Q3 2020 Manulife Financial Corp Earnings Call
Please standby or meeting is about to begin please.
Please be advised that this conference call is being recorded.
Good morning, and welcome to the manually financial third quarter Twentytwenty financial results Conference call. Your host for today will be Ms. Adrian O'neil.
Go ahead Mr. O'neil.
Thank you and good morning, welcome to me and your life earnings Conference call to discuss our third quarter 2020 result.
We are conducting this call virtually.
Our earnings release financial statements and related Mdna statistical.
Nation 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 an update on our strategic priorities by Roy Gori, our president and Chief.
For Executive Officer.
Following boys remarks, we'll end today's presentation with still Weatherington, our Chief Financial Officer, who will discuss the company's financial and operating results.
Following the prepared remarks, 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 here to a limit of two questions.
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 cost.
Washington 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 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 Aaron.
Good morning, everyone and thank you for joining us today.
Well I thought.
I'm very pleased with the third quarter financial results that we announced yesterday I want to start with a few opening remarks about how the.
The city 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 and our 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 player, we have insurance operations in 11 markets with over 115000 agents.
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We have more than 100 bancassurance partnership.
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You know your other which includes the emerging markets agent count is growing 30% in the last 12 months and.
An NBV is up 8% year to date.
We are at ASCO in most markets, where we have operations and the breadth and depth about franchisee. Nigel has played an important role in delivering the strong performance that I referenced.
In the U.S.
We're a leader in innovative behavioral insurance products and now John Hancock vitality, plus offering has continued to be a key.
See 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're number one in group benefits new business year to date offering top tier plans and support to more than 3 million Canadians.
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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 to retirement plans with nearly 8 million participants globally.
And 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 to 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.
Alright T cells were $1.4 billion.
Hello.
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 results will Miss about distribution channel.
Our capital position remains strong with a lockout ratio of 155%.
Book value per share.
Rose $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 three macro demographic trends that underpin them, namely one the most.
The growth of the Middle class in Asia to the impact of aging global demographics on the retirement gap and will transfer and three increasing trends towards digitization of the customer experience.
While we've already achieved our portfolio optimization target Im very pleased to report that we released 400.
$85 million of incremental capital from our legacy businesses in the third quarter. This.
This was largely as a result of executing a reinsurance agreement related to our US bank owned life insurance block.
We have a mature expense efficiency program with processes in place that enable us to be responsive to headwind.
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%.
A modest decrease of 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 food priorities to accelerate growth in our high potential businesses and.
When we aspire to have these businesses generate two thirds of total company core earnings by 2022.
Hi, its potential.
Actual 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 contributed 61% of total company core earnings which is a five percentage point Inc.
Increase since 2019.
In Asia, we sold our first policy memo, a digitally savvy market with one of the lowest insurance penetration rates in Asia.
And we entered into a new partnership with Kongzhong ball, a community with more than 5 million members across Vietnam that improves access to financially.
Will advice and solutions for expectant and new mothers.
In global when annualized investment management was included in the principal for responsible investing leaders grew 2020 as one of only 36 organizations globally recognized for being at the cutting edge of responsible investment and.
In striking 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 engage and retain customers by delivering an outstanding experience.
We remain focused on our digital transformation and.
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 quarter of 2019.
This reflects the quality of the digital solutions that we've rolled.
And our commitment to continue to provide outstanding service to customers during the pandemic.
Our final priority is building a high performing team.
Our target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022.
We recently.
We completed our 2020 employee engagement survey and ranked in the highest percentile amongst global financial services and insurance piece, a top quartile position and a significant improvement compared to 2019.
In addition, many life was recognized by Forbes on his 2020 world's best employers list.
I doubt many life 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 embarked on a digital transformation journey several years ago and have invested over $600 million in digital capabilities since 2018.
Putting.
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 analytics to help each member with a unique health journey.
When the U.S., 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 automation.
Importing 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.
Sure.
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 sensitivity to market movements.
Our financial performance has been solid and we continue 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 interest 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 fill with Barrington, 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 Twentytwenty.
We achieved solid core earnings of $1.5 billion in the quarter and core ROE was 11.4%.
And the declined by 14% and HP.
Sales declined by 2%.
Compared with the prior year quarter.
We view this performance favorably in light of the current environment.
Average you may in global one 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 count 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.
