Q3 2019 Earnings Call
Please standby or meeting.
Again, please be advised that this conference call is being recorded good morning, and welcome to them and you're like financial third quarter 2019 financial results Conference call for Thursday November seven 2019.
Our host for today will be missed aging O'neil. Please go ahead Ms O'neil.
Thank you and good morning.
Come to me like earnings conference call to discuss our third quarter 2019 result.
Our earnings release.
All statements and related.
Statistical package and webcast slides for todays call.
On the Investor Relations section of our website <unk> Manulife Dot com.
We will begin today's presentation with an overview of our third quarter highlights and an update on our strategic priorities.
We glory, our president and Chief Executive Officer.
Following <unk> remarks filled with range and our Chief financial Officer will discuss the Companys financial and operating results.
We will end today's presentation with Steve Finch, our chief Actuary, who will discuss the company's annual review actuarial methods and assumptions.
After the prepared remarks, we want to the question and answer portion of the call.
We are each participant U.S. yards will limit of two question. If you have additional questions. Please re queue and we will do our best you respond to all question.
Before we start please refer to slide two for a caution on forward looking statements and slide 39 for a note on the use of non-GAAP financial measures in this presentation.
No that certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from what I've seen it.
This slide also indicates where to find more information on these topics and the factors that could cause additional actual results to differ materially from those data.
With that I'd like to turn the call over to Roy Gori, Our President and Chief Executive Officer right.
Thank you Andrew Good morning, everyone and thank you for joining us today.
Turning to slide five [noise] yesterday, we announced a financial results for the third quarter 29 thing.
Core earnings of $1.5 billion were in line with a very strong probably a quarter and was supported by double digit growth in Asia.
We delivered net income of 723 million those which included a 500 million dollar charge related to update to the ultimate reinvestment right. You are all in accordance with changes issued by the Canadian actuarial standards Board.
Core Aro he was strong at 13% in the third quarter and 13.3% for the year to date.
You didn't this value increased 14% from the prior year quarter with double digit growth across all regions.
And was up 20% year to date.
And ill solid core already contributed to book value per share growth six thing to say.
With all I cant ratio of 146% and leverage now down to 26.1%. The company continues to be in a strong capital position with substantial financial flexibility.
We achieved solid result in spite of notable headwinds, including the temporary suspension of coal we sold in Japan market volatility low interest rates and geopolitical tensions.
Turning to slide six.
We're executing on out five priorities and I once again pleased to the progress that we made during the quarter.
Portfolio optimization continues to progress ahead of schedule.
And the third quarter, we renegotiated reinsurance agreements on a universal life walk in Canada, which resulted in the release of approximately $120 million the capital.
The initiatives announced to date have resulted in a cumulative capital benefit of $3.9 billion and are expected to release, a total of $4.4 billion once fully executed representing 88, the same about 2022 target.
And that long term care business, we continue to obtain regulatory approvals for premium rate increases and introduced innovative cotai options to our LTC Kaufman to manage high rights.
We believe this further opportunity to reduce risk and free up capital for redeployment and we continue to evaluate all options to optimize the remainder of out legacy portfolio.
We aggressively manage costs to drive expense efficiency, which resulted in modest core expense growth of 4% in the third quarter and just 2% year to date as a result, a year to date expense efficiency ratio stood at 51.2% compared with about 2022 target of 50%.
Expense efficiency initiatives continue to progress well and we're on track to achieve $700 million pretax expense efficiencies this year.
And we continued to be well position to achieve our target of $1 billion of expense efficiencies by 2022.
Third parties to accelerate growth in our highest annual businesses and we aspire to have these businesses generate two thirds of total company core earnings by 22.
In Asia, we entered into a long term strategic partnership with a leading online medical platform in mainland China.
And also established a new bancassurance relationship in Vietnam with Asia commercial bank.
And then I'll global wealth and asset management business, the retail and retirement business lines delivered strong net flows of approximately $3 billion.
You did they corning's brought to the highest potential businesses outpaced our other businesses by approximately 11 percentage points and represented 56% of total core earnings.
At both parties about our customers and how we're using technology to attract engage and retain customers by delivering an outstanding experience.
In the U.S., John Hancock was recognized as one of the best life insurance companies of 29 seen by U.S. News and we'll report magazine with the review highlighting the company's strong financial writing, it's behavioral insurance offering and straightforward lock insurance policies.
And he Vietnam, We launched our award winning many lot mood behavioral behavioral insurance platform that enables customers to live in active in healthy lifestyle, while also providing rewards.
A final priority is high performing thing I'll target is to achieve top quartile employee engagement compared to global financial services and insurance P is by 2022.
We recently completed out 20, and I'd seen employee engagement survey with a greater than 90% participation right.
This year, we change our engagement service provider to move to a shorter and more focused survey.
Dealt must transition to the new survey we included a set of questions that measure a year or the progress similar to our price survey.
On those questions, we saw an eight point increase and employee engagement.
I'm pleased with this progress and believe that we're making meaningful headway towards building a high performing team here at an annualized.
Q3 was another quarter of progress of the company I'm confident that momentum will continue to build and that we will deliver on the targets that we've laid out to unlock shareholder value.
So with Renton will now review the highlights about financial results, Phil Thanks, Roy and good morning, everyone.
Turning to slide eight and our financial performance for the third quarter of 29 team.
We achieved solid core earnings of $1.5 billion in the quarter and cool Aro He was 13%.
We delivered strong growth in new business value of 14% well expense growth was a modest 4%.
Net outflows were $4.4 billion, which included $8.5 billion of outflows related to the decision by one institutional clients in Canada.
Analyze the managements of several large primarily fixed income monday's.
We are pleased it has delivered strong net flows it nearly $3 billion in our retail in retirement business lines this quarter.
We maintain substantial financial flexibility with a light kept ratio of 146% under leverage ratio of 26.1%.
I will highlight the key drivers about third quarter performance with reference to the next twice.
