strong mutual fund net flows contributed to record assets under management for John Hancock Investments; continued to face a challenging competitive environment in Retirement Plan Services; delivered improved momentum in life insurance sales, driven by recent product initiatives, despite slow industry sales.
TORONTO, Nov. 13, 2014 /PRNewswire/ – Manulife Financial Corporation (“MFC”) announced today net income attributed to shareholders of $1,100 million for the quarter ended September 30, 2014, fully diluted earnings per common share of $0.57 and return on common shareholders’ equity (“ROE”) of 14.8%, compared with $1,034 million, $0.54 and 16.8%, respectively, for the quarter ended September 30, 2013.
In 3Q14, MFC generated core earnings1 of $755 million, fully diluted core earnings per common share1 of $0.39 and core return on common shareholders’ equity (“Core ROE”)1 of 10.1%, compared with$704 million,$0.36 and 11.3%, respectively, in 3Q13.
Donald Guloien, President and Chief Executive Officer, said, “We had a very strong quarter. Once again we delivered core earnings that were slightly better than planned, achieved outstanding investment results, and had lower-than-expected charges associated with our annual actuarial review. All of these together lead to very strong net income and capital ratio for the quarter.”
Mr. Guloien added, “We achieved satisfactory overall insurance sales, recording substantial growth from both the prior quarter and last year. Our results were highlighted by very strong sales from Asia, partially offset by some weaker results in Canada and the U.S. Owing to widespread global economic uncertainty prevalent in the third quarter, wealth sales were slower in the quarter, but we delivered our 24th consecutive quarter of AUM growth.”
Steve Roder, Chief Financial Officer said, “We completed our annual review of actuarial methods and assumptions in the third quarter, resulting in a net charge of$69 million. We are pleased that the reserve adjustment was below our previous estimate and lower than in prior years. The amount and direction of future reserve adjustments will be based on emerging experience, which we cannot predict.”
“We continued to generate excellent investment-related experience reflecting our high quality asset portfolio, disciplined approach to extending credit and expertise in managing alternative long-duration assets,” addedMr. Roder.
____________________________
1
This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Highlights for the Third Quarter of 2014:
Reported net income attributed to shareholders of $1,100 million, up $66 million from 3Q13. Our 3Q14 net income benefited by $370 million from strong investment-related experience as well as positive market-related factors of $70 million, partly offset by a net charge of $69 million related to the annual review of actuarial methods and assumptions. Net income attributed to shareholders for the nine months ended September 30, 2014 was $2,861 million as compared with $1,833 million for the first nine months of 2013.
Generated core earnings of $755 million in 3Q14, up $51 million from 3Q13, and up $54 million from 2Q14.
The increase compared with 3Q13 was driven by higher fee income on increased assets under management in our wealth businesses, lower net hedging costs and the favourable impact of a higher U.S. dollar, partially offset by the non-recurrence of a favourable tax item.
The increase compared with 2Q14 was largely due to improved policyholder experience, the impact of higher sales and favourable business mix on new business strain, and higher fee income. Last quarter, core earnings benefited from the release of a legal provision and a number of other items.
Core earnings for the nine months ended September 30, 2014 was $2,175 million as compared to $1,932 million for the first nine months of 2013.
Delivered insurance sales2 of $660 million, up 7% from 3Q13. In Asia,we achieved record insurance sales on a constant currency basis3, driven by continued momentum in corporate products in Japan, a successful start to Hong Kong’s annual sales campaign, and double digit growth in Indonesia and our Asia Other businesses.In Canada, the success of a recently launched simplified universal life product contributed to building sales momentum in Retail Insurance; however, lower sales in Group Benefits resulted in a decline in total insurance sales. In the U.S., life insurance sales continued to be challenged by slow overall industry sales, but improved over the prior quarter due to traction with recently launched products.
