Q3 2020 Manulife Financial Corp Earnings Call
Please be advised that this conference call is being recorded.
Good morning, and welcome to the menu life Financial's third quarter 22.
The financial results conference call your host for today will be Ms. Adrian O'neil. Please go ahead Ms. O'neil.
Thank you and good morning.
Welcome to Manulife earnings conference call to discuss our third quarter 2020 result.
We are conducting this call virtually.
Our earnings.
<unk> financial statements and related and DNA statistical information package and webcast slides for today's call are available on the Investor Relations section of our website at Manulife Dot com.
We'll begin today's presentation with an overview of our third quarter and then up.
<unk> on our strategic priorities by Roy Gori, our President and Chief Executive Officer.
Following boys remarks, we'll end today's presentation, which still Weatherington, our chief financial Officer, who will discuss the Companys financial and operating results.
Following the prepared remarks.
Great Art, which were recorded earlier this week to ensure optimal sound quality, we will move to the live question and answer portion of the call.
We ask each participant to adhere to a limit of two questions if.
If you have additional questions. Please re queue and we'll do our best to respond to all questions.
Before we start please refer to slide two for a caution on forward looking statements and slide 34 for a note on the use of non-GAAP financial measures in this presentation.
Note that certain material factors or assumptions are applied in making forward looking statements and actual results may differ.
From materially from what is stated.
With that I'd like to turn the call over to Roy Gori, Our President and Chief Executive Officer Roy.
Thanks, Andrew.
Good morning, everyone and thank you for joining us today, turning to slide five.
Im very pleased with the third quarter financial results that we announced.
Yesterday I want to start with a few opening remarks about how the diversity of our business has been a crucial factor in delivering strong financial performance since the onset of the global pandemic.
Despite operating in a challenging environment for most of the year, we delivered over $4 billion of core earnings year to date.
Now net income is comparable at $4.1 billion.
This is a testament to the diversity and resilience of our business model as well as to the importance of the investments that we've made in our digital transformation over the last few years.
In Asia, we rank as a top three Pan Asian playoffs.
Let me have insurance operations in 11 markets with over 115000 agents.
We have more than 100, bancassurance partnership of which eight or exclusive and provide us with access to over 14 million customers.
In Asia.
Which includes the emerging markets agent count is growing 30% in the last 12 months.
And NBV is up 8% year to date.
We are at scale in most markets, where we have operations and the breadth and depth of our franchise in Asia has played an important role in delivering the strong performance that I referenced.
In the US we're a leader in innovative behavioral insurance products.
And John Hancock vitality, plus offering has continued to be a key sales differentiator for us.
In addition, the USA is a solid contributor to core earnings led by stable contributions from our informed us business.
In Canada, we are number one in group benefits new business year to date.
Bring top tier plans and support to more than 3 million Canadians and their families.
Our Canadian business is a significant contributor to sales and NBP as well as to core earnings.
And finally in our global when business, we're a leading provider of investment and administration solutions.
Although retirement plans with nearly 8 million participants globally in Hong Kong the menu like mandatory Provident fund is the largest MPF scheme sponsor with a market share of nearly 25% in terms of AUM and.
And Weve been ranked number one in this market since the fourth quarter of 2016.
In terms of sales.
We also ranked number one in Canada retirement, and number two and three in US retirement small case and mid case, respectively.
We view the diversity of our global Whammy, you I may as a source of strength and effective in reaching $715 billion at the end of the third quarter.
Turning.
Slide six and our financial highlights for the third quarter of 2020.
We delivered core earnings of $1.5 billion and net income attributed to shareholders of $2.1 billion.
Which included a gain on a reinsurance transaction that improve the capital efficiency of our legacy business and a charge related to the.
Annual actuarial review.
Our AG sales were $1.4 billion.
Down a modest 2% from the prior year, which reflects the strength of our product shelf the maturity of our digital capabilities and the tenacity and resourcefulness of our distribution channels.
Our capital position remains strong.
With a light cat ratio of 155%.
Book value per share rose to $25.49 up 8% from the prior year.
Turning to slide seven.
As I've said on various occasions in recent months the focus on our five strategic priorities has not changed nor have the.
The three macro demographic trends that underpin them, namely one the emergence and growth of the middle class in Asia to the impact of aging global demographics on the retirement got them will transfer and three increasing trends towards digitization of the customer experience.
While weve already achieved.
The sale portfolio optimization target Im very pleased to report that were leased $485 million of incremental capital from our legacy businesses in the third quarter.
This was largely as a result of executing a reinsurance agreement related to our US bank owned life insurance block.
We have a mature expand.
Efficiency program with processes in place that enable us to be responsive to headwinds such as those in counted throughout the pandemic.
Core expenses declined by 5% in the third quarter of 2020 versus the prior year quarter, and we achieved an expense efficiency ratio of 51.2% among.
A modest decrease.
Spend 0.2 percentage points from the prior year quarter.
And we continue to expect to achieve our target of $1 billion of expense efficiencies by the end of 2022 years ahead of schedule.
Our third priority to accelerate growth in our high potential businesses.
And we aspire to have these businesses generate too.
For the total company core earnings by 2022.
Our highest potential businesses accounted for 65% of total company core earnings year to date. However, it's worth noting that this figure benefits from the absence of core investment gains in the denominator.
Normalizing for this item our highest potential businesses would have cost.
So you did 61% of total company core earnings, which is a five percentage point increase since 2019.
In Asia, we sold our first policy memo.
Digitally savvy market with one of the lowest insurance penetration rates in Asia.
And we entered into a new partnership with Guangdong ball a community.
Unity with more than 5 million members across Vietnam that improves access to financial advice and solutions for expected and new mothers.
In global win manual like investment management was included in the principal for responsible investing lead US grew 2020 as one of only 36 organizations.
Formally recognized for being at the cutting edge of responsible investment and demonstrating a strategic commitment to climate change reporting.
This highlights our commitment to being a leader in sustainable and responsible investing.
Our fourth priority is about our customers and how we using technology to attract.
Gauge and retain customers by delivering an outstanding experience.
We remain focused on our digital transformation.
And we've invested over $600 million in digital capabilities since 2018.
In Asia, our relationship NPS score increased by 11 points this quarter compared with the third.
Third quarter 2019.
This reflects the quality of the digital solutions that we've rolled out and our commitment to continue to provide outstanding service to customers during the pandemic.
Our final priority is building a high performing team.
Target is to achieve top quartile employee engagement compared to global financial.
Services and insurance peers by 2022.
We recently completed our 2020 employee engagement survey and ranked in the Eightyth percentile amongst global financial services and insurance piece, a top quartile position and a significant improvement compared to 2019.
In addition manual.
It was recognized by Forbes on its 2020 world's best employers list, putting manual us in the top 100, best employees globally, and making US one of only three financial services companies globally to make the top 100.
Turning to slide eight.
We embark on a digital transformation journey several years ago.
Hello, and have invested over $600 million in digital capabilities since 2018.
These metrics reflect the impact of those investments.
The vast majority of our products are available to prospective customers through virtual face to face solutions.
And given our success in this area. We expect these figures to remain.
Fairly stable over time.
Turning to slide nine.
We remain committed to proactive and continuous investment in digital capabilities to reorient the customer experience over the long term.
This quarter Canadian group benefits loans held by design, a proactive approach using the latest science technology and predictive.
Active analytics to help each member with a unique health journey.
In the US we added the Amazon Halo wellness band to devices supported by John Hancock Vitality program.