Turning to slide nine core earnings in the quarter of $1.5 billion will largely in line with the prior year on a constant exchange rate basis. This reflects continued expansion of enforce business in Asia offset by the impact of actions taken over the last 12 months to improve the capital.
Efficiency about legacy businesses, that's why there's low a new business volumes in Japan.
Net income attributable to shareholders was $723 million in the third quarter down from $1.6 billion in the prior year period, primarily due to investment related experience charges compared with gains in the prior year quarter.
Under $500 million charge related to update is ultimate reinvestment rates assumptions in line with guidance issued by the Canadian actuarial standards Board.
Of note investment related experience charges of $189 million in the quarter were primarily driven by lower than expected returns on oil and gas assets within our older portfolio, partially offset by favorable credit experience.
However, on a year to date basis. The performance about all the portfolio was very strong resulting in $494 million of investment related experience gains, which allowed us to report $300 million of gains in core earnings, including $100 million in the third quarter.
Slide 10 shows our source of earnings analysis.
Expected profit on enforce was in line with the prior year quarter as enforce business grows off 8% in Asia was offset by the impact self portfolio optimization actions on our legacy businesses in North America, and the annual actuarial review.
Excluding these items expected profit increased by approximately 5% in the third quarter within the range that we would typically expect.
New business gains decreased 17% from the prior year period, primarily driven by lower corporate owned life insurance sales in Japan, partially offset by double digit sales growth in Hong Kong and Asia. Other that's why this Canada.
Overall policyholder experience in the third quarter was favorable driven by experience gains in Asia, and Canadian group insurance, which more than offset unfavorable lapse related experience you know U.S. life insurance business.
Core earnings on surplus was inline with the prior year quarter as the impact of growth in our surplus portfolio was offset by lower gains on equities.
Turning to slide 11, we delivered double digit core earnings growth in Asia, driven by continued expansion of enforce business as well as the impact of crediting rate actions on some of our adjustable products.
This was partially offset by lower new business volumes in Japan.
Core earnings in our Canadian business decreased 8%, primarily due to the impact of ongoing portfolio optimization initiatives and less favorable policyholder experience.
In the U.S. core earnings were inline with the prior year quarter as the impact of portfolio optimization activities and less favorable policyholder experience were offset by higher tax benefits and the impact of improved margins in response to product pricing actions taken in recent quarters.
Core earnings in our global wealth and asset management business declined 3% from the prior year quarter. Despite similar average asset levels, primarily due to higher earnings contributions from higher tax jurisdictions.
We delivered core ROI of 13% in the third quarter and 13.3% on a year to date basis, consistent with our 13% plus medium term target.
Turning to slide 12.
How continued cost discipline is delivering meaningful benefits on a constant exchange rate basis, we contained core expense growth to a modest for a sense in the third quarter.
2% for the year to date.
As a result, our year to date expense efficiency ratio is 51.2%.
Slide 13 shows on new business value generation and the sales.
In the third quarter of 2019, we delivered new business value of $526 million up 14% from the prior year quarter, while the sales of $1.4 billion will largely inline with the prior year period.
In Asia, new business value increased by 10% from the prior year quarter, driven by more favorable product mix, partially offset by lower sales in Japan.
The primary focus of our Hong Kong business is the domestic market, which has served as well in recent months, our new business results were particularly strong in Hong Kong with both new business value on the sales increasing more than 55 cents from a year ago.
Given in part by the success of our recently launched falling three health insurance scheme and qualifying deferred annuity products.
The mainland Chinese visitors segment represents a modest components of our business in Hong Kong and accounted for only 14% of 80 sales in the third quarter, an 18% and full year 2018.
In Canada, New business saw you increased by 21% from the prior year quarter.
By higher insurance sales into more favorable business mix in group insurance and then the U.S. new business value increased 62%, primarily as a result of recent actions to improve margins as well as a more favorable product mix.
Turning to slide 14, our global wealth and asset management business experienced net outflows of $4.4 billion in the third quarter compared with net flows of <unk> point $4 billion in the prior year quarter.
This was driven by a single institutional clients in Canada, which decided to internalize the management of several large primarily fixed income mandates totaling $8.5 billion, partially offset by strong net flows of nearly $3 billion in our retail and retirement business lines.
Our core EBITDA margin was a solid 28.7% largely inline with the prior year quarter.
Turning to slide 15, the like half ratio of 146% for a primary operating company was strong at the end of the third quarter and represents nearly $26 billion of capital above the supervisory target.
The ratio was up two percentage points from the prior quarter, primarily driven by the favorable impact of lower risk free rates and capital initiatives.
Our financial leverage ratio decreased 30 basis points from the prior quarter.
Hi, merrily due to higher equity and yesterday, we announced our intention to redeem $1 billion off senior debenture notes at the end of year, which will reduce our leverage ratio by a further 120 basis points all else being equal.
Net share buyback activity in the third quarter was $262 million after taking into account dividend reinvestment.
Slide 16 outlined some medium term financial operating targets and our recent performance.
Core EPS growth for 2019 is below our medium term target primarily due to the impact of actions to optimize our legacy businesses lower Coty sales in Japan as far as a high 2018 imperative.
Nevertheless, our core ROTC remains on target despite our strong capital position and we have made substantial progress in reducing our leverage ratio towards the medium term targets of 25%.
Expense efficiency and capital release from portfolio optimization actions are also tracking ahead of schedule.
I would now like to turn the call over to Steve Finch, who will discuss the real results of our annual actuarial review Steve.
Thanks, Phil and good morning, everyone on slide 18, we've summarized the impact of this year's annual actuarial review, which included our comprehensive review of the long term care business.
The impact on net income was approximately net neutral both in total and for LTC.
We recorded a modest net charge of $21 million, including a charge of $8 million to reflect the impact of the LTC study. This was consistent with the estimates provided last quarter.