Generated strong wealth sales of $11.7 billion, in line with 3Q13. Asia wealth sales continued to build momentum, benefiting from successful product launches, marketing campaigns and improved investor sentiment in Indonesia. In Canada, wealth sales declined reflecting normal variability in large case group retirement sales and lower new bank loan volumes (which we include in wealth sales) due to competitive rate pressures in a slowing residential mortgage market. In the U.S., mutual fund sales continued to be strong, but declined relative to the prior year.
Strengthened the Minimum Continuing Capital and Surplus Requirements (“MCCSR”) ratio to 248% for TheManufacturers Life Insurance Company (“MLI”), up 5 points from June 30, 2014, reflecting the contribution of third quarter earnings. As a result of strong third quarter earnings and the favourable impact of a stronger U.S. dollar, the Company’s financial leverage ratio improved from 28.2% at 2Q14 to 27.1%.
Achieved 24th consecutive quarter of record funds under management5 of $663 billion.
Announced the proposed acquisition of the Canadian-based operations of Standard Life plc. This transaction, which is subject to regulatory approval, will accelerate our growth strategy for our Canadian business, in particular our wealth and asset management businesses. In addition, the transaction builds our capability to serve customers in all of Canada, and elsewhere in the world, from Quebec.
Generated strong investment-related experience of $370 million,$50 million of which was included in core earnings. The investment-related experience gains were largely due to fair value gains on alternative long-duration assets (“ALDA”) and the impact of further investments made in higher yielding ALDA on the measurement of our policy liabilities.
Starting in 2015, we intend to increase the amount of investment-related experience gains included in core earnings to a maximum of $400 million per annum from $200 million per annum, reflecting our recent strong experience and future outlook.4
Strengthened reserves following the annual actuarial review, resulting in a $69 million net charge to net income. Unfavourable changes to lapse assumptions and updates to the calibration criteria for fixed income funds used in the valuation of segregated fund guarantees were partially offset by benefits from updates to mortality assumptions and other annual updates.
Generated new business embedded value (“NBEV”)5 of $298 million, up 7% from 3Q13. The increase in NBEV reflects higher sales volumes in Asia, partially offset by the impact of lower interest rates on our insurance businesses.
Reported $823 million of net income attributed to shareholders in accordance with U.S. GAAP5. As outlined in section A4 below, starting in 4Q14, we are discontinuing use of this U.S. GAAP measure
____________________________
2
This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
3
Growth (declines) in sales, premiums and deposits and funds under management are stated on a constant currency basis. Constant currency basis is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
4
See section A4 “Future changes to non-GAAP measures” below.
5
This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Financial Highlights
Quarterly Results
YTD Results
(C$ millions, unless otherwise stated, unaudited)
3Q 2014
2Q 2014
3Q 2013
2014
2013
Net income attributed to shareholders
$
1,100
$
943
$
1,034
$
2,861
$
1,833
Preferred share dividends
(28)
(36)
(33)
(98)
(97)
Common shareholders’ net income
$
1,072
$
907
$
1,001
$
2,763
$
1,736
Reconciliation of core earnings to net income
attributed to shareholders:
Core earnings(1)
$
755
$
701
$
704
$
2,175
$
1,932
Investment-related experience in excess of amounts
included in core earnings
320
217
491
762
491
Core earnings plus investment-related
experience in excess of amounts included
in core earnings
$
1,075
$
918
$
1,195
$
2,937
$
2,423
Other items to reconcile core earnings to net income
attributed to shareholders:
Direct impact of equity markets and interest rates
and variable annuity guarantee liabilities
70
55
94
35
(255)
Changes in actuarial methods and assumptions
(69)
(30)
(252)
(139)
(356)
Other items
24
-
(3)
28
21
Net income attributed to shareholders
$
1,100
$
943
$
1,034
$
2,861
$
1,833
Basic earnings per common share (C$)
$
0.58
$
0.49
$
0.54
$
1.49
$
0.95
Diluted earnings per common share (C$)
$
0.57
$
0.49
$
0.54
$
1.48
$
0.94
Diluted core earnings per common share (C$)(1)
$
0.39
$
0.36
$
0.36
$
1.11
$
0.99
Return on common shareholders’ equity (“ROE”) (%)
14.8%
13.1%
16.8%
13.3%
10.1%
Core ROE (%)(1)
10.1%
9.6%
11.3%
10.0%
10.6%
Funds under management (C$ billions)(1)
$
663
$
637
$
575
$
663
$
575
(1)
This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
SALES AND BUSINESS GROWTH
Asia Division
Robert Cook, Senior Executive Vice President and General Manager, Asia Division stated, “We have delivered very strong growth in the third quarter with Hong Kong, Indonesia and our other Asia businesses adding to the continued momentum in Japan. Insurance sales were 46% higher than 3Q13, reaching record levels for the division on a constant currency basis. These results reflect the ongoing success of product enhancement initiatives, marketing campaigns and our multi-channel distribution strategy. Our third quarter wealth sales increased 74% compared to 3Q13, reflecting our success in launching new products, marketing campaigns and improved market sentiment.”