In mainland China, we introduced facial and video recognition and intelligent guide script into the sales process.
And in our global land business, we launched several online tools and Automations supporting our advisor community.
Overall, the acceleration and expansion of our digital tools have greatly enabled us to engage more effectively with our customers.
Moving to slide 10.
To conclude I'm pleased with our third quarter.
And year to date performance and Im confident the menu life is well positioned for the future.
We entered 2020 in a position of strength, thanks to actions taken over the past decade to de risk our business and reduce our company's sensitivity to market movements.
Our financial performance has been solid and we continue.
Can you to execute against our strategy.
And we have the financial flexibility to navigate the downturn and to capitalize on opportunities as they emerge both organic and inorganic we.
We will continue to take a disciplined approach to deploying capital and we'll only do so if it's in the best interests of our shareholders.
Finally.
We remain committed to both our dividend and medium term financial targets, given our consistent track record of execution and the fact that the demographics and economic fundamentals underpinning our strategy has not changed.
Thank you and I'll hand over to Phil Weatherington, who will review the highlights of our financial results Phil.
Thank you Roy and good morning, everyone.
Turning to slides 12, and our financial performance for the third quarter of 2020.
We achieved solid core earnings of $1.5 billion in the quarter and core ROE was 11.4%.
NBV declined by 14% and.
Sales declined by 2% compared with the prior year quarter.
We view this performance favorably in light of the current environment.
Average AUM a in global Lam increased by 8% compared with the prior year quarter, reflecting the favorable impact of markets and year to date net inflows.
Of $6.1 billion.
And we maintained substantial financial flexibility with a line current ratio of 155% and a leverage ratio of 26.7%.
I will highlight the key drivers of our third quarter performance with reference to the next.
Few slides.
Turning to slide 13 core earnings in the third quarter of 2000 $21.5 billion down 6% from the prior year quarter on a constant exchange rate basis.
The decrease in core earnings was driven by the absence of.
Core investment gains in the quarter.
Lower investment income in corporate and other.
Unfavorable policyholder experience in our Canadian insurance businesses, and lower new business volumes in the us and Asia.
These items were partially offset by the impact to enforce.
Business growth.
Favorable product mix in Hong Kong, and Asia, other and higher average AUM a global one.
We delivered net income attributed to shareholders of $2.1 billion in the third quarter of note we recognized a gain of one.
$147 million from investment related experience, reflecting the favorable impact on fixed income reinvestment activities and higher than expected returns on older driven primarily by fair value gains on private equities, partially offset by modest credit losses on the estimated.
Due to the impact of the sale of NHL resources limited, which is expected to close on January 4th Twentytwenty one.
The gain of $228 million from the direct impact of interest rates was driven by non parallel movement in swap spreads.
Us risk free rate.
And modest gains on the sale of Fs bones.
Mostly offset by the impact of narrowing corporate spreads primarily in the U.S.
The gain of $162 million from the direct impact of equity markets reflects the continued recovery of global equity markets in the third.
Third quarter of Twentytwenty.
We completed our annual review of actuarial methods and assumptions, resulting in a charge to net income attributed to shareholders of $198 million consistent with the estimate that we had provided in the second quarter.
The largest component of the net charge related to a review of the lapse assumption for our Universal life policies in Canada.
This was largely offset by the favorable impact of mortality and morbidity updates and various other updates.
This year's review also included.
A comprehensive study of our Canadian variable annuity assumptions as well as certain methodology refinements.
Finally, the gain of $276 million from reinsurance transactions was primarily driven by the execution of an agreement to reinsure approximately 3.4.
$4 billion of policy liabilities related to our US legacy Bank owned life insurance business during the third quarter of Twentytwenty, which generated a gain of $262 million.
Slide 14 shows our source of earnings analysis. Thanks.
Forecasted profit on in force increased by 9% on a constant exchange rate basis, driven by growth in Asia and the U.S.
The year over year growth rate was higher than we would typically expect as it benefited from market movements throughout the year as well as from the impact of the annual actuarial review.
We continue to view, 6% as a reasonable annual growth rate for our expected profit on in force.
New business gains were higher than the prior year quarter, driven by favorable new business product mix in Hong Kong and Asia, other partially offset by unfavorable new business product.
Mix in Japan, and lower international sales in the us, reflecting the adverse impact of COVID-19.
Overall policyholder experience in the third quarter was unfavorable driven by higher launch case claims in the us life and lower lapses in North America, partially.
The offset by the impact of higher claims terminations in long term care due to the impact of Cove at 19.
Of note policyholder experience in the US was flat compared with the prior year.
Unfavorable life experience, which included modest Cove at 19 related claims losses.
Was partially offset by favorable long term care experience.
Core earnings on surplus declined compared with prior year quarter, largely due to lower yields and the change in asset mix, partially offset by higher average asset levels.
Turning to slides.
15.
Core earnings increased by 9% in our global wealth and asset management business, driven primarily by higher average you I may partially offset by unfavorable impacts from changes in product mix and lower fee spread in the us retirement business and lower tax benefits.
Core earnings in Asia increased by 6% driven by enforce business growth across Asia, and favorable new business product mix in Hong Kong and Asia, other partially offset by unfavorable new business product mix in Japan, and the Nonrecurrence of management.
Sums in Asia other in the third quarter of 2019.
In the US core earnings increased by 5%, primarily driven by higher in force earnings and a focus on reduced spending in the current economic environment, partially offset by the non recurrence of a favorable tax.
Size in the third quarter of 2019.
Core earnings in our Canadian business decreased by 12%, reflecting unfavorable policyholder experience in our insurance businesses and the number of smaller experience related items.
Core losses in our corporate.
She segment increased by $128 million compared with the prior year quarter, reflecting the absence of core investment gains in the third quarter of 2020 and lower investment income.
We expect lower yields to persist as a headwind to the corporate and other segment given the prevailing in.
The interest rate environment.
Slide 16 shows our new business value generation and sales.
In the third quarter of Twentytwenty, we delivered new business value of $460 million.
Down 14% from the prior year quarter.
In Asia.
New business value decreased 16% from the prior year quarter, primarily driven by lower sales in Hong Kong and the decline in interest rates in Hong Kong.
In Canada, new business value increased 31% from the prior year quarter due to higher sales volumes in large case.
In group insurance.
And in the us new business value decreased 38% from the prior year quarter, largely driven by lower international Universal life sales due to Cove at 19.
In the third quarter of 2020, we delivered eight the sales at 1.4 billion.
It was down a modest 2% from the prior year quarter.
In Asia sales declined by 6% from the prior year quarter as growth in Japan, and Asia other was more than offset by lower sales in Hong Kong.
In Canada, a b sales increased by 23%.
Gold from the prior year quarter, primarily driven by higher large case group insurance sales, partially offset by lower individual insurance sales due to the adverse impact of cope at 19.
In the us a PE sales declined by 14% from the prior year quarter due to the answer.
Premise impacts of Koop at 19, this lower international Universal life domestic protection Universal life and variable Universal life sales were partially offset by higher domestic indexed universal life and term life sales.
Turning to slide 17.
Our global wealth and asset management business experienced net outflows of $2.2 billion in the third quarter compared with net outflows of $4.4 billion in the prior year quarter.
The third quarter numbers include the redemption of a $5 billion equity mandate by a UK based.
Based institutional asset management client.
In Canada, net inflows were $1.2 billion compared with net outflows of $6.9 billion in the third quarter of 2019.
The improvement was driven by the non recurrence of an $8.5 billion redemption.
