Q4 2020 Manulife Financial Corp Earnings Call
But from our legacy businesses in 2020.
The portfolio optimization initiatives announced to date have resulted in cumulative capital benefits of $5 9 billion.
And we will continue to pursue opportunities to further optimize our legacy portfolio.
This will include both organic and inorganic initiatives and we will execute if they are in the best interest of our shareholders.
We have a mature expense efficiency program with processes in place that enable us to be responsive to headwinds such as both encountered throughout the pandemic.
As a result, our core expenses declined by 3% in 2020, and our expense efficiency ratio of 52, 9% exhibited resilience when compared with 52% in 2019.
I am pleased to announce that we have successfully completed our 2022 target of delivering $1 billion of expense efficiencies. Two years ahead of schedule, which Phil will discuss in more detail.
Our third priority is to accelerate growth in our highest potential businesses.
And we aspire to have these businesses generate two thirds of total company core earnings by 2022.
Our highest potential businesses accounted for 66% of total company core earnings in 2020.
However, it's worth noting that this figure benefits from the absence of core investment gains in the denominator.
Normalizing for these items, our highest potential businesses would've contributed 62% of total company core earnings.
Which is a five percentage point increase over 2019.
Our fourth priority is about our customers and how we're using technology to attract engage and retain customers by delivering an outstanding experience.
We've invested over $650 million in digital capabilities since 2018 on the.
Impact of these investments on our operations is visible on slide 29, which shows our digital kpis.
At the start of 2020, I mentioned that our NPS school will be the ultimate test as to whether our digital capabilities are working on.
I am happy to report that we achieved a net promoter score of plus 12 in 2020, which is an 11 point improvement from the 2017 baseline and a four point improvement from 2019.
This is a reflection of our ability to quickly adapt to the current environment listen to our customers and leverage our digital capabilities to better serve our customers.
Our final priority is around building a high performing team and culture at <unk>.
Target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022.
And I'm proud to say that we made significant progress on this front in 2020.
We ranked the <unk> percentile amongst global financial services and insurance piece on our employee engagement survey.
Top quartile position and a significant improvement compared to 2019.
And Manulife was voted one of the world's best employers by Forbes ranking in the top 100 globally and one of only three financial services companies ranked in the top 100.
Finally, we are committed to invest more than $3 $5 million to promote diversity equity and inclusion through expanding hiring commitments education and community support for organizations, helping black indigenous and people of color.
Moving to slide 12 to conclude I am pleased with our fourth quarter and full year 2020 performance, which continues to showcase our consistent track record of execution.
We delivered strong results in 2020, despite significant headwinds and remain committed to both our dividend and medium term financial targets.
It continues to be a high degree of uncertainty as we enter 2021, however, the long term fundamentals and demographics underpinning our strategy remain unchanged and I am optimistic from annualized future.
I believe that we will unlock significant shareholder value by continuing to deliver strong results executing against our five strategic priorities and making progress against the targets that we've established.
Thank you and I'll hand over to Phil Witherington, who will review the highlights of our financial results Phil.
Thank you Roy and good morning, everyone.
Turning to slide 14, and our financial performance for the fourth quarter and full year.
I was wondering discussed in 2020, we delivered solid operating results I made consistent progress against our five priorities demonstrating our resilience amid a challenging environment.
On a highlight the key drivers of our fourth quarter on full year performance with reference to the next few slides.
Turning to slide 15.
Core earnings remained solid at $1 $5 billion from the fourth quarter of 2020, largely in line with the prior year quarter on a constant exchange rate basis, reflecting the absence of core investment gains in the quarter and lower investment income in corporates on Aldo.
These items were offset by the favorable impact of in force business growth in Asia on the U S higher average <unk> in our global lab business and lower general expenses.
Net income attributed to shareholders of $1 7 billion in the fourth quarter was up $6 billion from the prior year quarter on a constant exchange rate basis, primarily due to higher investment related experience gains.