Asia Division 3Q14 insurance sales of US$352 million were 46% higher than 3Q13 and year-to-date sales of US$914 million were 32% higher than same period of 2013. (Percentages quoted below are for the period 3Q14 compared with 3Q13, unless stated otherwise.6)
Japan insurance sales of US$165 million increased 83% driven by the continued momentum of corporate product sales and the launch of new retail products.
Hong Kong insurance sales of US$81 million increased 37% driven by several product launches in the latter part of 2Q14 and a series of sales campaigns.
Indonesia insurance sales of US$28 million increased 14% driven by strong growth in our bancassurance channel and a series of sales campaigns.
Asia Other (excludes Japan, Hong Kong and Indonesia) insurance sales of US$78 million increased 16%. We delivered double digit growth in all markets, except for Singapore, where sales were at a level similar to 3Q13 but showed significant growth over 2Q14.
Asia Division 3Q14 wealth sales of US$2.2 billion were 74% higher than 3Q13 and year-to-date sales of US$5.6 billion were 14% lower than same period of 2013. The decline in our year-to-date sales was due to less favourable market sentiment in several Asian markets in the first half of 2014 compared to the same period of 2013, the very successful launch of the Strategic Income Fund in the first half of 2013 and lower investor demand for our products in Japan. (Percentages quoted below are for the period 3Q14 compared with 3Q13, unless stated otherwise.6)
Japan wealth sales of US$516 million increased 140% as a result of the successful launch of a floating rate loan fund and the launch of a new single premium product.
Hong Kong wealth sales of US$366 million increased 50% driven by successful marketing campaigns in the pension and mutual fund businesses.
Indonesia wealth sales of US$239 million increased 93% reflecting the favourable impact of improved market sentiment on mutual fund sales.
Asia Other wealth sales of US$1.0 billion increased 57% driven by the increase in mutual fund sales in China, Taiwan and Thailand.
____________________________
6
Growth (declines) in sales, premiums and deposits and funds under management are stated on a constant currency basis. Constant currency basis is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Canadian Division
Marianne Harrison, Senior Executive Vice President and General Manager, Canadian Division stated, “In the third quarter, our mutual fund and group retirement businesses delivered solid sales and record assets under management. We were excited to announce our agreement to acquire the Canadian operations of Standard Life plc which, if approved, will accelerate our growth plans, particularly in wealth and asset management. With our focus on future innovation, we launched our Manulife RED Lab partnership with Communitech with a contest for Ontario university and college students, inviting their ideas to improve the delivery of financial services through the use of emerging technologies.”
Wealth sales in 3Q14 were $2.6 billion, 15% lower than 3Q13 primarily due to reduced new bank loan volumes as a result of competitive pressures in a slowing residential mortgage market. Year-to-date sales of $8.6 billion were 4% lower than the same period of 2013. (Percentages quoted below are for the period 3Q14 compared with 3Q13, unless stated otherwise.)