And and institutional asset management in the prior year quarter and lower redemptions in retirement.
In Asia net inflows of $1.1 billion were lower than net inflows of $2.3 billion in the prior year quarter, driven by higher retail redemptions.
And in mainland China, partially offset by higher gross flows.
In the US net outflows were $4.5 billion in the third quarter of Twentytwenty compared with net inflows of point $1 billion in the third quarter of 2019.
This decrease was driven by.
She redemption of the equity mandate in institutional asset management, which I referred to earlier, coupled with lower retirement plan sales and recurring deposits and higher member withdrawals.
Our average you m- increased by 8% compared with the prior year.
Quarter, driven by the favorable impact of markets and year to date net inflows of $6.1 billion.
And our core EBITDA margin was 30.4% up 170 basis points from the prior year quarter, reflecting our scale and commitment.
Two expense efficiency.
Turning to slide 18.
Our light cat ratio of 155% in the third quarter of Twentytwenty represents $32 billion of capital above the supervisory target.
This is in line with the prior quarter as the impact.
Impact of a net capital issuance and reinsurance as a block of US legacy business were offset by the overall movement in markets and the capital impact of investment activities.
Our leverage ratio increased to 26.7% slightly above our medium term targets.
I'll get to 25% as we have been proactively pre financing debt that is approaching maturity in.
In addition, the stronger Canadian dollar also contributed to the increase this quarter.
Turning to slide 19 and core expenses.
Our expense efficiency program is mature and a disciplined approach to expense management is deeply embedded in our culture at many life.
We've taken actions to contain core expenses since the onset of the Cove at 19 pandemic and have reduced court general expenses by 5%.
Compared with the prior year quarter, and 3% on a year to date basis as a result, our year to date expense efficiency ratio is 52.9%.
Turning to slide 20, which shows the performance of our older portfolio by asset class.
And over the 15 year period since many lives acquisition of John Hancock.
The average return of the overall portfolio during the period from 2005 to 2019 was 9.4% and it's worth noting that this was delivered with significantly lower volatility.
In comparison to public equities.
With the exception of oil and gas and timberland.
Average return of each of the underlying asset classes has exceeded its current best estimate long term return assumption over this period.
Despite this the overall older ports.
The folio return over this period has exceeded our current aggregate best estimate long term return assumption.
Slides 21 outlines our medium term financial operating targets and recent performance.
Core EPS growth and core Aro.
For below our targets, reflecting unprecedented levels of disruption as a result of Cove at 19, Nonetheless, our performance during the first three quarters of Twentytwenty demonstrates the resilience of Manulife business.
Well, it's reasonable to expect code that 19 related headwinds to persist for the first.
Seeable future, we believe a 10% to 12% core EPS growth rate remains appropriate for 2021 and beyond.
This is well supported by both geographic and line of business diversification. In addition, we anticipate continued contributions from our well established expense.
Sufficiency program and robust digital capabilities.
This concludes our prepared remarks, operator, we will now open the call to questions.
Thank you we will now take questions from the telephone lines. If you have a question and you are using a speakerphone. Please mr. handset before making.
Taking your selection if you have a question. Please press star one on your devices keypad. If at any time you wish to cancel the question. Please press the pound sign. Please press star one at this time, if you have a question.
Will be a brief pause of participants register thank you for your patience.
And the first question is.
From John Aiken from Barclays. Please go ahead.
Good morning in terms of the long term care experience. The claims terminations can you give us a sense as to what the split was between the terminations of those policies actively in claims and those that are not and then as a follow.
One if we continue to see the the case counts in das the increase in the US where we should we expect to see the same trade off in terms of the benefits versus the higher claims on life to to basically offset like we saw in the third quarter.
Thanks, John its.
It's Steve bench I'll take that question.
The the gain that we saw in long term care in the quarter that was really primarily driven by guide depth of those on claims. So claim terminations of those that are already receiving benefits. We didnt see a notable increase in index in our active life.
Thanks.
So that was that that was the driver in the quarter in terms of how it.
How it trends from here, it's really difficult to say it.
It depends on how the pandemic impacts different parts of the population and we certainly saw.
In earlier in the year and it was.
Actually reported on that nursing homes care facilities were disproportionately impacted and we saw that come through our Q2 results.
Hopefully and it seems that.
That that situation has improved.
And the the claim terminations that we saw in Q3.
Were significantly lower than what we saw and reported on that earlier in the year. So it it's hard to predict how it is going to play out we're going to we're going to continue to watch the data closely.
Understood. Thanks to Phil if I may on expenses and the efficiency ratio.
Obviously you feel.
I feel very confident about hitting a billion dollar target for 2020, how can we think about expenses going forward in terms of ongoing reinvestment programs, what's going to fall to the bottom line and what what are your it looks for ongoing spend in technology or we're going to continue to see inflation on that same degree as we have.
Last couple of years.
Thanks for the question John and good morning.
Yeah. So on expense efficiency Youre right. So we have made progress it continues to be a core part of our strategy key priority and our strategy.
We do expect this year to deliver the one.
1 billion dollar target that we have laid out.
But we are falling short at the moment of the overall cost efficiency ratio target and we said that we would get to 50% by Twentytwenty two that still the plan, but there is clearly more work to do there.
As a consequence of the environment, we're in and the impact that that had.
Levels on revenues. So it does continue to be important.
In terms of reinvestment and what the component we would expect full to the bottom line.
The results year to date clearly demonstrate that the cost program is having bottom line benefits in the same was true in the prior.
With expenses falling by 5% in the quarter, 3% year to date, that's clear we are continuing to reinvest in one of the metrics that we gave in his remarks is that we have invested $600 million in digital initiatives.
Our intention is absolutely to continue.
New to invest but despite that reinvestment, we do remain committed to a 50% cost efficiency target by 2022.
Thanks to our already.
Thanks, John.
Thank you.
The next question is from Humphrey Lee from Dowling and partners.
Yes. Please go ahead.
Good morning, and thank you for taking my questions. Maybe a question for Steve just wondering if you can go into some additional color in terms of the assumption review specifically on the key changes to lapses and then also the the one from up the the mortality.
Sure. Thanks, Humphrey Hi in terms of the guys. The lapse review the charge that we took there is primarily from the review of our yearly renewable term and level cost of insurance products in Canada.
And that the the reserve strengthening was.
Primarily driven by the experience that we're seeing emerge on our larger policies, so a million a million plus.
We think one of the drivers of the experience that we're seeing is the persistent low interest rates that we've seen over the past many many years and we've been we've been tracking this block quite closely the last.
Detailed study that we did was in 2017.
Since that time as the block has matured we got a lot more data points that the later durations. So after a policy has been in place in in force more than 15 years. The data points that we've got there are more than doubled and we are seeing a lower.
Lower experience lower lapses and.
That is what we've reflected in the experience and just for context. So you get a sense of what the assumption is on these large policies our ultimate lapse rate now after this change is 0.25% per year.
0.25% of customer stopping paying premiums and lapsing each year, that's the best estimate and.
We add a margin of 20% on to that as well to get to that padded assumption. So.
I feel good that we've reflected all this emerging experience and I think we're at the prudent and as a practice in the industry.
In terms of mortality the changes that we saw there we.
We strengthened reserves in our us life insurance business.
As emerging experience showed the need to increase the single mortality rates older Ages.
We saw.
Gains in Canada, we reviewed certain reinsurance or grant agreements and.
We have undertaken some recapture is which is a benefit and.