In addition to the LTC study. This year's review included mortality and morbidity and assumptions in our Canadian individual insurance business lapse assumptions across several term into a life products in Canadian individual insurance and certain investment assumptions for the U.S. and Canada.
Overall, our actuarial valuation practices continue to be conservative and our reserves and margins are appropriately aligned with the risks in each of our businesses.
Ill now discuss the results of our comprehensive LTC experienced steady in more detail.
On slide 19, we have highlighted the key drivers of our LTC study. The review included all aspects of claims assumptions the impact of policyholder benefit reductions the progress on future premium rate increases as well as a review of margins for adverse deviation the net impact on our LTC reserves was approximately.
Our review of claim assumptions led to a strengthening LTC reserves by approximately 2 billion US dollars you experienced study showed at lower termination rates than expected during the elimination or qualifying period, which is the period between when it claims filed and when benefit payments began however.
The study also showed favorable incidents as policyholders are filing claims at a lower rate than expected.
This was partially offset by a point 2 billion U.S. dollar benefit to reflect the fact that some policyholders elect to reduce their benefits rather than paying increased premiums on their policies.
Turning to slide 20.
As I stated in the past our data continues to support the assumptions of both morbidity and mortality improvement and we strongly believe in the correlation between the two assumptions.
We reduced our added morbidity assumption to 0.25% for 25 years down from 0.4, or 5%, which resulted in the strengthening of reserves by approximately point $7 billion us dollars.
Benefit from morbidity improvement embedded in our pattern reserves is now point 8 billion us dollars or less than 2% of the present value of future claims.
Of note, our mortality and morbidity improvement assumptions result in a point 6 billion U.S. dollar higher reserve in other words more conservative than if we assume no improvement in mortality and morbidity.
On slide 21, we have highlighted the solid progress we've made today in obtaining regulatory approval for premium increases over the last decade state regulators have improved rate increases amounting to 8 billion us dollars on a present value basis to offset higher future claims costs.
As of the ended the third quarter, we had achieved all of the 2.1 billion in us dollars in premium increases embedded in our added reserves. Following our last comprehensive LTC review in 2016.
Consistent with past practice, we continue to be conservative on how much future premium increases we reflect in reserves.
In this year's review, we embedded a benefit of approximately 1.9 billion in us dollars interim how did reserves, which is about one third of the approximately 6 billion in us dollars of premium increases that are yet to be approved by state regulators.
Overall, our approach to premium increases embedded in reserves remains conservative end of industry practice with the amount reflected representing only 5% of our total reserves.
Turning to slide 22, Theres been a significant increase incredible claims data since our last review in 2016 due to the national aging of the block today over 156000 of our LTC policyholders have filed claims.
Whom 40% filed during the latest any period.
Importantly claims data on older insurance has roughly doubled since the last study increasing our confidence in calibrating reserve assumptions as most LC LTC claims occur when customers are over a JV.
In addition to our own data we've drawn from industry studies to supplement our analysis and had our updated assumptions reviewed by two independent consultants, while osby requires one reviewer.
Given the increase incredible claims data, we modestly reduced certain margins for adverse deviation, which resulted in a point 7 billion U.S. dollar reduction in reserves.
Turning to slide 23.
Our LTC business is among the most conservatively reserved in the industry our provisions for adverse deviation continue to represent a margin of 45% over our best estimate reserves and total apparatus reserves are roughly 30% higher than our us statutory reserves.
By contrast, our U.S. peers have average margins of approximately 5% over required reserves based on loss recognition testing.
As a result, we remain confident in the adequacy of our LTC reserves in aggregate.
Turning to slide 24 in summary, the impact of our Acura actuarial review on net income in the third quarter was approximately neutral in total including for LTC.
We have higher confidence in the adequacy of our LTC reserves, given a significant increase incredible claims data.
We reduced the benefit of morbidity improvement embedded in LTC reserves and the combined impact of morbidity and mortality improvement results in a higher reserve and assuming no improvement in morbidity and mortality.
We have a strong track record of obtaining approval for rate increases, but our approach to embedding premium increases in LTC reserves remains conservative.
Overall, our LTC business is among the most conservatively reserved in the industry with a margin of 45% or 10.9 billion us dollars over our best estimate reserves.
This concludes our prepared remarks, and operator, we'll now open the call to questions.
Thank you if you have a question and you see speakerphone. Please mr. Vincent before making your selection. If you have a question. Please press star one on your telephone keypad canceled. The question. Please press the pound sign. Please press star one at this time, if you have a question there'll be a brief pause for participants register thanks for your patience.
Okay.
And the first question is from John Aiken from Barclays. Please go ahead.
Good morning, right, it's hard to argue against the success you've had on the portfolio optimization, particularly since we've got.
Hit ratio up at a 146%, but we're actually seeing now the tangible evidence of the impact that seeing and growth, particularly in North America at what point do we are we going to see the capital deployed to in terms of to offset this headwind on earnings and on this deployment how long is.
Going to take before we actually start to see earnings come into it to be able to boost the growth that's been moderated over hospital.
Yes. Thanks for the question, John well, I think you're you're right clearly portfolio optimizations being a big focus for the organization. We stated at our Investor Day. This was going to be one of our big priorities and quite frankly, the first about birdies.
And as we mentioned earlier, we had a goal of 5 billion and Weve delivered against 3.9 at that goal with the actions that we've already taken.
Delivering once fully completed will will deliver 4.4.
We're also really pleased with the trade offs that we've had to Mike from an earnings and from a future earnings perspective, as it relates to the portfolio optimization activities.
And in spite of the drag that comes with the earnings on portfolio optimization, we still being able to deliver really strong ROI. This year you did like we've delivered 13.3% year to date early despite the buffer that we haven't capital. So there is a time lag from when we free up there.
Well to where we deploy it and that again, we will be something that we'll continue to focus on and we've been very focused on the way that we deploy our capital we believe that whilst organically, we still have a lot of opportunity to.