Mutual Funds’ assets under management were a record $31.8 billion at September 30, 2014, increasing 26% year-over-year and outpacing industry growth7. Gross mutual fund deposits8,9 of $1.3 billion in 3Q14 were down 10% as investor preference shifted toward equities where we continue to build our presence. In the quarter we added two global equity mandates to complement our growing suite of equity funds. Increased market volatility in September also put strain on sales.
Segregated Fund Products10sales were $353 million in 3Q14, an increase of 13% reflecting steady growth in our repositioned new business portfolio. Fixed Products sales of $72 million in 3Q14 were down 33% reflecting our deliberate rate positioning in this market.
Group Retirement Solutions sales of $188 million in 3Q14 were 31% lower, reflecting normal variability in the large case group retirement market. Year-to-date, sales of $1.1 billion were 10% higher than the same period of 2013, reflecting continued success in the defined contribution plan market.
Manulife Banknew lending volumes continue to reflect the impact of intense rate competition driven by the slowdown in the residential mortgage market. New loan volumes for 3Q14 were $927 million, 27% below 3Q13 levels and 3% higher than 2Q14. Net lending assets increased by 4% to $19.4 billion as at September 30, 2014.
Insurance sales in 3Q14 of $143 million were 23% lower than 3Q13 reflecting competitive pressures and our disciplined approach to pricing in the large case group benefits market. Year-to-date sales of $406 million were 58% lower than the same period last year. Excluding Group Benefits, 3Q14 insurance sales were 5% higher than 3Q13 and year-to-date sales were 3% higher than the same period in 2013. (Percentages quoted below are for the period 3Q14 compared with 3Q13, unless stated otherwise.)
Retail Markets’ insurance sales of $41 million increased 11%, reflecting the success of our new Manulife UL product, a universal life solution for Canadians looking for simplified investment options combined with long-term insurance protection.
Institutional Markets’ insurance sales of $102 million decreased 32%, reflecting competitive pressures which challenged large case sales in Group Benefits. In the small and mid-sized market, Group Benefits’ sales increased 15%.
________________________
7
Based on publicly available information from Investor Economics and the Investment Funds Institute of Canada as at September 30, 2014.
8
This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
9
Gross mutual fund deposits in 3Q14 included deposits from segregated fund products of $263 million.
10
Segregated fund products include guarantees. These products are also referred to as variable annuities.
U.S. Division
Craig Bromley, Senior Executive Vice President and General Manager, U.S. Division stated, “Sales results for the quarter continued to be mixed but as expected our recent product and business initiatives are gaining traction. In John Hancock Investments, sales were 8% below 3Q13, while retention and net flows were strong, once again contributing to record funds under management. Our strong product line-up, including 39 Four- or Five-Star Morningstar rated mutual funds, continues to drive results in this business11. On the insurance front, product enhancements and targeted pricing changes implemented earlier this year improved John Hancock Life sales compared to 2Q14 despite a sluggish estate planning market.”
Wealth Management sales in 3Q14 of US$6.2 billion decreased 6% compared with 3Q13. Decreased sales in John Hancock Investments (“JH Investments”) were partially offset by an increase in John Hancock Retirement Plan Services (“JH RPS”). Year-to-date sales of US$22.0 billion were 5% higher than in the same period of 2013 as a result of a 7% increase in JH Investments year-to-date sales. (Percentages quoted below are for the period 3Q14 compared with 3Q13, unless stated otherwise.)