And in Canada. We also did a review of the mortality margins on our preferred business.
We've got a lot more experience than we harmonize those assumptions with our with our us business and finally in Japan, we we.
Have been observing gains in our.
In our retail business, there primarily related to.
Hospitalization benefits in cancer benefits and that resulted in our release of reserves there.
So I guess, when we think about the basis change affecting the the run.
Run rate earnings for the different segments like how should we think about the the uplift.
Right. Thanks, Humphrey So we're seeing it come through in a few places and the uplift is.
On the order of $15 million per quarter. Some of that is coming through in terms of an increase in earnings on in force.
In.
In the us from the mortality basis change also some of the true ups in our models. We are seeing a pick up in Asia offset by a decrease in Canada and then we're also seeing it come through the policyholder experience line, but all in roughly 15 million a quarter.
That's helpful. Thanks.
Thank you.
The next question is from Tom Mackinnon from BMO capital markets. Please go ahead.
Yes, thanks, good morning.
Just start with still just really on the earnings on surplus and the impact on new business.
You mentioned lower yields in the asset mix changes impacting this quarter and.
Lower investment environment.
Certainly a headwind going forward. So just trying to gauge as to how we should be thinking about earnings on surplus.
Just given where we are at the third quarter level and as well as the impact of new business certainly better in Asia, you know helped by.
Better sales and more profitable sales mix is this kind of more indicative of what we should probably expect going forward.
In terms of impact in new business in Asia, as well and I have a follow up thanks.
Great. Thanks, Tom for the question this is Phil Okay.
I'll cover the earnings on surplus points and then May.
And over to Aneel to cover the Asia New business question, then we'll take your follow up.
So earnings on surplus.
As you probably know a variability and earnings on surplus is one of the key drivers between courses in the co person all the earnings variability.
In the third quarter earnings on surplus pre tax was $126 million.
That's in the order of $50 million to $60 million lower than the third quarter of 2019, and as I said in the prepared remarks, and as you've called out the key drivers that lower yields, which really reflects the lower interest rate environment.
Environment that we're in as well as asset mix changes and there was a tactical change in asset mix in our surplus portfolio. During 2020, we reduce reduced the components of the portfolio that is invested in public equities switch those into fixed income just in view of the environment that we're.
We're in we're not completely out of equities, but we just that weve approximately half the.
The exposure to equities.
It was a slight offset from not from.
Higher average asset levels I think it's also worth noting the quarter on quarter movement in earnings on surplus.
And in the second quarter as we called out I think in our earnings call last quarter. There was a gain from the impact of seed capital. So that was a bit of a bounce back in seed capital valuations now has 100 in the order of $150 million. The third quarter also saw favorable seed capital.
Over terms, but at about half that level 70 $75 million, so that really explains the quarter on quarter movement.
I think I'll hand over to Neil to talk about the Asian business question.
Thanks, Bill and thanks, Tom for the question. So if you look.
The new business gain for Asia, and let me start with providing a little bit of color up quarter on quarter. Our sales volumes were up by 31% to our new business gain was up about 66% and as you rightly pointed out it was on account of better product mix.
Largely predicated on the back of the increase that we saw in health and protection in fact, our health and protection sales.
Jumped by 27% quarter on quarter. In addition to that we were up very disciplined on expenses as Phil alluded to.
In his opening comments from.
From a year on year perspective, again, while our sales were down 6%.
Our new business gain what was up 24% and a couple of reasons for that firstly again improved product mix, so shift to our health and protection.
Add a continues to be a top of mind, our topic for our customers on the back of the on the back of the outbreak in Hong Kong for example, be repriced and launched our bar critical illness product as well as a new bar savings products, both with improve.
Our guidance.
We continue to be very disciplined on expenses and our expenses, Despite Asia being the growth engine.
Declined year on year by 5%. So we saw expense reductions in Japan, and Hong Kong and continue to be very prudent about that.
As I mentioned earlier and last but not the least if you look at it from a year on year perspective, being had lower Riyadh child sales in quarter three of Twentytwenty as compared to quarter three of granting 19.
And as you would have noted that be a child's wild has a healthy new bids.
Business value margin from.
Core earnings perspective, it does kind of create new business strain and that strain on was significantly lower for us in quarter three of 2020, So a combination of factors around improved product mix.
Correct.
Disciplined and at the edge Hyatt resulted into the new business gain increase that you see in court appeals going great.
Tom I'm not just also just supplement to Al's comments, some and also has done a phenomenal job of growing our agency force in Asia as well in fact, we've grown or agency by 27% on.
On last year, which has been a huge source of strength for us and the focus for us in agencies on a Premier agency, where we really look for higher productivity than what most would would see in the marketplace. So thats been another tremendous driver of growth for us as has been our strong bancassurance agreements that again.
Next mills being really driving with great emphasis stage certainly has helped us with the momentum that weve had in sales in Asia as well.
Okay. Thanks, and then.
Then the follow up has to do with Canadian individual insurance sales, which are down ticking here and maybe 23% year over year I think you've mentioned you're still good.
Adding quite a.
Q.
Being able to send in apps electronically, but is it just the fact that you can't have sort of the.
A paramedic visits which slowing down the sales is it strictly coded, which we anticipate sales pick up to post kogut a as a result.
That which we'd be driving those insurance sales down year over year in.
In Canada. Thanks.
Thanks, Tom, It's Mike Dougherty, and Ben and I will take that question. Yeah, you saw in our overall.
Canadian segment, because we have a diversified business you actually had a pretty strong quarter in total sales, but definitely are seeing the impact.
Good on our individual insurance line, you'll remember we entered the year and a very strong position.
But and really what you're seeing now is the is kind of the delay.
Delayed effect of the early lock down where the paramedics were close so it.
At the higher face amount. So it was very difficult to get new business written into the pipeline, we have seen an improvement throughout the.
Quarter, so activities are certainly coming back and we're optimistic that thats.
Thats going to continue of course absent.
You know more sort of severe.
Shutdowns and the one exception I would hardwood references of course, we do write travel insurance and that.
Well certainly be depressed until orders reopened if you are traveling again.
Are you working at all any kind of simplified underwriting product, where you wouldn't need any kind of paramedic because that door is ah.
What would be the appetite for that just a that you see in the market are you see with brokers.
Yeah, we've actually very early on in the pandemic, we actually worked with our reinsurance partners and we're very quick to actually expand the agent in Mount limits. So that we can actually process quite a bit of business under.
$2 million that they sort of younger ages without needing medical evidence. So that has been very popular the other thing that we did we we've had an electronic application for for some time and have really been promoting that.
83% of our insurance business was process through that electronic application in the third.
Underwater. So we do think our products are available virtually all of them virtually now so that's not a that's not a an issue for us.
Okay. Thanks.
Thank you. The next question if some Gabriel Dechaine from National Bank Financial. Please go ahead.
Good morning, Thanks for the additional information on the ALDA portfolio returns, but it's something that you'll end up through you know highlighted one of the main concerns that they have.
Turns not portfolio and a potential charge. If you have to you know lower them I'm just wondering if.
Yes.
There is there anything else you can provide on the disclosure side.
For this call it really but.
Similar to what you've done for long term care.
Give more granularity on the.
And then Ruth Keith.
Some sensitivities to ill changes that might arise and basically.
Stuff that would downplay or at least from your perspective downplay the risk of Oh.
Possible charge I'm wondering if that's something that you guys would be considering you're presenting.
And actually if there is anything you can say about the theory of them there.