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.
I'm, calling and Asia, other and higher average AUM a in global land.
We delivered net income attributed to shareholders of $2.1 billion in the third quarter of note, we recognized a gain of $147 million from invest.
And related experience, reflecting the favorable impact of 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, and the estimated impact of the sale of NHL resources limits.
Hi, good which is expected to close on January four Twentytwenty one.
The gain of $228 million from the direct impact of interest rates was driven by non parallel movement in swap spreads use.
US risk free rates and modest gains on the sale of assets.
Yes bones.
It should be 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 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.
Few 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, but our Canadian variable.
The key assumptions as well as certain methodology refinements.
Finally, the game of $276 million from reinsurance transactions was primarily driven by the execution of an agreement to reinsure approximately $3.4 billion of policy liabilities related.
Uhhuh, 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 X.
Expected profit on enforce 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 result.
Clinical 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.
Results in the U.S, reflecting the adverse impact of COVID-19.
Overall policyholder experience in the third quarter was unfavorable driven by higher launch case claims in us life and lower lapses in North America, partially offset by the impact of higher claims termination.
Runs in long term care due to the impact of curve at 19.
Of note policyholder experience in the US was flat compared with the prior year as unfavorable life experience, which included modest Cove at 19 related claims losses was partially offset by favorable longed.
Salem care experience.
Core earnings on surplus declined compared with prior year quarter, largely due to lower yields and a change in asset mix, partially offset by higher average asset levels.
Turning to slide 15.
Core earnings.
<unk> 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 non recurrence of management actions in Asia other in the third quarter of.
18 19.
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 item in the third quarter of 2019.
Core earnings in our Canadian business decreased by 12%, reflecting unfavorable policyholder experience in our insurance businesses and a number of smaller experience related items.
Core losses in our corporate segment increased by $128 million compared with the prior.
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 interest rate environment.
Slide 16 shows.
Our new business value generation and HPP 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 group insurance.
And in the us new business Sally beauty.
Creased, 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 APE sales of $1.4 billion 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, HIV sales increased by 23% from the prior year quarter, primarily driven by higher large case group insurance.
Print 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 adverse impact of COVID-19, as 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.
Flows 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 institutional asset management client.
In.
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 institutional asset management in the prior year quarter.
And to 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 in mainland China, partially offset by higher gross flows.
So.
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 the 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 a UN may 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 to expense efficiency.
Turning to slide eight.
The team.
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 of a net capital issuance and reinsurance as a block of us.
I guess the 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 target of 25% as we have been proactively pre financing.
Debt that is approaching maturity.
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.
Surged to expense management is deeply embedded in our culture at Manulife.
We've taken actions to contain core expenses since the onset of the COVID-19 pandemic and have reduced core general expenses by 5% compared with the prior year quarter and 3% on a year.
Age 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 over the 15 year period since many lives acquisition.
As 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 the 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 portfolio return over this period has exceeded our.
As earned 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, we were below our targets, reflecting unprecedented levels of disruption.
Karen as 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 cold at 19 related headwinds to persist for the foreseeable future, we believe a 10% 12% core.
GAAP 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 efficiency 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 your selection if you.
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There will be a brief pause the participants register thank you for your patience.
And the first question is from John Aiken from Barclays. Please go ahead.
Good morning.
Morning in terms of the 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 on if we continue to see the case counts in staff an increase in the us.
Yes, well, 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 It's Steve Finch I'll take that question.
The the gain that we saw.
Long term care and the order that was really primarily driven by.
Deaths of those on claims so claim terminations of those that are already receiving benefits. We didnt see a notable increase in indesit in our active lives.
So that was that was the driver in the quarter in terms of how.
Yeah.
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 widely 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 that situation has improved.
And 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'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.
All right. So thanks, Steve and Phil if I may on expenses and the efficiency ratio.
Obviously, you feel very confident about hitting a billion dollar target for 2020, how can we think.
Expenses going forward in terms of ongoing reinvestment in programs, what is 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 in the same degree as we have over the last couple of years.
Thanks for the question John.
But and good morning.
Yes, 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 1 billion dollar target that we have laid out.
But we are falling short at the moment.
The overall cost efficiency ratio target that we said that we would get to 50% by 2022 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 has on revenue. So it does continue to be important now in terms of.