JH Investments 3Q14 sales of US$5.4 billion decreased 8% primarily due to higher mandates from large wirehouse firms in 2013, the impact of the closure to new sales of a top selling fund at the beginning of 2014 and tempered industry sales. On a year-to-date basis, sales continue to outpace the industry in the intermediary channel with an increase of 7% compared to 0.9% for the industry12. Our year-to-date results also continue to outpace the industry on organic growth (net new flows / beginning assets) with a 16% year-to-date growth rate compared to a 2% industry growth rate.12
JH RPS 3Q14 sales of US$886 million increased 2%. While sales are challenged by a very competitive environment, we are beginning to see momentum and an increased sales pipeline from initiatives launched earlier this year. This includes the Signature 2.0 product within our core market of plans under US$10 million in assets under management, as well as increased distribution capabilities and pricing actions for plans with assets over US$10 million.
Overall U.S. Insurance sales in 3Q14 of US$124 million decreased 19% compared with 3Q13, but were 8% higher compared with 2Q14 due to new product enhancements. Year-to-date sales of US$347 million were 19% lower than same period of 2013. (Percentages quoted below are for the period 3Q14 compared with 3Q13, unless stated otherwise.)
John Hancock Life (“JH Life”) 3Q14 sales of US$112 million were 19% lower as overall industry sales were challenged in the estate planning market. Compared with 2Q14, sales increased by 10% driven by changes to our Protection Universal Life (“UL”) product and accumulation and indexed UL products.
John Hancock Long-Term Care 3Q14sales of US$12 million decreased, as expected, due to recent price increases. Sales were down by US$3 million from 3Q13 and US$1 million from 2Q14.
________________________
11
For each fund with at least a 3-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return that accounts for variation in a fund’s monthly performance (including effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category, the next 22.5%, 35%, 22.5% and bottom 10% receive 5, 4, 3, 2 or 1 star, respectively. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance associated with its 3-, 5- and 10 year (if applicable) Morningstar Rating metrics. Past performance is no guarantee of future results. The overall rating includes the effects of sales charges, loads and redemption fees, while the load-waived does not. Load-waived rating for Class A shares should only be considered by investors who are not subject to a front-end sales charge.
12
Source: Strategic Insight: ICI Confidential. Direct Sold mutual funds, fund-of-funds and ETF’s are excluded. Organic sales growth rate is calculated as: net new flows divided by beginning period assets. Industry data through September 2014.
Investment Division
Warren Thomson, Senior Executive Vice President and Chief Investment Officer, said, “We experienced exceptional General Fund investment-related results, driven primarily by large positive returns on our private equity and other alternative long-duration asset holdings and the favourable impact of additional investments in real estate, private equity and timberland on the measurement of our policy liabilities. In addition, credit experience continued to be a positive contributor to investment-related experience.”
Mr. Thomson continued, “Long-term investment performance continues to be a differentiator for Manulife Asset Management, with the significant majority of public asset classes once again outperforming their benchmarks on a 1, 3, and 5-year basis.”
At September 30, 2014 total assets managed by Manulife Asset Management (“MAM”) were $309 billion, including $266 billion managed for external clients. Assets managed for external clients increased $7 billion from June 30, 2014. At September 30, 2014, MAM had a total of 85 Four- or Five-Star Morningstar rated funds, an increase of 3 funds since June 30, 2014.
CORPORATE ITEMS
In a separate news release today, MFC announced that the Board of Directors approved a quarterly dividend of 15.5 cents per share on the common shares of MFC, payable on and after December 19, 2014 to shareholders of record at the close of business on November 25, 2014.
The Board of Directors also approved, in respect of MFC’s December 19, 2014 common share dividend payment date and pursuant to MFC’s Canadian Dividend Reinvestment and Share Purchase Plan and its U.S. Dividend Reinvestment and Share Purchase Plan, that the required common shares be purchased on the open market. The purchase price of such shares will be based on the average of the actual cost to purchase such common shares. There are no applicable discounts because the common shares are being purchased on the open market and are not being issued from treasury.
AWARDS & RECOGNITION
In the U.S., John Hancock received the 2014 LIMRA LOMA “Social Media Silver Bowl Awards” for “Best use of Twitter” for the #WeRunTogether social-media campaign in support of John Hancock’s Boston marathon sponsorship and “Best of the Best” for the overall John Hancock social media program (Facebook, Twitter, LinkedIn and YouTube).