Finally got performance this quarter that'd be great too.
Okay. Thanks, Thanks for the question goodwill so on your point on disclosure, that's something we can take away and.
Think about it is certainly a good suggestion, we are very open to providing transparent disclosures.
Scott I don't know if there's anything else you wanted to add with respect to older buttons and the.
The disposal of NPL.
Sure, let me back up a little bit here. Thanks.
Thanks, Gabriel through for bringing this up.
Cash.
No our our assumed returns our long term returns 50 plus years the experience any given quarter in a given year doesn't really inflow.
Fluence us that much with that said, we do look at those returns each year to make sure. We continue to be comfortable with our men and that starts with looking at history and hence sales showed the longer term history. We have here, where we have actually achieved to the current assumptions over 15 years, but.
As everyone knows past performance is no guarantee of future performance. So we do look at what drove those returns and whether we think conditions have changed and there certainly were some tailwinds over that period, but there also were some headwinds and I'll just point a few of them out.
First we did see into.
Traits drop enhanced discount rates drops over this period, which was a tailwind but on the other hand.
This is largely a real asset portfolio, it's got infrastructure real estate timber agriculture oil and gas and and inflation is a big component of the returns there and that you know inflation has come down inflation expectations.
They've come down even more and that's been a bit of a headwind for the portfolio.
And then if you look at that time period, it's been you know.
Especially the last 10 years are really good one for equities a bit of a bull market, but but reaching back to 15 years does take us through the global financial crisis, when equities performed poorly and realist.
The state certainly performed poorly so.
Again as you saw on Phil's exhibit.
US equities were at about a 9% return Canadian equities about 7% return, which is pretty consistent or even maybe a little below that really long term returns in those markets. So we don't feel like it was an unusual period from from that perspective.
And then you pointed to oil and gas, which certainly has been a headwind for us over those past 15 years returning well.
Less than 5% and even worse in more recent times so.
We did sell and AOL with it closing in January.
This past quarter and with that our oil and gas exposure falls to below 5% of the overall all the exposure and Thats by 12 point over the last 15 years, where it's been as high as 10 as nearly 10% at certain point. So we we do feel like a lot of that headwind.
Is behind us.
At this point and so you put all that together and we do get comfortable with our current assumptions.
I guess your other question was was just sorry, just a follow up real estate and sort of looking forward on real estate. So I think I indicated on prior calls it is an area that I'm concerned about.
Yes.
And retail obviously would be a big concern we have very little there, 3% of the portfolio industrial and multifamily I feel actually very good about particularly industrial but offices. The biggest question Mark and that is the biggest part of our portfolio with little over two thirds of the portfolio and office, although we do occupy a.
In that space and so looking at just what we would call investment office properties, that's a little less than half the portfolio and that is where I am most focused and listening to a lot of folks as to where that's going and of course I've been very concerned that the longer we continue to work from home less amount of people will go.
A lot of that.
But on the other side of that people would argue that when we do go back we wont be cramming people into smaller and smaller space, which has been a bit of a trend. So it's hard to say where were those two will play out but it is certainly concerning I think the news in the vaccine this past week.
Has been pretty helpful. Because my biggest concern was we go through a really long extended period out of the office and a lot of that sticks I certainly think some of it will stick, but the sooner we can get back.
The less app it is to be a large chunk. So we had modest losses on our real estate portfolio.
This quarter and modest loss means just we underperformed the assumption that was still actually slightly positive return.
And we'll we'll be watching it closely that is that that is a that is.
Probably my biggest concern in that portfolio I think.
Private equity on the other hand.
Is a bit of a tailwind as.
I think you know those returns are a bit lag then we in third quarter was a good quarter for public equity income and continues to be good.
Good quarter in the fourth quarter. So I think that all is provide will provide us pretty good returns absent markets change radically over the next couple of quarters in private equity.
So I think those two largely balance each other out at this point.
Okay. Thanks, Steve.
It's Steve I just wanted to add very briefly add my comments in terms of my review of the assumption Scott NIE and his team worked very closely together I continue to be confident in.
All the assumptions.
Over the long term and the key things there that Scott pointed out that I'll reemphasize is it is a very long term assumption.
We have a really strong team and demonstrated track record for delivering the returns that on a risk adjusted basis, our our as you saw in what Phil presented earlier the other thing I gave.
Just to remind you of is we put significant margins on all the all the assumptions. So we put margins on gross income and were also required to shock the portfolio at the time, that's the least favorable so our all in average padded assumption is 6.1% annual return. Thanks.
Yes.
Uh huh.
You know all I wish I had a second question, but Oh graciously leave time for my fellow analyst.
Yeah.
Thank you.
The next question is from Manny Grauman from Scotia Bank. Please go ahead.
Hi, good morning.
Question about.
The annual assumption review and I'm wondering if.
Encoded considerations played any role in that review did that factor in at all to what you did this quarter.
Thanks, Manny it's Steve the short answer is.
Now a word we're still you know tracking these these trends that we're seeing from calls ahead and we're not taking a view at this point of updating long term assumptions and that is consistent with what I've seen for peers across.
The globe in the industry have seen.
Surveys.
From some of the the audit firms and consistently people are saying.
Saying, we need to see how all this experience develops well form views and what we all factoring in the future, but not part of this year's study.
So that was the second part of my question, whether you would ever.
Consider being proactive given the nature of the short going to one of your peers has talked about that.
And I'm, just wondering under what circumstances would it make sense to be proactive work.
How much time do you need to see things develop before before you would feel comfortable doing something on on this particular issue.
Issue.
Yes.
Okay.
It yeah. It's a good question I think what people are thinking about in the industry I just remind you that we have a diversified book of business. So we've seen no gains in some product lines we've seen.
You know some.
Some modest.
Life claims from co vid.
It can impact Paul.
Policyholder experience. So we've got a diversified book so I would be cautious that we don't look at any one assumption we need to look at it holistically in term in terms of how it's impacting us and that will be part of you know.
All the data that we look at going forward.
Forward.
Thanks.
Thank you Nick.
The next question is from David Motor Madden from Evercore. Please go ahead.
Okay.
Hi, good morning.
I had a question for the bead and Phil maybe.
I guess just wanted.
An updated view on the variable annuity book and.
Particularly in the us and just your view on risk transfer opportunities there.
We saw a large transaction recently.
And how much stock there that was involved.
Meaningfully rerated after that so wondering what your current view is on.
Potential risks transfer opportunities on the U.S. book on the on the variable annuity side.
Hi, David its divvied here.
So.
Transactional it's certainly interesting it's one that we're viewing reviewing closely and seeing for the new applicability for us.
We know that it was a significant process that took over a year to complete we also know.
There are potential buyers of the.
Blocks recognized at the market may not be appreciating value with them.
So we do regularly explore more organic options and we will transact if it is in the best interest of our shareholders.
I've said.
Our VM business continues to perform really well.
Generate earnings and cash.
Well hedged.
Hedging program is holding up well through periods of high volatility historically, we've seen 95%.
Effectiveness.
So what's working well we're also pleased with the success, we're having with organic initiatives.
Let the buyback program and have plans to continue our organic Merck. So I'd say, it's it's looking at both options.
But again, we're happy with.
Performance of the business.
Got it and if I could just follow up on.
Any any sort of.
You guys, obviously give capital on reserves backing the entire VA book is it safe to assume that the majority of that is backing US book, given that's where the majority of the.
I guess the net amount at risk is.
Yes.
It's a it's Steve I can comment on that.