Earnings from reinsurance transactions compared with losses in the fourth quarter of 2019.
And a low of charge from the direct impact of markets.
Of note, we recognized a gain of $585 million from investment related experience from the fourth quarter of 2020, reflecting the favorable impact on fixed income reinvestment activities.
Higher than expected returns on our older portfolio, primarily driven by fair value gains on private equity on the value of proceeds from the sale of Nal and favorable credit experience, partially offset by lower than expected returns on real estate.
The loss of $674 million in the fourth quarter from the direct impact of interest rates was driven by narrowing corporate spreads primarily in the U S. Partially offset by realized gains on available for sale bonds.
The gain of $351 million from the direct impact of equity markets reflects the strong performance of global equity markets in the fourth quarter of 2020.
Slide 16 shows our source of earnings analysis.
Expected profit on in force increased by 7% on a constant exchange rate basis, driven by in force business growth across Asia and the U S.
As I mentioned last quarter, we continue to view, 6% is a reasonable annual growth rate for our expected profit on in force.
New business gains were in line with the prior year quarter, reflecting favorable product mix in Hong Kong, and Vietnam offset by lower sales volumes in our international high net worth business related to COVID-19, and lower sales from both group and individual insurance in Canada.
As a reminder, our international high net worth business rolls up to the U S segment.
Overall policyholder experience in the fourth quarter was unfavorable reflecting mortality losses from excess deaths in U S life, partially offset by the impact of higher claims terminations and long term care and favorable claims experience in long term disability in Canada.
Core earnings on surplus declined compared with the prior year quarter, largely due to low yields and change in asset mix, partially offset by higher average asset levels and the favorable impact of markets on seed money investments.
Turning to slide 17, where I will comment on fourth quarter results compared with the prior year quarter.
Core earnings increased by 15% and a global one business, reflecting higher average <unk> and continued disciplined expense management.
Core earnings in Asia increased by 16% driven by in force business growth from across Asia, New business gains relating to more favorable product mix in Hong Kong, and Vietnam and disciplined expense management.
Actually offset by lower new business volumes in Hong Kong.
Core earnings in Canada increased by 10% driven by favorable policyholder experience and insurance in.
In the U S core earnings were at a similar level to the prior year, reflecting higher enforce earnings and lower expenses offset by unfavorable policyholder experience and the non recurrence of tax benefits in the fourth quarter of 2019.
Core losses in our corporate and other segment increased by $137 million compared with the prior year quarter, reflecting the absence of core investment gains and lower investment income, partially offset by the favorable impact of markets on seed money investments.
Slide 18 shows on new business value generation and APE sales.
R and D C and <unk> results improved in the fourth quarter of 2020 relative to earlier in the year and while much uncertainty persists regarding how and when global economies will emerge from COVID-19 containment. We are nonetheless encouraged by this trend.
In the fourth quarter of 2020, we delivered new business value of $489 million down 7% from the prior year quarter.
In Asia, new business value decreased 5% from the prior year quarter due to low sales volumes in Hong Kong and a less favorable product mix in Japan.
This should be offset by higher sales and a more favorable product mix in Asia other.
In Canada, new business value increased 10% from the prior year quarter, primarily driven by higher margins across all business lines, partially offset by lower volumes in both group and individual insurance and.
In the U S new business value decreased 26% from the prior year quarter, reflecting lower sales in our international business.
In the fourth quarter of 2020, we delivered eight day sales of $1 $4 billion down 5% from the prior year quarter.
In Asia sales.
Sales increased by 2% from the prior year quarter as growth in Japan from coli and growth in Vietnam, and Singapore was partially offset by lower sales in Hong Kong due to the tightening of COVID-19 containment measures.
In Canada, <unk> sales decreased by 10% from the prior year quarter, primarily driven by lower group and individual insurance sales due to the adverse impact of COVID-19, partially offset by higher sales and a low risk segregated funds.