In Hong Kong, Manulife Hong Kong received the “Yahoo! Emotive Brand Award” for the 11th consecutive year. The award aims to recognize the most emotionally appealing brands in the territory, as selected through online public voting.
In Hong Kong, Indonesia and the Philippines, Manulife Asset Management portfolio managers were recognized in The Asset Benchmark Research 2014 (“The Asset”) as “Most Astute Investors in Local Currency Bonds”. This is the 8th year that Manulife Asset Management’s portfolio managers have been ranked at the top of The Asset’s survey.
In Canada, Manulife was named to the 2014/2015 “Dow Jones Sustainability North American Index”. This recognition highlights Manulife’s continued commitment to ethical and sustainable business practices, good governance and making positive contributions to the communities it serves.
Notes:
Manulife Financial Corporation will host a Third Quarter Earnings Results Conference Call at 2:00 p.m. ET on November 13, 2014. For local and international locations, please call 416-340-8530 and toll free in North America please call 1-800-769-8320. Please call in ten minutes before the call starts. You will be required to provide your name and organization to the operator. A replay of this call will be available by 6:00 p.m. ET on November 13, 2014 through November 27, 2014 by calling 905-694-9451 or 1-800-408-3053 (passcode: 6718073).
The conference call will also be webcast through Manulife Financial’s website at 2:00 p.m. ET on November 13, 2014. You may access the webcast at: www.manulife.com/quarterlyreports. An archived version of the webcast will be available at 4:30 p.m. ET on the website at the same URL as above.
The Third Quarter 2014 Statistical Information Package will also be available on the Manulife Financial website at: www.manulife.com/quarterlyreports. The document may be downloaded before the webcast begins.
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (“MD&A”) is current as of November 13, 2014, unless otherwise noted. This MD&A should be read in conjunction with the MD&A and audited Consolidated Financial Statements contained in our 2013 Annual Report.
For further information relating to our risk management practices and risk factors affecting the Company, see “Risk Factors” in our most recent Annual Information Form, “Risk Management and Risk Factors” and “Critical Accounting and Actuarial Policies” in the MD&A in our 2013 Annual Report, and the “Risk Management” note to the Consolidated Financial Statements in our 2013 Annual Report.
In this MD&A, the terms “Company”, “Manulife Financial”, “Manulife” and “we” mean Manulife Financial Corporation (“MFC”) and its subsidiaries.
Contents
A
OVERVIEW
D
RISK MANAGEMENT AND RISK FACTORS UPDATE
1.
Q3 highlights
1.
Variable annuity and segregated fund guarantees
2.
Standard Life transaction
2.
Caution related to sensitivities
3.
Q4 items
3.
Publicly traded equity performance risk
4.
Future changes to non-GAAP measures
4.
Interest rate and spread risk
B
FINANCIAL HIGHLIGHTS
E
ACCOUNTING MATTERS AND CONTROLS
1.
Q3 and year-to-date earnings analysis
1.
Critical accounting and actuarial policies
2.
Premiums and deposits
2.
Actuarial methods and assumptions
3.
Funds under management
3.
Sensitivity of policy liabilities to updates to assumptions
4.
Capital
4.
Accounting and reporting changes
5.
Impact of fair value accounting
5.
U.S. GAAP results
C
PERFORMANCE BY DIVISION
F
OTHER
1.
Asia
1.
Performance and Non-GAAP Measures
2.
Canadian
2.
Key planning assumptions and uncertainties
3.
U.S.
3.
Caution regarding forward-looking statements
4.
Corporate and Other
A OVERVIEW
A1 Q3 highlights
Manulife reported 3Q14 net income attributed to shareholders of $1,100 million and core earnings13 of $755 million compared with 3Q13 net income attributed to shareholders of $1,034 million and core earnings of $704 million.