Matt.
It I don't have the split in front of me, David but you know the the largest part of the block and realm.
Relatively higher risk benefits are in the U.S.. So it would be it would certainly be more than half.
You know the majority would be in the U.S., but we can circle backup.
If we're willing to provide that information.
Okay, Okay, great that's it.
Helpful. And then my second question is.
On the all the portfolio and you guys have given disclosure are.
The book value and net.
Income hit from a 100 basis point reduction.
And if I look at that reduction if I just look at year end 2018.
There was 3.9 billion of a of an impact to net income.
And that increased by 30 over.
Overall.
30% to 5.2 billion dollar impact to net income from a 100 basis point reduction in that return assumption.
I guess I'm just wondering why that's gone up so much.
Over the last several years.
Yes, it's definitely more than the overall.
Overall portfolio has grown I think it's the portfolio overall has grown about 15% over that time period, but is there something.
I guess I'm, just wondering why that sensitivity continues to move upwards.
Thanks, David It's Steve I'll take that one there.
There are two drivers of whats increase that sensitivity the first.
It was in the basis change in 2018, we saw some lengthening of our liabilities long term care was was one of those drivers and what that means as we hold the all day in our model for longer so we're getting the benefit of the.
The all the returns over a longer period of time, which impacts the sensitivity and the second driver, which is a little bit bigger is the significant drop in interest rates in 2020, and what that does when we run our sensitivity.
We've got lower returns for all to US we've got less all the in the model and.
The spread because of the lower rates between the fixed income and the ALDA is larger that increases the sensitivity. So it's really a modeling thing as opposed to growth in that portfolio.
Got it that makes sense. Thank you.
Thank you.
The next question is from Doug Young from Deutsche Bank Capital markets. Please go ahead.
Good morning, Steve you are popular person today, so I'm going to stick with you.
He took a sizable hit in the actuarial assumption review related lots that you did have some negative lapse experience in Canada again this quarter. So.
Just hoping you can unpack that and maybe give a sense of what you're seeing and you also had some negative lapse experience.
Sounds like in the U.S. has fallen so been hoping you can elaborate on that.
Yes.
Thanks, Doug Yes, we so there there is not directly connected really I mean the.
The lapse review in Canada, as I talked about earlier, it's reviewing the emerging experience in terms of the quarter, what we're seeing.
What we believe we're seeing just like in Q2 so.
Going to the dentist not going for routine care that drove gains were seeing.
Higher claims terminations in long term care, what we are seeing across North America across our protection products is lower lapse rates than a trend. So we're seeing people hanging onto their coverage in in a situation, where there is a global pandemic and.
Right, Mike referred me to some studies, Mike that you referred me.
Some studies that are showing that consumers are valuing their life insurance more in this environment. So we think it's just like we saw in the global financial crisis, where you can see.
Off trend experience.
In terms of what customers might be doing we think we're seeing some some trends here on the North American last week.
People are holding onto their coverage.
Is there a risk that you didnt take the lapse assumption down enough is that what the experience is telling us or is this just something that.
Do you think it's more of an unusual event right now given so that and that it will go back to more what you've assumed in your right and your assumptions.
We think its.
We think it's an unusual trend I mean, we took those levels here why lapse rates as I mentioned at the ultimate and the larger policies down 2.25%, 0.2% on a padded basis. So they are pretty low.
We think this is.
Unusual trends that are likely to reverse over time.
Fair enough and then Phil I know there has been discussions on these calls in the past about.
Trapped capital and you obviously have a strong like cat ratio of 155, but there is concerns that I get questions on in certain regions or requirements would be higher than what would be required under light cat is there any kind of additional color you can provide.
Ah around what is trapped capital if there is any and maybe put that 155 cents in context.
Hey, Doug Thanks for the question, you're certainly right that are comfortable position is strong and that strengthened substantially in recent years and just to put a reference point behind back when we adopt.
To delight methodology in the first quarter 2018.
We had $16 billion of capital above the supervisory targets at that point. When you look at the Q3 results with Allied capital ratio of 155%, that's $32 billion of capital above the supervisory target.
Now, we very deliberately well.
Well capitalized.
Operating entities around the world and so in all of our operating entities. We are above the supervisory target some need to hold quite substantial cushion that is.
Very deliberate in order to really provide resilience to market shocks that may occur and it's actually quite.
Efficient to do that when we think about.
Potentially withholding taxes that are levied when we when we provide remittances to the holding company, having said that we do maintain some.
Sufficient flexibility at the at the MLP level to to be able to fulfill.
Total any calls that may be necessary on their resources centrally and just to give a few examples of what.
What we have done to deploy capital in the past couple of years, we look 2017 through the Twentytwenty, we've increased the dividend by 11%.
And I think that speaks to the confidence that we have in capital Fungibility and flows from subsidiaries to to the parent.
But we also deployed on top of that $1.2 billion of capital into share buybacks and that's net of the the treasury drip that we.
We had in place.
And beyond that we've also been redeeming debt serving 2018 2019.
That was $1.5 billion of net redemptions. So I think you can see that we do have flexibility to deploy capital as needed.
And one thing that I.
Just call out from Royce remarks earlier, we are absolutely committed to the dividend and we feel very confident in the medium term remittance flow to support that.
And then a quick follow up I mean is there.
Yes, so I would like to add to this is my number but one very liquid.
You kind of looked across all of your operations would would leave you in an excess capital well like.
Video above target capital requirements and all your jurisdictions with a little attrition is there like a rule of thumb, we to think about.
Well I think you called out 131, 30 is actually very close.
Where we transitioned to our line count in first quarter of 2018, we had a like kind of 129%.
And I do consider 130% to be a strong capital position.
So I think it's a good rule of thumb, but there is no magic number the amount of capital that we feel is appropriate will depend upon.
On market conditions and market circumstances and in this environment. We are remaining very cautious with that theres an uncertain outlook.
We do continue to see volatility both upwards and downwards and I think thats a good reason for us to continue to hold.
And maintain a very strong capital position.
Thank you.
Thank you.
The next question is from Paul Holden from CBC. Please go ahead.
Hi, Thanks, good morning.
First question is related to the Asia business and specifically Hong Kong.
If I look at the report.
Good covert cases post quarter, they've trended down significantly so wondering if that if you're seeing a correlation.
Between that decrease and in KOVA cases, and and an improvement in sales.
Thanks.
The good part of this is the Neal so our Hong Kong as you know.
He has been exceedingly resilient and thats not only in the light of.
The current challenges that we've kind of witnessed in 2020, but even if you were to penetrate back to honor to have 2019, then Hong Kong was witness.
Letting disruptions, we were very resilient, while 2019 and getting into Twentytwenty.
If you look at our Hong Kong business, we were able to deliver a core earnings growth of 15% year on year Importantly, we saw a strong traction quarter on quarter, So our new business.
Value and our new business volume Board put up.
Hi by 8%.
And what we are really kind of focused on carbon.
Corbett notwithstanding is to focus on the fundamentals of the business. The drivers of the business. So we have a very strong agency in Hong Kong, which now stands at nine.
10000, you have gone that a 7% year on year, we have strong broker and bank partnerships beyond investing significantly.
In virtual face to face capabilities, which in case, a pandemic proves to be a great defensive tool box, even not without the pandemic is a three.
Great productivity tool for our agents and our customers alike to to utilize we have also on the back of the demand that we are witnessing on health and protection.
We have launched a new critical illness products, which again have.
Have found good favor.