Grow the businesses in the geographies that we operate in we'll continue to look at.
Increasing the balance sheet strength of our business our leverage ratio has come down quite significantly you heard earlier from fill that we have further opportunities to read you sell leverage and we'll continue to look at buybacks. So I feel pretty good with where we're at on portfolio optimization I feel good about the tradeoffs that we've made to deliver against the goals.
On capital and that capital strength will will be I think the tailwind for us as we look to the future. So generally feel quite positive about where were at their.
Great and this is Phil if I could supplement just for the number on the earnings impacted that tradeoff.
$40 million per quarter.
In the context of the $3.9 billion of capital that has been released from portfolio optimization activities and the number on the redemption in.
Use of capital to redeem.
Thats in the fourth quarter at the end of this year a billion dollars being deployed.
I'll preferences for organic growth and we continue to remain very disciplined when it comes to inorganic activities, but that is not something that we will rollout will just make sure that thats. What we do inorganically is something that would be in the best interests of shareholders.
Thanks for the color I'll re queue.
Thank you.
The next question is from Meny Grauman from Cormark Securities. Please go ahead.
Hi, good morning.
And on Hong Kong looking at it from the outside it seems.
Surprising that you had so much strengths.
In that region, just given what's going on and ER and not just politically but the recession that seems to have been triggered by by the political unrest Im just wondering how you how you explain that.
Hi, I understand that basically and if you look forward.
If the same conditions persist would you expect over time to see more of a drag from conditions on the ground just trying to get better understanding of how those conditions are impacting your results.
Thanks for the question. This is I mean, let me just going to step back and give a little bit of.
The business background on Hong Kong, our primary focus as.
Phil mentioned in his opening comments is the domestic market, which has resulted in a slightly different mix.
For us as compared to our peers.
The mainland Chinese visitor business, that's contributed in the previous quarter's roughly in the region of about 18% to 20% this quarter as importantly off 2019.
Contribute at 14%.
What we have also been able to do in Hong Kong is significantly increase distribution strength. So our agency headcount is up by 20%.
And we have been able to see broader level of success not only on agency momentum, but also in bancassurance as well as the volumes that we generate to the broker channel.
In addition to that.
In quarter, two at the start of quarter to the Hong Kong government announced tax advantaged schemes, covering health and the Diamond health and the document that two strategic areas of focus for us I'd be have again distinct strength, both in health as well as in the document of it in Hong Kong as you would know.
Within Hong Kong.
The number one sponsors are on the MPS scheme and again, we have been able to establish ongoing momentum in terms of net flows as well as in terms of AIU ends on back of some of these sites advantage announcements that were made in early.
Part of.
Quarter to be did launch, which is we had tires did get overwhelmingly strong response and that led to the growth in sales as well as new business value that you see for Hong Kong in policy, but again as Phil again alluded in his opening comments that it will not only the strictly to.
We had tires. We also got strong response on the deferred annuity plan as well as some of the boss savings products that we had launched at the at the start of the.
Quarter. So the core earnings growth of 28% the new business value growth of 55, along with sales growth of 58%, it's primarily predicated on the broad level of traction that we've seen in Hong Kong across channels, specifically in the agency force as well as on account of the tax advantage.
It seems that will launch in the early part of quarter to having said, which we obviously are keeping a close watch on the challenging Hong Kong situation and it's not unreasonable to expect that could cause some headwinds as we look into the future quarters, but.
Again, we feel confident about our Hong Kong franchise, and we have continued to invest it in meston.
What what has been a flagship franchise for us in Asia.
Great. Thanks. Now then this is Phil if I could just a couple of things clearly it's business as usual for us at the moment in Hong Kong, but I just wanted to emphasize that the introduction of the.
Tax deductible solutions, both for the insurance products, but also in the retirement products the phone talked about wealth and asset management business. That's been a favorable favorable development so for us on for the industry.
The Sunday were seeing very strong initial impact.
Once.
Once that initial impact is.
Is complete the May we may see a diminishing.
Ongoing.
Amounted to sale. So we've seen a 55% increase in the volume of sales I'm not that that is really as a consequence of the introduction of those products that came in on the first of April and that said that initial interest we over the course of the coming year, we may see subsided somewhat.
Thanks for that and then if I could just ask on the the LTC review, if I understand correctly when you talk about.
Morbidity your.
Sort of reiterating that you that you believe in your view of of of morbidity, but you're still.
In this review taking a more conservative.
Stance, nevertheless, and and reducing the padded assumptions.
So im just wondering how you make that decision.
Is it really just sort of Uh huh.
Market driven decision to say that we believe in our in our.
Look, but the market wants us to be more conservative Im curious, how you make that that decision.
To to reduce those assumptions.
Many it's Steve here and it's the morbidity improvement assumption that I believe you're referring to there and yes. So we did we did a very exhaustive review of our own data there and as I said, we see evidence of morbidity improvement and mortality improvement and I think the keeping as the correlation between the assumptions.
When we look at our reserves in aggregate, we're taking we look at the overall adequacy of reserves and where we set in terms of level of prudence on certain assumptions.
We feel that.
We've moved to a more conservative ended the range on the morbidity improvement assumption.
But I would acknowledge that we've heard there's been so much focus on this assumption while it only represents about 2% of the PV of claims so.
We listen to some of that in terms of making decisions on where to land in the range.
Thanks.
Thank you. The next question is from Steve Carell from a capital. Please go ahead.
Thanks, very much probably for Neil a question on the Japan, Cooley business, which.
Mentioned it a couple of times. This morning is clearly Wang here in the near term I.
I didn't see we didn't see sales improved much from Q2, so maybe it's worth circling back is the conclusion.
I guess I'm wondering is the conclusion that the products back to being in full flight and sales or are sort of not getting back to prior levels.
And maybe this is the run rate or do you expect more traction or that to evolve over the next few quarters.
Yes, thanks for the question.