Or reinvestment and what the component that we would expect fall 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 year with expenses falling by 5% in the quarter, 3% year to date.
Thats 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 and our intention is absolutely to continue to invest but despite that reinvestment we do remain.
Committed to a 50% cost efficiency target by 2022.
Thanks, Bill over to you.
Thanks, John.
Thank you.
The next question is from Humphrey Lee from Dowling and partners. Please go ahead.
Good morning, and thank you for taking my questions.
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 form up the V. and mortality.
Sure. Thanks Humphrey Hi.
Policy, 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 a detailed study that we did was in 2017.
Since that time as the block has matured we got a lot more data points at 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.
Lower experience lower lapses and that is what we've reflected in the experience and just for content.
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.
<unk>, 0.25% its customers stopping paying premiums and lapsing each year, that's the best estimate and we add a margin of 20% onto that.
Ted 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 endeavours practice in the industry.
In terms of mortality the changes that we saw there we we strengthened reserves in our us life insurance business.
Yes.
As emerging experience showed the need to increase assembled mortality rates.
Rages.
We saw.
Gains in Canada, we reviewed certain reinsurance or grant agreements and.
I've undertaken some recapture is which is a benefit.
And in Canada. We also did a review of the mortality margins on our preferred business.
We've got a lot more experience than weve 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.
And thus 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 rate earnings for the different segments, but how should we think about 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 it.
In the U.S. from the mortality basis change also some of the true ups.
And our models, we're seeing a pickup 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.
Hi, Mark. Please go ahead.
Yes, thanks, good morning.
Let's 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.
Currently a headwind going forward, so just trying to get.
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 help.
Helped by a.
Better sales and more profitable sales mix is this kind of more indicative.
But 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.
I'll cover the earnings on surplus points, and then maybe handover to Anil to cover the Asia New business question, then we'll take your follow up.
But.
So earnings on surplus.
As you probably know a variability in earnings on surplus is one of the key drivers between courses in the core person all the earnings variability.
In the third quarter earnings on surplus pre tax was 126.
Billion dollars.
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 there lower yields which really reflects the lower interest rate environment that we're in as well as asset mix changes and there was a tactical changes.
Engine asset mix in our surplus portfolio during 2020, we reduce risk.
Reduce 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 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 a.
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.
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 that was 102 in the order of $150 million. The third quarter also saw favorable seed capital returns, but at about half that level 70 $75 million so that.
He explains the quarter on quarter movement.
I think I'll hand over to Emil to talk about the Asian business question.
Thanks, Bill and thanks, John for the question. So if you look at the new business gain for Asia, and let me start with providing a little.
Great color up quarter on quarter, our sales volumes were up by 31% due on 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 count.
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 bill alluded to in his opening comments.
From a year on year perspective again.
While our sales were down 6% odd new business gain what was up 24% and a couple of reasons for that closely again improved product mix sold shift to health and protection as that continues to be a top of mind, our topic for our customers.
Comment on the back of the on the back of the outbreak in Hong Kong for example, be repriced and launched on Bob critical illness product as well as a new boss saving start out both with improved margins as 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.
The year on year perspective of being had lower we at China sales in quarter three of 2020 as compared to quarter three of 2019 and as you would have noted that be a child's wild has a healthy new business value margin from.
Core earnings perspective.
Thats going to create new business strain on that train one significantly lower for our in quarter three off 2020. So a combination of factors around improved product mix.
Better expense discipline and the reaction is resulted into the new business.
The increase that you see in court appeals going great.
Yes, Tom Im not just also just supplement to Wales comment some and it also has done a phenomenal job with growing our agency force in Asia as well in fact, we've grown or agency by 27% on last year, which has been a huge source of strength for us and the focus for us in agent.
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 nails being really driving with a great emphasis they certainly have helped us with the me.
And that we've had in southeast Asia as well.
Okay, Thanks and.
Then the follow up has to do with Canadian individual insurance sales, which are down I think in your and maybe 23% year over year I think you've mentioned you're still getting quite a.
Hugh.
Being able to send in apps electric.
Honestly, but is it just the fact that you can't have sort of a.
A paramedic visits a whats slowing down the sales is it strictly coded which we.
Dissipate sales pick up to post co. Good a as a result of that which we'd be driving those insurance sales down year over year in.
In Canada. Thanks.