Topline tile a in Hong Kong, So we feel very confident the the way our Hong Kong business is physician strong brands diversified business diversified channel mix. In fact, we have been able to prove that track record and execution and if you were just to kind of compare our market share for.
Stop 90 to first half 20, 2020, we've almost doubled our market share in Hong Kong.
So we feel very confident I am not even mention the fact that we have very strong position on MPF as Roy mentioned in his opening comments beyond number one and we continue to.
Solidify our market position on the on the MPF business as well.
Polly pocket if I could also chime in just beyond Neal's comment specifically as it relates to Hong Kong in Asia, I would say the global diversity of our business.
Across all of our geographies and business lines.
Has been a really key source of strength for us to navigating this co that environment and the fact that we've had some markets in lockdowns and experiencing significant challenges, while others have emerged out of a more stringent locked down environment.
That's been a real source of strength for us and for me that's.
Have you added significantly to the fact that our IP sales in the quarter were only 2% down on prior year I'd highlighting that a really strong results for our Canadian Division in fact sales up 23% group benefits was a key driver that helped US there are us domestic business again was a source.
Strength.
And then.
Reflecting on our wind business, where we saw lower gross flows year to date grow 20% on the prior year to me that just paint a picture of how the global diversity of our business across business lines and geographies has really helped us navigate the difficulties in the challenges of.
Coated which has been significant and that impacted certain markets in very significant ways.
But we've been able to offset some of that through the <unk> the improvements of the benefits that we're seeing in other geographies.
Okay got it.
If you want to just my second question is related to.
Through Wham and.
As you already pointed out we have a diversified global model and across a number of different product categories as well, but if I look at results. It seems like the U.S. in terms of a flow perspective as being.
Softer than some of the other geographies.
Wondering if there's particular drivers behind that and if there is a strategy in place to help prop up those those outflows in the us market specifically.
Yes, thanks, Paul its tolerance here I'll take the question, yes, as you mentioned around the flows we have an already spoke to the diversification.
Station across the different business lines, particularly in the U.S., we do see some headwinds as it relates to that.
You asked retirement business generally for the industry, just because of the impact of covert on the small business owner and what that means and we have seen a little bit of an uptick in terms of.
Some of the withdrawals of participants are accessing you know in light of just wanting.
So our cash flow in this particular environment, but having said that the impact of that has been offset somewhat by lower lapses of plans that aren't moving as much and frankly the impact of the withdrawals in flows is quite small relative to the AUM and earnings base of that business. So we do think there are some temporary headwinds.
But speaking more to just taking a step back and looking at it you would have seen excluding that large case redemption U.S. in aggregate what would have been actually positive net flows this quarter and in fact, our US retail business was positive in the third quarter, which was the first time this year and that has been slowly picking up business across the globe and so I think if you kind of just.
On him step back and again look at large.
Large institutional client, which we do get variability and we had positive net flows across every geography and every business line. The gross flows were up 20% and we do have different businesses. You know offsetting some of these headwinds and Neil talked about our MPF market share just to give you some perspective in Q3, we.
We led market share and net flows and we were 30% ahead of the next closest competitor just to give you the sense of the strength, that's really helped offset where we do see short term challenges in the business and other business lines and has given us a lot of confidence in our ability to continue to drive positive net flows over the long term.
Thats great. Thank you that's all for me.
Thank you.
The next question is from Nigel This is <unk> from Veritas investment research. Please go ahead.
Thank you good good morning, I had a question for you on interest rate sensitivity.
Great declining in the past like has benefited from fair value gains related to.
Fs bonds held in surplus so I'm wondering if that trend reverses and we see rates rise due to a successful vaccine or quick return to normalcy in.
And high inflation expectations or.
Or would you look to crystallize the gains and NFS bonds to reduce the drag to light cat in a rising rate environment is that the right way to think about it.
And then could you also touch on outside of PFS bonds.
How you expect like out to be impacted.
If rates do continue to rise, let's say over the next few years.
So Nigel this is Phil and just to clarify on a like basis, we the value of the FSB.
It is.
Fat body as carried on the balance sheet, so whether it's an unrealized gain or a realized gain the impact is neutral and that's a notable difference to the old capital regime, BPMC CSR regime, where the gains on the qualified as capital upon realization so that would be neutral and I think the point.
With that you highlight that the line cap ratio has benefited from the lower interest rate environment because of the combination of the.
The impact on the fixed income portfolio, but also the fact that we had invested surplus assets.
Substantially in fixed income treasuries that the therefore didn't suffer from the widening credit spreads in a stressed environment.
And if we if we see interest rates rise further some of that benefit to like cat will unwind silly currently at 155%.
Okay, I think thats higher it certainly is higher than what I would expect two to be reporting in normal times. So it's hard to say exactly how much that would reverse out.
But you know I I think we could see a quite a notable reduction in like cat if interest rates rise and therefore the fed.
My view of it.
First on the sub side.
Okay. That's that's all scheme homestead.
Yep.
Sorry, its Steve I was just going to add a couple of quick points.
Certainly in these uncertain times, we've stress the balance sheet under a variety of scenarios, including scenarios with.
Higher inflation higher interest rates and the capital position remains strong and if interest rates were to rise in general that would be good for form annualized good for the industry. It's good for the the.
The products and the underlying economics. Thanks.
Okay, great. Thank you appreciate the color.
Thank you.
The next question is from Scott can from Canaccord Genuity. Please go ahead.
Good morning, I just wanted to go back to all day and a again appreciate the the the performance update over the past 15 years.
Averaging 9.4%, but during that time period, the risk free rate.
On down about 500 beeps.
So how can you expect those returns to continue to that similar level in terms of your best estimate I guess put another way.
It seems like your equity risk premium or older.
Premiums have.
Has increased.
Yes. Thank you. Thank you for the question Scott This is Scott Hartz.
So I sort of went through this a little bit earlier, but yeah, absolutely declining rates is is in general a positive thing as as your discount rates come down but on the other hand offsetting that significant waste.
I said, it's largely a real asset portfolio and inflation has come down as well and inflation expectations and thats sort of mitigated that impact of the lower discount rate.
And what I would probably add here as well is that.
Our all the strategy we.
So it is really an appropriate strategy for long tailed liabilities and particularly in a low rate environment, where we don't see returns compressing as much as as risk free rates would compress and so you've seen a lot of investors and other life companies talk about.
Trent.
Transitioning more to all that type assets and and for US. It's been it's been a strategy for 20 plus years. We have teams that do most of the investing in house and have 20 plus years of experience. So you know others are are moving into this market in a new way, whereas we're very.
Variance, we think it's a great fit for alarm care liabilities, it's it's even more attractive in a in a low rate environment and as as you saw on the numbers.
We put together really diversified portfolio that.
It's about a third the risk.
Public equity so it will create some noise.
Quarter to quarter, and particularly when we have things like a pandemic, but over the long term, we think it's the right strategy and.
Much more attractive than putting everything expect.
And just lastly, Ah thanks for like pulling back to Paul at when I look at your EBITDA margin.
As you can see that 30% and can you remind us what that kind of the target you envisioned.
And you know assuming normal markets equity markets or or just markets in general is that sustainable heading into next year.
Yes, Thanks, Scott its Paul Yes, you are correct in noticing we have driven cigna.
It's going to proven and the EBITDA margin and I would say you do get some volatility quarter to quarter in the margin and there are a few one time items in there. So we we tend to look at the year to date year over year, just to be a little bit better proxy for that and we are moving in the right direction. I think we have disclosed before that we do think 30% is a viable target for us in terms of our EBITDA margin.