Let me start by saying that despite the recent headwinds that we've experienced in Japan we.
Have delivered double digit Goto earnings growth in Asia.
Got it.
Three as well as we delivered double digit.
Yeah.
In core earnings in Q2 and in part to plead specifically has been on the back of the in force business growth as well as the impact of some other management actions just kind of underscores the diversity and the strength of our diversified franchise in Asia.
On an ex Japan bases, our core earnings have grown 35% as as you probably would have I would have seen from our from our earnings release.
On Japan, specifically.
The sales what challenged in quarter three and this was again on the back of the fact that we did experience.
Definitely cessation of quality sales and product to the new axles got enacted.
Early part of quarter three soon after that we launched a 40 proposition.
Did not get too much traction.
In both July and August however, on the back all the device product that we launched in September we did see some pick up in momentum.
In September having said beds.
I had mentioned during the quarter to earnings call that it will take us a few quarters to really understand the full impact of the new tax rules on on quality.
And our focus has also been diversifying and reducing our dependence on quarterly so we have been expanding our channels to offer nonqualified products. So for example.
The retail products grew by about 18% in part of three and again on other wells brought up specifically in our died agency force in Japan as well as on the MGM side, we saw double digit growth. So it's the focus has been as I said bought on devising and coming up but new ideas and calling as well.
Well as focusing on some of the.
Other non clearly products, but again wanted to re iterate that it's still kind of early days. We've just had a couple of months of experience.
And I think it's going to take us a at least a partner if not too.
We will realize the full impact of the new tax rules on quality.
Thanks for that and fair enough I'm sure July and August or seasonally slow months as well. So we'll continue to look out.
Look at that Ed So second question.
You talked about the buyback.
A little bit earlier used about half the buyback last year you filed for another 5% buyback can you just refresh us on how you're thinking about its use going forward and I guess, specifically with now very good visibility to get to that 25% leverage ratio, maybe even a bit better does that make you inclined to be a bit more aggressive with the program.
Yes, Thanks, Steve.
We think obviously very active with our anti body since we initiated our program Weve repurchased 70 million shares total value of 1.5, Bill and Q3, there was a repurchase of 443, if you net that against the drip.
We returned about $260 million, where the capital.
So we feel good about how we've been executing against our NCB program and clearly you know as we improve out luquette ratio and as we feel even more confident about our balance sheet strength.
We believe that that gives us even more flexibility to think about how we deploy our capital and as I've said many times.
Being in a very strong position from a capital and balance sheet perspective, just gives us much more optionality and abilities to think through how we deliver against our medium to long term targets for the franchise and again as I highlighted earlier I think we've done that in a very efficient way the tradeoff in terms of the freeing up capital as being a very good one for the company not only from or touch.
Specifically, but also from a risk profile perspective. So we continue to look at share buybacks is an important way to return capital to the shareholder and to improve our returns and will again I think continue to focus on.
Being a net return or of capital when we think about.
The future quarters.
And this is Phil just to supplement it goes back to a year ago. When we introduced the Unsi Ivy the context for introduction of the NC IB was that we had released a substantial amounts of capital as a consequence of portfolio optimization in the case of the year ago. It was a billion dollars for number of from a number of reinsurance transactions.
We very much like the tactical flexibility that the inside the provides and we're not yet done with portfolio optimization, we've released $3.9 billion of capital from those initiatives got a 5 billion dollar targets. So that's one of the ways in which we expect to continue to utilize it.
Thanks very much.
Okay.
Thank you.
Your next question is from that Gabriel machines from National Bank Financial. Please go ahead.
I have another question on the quarterly and on the capital.
Coli sounds like you launched a new product.
The sales outlook, there and the dollar for dollar.
Well, if they'll have a new product view, the gain new business being producing over the old product growth.
So.
On on quality sales.
I said be on the back of the enactment of the new rules, we did not see too much of attraction in July and August .
We did have we did launch a device version of the quality product in September we did see some pickup.
Lastly, the total sales of coli for for Japan, and pardon me a was about 15% off that also.
Baton sales.
And again as I mentioned earlier I think it's going to take US a couple of quarters to understand the full impact now we also understand that the tax advantage oncology products have significantly diminished. So it's kind of difficult for us to kind of predict as of right now as to how bad the quality sales.
Unlikely to settle but my sense is it's going to be lower than what we had seen or encountered in in 2018, but as I said.
Watching it closely I think between quarters for all this year and part of one up next year, we should be able to get a good grasp of it.
Does that I'd just add.
The question was also on the profitability of the new product, we get real we don't clearly disclose profitability by product or the margin on each product, but you know that we would have very clear guidelines on minimum thresholds that each product would need to deliver against to to be able to go to market. So thats something that we reported.
And against.
My next question on capital deployment.
People are acknowledging your position of improved substantially in the buyback is nice, but a lot of investor go dark who are benoit by the the drip discount that the.
90 million a buyback this quarter, but 7 million Im sure shares issued under the drip.
I'm wondering if.
About a bit more and why you still have a structure in place and maybe it's but you're issuing the drip above of where you're you're you're buying them up with pack. The goal adds you're talking about.
Yeah. Thanks Gabriel.
Not surprised to get this question and again, we continue to feel that the drip is a really valuable and important element about tool kit as it relates to capital management, we had been a net return or capital as you highlighted we've.
Repurchased 19 million worth of shares, but we issued seven or 7.6 in drip, but the net of the two was was the repurchase of 11.7 million shares or return of capital of about 260, as I mentioned earlier and since the inception of both programs. We've returned more than 800 million adults with the capital.
So so we gain a really pleased with the strength of the capital position that we're in and the balance sheet and we're going to continue to look at our optionality as it relates to deployment of capital.
But were going to be a net return or of capital in the drip is a tool kit that I think gives us even greater flexibility in strength.
Through question limit.
Okay.
Thank you.
Your next question is from Humphrey Lee from Dowling <unk> partners. Please go ahead.