I mean.
Thanks, Tom, It's Mike Dougherty, and Ben and I will take that question. Yeah, you saw in our overall.
Our Canadian segment, because we have a diversified business, we actually had a pretty strong quarter in total sales, but definitely you are seeing the impact of covered on our individual insurance line, you'll remember we entered the year and a very.
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 workloads. So at the at the higher face amount. So it was very difficult to get new business written into the pipe.
Hi, Brian we have seen an improvement throughout the quarter. So activities are certainly coming back and we're optimistic about but thats going to continue of course absent you know more sort of severe shutdowns and the one exception I would I would references of course, we do right.
Travel insurance and that will.
Well certainly be depressed until borders reopening deeper traveling again.
Are you working at all any kind of simplified underwriting product, where you wouldn't need any kind of a paramedic visit door is a what.
What would be the appetite for that just a that you see in the market are you see with brokers.
Yes, we have actually very early on in the pandemic, we actually Ics worked with our reinsurance partners and we're very quick to actually expand the agent amount limit. 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 was process through that electronic application in the third quarter. So we do think our products are available virtually all of them are virtually now so that's not a.
That's not.
An issue for us.
Okay. Thanks.
Thank you good thanks.
Question, if some Gabriel Dechaine from National Bank Financial Please go ahead.
Hi, good morning, Thanks for the additional information on the ALDA portfolio returns, but it's something that.
Gil Investor.
Highlighted one of the main concerns that they have rich.
Returns not portfolio and potential charge, if you have to.
Lower them I'm just wondering if.
If there's anything else you can provide on the disclosure side and then Kurt this qualitatively but.
Or to what you've done for long term care give more granularity on the you know best estimate versus Ti or the some sensitivities to you know changes that might might arrives and and basically.
<unk> stuff that would downplay or at least from your perspective downplay the risk of a you know a possible charge.
I'm wondering if that's something that you guys would be considering presenting.
And actually if there is anything you can say about the theory in Uh huh.
Finally got performance this quarter that'd be great too.
Okay. Thanks. Thanks for the question Gateway also on your point.
Philip 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 all the returns and the disposal of NPL.
Sure Ed.
So let me back up a little bit here. Thanks, Gabriel from for bringing this up I'm sure you know our our assumed returns our long term returns 50, plus year see experience any given quarter in any given year doesn't really influence 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 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 interest rates drop enhanced discount rates drops over this period, which was a tale.
And 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 have come down even more and thats 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 real estate certainly performed poorly so.
Again as you saw on Phil's exhibit.
You bet.
US equities were at about a 9% return Canadian equities about 7% return, which is pretty consistent or even maybe a little below the 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.
Has 15 years returning.
Less than 5% and even worse in more recent times so.
We did sell and AOL with that closing in January.
This past quarter and with that our oil and gas exposure falls 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 points. 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.
With our current assumptions.
I guess your other question was was just sorry, just to follow up on 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.
In retail obviously would be a big concern we have very little there 3%.
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 lot of that space and so looking at just what we would call investment office proper.
Ladies 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 back.
But on the other side of that people would argue.
You 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 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.
Longer 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 west 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.
A slightly positive return.
And we'll be watching it closely that is that that is a that is.
You know probably my biggest concern in that portfolio I think private equity on the other hand.
It is a bit of a tailwind as.
Thank you know those returns are a bit lag than we in third quarter was.
Good quarter for public equity income and.
It tends to be good.
Good quarter in the fourth quarter. So I think that all is provide will provide us pretty good returns absent markets changed radically over the next couple of quarters and private equity. So I think those two largely balance each other out at this point.
Thanks, Steve.
It's Steve I just wanted to add very briefly add my comments in terms of my review the assumptions, Scott and I 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 altria.
The size 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 again just to remind you of is we put significant margins on all the all the assumptions.
Options. 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.
Uh huh.
You know how to.
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.
I'm wondering if coded considerations played any role in you're not reviewed did that factor in at all to what you did this quarter.
Oh.
Thanks, Manny it's Steve the short answer is no word we're still you know tracking these these trends that.
Seeing from Cove 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 that we need to see how all this experience develops a form views and we'll we'll factoring in the future, but not part of this year's study.
So what 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.
Okay.
It.
Yes, 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 modest life claims from co bid.
It can impact.
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 terms 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.