Got it and I've said this consistently and you'll see it filled made the comment on expenses, we continue to get leverage out of the global organization as we brought it together and despite some of the shift and and business mix and our fixed income base. Despite that we were still able to improve EBITDA margin this quarter, which I think it really speaks to the diversification the leverage.
Starting from an efficiency perspective, and gives us a lot of confidence that that 30% target risk that is definitely quite achievable for us.
Right, so what I'm looking at it they had.
All right I, just want I might add that pulls comments I think was 30 cents is certainly a target that we sort of had does as a guide post.
There are headwinds and Tailwinds in Thrace clearly this is margin compression in certain geographies. The us in particular has seen a shift to passive and Ats, which has created some pressure, but as Paul highlighted the diversity of our business and the fact that we've got operations in Asia, and obviously in Canada as well has certainly helped.
The us offset some of these headwinds and the margins that we see when business in Asia is significantly higher.
Then then what we see in other geographies and they are growing at quite a rapid pace and we again see that our footprints a source of strength for us as we look to continue to grow our land business in Asia. So suddenly the 30% the guide post and.
The way I am organization led by pull has just done a phenomenal job of driving up our margins and profitability. The diversity of our franchise is again the key factor that's going to help us make that sustainable in the long run.
Thanks for the additional color.
Thank you.
Sydney.
Our next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, I'll try to keep this quick the.
Going back to Asia, and the new business gains that number does bounce around a fair bit and I understand the comments you've made around.
Around mix of business and.
The the H.I.S. being alone.
Or.
What would be helpful to understand then is if I look the three main geographies, Hong Kong, Japan and Asia.
Could you talk about and this is not new business value, but new business gains.
As a general rule would it be fair to say that Hong Kong generates the lower new business gains and the other to generate higher new business.
These gains I'm asking it this way I guess I'm trying to think how might I look at this on a go forward basis that the new business gains in Asia.
Yes, hi, thanks, Thanks for the question.
Hey, good indication of that would be a.
Also the contribution that each of the geographies may.
I would add to our core earnings so Hong Kong high definition, just kind of given the scale.
Fourth as well as the scale of the new business that we put on in Hong Kong or every.
Every quarter I think just kind of signifies an underscores that Hong Kong is a significant.
They continue to do.
Due to our our new business or new business or.
New business gain line. In addition to that we've also seen a markets like markets like Vietnam, and China that happened kind of growing at a factor.
Well with the lost a couple of a couple of years and dad contribution not Oh, hi. So this has started to kind of increase on the new business gain line is that I guess going back to going back to realize comment on diversification I think that is you know bad the diversified nature of our markets.
It's in Asia, because it's such an important factor for us they did.
What we witnessed during 2020 and specifically of end market was kind of affected on account of containment measures. We saw all the other markets cannot or will not and and and really kind of contribution to the Asia as a new business gain and.
Overall core earnings story, so we.
We continue to kind of close to that and as I said, a Hong Kong continues to be the largest but the Asia. Other segment is becoming an increasingly bigger that both in terms of new business gain as well as in terms of its gone.
Contribution to core earnings.
So just to put a finer point on this then if Hong Kong is the biggest contributor to new business gains in Asia and sales were down 30% year over year, you still had sharply higher.
New business gains in Asia total so is it.
Is it just specifically the mix of business within within Hong Kong that will have the greatest effect on this number.
Right I think.
I think there were two factors. So one was the mix as you rightly pointed out the second as I explained earlier was that if I went to kind of take you back to call. It three of 20.
Empty that was the strongest quarter of four RVX highest product and via ties was launched in quarter. Two of 2019 beer tides Wild has a very healthy new business value. It does kind of create that string on on new business.
As we have penetrated Viet giants or would it be to sign the trajectory Mario all we had China volumes have calibrated or over the past quarters and as a consequence of that we saw a significantly lower new business strain in quarter three of Twentytwenty that that.
And really kind of contributed to the to the core earnings.
That you are witnessing in Hong Kong. So it was a mixture all product mix combined with a lack of or the lesser of new business strain that we witness introductory of Twentytwenty Mario.
Mario Sorry, Mario we also saw a strong focus on expense management across.
Across the board and certainly in Asia, which contributed significantly also to our core earnings in the quarter.
Let me just ask one final way then this quarter was about $170 million. If you look at the last couple of quarters. There was about 100 and about $100 million, which one seems more reasonable going forward 100 million or 170 million.
Yes, I think the 100 million you need to kind of take it with the backdrop on the fact that we were witnessing go away.
In many of our markets.
In Asia, So the containment measures were pretty much at its peak.
As the containment measures has receded won't.
We have seen is the resurgence of volumes quarter on quarter, our follow on quarter.
New business sales.
Were up by 31% so.
It is it is.
A hard comparison to make money because the situation. Unfortunately.
It has to be quite quite fluid. So on one side won't be witness in quantities that by certain markets got better. We also saw.
Toward wave the onset of third wave of overhead in Hong Kong, So becomes a bit of a challenge for me to kind of predict as to what would be the.
One point.
For new business gain kind of going forward, but as I said, we did see a very strong rebound in quarter three or quarter. Two as was witnessed pretty much on all our value matrix volumes value as well as core earnings.
For help freesheet.
Yeah.
Thank you.
No further questions at this time I'd like to turn the meeting back over to Mr. O'neil.
Thank you operator, we'll be available after the call. If there's any follow up questions have a great morning.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.
[noise].
This conference is no longer being recorded knowledge is promoted confirm also that the whole piece.
[music].
FIFA please.
Please note that this conference call has ended please disconnect your.
At this time thank you.
Okay printing up because it had been able to handle the community.
She was feeling.
[music].
Let me start up process fever. Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay opinion, that's because it fits.
I mean.
In a country with funding.
[music].
Hi, guys I'm cautious before please.
Please note that this conference call has ended please disconnect your line.
Time, thank you.
<unk> opinion, not because of that that is going to host autonomy superior 'cause she was funding deficit.
[music].
Office people please.
Please note that.
This conference call has ended please disconnect. Your line at this time thank you.
And they are not because it had been closer to home for the company.
Okay got consumer spending.
[music].
Since people.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay opinion, that's just something else autonomy.
Okay, then or Cushing.
She was funding.
[music].
So I don't process before.
Please note that this call.
Conference call has ended please disconnect your line at this time thank you.
Probably not because of that that's going to host autonomy.
She was trending.
[music].
MS settlement process FIFA.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
<unk> for the Tommy Super Pit got consumer spending you know <unk>.
[music].
Since FIFA. Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay opinion, that's because at that.
Hi, Tony.
Okay, then or Cushing with funding.
[music].
So I don't process before.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Opinion, not because of that that's going to host autonomy.
Okay, she wants and needs.
[music].
Well since people please.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
Okay opinion, not because it had medical sales autonomy.
She was funding.
[music].
Since we've please note that this conference call has ended please disconnect. Your line at this time.
Thank you.
Okay opinion, that's because that's something else autonomy.
Consumer spending.
[music].
I mean, it sounds on process before please.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Probably not because of that that is going to host autonomy.
Okay. She was funding.
[music].
Well since few phone please.
Please note that this conference call has ended please disconnect. Your line at this time. Thank you.
If you compare opinion not because it had been closer to home for the company.
Consumer spending.
[music].
Success fees. Please note that this conference call.
Ended please disconnect your line at this time.