Good morning, Thank for taking my questions. The first one is on Ltcs first Steve Finch.
About the adjustments will expect a clean coal and then also the embedded re increasing reserves I was just wondering if you can provide a little bit more color in terms of the moving pieces I understand the the lower termination elimination peak periods was partially offset by incidence and.
A little bit of other benefits kind of reduction, especially on the termination side, what you've been seeing in terms of.
How much lower the termination relative to your expectation and what were the changes that you made that attitude the reserves.
Okay. Thanks Humphrey.
So I think it's also important I'll comment on what that drivers, but also comment first on what we're not seeing which I think is notable as well specifically, we're not seeing longer length of stay on claim which I think as important we're not seeing claim shifting to higher cost site of care and we're not seeing increased usage of the amount.
The benefits so a bit of contacts for what we're seeing on the termination experienced that you referenced a number of years ago. We made operational changes to standardize our claims adjudication process and make it more proactive much earlier in the assessment and that resulted in a reduction in incidence rates and a reduction in termination.
Rates in the elimination period.
In our 2016 study all of those impacts of the operational changes were not fully apparent in the data termination experienced tends to lag incidents experience and at the time, we reflected the emerging data that we had and we move forward to 2019, and our 2019 study has significantly more termination and incidents experience which increased.
As our confidence in setting our assumptions. In addition during the study period for 2019 has homogeneous data. So no major operational changes that can make identify identification of trends have been more challenging so thats really the driver them, where we're seeing.
That makes sense.
And then in terms of the.
Shifting gears to be global Lam about the.
It's a single fixed income then days of 8.5 billion outflow, but do you still have any exposure to that particular client and also how should we think about the earnings impact, which I think should be pretty modest, but I just want misha that's the case.
Yes, Thanks Humphrey, it's Paul here, Yeah, the as Phil mentioned it was a redemption of a large.
A large can't institutional client it was a sub advised mandate.
The redemption when there was a decision made to internalize those assets. There was no real performance concerns raised to us by the client which is important to note on it and you're right. The relatively earnings impact and this is relatively immaterial due to the thin margins of a mandate that ties.
In terms of.
Our exposure to the client, we still have assets with them or one of a one of the larger multi manager still on their platform and at this point there is no indication that theyve any plans to.
Change that relationship with us so for the to the assets that you the that they still have with you.
Similar kinds of generic core fixed income products come more specialty product.
There are a little bit different in terms of that type of product and the magnitude wouldn't be as big as what this redemption months.
Okay got it thank you.
Thank you.
The next question is from Sumit Malhotra from Scotia Bank. Please go ahead.
Thanks, Good morning, first for Anil or maybe Phil.
Just looking at the.
The impact of new business in the Asian segment.
You you folks have given us some disclosure six months ago on what exactly the Japan coli business was contributing to this line.
We obviously saw the decrease last quarter, but.
A good level of bounced back in Q3 sequentially is this.
Primarily related to.
The introduction of the new products in Japan, because as has been mentioned they call. It didn't look like the.
The sales in Japan rebounded as sharply as his contribution that.
Then I'll take it and then you cannot be orbcomm and so so some of this is a aneel. Thanks to the question. So.
The sales as.
As I mentioned the quality sales are roughly about 15% off the total sales.
In Japan, and I guess, we saw a little bit of step up in momentum.
In the month of September the total impact from a year on year bases on new business gain line for.
For 40 sales in Japan on a post tax basis is approximately $25 million.
And again, that's as I said as you rightly said is on account of the lower sales that we experienced in this quarter and specifically from a yield on your perspective, it becomes more challenging because quietly and quota for off last year was very strong months, although based on quarters sorry.
I should say Oh fought for the poly sales in Japan.
And this is Phil just to supplement as we said earlier the total company level, we've seen decline in the impact of new business compared to the same quarter of last year, a 17% decline that is driven by the experience in Asia and the most significant component of that as Anil said was the coli busy.
In this in Japan.
To add to that explanation. Another contributor was in fact Hong Kong.
The business that we've written in Hong Kong, we have seen quite significant sales of the voluntary health insurance game products those products ourselves that generate strain rather than gain upon initial issuance and therefore, that's a that's also been the contributed to the year on year decline in the impact of new business that doesn't.
And the businesses is poor the new business value.
In other words, the present value of future statutory profits remained strong, but it's it's a consequence of the Canadian accounting with these being annually reprice CIBIL renewable products.
And I think the bottom line, we're getting two years you look at this set of results for many life and whether it's some of the divestitures or.
The the product changes in Asia.
We're seeing a slower growth rate and Asia, certainly having to carry.
Almost all of the earnings growth for the company relative to the other businesses with what's going on in Japan in Hong Kong until you made mention to the consistent double digit growth. This business has produced do you still feel that's a reasonable outlook in the in the context of.
These these factors were talking about.
So summit as you know I couldn't make forward looking statements but.
We've had the headwinds on on quality sales in Japan and call it to be had that pretty much.
Oh God scratch into quarter three.
Well add in both these quarters, we weren't able to deliver double digit growth on core earnings as well as on new business value I think one other key things.
Is the diversification strength of our Asia business and as you can tell on an ex Japan bases are coatings is up 35%, our new business value was up 31% and Thats on account of the fact that we have been investing consistently in expanding our debt.
If you should not agency headcount at the ban Asia level is not up 18% year on year and that has translated into a very significant both for us on active agents, which in turn is kind of onto butane to the to the ongoing sales.
Well as the new business value growth. So I think the diversification strength of our Asia franchise gaming came through in quarter. Two we believe despite the challenges and it did come through again in quarter three.
Last question is for Stephen maybe fill again.
Certainly appreciate the the increased disclosure that you folks have given us with respect to long term care over the last year, and especially as the new information today.
With this with this in mind and this this greater transparency is there any change in how frequently you're planning to review.
The assumptions and.