Thanks.
Thank you Didnt.
The next question is from David mode of 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.
On the variable annuity book and.
Particularly in the U.S. and just your view on risk transfer opportunities there.
We saw a large transaction recently.
And you know us stock there that was involved.
Meaningfully rerated after that so wondering what your current view is on.
Potential risk transfer opportunities on the U.S. book on the on the variable annuity side.
Hi, David its divvied here.
So.
Actually what certainly interesting it's one that we're viewing reviewing closely and seeing visiting applicability for us we.
We know that it was a significant process that overtime took over a year to complete we also know.
That there are potential buyers of vblocks, who recognize that the market may not be appreciating value.
Trying to them.
So we do regularly explore organic options and we'll transact if it is in the best interest of our shareholders.
That said.
Our VM business continues to perform really well.
Generate earnings and cash well hedged and.
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 like the buyback program and have plans to continue organic merx.
So I'd say, it's looking at both options.
But again, we're happy with.
Performance of the business.
Got it and then if I could just follow up on.
Any any sort of.
You guys, obviously give capital on reserves backing the entire.
The book is it safe to assume that the majority of that is backing the U.S. book, given that's where the majority of the.
I guess the net amount at risk is.
It's it's Steve I can comment on that.
I don't have the split in front of me David but.
The.
Largest part of the block and.
Relatively higher risk benefits are in the us so it would be we would certainly be more than half.
You know the majority would be in the us, but we can circle back.
If we're willing to provide that information.
Okay. Okay, great. That's helpful. And then my second question is.
On the all the portfolio and you guys have given disclosure are.
[music].
The 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.
Over 30% to 5.2 billion dollar impact to net.
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.
Over the last several years.
Yes, it's definitely more than the overall portfolio has grown I think that the portfolio overall has grown about 15.
10% 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 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 one of those drivers and what that means as we hold the ALDA in our model for longer so we're getting the benefit of the deal.
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 of 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 the 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're 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 I'm just hoping you can unpack that and maybe give a sense of what you're seeing and.
And you also had some negative lapse experience it sounds like in the U.S. has fallen so hoping you can elaborate on that.
Yes.
Thanks, Doug.
Yeah. We so there there is not directly connected really I mean, the the lapse review in Canada as I talked about earlier, it's really.
In the emerging experience in terms of the quarter, what we're seeing.
What we believe we're seeing just like in Q2 saw going to the dentist not going for routine care that drove gains were seeing higher claims terminations in long term care, what we're seeing.
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 Mike.
Mike Mike referred me to some studies, Mike that you referred to some studies that are showing that consumers are valuing.
Credit life insurance more in this environment. So we think it's just.
Just like we saw in the global financial crisis, where you can see you know off trend experience.
You know in terms of what customers might be doing we think we're seeing some some trends here on the North American labs, where people are holding onto their coverage.
I mean is there risk that you didnt.
Take the lapse assumption down enough is that what the experience is telling us or is this just something that.
You think it's more of an unusual event right now given that it will go back to more what you've assumed in your in your assumptions.
We think it's we think it's an unusual trend I mean, we took those levels.
Didn't box rates as I mentioned at the ultimate and the larger policies down to <unk>, 0.25%, 0.2% on a padded basis. So they are pretty low.
We think this is.
No unusual trends that are likely to reverse over time.
Fair enough and then Phil I know there's been discussions.
On these calls in the past about.
Capital and you obviously have a strong light cat ratio of 155, but there is concerns and I get questions on in certain region. Your requirements would be higher than what would be required under light cat is there any kind of additional color you can provide.
Around what is trapped capital.
Well, if there is any and maybe put that 155% in context.
Hey, Doug Thanks for the question Youre, certainly right that are comfortable position was stronger that strengthened substantially.
Recent years and just to put a reference point behind back when we adopted the like methodology in the first quarter were 20.
18.
We have $16 billion of capital above the supervisory targets at that point when you look at the Q3 results with Allied capital ratio of a 155% that's $32 billion of capital above supervisory target.
We very deliberately well capitalize.
Operating in.
Cities around the world and so in all of our operating entities. We are above the supervisory target. So we do hold quite substantial cushion but is.
Very deliberate in order to really provide resilience to market shocks that may occur and its actually quite efficient to do that when we think about.