Results included investment-related experience gains of $370 million (of which $50 million is included in core earnings), and a net charge of $69 million related to our annual review of actuarial methods and assumptions and updates to actuarial standards related to bond parameter calibration for stochastic models used to value segregated fund liabilities.
The $51 million increase in core earnings was driven by higher fee income on higher assets under management in our wealth businesses, lower net hedging costs, and the favourable impact of a stronger U.S. dollar, partially offset by the non-recurrence in 3Q14 of a release of tax provisions from the closure of prior years’ tax filings that benefited 3Q13. The $15 million net increase in items excluded from core earnings included lower charges related to the changes in actuarial methods and assumptions mostly offset by the non-recurrence of a gain related to a specific asset allocation activity in 3Q13.
Net income attributed to shareholders for the 9 months ended September 30, 2014 was $2,861 million, compared with the $1,833 million for the same period of 2013. Four items primarily contributed to the $1,028 million increase: higher core earnings ($243 million), higher investment-related experience ($271 million), a lower charge for changes in actuarial methods and assumptions ($217 million) and the non-recurrence of a charge related to the direct impact of equity markets and interest rates ($255 million).
The Minimum Continuing Capital and Surplus Requirements (“MCCSR”) ratio for The Manufacturers Life Insurance Company (“MLI”) increased 5 points from June 30, 2014 to 248% reflecting the contribution of 3Q14 earnings. As a result of strong 3Q14 earnings and the favourable impact of a stronger U.S. dollar, the Company’s financial leverage ratio improved from 28.2% at 2Q14 to 27.1%.
Insurance sales14 were $660 million in 3Q14, an increase of 7%15 compared with 3Q13 as strong results in Asia were partially offset by mixed results in Canada and the U.S. In Asia, sales rose 46% as increased sales in Hong Kong, Indonesia and Asia Other businesses added to the continued momentum in Japan. Institutional insurance sales in Canada decreased 32%, reflecting competitive pressures, and Retail sales increased 11%, reflecting the success of a recently launched universal life product. U.S. insurance sales in 3Q14, while 19% lower compared with 3Q13, were 8% higher compared with 2Q14 due to new product enhancements. On a year-to-date basis, insurance sales were 19% below the same period of 2013 as the 32% increase in sales in Asia was more than offset by lower sales in Group Benefits and U.S. Insurance.
Wealth sales were $11.7 billion in 3Q14, an increase of 1% compared with 3Q13. In Asia, wealth sales increased 74% reflecting our success in launching new products in combination with marketing campaigns and improved market sentiment. Sales were 15% lower in Canada primarily due to the impact of competitive pressures in a slowing residential mortgage market on new bank loan volumes (which we include in wealth sales) and normal variability in large case group retirement sales. In the U.S., sales were 6% below 3Q13, while retention and net flows were strong. On a year-to-date basis, wealth sales were 1% below the same period of 2013 due to lower new bank loan volumes.
______________________________
13
This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
14
This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
15
Growth (declines) in sales, premiums and deposits and funds under management are stated on a constant currency basis. Constant currency basis is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
A2 Agreement regarding acquisition of Canadian-based operations of Standard Life plc
On September 3, 2014, MLI entered into an agreement with Standard Life Oversea Holdings Limited, a subsidiary of Standard Life plc, and Standard Life plc to acquire the shares of Standard Life Financial Inc. and of Standard Life Investments Inc., collectively the Canadian-based operations of Standard Life plc, for approximately $4 billion in cash at closing, subject to certain adjustments.
The transaction was approved by the shareholders of Standard Life plc on October 3, 2014. The waiting period under the Competition Act (Canada) expired on November 10, 2014. The closing remains subject to the approval of the Canadian Minister of Finance and certain securities regulators. Subject to the receipt of all necessary approvals, the transaction is anticipated to close in the first quarter of 2015.