In the U S. HPV sales declined by 28% from the prior year quarter sales in our international high net worth business were adversely impacted by COVID-19, and domestic universal life sales decreased compared with the strong prior year quarter, which benefited from higher sales in advance of <unk>.
Anticipating regulatory changes.
The modest decline in NPV and API sales from compared to the prior year quarter reflects our digital capabilities, which has enabled us to continue to engage with our customers in this challenging environment and we stand ready to capture growth from demand as COVID-19 impacts diminish.
Turning to slide 19.
The benefits of our geographic and line of business diversification are evident in our results. Despite the challenging backdrop in 2020.
Our global wealth and asset management business generated net inflows of $2 $8 billion in the fourth quarter compared with net inflows of $4 9 billion in the prior year quarter.
In Canada net inflows were $2 2 billion.
Compared with net inflows of $1 billion in the fourth quarter of 2019.
The improvement was driven by low upon the redemptions in retirement and higher gross flows across the product line up in retail.
In Asia net inflows of $2 2 billion were higher than net inflows of $2 billion in the prior year quarter, driven by low redemptions in institutional asset management and higher gross flows of retail money market funds in Indonesia.
In the U S. Net outflows were $1 $6 billion in the fourth quarter of 2020, compared with net inflows of $3 7 billion in the fourth quarter of 2019.
This decrease was driven by higher redemptions across all business lines lower new pump sales in retirement on the non recurrence of several large sales in institutional asset management in the fourth quarter of 2019, partially offset by higher net inflows in retail from strong intermediary.
Sales.
Turning to slide 20.
On average global one <unk> increased by 10% compared with the prior year quarter and 6% on a full year basis, driven by the favorable impact of markets on high end net inflows.
And our core EBITDA margin was 37% in the fourth quarter up 340 basis points from the prior year quarter, reflecting our scale and commitment to expense sufficiency.
Turning to slide 21, we.
We delivered over $300 million of incremental expense efficiencies in 2020, and $1 billion program to date. Thanks to the success of previously announced expense initiatives, including Digitization vendor management employee costs and real estate optimization.
Turning to slides 22 and core expenses.
Our expense efficiency program is mature and deficiency is now embedded in our culture.
We continued to take action to drive efficiencies and successfully reduced core expenses by 4% from the fourth quarter and 3% on a full year basis.
As a result, our 2020 expense sufficiency ratio was resilient at 52, 9% despite core earnings declining 9% year over year.
Despite headwinds related to the global pandemic, we remain committed to achieving our expense efficiency ratio target of less than 50% by 2022.
Turning to slide 23, our capital position remained strong throughout 2020, and we ended the year with a light cat ratio of 114, 9% representing $29 billion of capital above the supervisory target.
Compared with 2019, the ratio increased by nine points driven by market movements, primarily from lower interest rates net capital issuances and a capital benefit from the reinsurance of a block of U S Bank owned life insurance business.
Slide 24 outlines our medium term financial operating targets and recent performance.
As expected we felt short of our medium term targets from 2020 as a result of unprecedented levels of disruption related to COVID-19.
While it is reasonable to expect COVID-19 related headwinds to persist for the foreseeable future. We believe that our medium term financial targets remain appropriate.
This is well supported by both geographic and line of business diversification in.
In addition, we anticipate continued contributions from our well established expense sufficiency program and robust digital capabilities.
Before we open the call to questions I will turn it over to Adrian for some brief remarks on Investor Day Adrian.
Turning to slide 25 prior.
Prior to concluding our prepared remarks I wanted to let you know those debt we will be hosting an investor day on Tuesday June 29 2021.
Event will be conducted virtually and please save the date and registration details will follow later this month on.
Operator, we will now open the call to questions.
Certainly thank you.
Do you have a question and Youre using a speakerphone. Please lift your handset prior to making your selection.
If you have a question. Please press star one on your devices keep pack is that anytime you wish to cancel your question. Please press the pound time. Please press star one at this time, if you have a question.