Trends in this business I know, it's been triennial for as long as I can remember anyway.
Is this enhanced disclosure.
The first step into perhaps communicating more frequently with.
How how this business is performing and related to the just to take back to Investor day.
Year to half ago, one of the slides you showed us indicated that.
Long term care profitability or where earnings from enforce we're going to increase it at a decent rate through 2024 do any of the changes you've enacted in the review this year.
Back to that.
For the ability outlook.
Hi, Thanks emitted, Steve I'll start and sell can add.
So just a reminder, that we track the experience on this business on a quarterly basis, so very very frequent and each year as chief actuary I'm required to sign off on overall reserve adequacy. So if there were any material changes that impacted what I believe the adequacy of reserves, we would have to update.
More frequently.
We are in this business, it's a very long term business as you know so it takes a while upward trends to begin to emerge as sad if experience changes. So the plan is to keep on a three year cycle, but we will certainly be hide looking in a lot of depth on a much more regular base.
Yes, and we'll think about what what we disclose around that.
Nothing nothing fulfill to add on that Okay, and then in terms of.
The.
The impact on on run rate earnings this really it didnt have a material impact on the run rate earnings if you look at.
The slides.
Which shows the bad levels before and after the basis change on LTC. It only went down by $200 million. So thats not going to have any material impact on run rate earnings.
Overall, we did see a little bit of geography changed from the basis changes so reduction in earnings on enforce of roughly 10 million Canadian pretax and that's offset by a pickup in the policyholder experience line, so that sort of the run rate impacts that we're seeing from the overall basis changes.
Thanks for taking us.
Thanks.
Thank you.
Next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Hi, Good morning, just on expected profit.
And it was flat.
Phil you mentioned, a few items that that take it up to 5% and I apologize I missed it and so you can reiterate that but where where I'm going is it.
If we have the same headwinds as we do which is weighing on expected profit.
Is it fair to say that over the next year or two years.
Keeping your 10% to 12% EPS growth target looks a bit challenged or is there other items that can help push you into that.
Into that range.
Hey, Doug This is Phil Thanks for the question so expected profit growth. The two items that I highlighted earlier, one was the impact of legacy transactions.
The U.S. in Canada.
To put a number around the year on year headwind, if we compare third quarter of 2019 compared to the third quarter of 2018 isn't the order of $35 million. So that's clearly weighing on expected profit growth. The other component. So that I highlighted is the impact of the annual actuarial review as Steve just said.
That's about $10 million. So if we adjust for those two items, we would get to a normalized growth of 5% in the current quarter. What we've said before and I think this is a good indication is that.
Normal run rate, we would expect or or level of growth.
For expected profit in the order 6%.
And that would of course will be higher.
Asia insurance business than the rest of the world, but I think that's a good indication.
And that's one component of the overall tend to 12%.
That is part of our medium term financial operating guidance other elements that make that 10% to 12% credible are that we expect wealth and asset management to be accretive to earnings in the medium term accretive to earnings growth in the medium term, we expect new business in Asia to contribute to growth.
And we also have the the bottom line impact of the expense program that as you can see from our efficiency ratios just over 51% that is having a meaningful impact on our level of profitability in the earnings growth. So I think 10% to 12% is still credible but it is challenged.
During in the context of what's going on in the external environment, we're seeing.
Reductions in interest rates were seeing challenges in Japan with coli for example.
But I think we have a diverse business with tremendous growth opportunities.
Okay, and then just second on long term care insurance, Steve again, I apologize you've talked about embedding 1.9 billion.
For rate for for price increases I believe and I think you mentioned what you what the total would be in I think it was around 6 billion just wanted to clarify that.
Then the other one I just on long term care insurance I know this year I have for us reserves as a percent of any I see was actually increased to about 32% first and it was 30% of think back in 2018. When you gave us that disclosure at the Investor Day is there anything to take from that increase.
And the gap between your Canadian any IC reserve.
Thanks, Doug I'll, Oh, I'll take those in order so on the premium increases yes. So we've embedded 1.9 billion and then you can you can see on page 21, as a result of this review and carryover from the continued guy.
Rate filing efforts that we have ongoing the estimated total ask is about $6 billion.
There is a process that we have to go through too with the updated experienced go through the the rules and requirements. So that number may change a little bit but six is a solid estimates so yes just under.
A third of the total amount where embedding in our padded reserve assumptions and as I said, we we've shown really good track record here.
Having achieved all of the amounts that we had it embedded in our pattern reserves from the 2016.
Then on your second question about level of IRS reserves relative to the U.S. stat.
I say about 30% the IRS is more market sensitive so it does bounce around a little bit I think that that that.
Access has been about 25% to 30% depending on the where interest rates are I think the way I look at I think whats really important in terms of the difference between our book of reserves under the IRS at standards and U.S. GAAP reporters, which are very different rules results in us having.
Margins on each of the assumptions that adds up to 45% over best estimate.
And under US GAAP rules very different construct and as you see from the.
That the S&P report that we put information on a on one of the slide shows that the industry averages about 5% margin over.
Over last recognition. So we think there's fundamental difference in our reserving that is.
Next the reserves very robust.
Great appreciate the color. Thanks.
Thank you.
Next question is from David smelter Madden from Evercore. Please go ahead.
Hi, good morning, Thanks for taking the question.
Just a question for Steve on the long term care review.
And I I saw that you you lowered the incidents assumption, which was an offset to the lower termination rate.
Just wanted to drill dot down exactly on what you're seeing.
On incidents across the attained ages.
And I'm, specifically interested in what you're seeing in attained age plus 85, or 85, plus and how you had changed how you change your assumptions there.
Right. Thanks, David.
Going back to.
The comments that I made about some of the operational changes that were not fully apparent in our 2016 study. So what we found overall is that we we've got lower termination experience and lower incidence in part because the full impact those operational changes were not reflected in.
All the data that we had for 2016, so thats more of the fundamental.