Potentially with holding taxes that are levied when we when we provide remittances to the holding company, having said that we do maintain.
Sufficient flexibility at the at the MLP level to to be able to fulfill any calls that may be necessary.
Gary on the centrally and just to give a few examples of the 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 on 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 had in place.
And the.
Beyond that we've also been redeeming debt selling 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.
Sooty 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 now we're like Adam. This is my number 130, where you kind of looked across all of your operations.
Abbott.
You in an excess capital well like video about target capital requirements and all your jurisdictions little attrition is there like a mullah on.
One way to think about.
Well I think you called out 131 30 is.
Actually very close to where we transitioned to our line.
I cant in first quarter of 2018, we had a like kind of 129%.
And I do consider 130% be a strong capital position.
So I think it's a good rule of thumb that there is no magic number the amount of capital that we feel is appropriate will depend upon 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 C. I'd be feet. Please go ahead.
Hi, Thanks, good morning.
First question is related to the Asia business and specifically Hong Kong fly look at the reported a covert cases.
Post quarter, they've trended down.
Significantly so I'm wondering if that if you're seeing a correlation.
Between that decrease and a in KOVA cases, and ER, and ER and improvement and a and sales.
[laughter] because part of this is I mean so.
Hong Kong I do know has been exceedingly resilient and that's not only in the light all the current challenges that these kind of existing in 2020, but even if you want to kind of trace back to order to all 2019 band or Hong Kong was witnessing disruptions you a verizon.
Two 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 strong traction quarter on quarter, So our new business value and our new business volume both put up.
Bye bye, 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 north of 10000, we've grown that at 7%.
And year on year, we have strong broker and bank partnerships beyond investing significantly in virtual face to face capabilities based in encase, a pandemic proves to be a great defensive tool, but even not without the pandemic is a great productivity tool for our agents and.
And our customers like two 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 the topline tile a in Hong Kong so.
We feel very confident there the way our Hong Kong business is positioned strong brands diversified business diversified channel mix. In fact, we have been able to prove that track record and execution than if you were just to kind of compare our market share first half 19 to first half 20.
Twentytwenty, 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.
Pulling pockets if I could also chime in just beyond Neal's comments, 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 soul.
So 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 contributed significantly to the fact that our IP.
Sold sales in the quarter were only 2% down on prior year at 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 U.S. domestic business again was a source of 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 have been significant and.
It impacted certain marketing very significant ways.
But we've been able to offset some of that through the the improvements are the benefits that we're seeing in other geographies.
Okay got it.
If you want so my second question is related to women.
Yes.
You already pointed out we have a diversified global model and across a number of different product categories as well, but.
We look at results it seems like the U.S. in terms of a flow perspective as being softer than some of the other geographies. So wondering if there's particular dry.
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 haven't really spoke to the diversification across the different business lines protect.
In the U.S., we do see some headwinds as it relates to.
The U.S. 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 more cash flow and this particular issue.
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 women earnings base of that business. So we do think there are some temporary headwinds but.
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 take a step back and again look at that.
You know a 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 offsetting some of these headwinds and Neil talked about our MPF market share just to give you. Some perspective in Q3, we lead we lead 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.
Great. Thank you that's all for me.
Thank.
<unk>.
The next question is from Nigel This is <unk> from Veritas investment research. Please go ahead.
Thank you good morning, I had a question for you on interest rate sensitivity what grades declining in the past like has benefited from.
Okay gains related to a pest bonds held in Sir.
Yes, 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.
And high inflation expectations.
Or would you look to crystallize the gains in east DUS bonds to reduce the drag to like cats in a rising rate environment is that the right way to think about it and then could you also touch.
John outside of PFS bonds.
Do 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 NFS bonuses.
Finally, I was 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 only qualify this capital upon realization so that would be neutral and I think the point 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.
In fixed income treasuries that that 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 light cat will unwind silly currently at 155% light cat I think that high.
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.
I think we could see a quite a notable reduction in like cat if interest rates rise and therefore, the fair value of.
Our first bond subside.
Okay. That's that's helped offset.
Yes.
Sorry, its Steve I was just going to add a couple of quick points I certainly in these uncertain times, we've stress the balance sheet under a variety of scenarios, including scenarios with higher inflation higher interest.
Straits 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 products and the underlying economics. Thanks.
