Managing Risk Profitably in a Low Interest Rate Environment - Cindy Forbes, EVP & Chief Actuary October 28, 2013
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Managing Risk Profitably in a Low Interest Rate Environment Cindy Forbes, EVP & Chief Actuary October 28, 2013
Caution regarding forward-looking statements
From time to time, MFC makes written and/or oral forward-looking statements, including in this presentation. In addition, our representatives may make forward-looking
statements orally to analysts, investors, the media and others. All such statements are made pursuant to 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 2016 management objectives for core earnings and core ROE, the impact of the sale of our Taiwan life insurance business on MLI’s MCCSR ratio; the third
quarter 2013 charge related to the annual review of actuarial methods and assumptions; the continued growth in insurance sales in Asia; and the quarterly run rate
hedging costs and annual run rate savings from E&E projects. 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 2016 management objectives for core earnings and core
ROE, the assumptions described under “Key Planning Assumptions and Uncertainties” in our 2012 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 2012 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 provisions against future tax assets; the accuracy of estimates relating to morbidity, mortality and policyholder behaviour; 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
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 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 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. The forward-looking statements in this presentation are, unless otherwise indicated,
stated as of the date hereof and are presented for the purpose of assisting investors and others in understanding our financial position and results of operations as well as
our objectives and strategic priorities, and may not be appropriate for other purposes. We do not undertake to update any forward-looking statements, except as required
by law.
2
Canadian IFRS
One of the most ‘mark to market’ regimes in the world today
Most of the impact of lower interest rates capitalized into reserves and thus
earnings and equity
As a result, Canadian insurers responded much more quickly to lower
interest rates
FASB and IASB Insurance Contract Proposals, as drafted, are more
sensitive to interest rates and thus more volatile than Canadian IFRS today
Life Insurer Comments on Field Testing of FASB and IASB Insurance
Contract Proposals, prepared by Manulife, MetLife Inc., New York Life
and Prudential Financial Inc.
3Canadian IFRS and Income Volatility
3.0
C-IFRS
U.S. GAAP
2.0
1.0
0.0
(1.0)
(2.0)
(3.0)
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
IFRS equity is $12 B lower than US GAAP equity at Q2 2013
4Volatility of Total Income under Proposed
Accounting Standards
Long Term Contracts Portfolio
Pretax Comprehensive Income/(Loss)
$
Current
USGAAP
For long duration products, such as Immediate Annuities and Long Term Care, the new
standards will result in greater Comprehensive Income volatility than under current
USGAAP (or C- IFRS)
The extreme volatility is a result of using market consistent discount rates particularly at the
long end of the curve
Short term fluctuations in market yield curves directly impact liability measurement
A group of companies is proposing using a stable graded approach to better reflect the
long term nature of these insurance contracts
5Responding to the Low Interest Rate
Environment
Significant Product Changes to increase adjustability and reduce guarantees
Repricing actions and Product Features Changes
— T100/LCOI in Canada
— Guaranteed UL in the U.S.
Sales focused on products with lower embedded interest rate guarantees
— Canada: Adjustable Whole Life replacing T100 / Level COI
— US: Indexed UL replacing No-Lapse Guarantee UL
— US: LTC with pass-through investment returns
Hedging Actions
Reduced interest rate risk exposure through portfolio action as well as
interest rate swaps and options
6De-Risking for Low Interest Rate Environment
Premium Differential Relative to John Hancock’s ’10 Product
40%
35%
30%
25%
20%
15%
10%
5%
0%
2010 2011 2012 2013
John Hancock Market Leader Market Average
Total John Hancock GUL Sales
(Target Commissionable Premium, in $M)
2010 2011 2012 2013
$199 $59 $25 $1*
*Through June. Current Run-Rate is below $1M per month
7Transitioning Away from Guarantees
Core U.S. Life Individual Insurance Sales ($M)
$450
$400
$350
$300
$250
NLG
$200 Non NLG
$150
$100
$50
$0
2009 2010 2011 2012 2013
We successfully transitioned away from no lapse guarantee UL
8Manulife has closed the gap on interest rate risk
Impact of a 100 bps Decline in Interest Rates as at 2Q131
(as a % of equity)
Decreased
74%
Earnings Sensitivity MFC Co A Co B Co C
(as at 2Q131)
Immediate impact of $ millions ($500) ($350) ($440) ($160)
a 100 bps decline in
interest rates As a % of equity (1.9%) (2.0%) (2.4%) (4.5%)
9Where does Interest Rate Risk Come From?
Products with guaranteed premiums and benefits
Promise of benefits payments in the future in return for premiums
Benefit (promise of payment) is fully or partially guaranteed
Premiums (or Cost of Insurance) is fully or partially guaranteed
Payments are beyond the investable horizon
Recurring premium and reinvestment
of assets is a large part of Insurance
company’s reinvestment risk
Traditional Insurance Products are
long in nature, well beyond the 30-
year investable horizon
10Managing through the Economic Cycle
Insurers take interest rate risk due to the guaranteed nature of the products they sell
Some companies manage through the economic cycle or price products assuming
interest rates will rise in the future
Rates have been trending down for a number of years
What is the “normal” interest rate level that should be reflected in pricing?
What is an acceptable level of interest rate sensitivities for new business?
11A defined risk philosophy and risk infrastructure
are key to managing risk profitability
Agreement on risk philosophy
Risk tolerance for in force and new business
In-depth understanding of risk taking
Volatility of accounting measures
Volatility of economic value
Risk Limits developed by Management and approved by the Board of Directors
Compliance to these limits is reported on quarterly
Appropriate measurement a key component of understanding risk
12Thank you 13 13
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