Thing that we're seeing.
In terms of answering your question, though we as I pointed out we do have an increase in.
In data at the older ages, and our updated assumptions.
Our our well in line with the experience that we're seeing across the ages.
When we get into the very older Ages, we do supplement you know overage 90 or 95, we also supplement with industry data in terms of looking at trends in terms of how the rate of increase in incidence rate, but we feel quite good. We spent a lot of time, making sure that are set of assumptions was in line with or.
And where we think the experience is going.
Got it and.
I guess just on just on the increase in just the amount of data that you have.
Do you think that this makes it more likely that you can transact on the book.
In terms of maybe some sort of risk transfer or like I guess, just how our counterparties viewing.
The increase in data, especially at this older ages or that do they think its credible or maybe a little bit of a bit of color on how thats being viewed in the marketplace.
Hi, David its leadership here.
Obviously, the data is something that we've recently reviewed.
And I would say with respect to.
Narrowing the range of potential future outcome is more credible experience here so to that to that extent, we would expect in any discussions with external parties that that the credibility data.
We'll have improved and I'll be reflected in any market pricing.
Okay, Great and also just just a question around capital.
I guess, just just generally what do you guys think your excess capital position is.
Right now.
And also I think.
Yes last last time rates, where this low in Hong Kong, there was a need to inject capital and into the the Hong Kong local entity.
Do we need to do that again now that raised or kind of testing those loans again.
This is Phil David Thanks to the question I saw the with the Hong Kong piece first you're right. So when we last or quite substantial drops and interest rates in Hong Kong, we did inject capital into that business, we haven't needed to inject capital into the business. This year as a consequence of lower rates.
But what we have done is deferred remittances, there's no doubt that lower interest rates to create a capital headwind in Hong Kong, but that is our solution the deferral of from businesses. Other other tools at our disposal as well such as reinsurance.
Should we see things deteriorate further.
To your question on.
Capital management.
I think we are in a strong capital position and this is exactly where we did want to be in what is one of the objectives of the portfolio optimization components of our.
Strategy.
With 146% so like that ratio.
That is above what you would typically expect to see as that so we do have capital to deploy and that is why we are taking actions such as.
Taking opportunities to redeem maturing maturing debt issuances or debt issuances that become available for adoption. So that we can deploy that capital in a way to further strengthens the balance sheet and also deploy capital in a way that rewards shareholders and thats the context for the.
See I B and also our commitment to the 30% to 40%.
Dividend payout range with a fourth quarter annual review cadence.
I can give a number on.
Above above what like out ratio would be considered excess I think there's always a judgments as to what that is but we do have flexibility in how we deploy capital including to support all of our organic growth opportunities and potentially inorganic opportunities, but as I said earlier will be sorry.
Supplant when it comes to inorganic options.
Okay. Thanks for the answers guys.
Thanks, David.
Thank you next question is from Tom Mackinnon from BMO capital markets. Please go ahead.
Yes. Thanks quick numbers question, then a follow up.
Throughout the release it talks about.
In the corporate segment, an increase in the withholding tax accrual and in the USA segment, a tax true up.
If you can give a those with each of those.
Numbers were.
Hi, Tom This is Phil So yes, you can see in the corporate segment. So low earnings in the order of $14 million I think if we compare this quarter to the same quarter last year.
One of the drivers for that is high withholding tax accruals and that simply is.
We accrued withholding tax on.
Remarkable earnings from the U.S. above us and I see threshold. So I don't have the exact number for that in front of me, but we can give you a call offline I think.
The second item.
On us tax accruals actually both in the U.S. segment and in wealth and asset management.
You see some some noise in the tax line this quarter compared to the same.
Quarter of last year on the run rate.
And ready that is part of an annual process, where we true up tax accruals. It just so happens this quarter in the U.S. that has.
Favorable impact relative to the prior year and wind that has modestly unfavorable impact relative to the prior year, but in fact, both this year and last year were favorable and if you compare if you compare the.
The tax that you're seeing relative to the run rates I think thats a good estimate of the dollar impact.
Okay. Thanks.
And then with respect to all this discussion about new business gains in coil in Japan, I mean, the way I look at this is the new business value margin in Japan.
Third quarter of 2018, we sold a boatload of this quarterly stuff in Japan. It was 27.7.
Yes, I hardly sell any in its up into 36% range.
It sounds like what you're selling in Japan is a lot more profitable than what you sold before.
It just happened that the way the earnings were booked when that on a on the coli stuff before or is it front at more and now it's more in the expected profit is that is that safe to say and once we kind of lap this quarterly noise from Q3 in Q4 18.
I would we be back to more of a reasonable cadence in terms of Asia.
You know expected profit in new business gains growth.
So Tom this is a neil.
So so that's right I mean a fully.
First we have.
Portfolio off kind of offerings in Japan, because the maybe think about it is that'd be a kind of addressing a different needs of clients across different segments, and and I alluded to the fact that we try and Frank they're trying to kind of drive.
Great a balance between coli and non quality sales and we've kind of seen some some progress in in that direction.
On the quarterly margin Speece, yes, the margins have kind of gone up.
By by about.
Eight percentage points to 36%, but that's also on a founded the fact that we've been very disciplined around expenses.
And ensuring that we have kind of driving a much more optimal product mix on the back of the slowdown that we've kind of witnessed on quality side and in many ways. It's kind of a testimony to the fact that we have a different levers to be able to kind of mitigate some of the headwinds.
That that that have been presented to us in Japan.
Okay. Thanks for that color.
Thanks, Tom This is Phil again, just to get back to you on that number you asked for a moment ago. The withholding tax accrual. This oh, we might incorporate for multiple earnings from the U.S. $25 million.
Okay. So that hurt the earnings by 25 million in corporate is that right.
Correct.
And and nothing on the tax true up in the U.S. segment.
You know the dollar amount there.
Let's say sort of in the order of $15 million. Thank you.
Thank you.
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