Okay, great. Thank you appreciate the color.
Thank you.
Yes.
The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning.
I just wanted to go back to all the and again appreciate that the AD the performance update over the past 15 years.
Averaging 9.4%, but during that time period, the risk free rates have on.
On down about 500 beeps.
So how can you expect those returns to continue to that similar level in terms of your best estimate and I guess put another way.
It seems like your equity risk premium are all direct equity risk premium has.
Have increased.
Yes. Thank you. Thank you for the question Scott This is Scott Hearts.
So I sort of went through this a little bit earlier, but I'm absolutely declining rates is is in general a positive thing as as your discount rates come down but on the other hand offsetting that significantly.
I said, it's largely a real asset portfolio and inflation has come down as well and inflation expectations and that's sort of mitigated that impact of the lower discount rate.
And what I would probably add here as well is that.
Our oldest strategy we.
I think 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.
Trends.
He is listening more to all that type assets and and for US. It's been it's been in 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.
Is there and so we think it's a great fit for a long tail liabilities. It's it's even more attractive in a in a low rate environment and as as you saw in the numbers.
We put together really diversified portfolio that.
About a third the risk of public equity so it will create some noise.
Quarter to quarter, and particularly when you know we have things like a pandemic, but over the long term, we think it's the right strategy and more.
Much more attractive than putting everything.
And just lastly, thanks for like going back to.
Paul at when I look at your EBITDA margin.
Exceeded 30% and can you remind us was that kind of the target you envisioned.
And.
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 an improvement in the EBITDA margin and I would say you do get some volatility quarter to quarter in the margin and there are a few onetime items in there. So 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 Mark.
Got it and I've said this consistently and you will see it Phil made the comment on expenses, we continue to get leverage out of the global organization as we brought it together despite some of the shift in 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.
George and from an efficiency perspective, and gives us a lot of confidence that that 30% target reset is definitely quite achievable for us.
Right, so what I'm looking at AAD.
All right I, just want I might add to Paul's comments I think Walt 30 cities is certainly a target that we sort of have as a as a guide post there.
There are headwinds and tailwinds than for US clearly, there's this margin compression in certain geographies. The us in particular has seen a shift to passive and EPS, 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, a 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 out when business in Asia. So certainly the 30% that 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 thats sustainable in the long run.
Thanks for the additional color.
Thank you.
Sydney.
The 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 V.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.
Its games 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.
The good indication of that would be also the contribution that each of the geographies may.
Thanks to our ongoing so Hong Kong by 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 heavy.
Every quarter I think just kind of signifies an underscores that Hong Kong is a significant.
Computer odd due to our our new business or new business or.
A new business gain line. In addition to that the mall, so I've seen a markets like markets like Vietnam, and China that happened kind of growing at a fast clip.
Well with the last of couple of a couple of years and dead contribution not IOL has a 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.
In Asia becomes such an important factor for us they did.
What would be maintenance during 2020 and specifically of end market was kind of affected on account of containment measures. We saw all the other markets kind of quote will not and and and really kind of contribution due to the Asia as a new business gain and.
Oh It all go to earnings story so.
We continue to guide up 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 and then as a dose of its gone.
Contribution to quarterly 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 are 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 quantity of 20.
Indeed that was the strongest quarter for rvs highest product.
And we are ties was launched in quarter two of 2019, Biotime Biotime has a very healthy new business value. It does kind of create that strain on on new business.
As we have penetrated, albeit giants or would it be at a time, we 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 2020 that that.
And really kind of contributed to the to the core earnings.
That you're witnessing in Hong Kong. So it was a mixture of product mix combined with a lack of or the lesser of new business strain that we witness in quarter three of 2020.
Mario Sorry, Mario we also saw a strong focus on expense management across.
Yes, 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 but the backdrop on the fact that we were witnessing goes away.
In many of our markets.
In Asia, So the containment measures were pretty much at its peak.
As the containment measures has receded what.
We have seen is a resurgence of volumes quarter on quarter our quarter on quarter.
New business sales.
Were up by 31%.
So it is it is a hard comparison to make money because the situation. Unfortunately.
He needs to be quite quite fluid. So on one side won't be witness in countries that by certain markets got better. We also saw.
Toward wave the onset of third wave of overheads in Hong Kong. So it 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.
Yes.
Thank you.
Having 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.
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