The acquisition will be funded in part by the issuance of common shares. On September 15, 2014, we completed offerings of approximately $2.26 billion of subscription receipts that will be exchanged for common shares upon closing of the acquisition. The subscription receipt offerings comprised an approximately $1.76 billion public bought deal offering, as well as a concurrent private placement to the Caisse de dépôt et placement du Québec for $500 million. The balance of the acquisition funding will be from internal resources and possible future debt and/or preferred share issuances.
This transaction significantly builds the Company’s capability to serve customers in all of Canada, and elsewhere in the world, from Quebec. Based on industry data from the Fraser Group and the Investment Funds Institute of Canada, on a pro forma basis as of December 31, 2013 after giving effect to the transaction, the transaction would add $19.0 billion in assets under administration16 to our group retirement business in Canada, bringing our total group retirement assets under administration as of December 31, 2013 to $40.9 billion16, and would add $5.4 billion in assets under management16 to our mutual funds business in Canada, bringing our total mutual fund assets under management to $33.0 billion as of December 31, 201317. The transaction would, based on information from the Fraser Group, also increase our annual Canadian group benefits premiums and deposits18 from $7.5 billion to $8.3 billion on a pro forma basis for the year ended December 31, 2013 after giving effect to the transaction.18
Transaction highlights19:
Excluding transition and integration costs, after the first year we expect the transaction to be accretive by approximately 3 cents to earnings per common share (“EPS”) per year over each of the next 3 years. It will also increase our earnings capacity beyond our 2016 core earnings objective of $4 billion.
The transaction, and the financing, maintain our strong capital position and financial flexibility, and in no way inhibit our ability to pay dividends. In fact, it will enhance our ability to increase dividends in the future.
We believe the transaction will improve core earnings, however the transition costs reported in core earnings will create a modest, temporary headwind on our core return on common shareholders’ equity (“Core ROE”) objective of 13%.
Excluding transition and integration costs, the transaction is expected to be marginally accretive to EPS in the 1st year.
Increases earnings contributions from less capital intensive, fee-based businesses.
Integration costs totaling $150 million post-tax expected to be incurred in the first three years and we expect revenue synergies which will build over time.
Annual cost savings of $100 million post-tax expected to be largely achieved by the 3rd year.
Targeting MCCSR ratio in the range of 235% to 240% at close.
Targeting financial leverage ratio of approximately 28% at close.
We continue to target a 25% financial leverage ratio over the long-term.
Does not significantly impact our interest rate or equity market risk profile.
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16
Source: Fraser Group, “Pension Universe Report”, data as of December 31, 2013, includes capital accumulation plans only.
17
Source: Investment Funds Institute of Canada, data as of December 31, 2013.
18
Source: Fraser Group, “Group Universe Report”, data for the year ended December 31, 2013.
19
See “Caution regarding forward-looking statements” and “Performance and Non-GAAP Measures” below.
A3 Q4 items
In the fourth quarter, the Canadian Actuarial Standards Board’s (“ASB”) revisions to the Canadian Actuarial Standards of Practice, issued in May 2014 and related to economic reinvestment assumptions used in the valuation of policy liabilities, will become effective. As noted previously, we estimate that the impact of these revisions will be a charge to net income of up to $200 million.
A4 Future changes to non-GAAP measures
Core earnings is a non-GAAP measure which we use to better understand the long-term earnings capacity and valuation of the business. It excludes the direct impact of changes in equity markets and interest rates as well as a number of other items that are considered material and exceptional in nature. Since we introduced this measure in 2012, we have included up to $200 million of favourable investment-related experience in core earnings per year. Recent investment-related experience has trended higher than the amount currently included in core earnings and, accordingly, we intend to increase the maximum annual amount included in core earnings to $400 million per year beginning in 2015.
Net income attributed to shareholders in accordance with U.S. GAAPand Total equity in accordance with U.S. GAAP - This is the last quarter we will be disclosing U.S. GAAP measures. In the past, we elected to report consolidated U.S. GAAP information because of our large U.S. domiciled investor base and for comparison purposes with our U.S. peers.