Be a brief pause about the participants register for questions. Thank you for your patience.
The first question is from Gabriel Deschaine with National Bank Financial. Please go ahead.
Hi, good morning.
First one on mortality losses in the U S life block can you tell me, what Youre seeing there and Oh, that's a trend that.
Could result from a reserve charge later on Q3 typically.
Because they don't book, we're hearing from other insurers that Oh, there's excess mortality, but not necessarily on the insured population. So I'm wondering what.
Your experience with that.
Okay.
Thanks, Gabriel it's Steve here.
I'll take that one and.
I'll get to your question I think it's important to remember the context of what we're seeing from the impact of Covid on claims across the company.
We are benefiting from the diversification that we've got so we're seeing as you know we're seeing losses in our life insurance business, particularly in the U S. On claims, but we're seeing gains in other lines of business and that's coming through the overall company experience with respect to U S life, just a reminder that debt.
In 2019, our claims experience was in line with expectations. So in line with our evaluation best estimate assumptions. We also did a deep dive and true up our mortality last year and we strengthened our mortality assumptions on older Ages, So I feel good about our mortality assumptions.
In the U S life business, what we've seen in 2020 is COVID-19 related claims so.
We have seen Covid claims experience come through we've also seen some variability in large cases, but I would chalk that up to normal experience.
And as you've noted we've as you've seen we've had.
Very meaningful offsets in our long term care business one of the points of diversification. So we will continue to watch the U S life claims experience.
But I think that's the context and I feel good about our assumptions.
Okay.
The other question I have is the.
Our expense reduction of $1 billion now.
Great.
But then if I look on your note the financials EBIT card generally about the various assumptions on how your business performed favorable or unfavorable on expense has been unfavorable.
Oh from I guess for several years now, including Korea 20, I'm wondering.
Is there another from out of cost cutting you need to do or what needs to happen for that.
Experience across the company the term favor board reported neutral.
Thanks, Gabriel this is Phil.
I'll make a start and then I might turn it over to Steve to talk on about experience. So when it comes to expense assumptions.
You're absolutely right, we've made substantial progress and as I've always said in his remarks that we have.
<unk> achieved the billion dollar target that we set ourselves, but we are not done.
Recall very clearly at the Investor day in 2018, when we stood up.
And said that we have two targets, we've got the $1 billion.
The 1 billion cost target as well on the expense efficiency ratio target and we do remain committed to achieving that 50% or less expense sufficiency ratio consistently by 2022 and that means there is work to be done the ratio. If you look at 2020 was $52 nine.
Percentage, which I think is good in the environment. It was really resilience.
Against the backdrop of revenue challenges.
We look forward there are a couple of ways to achieve that 50% cost efficiency ratio target one is to lower expenses and for every $150 million of expenses. We can save that does take a percentage points off that ratio. The other way to grow it to achieve the ratio of course is growing on.
Revenues and $300 million of revenues would have a 1% impact on the ratio spa.
Specifically with respect to experience I'll hand over to Steve to comment.
Thanks, Bill and Gabriel.
One place that you can see where the expense actions are coming through our experience. If you look at the total company core experience on our source of earnings in the supplement on page four.
What's in that core experience its policyholder experience that was neutral relative to Q4 of last year. So that's not explaining the significant improvement that we're seeing in core experience. The primary driver is expenses and expense actions that we've taken that debt is showing up in that line.
The primary driver alright.
Alright, thank you.
Thank you. The next question is from Tom Mackinnon with BMO capital markets. Please go ahead.
Yes, thanks very much.
A question about the remittances, one 6 billion in 2020, and I believe you had downstream two and a half.
Billion into Asia in the first four months of 2020.
Due in part to the unusually low interest rate environment. So does that mean like in more normal times. It would be the remittance since it would be if we add back that two and a half would it be.
For nearly $4 billion or above.
You can just comment on the outlook for remittances.
Going forward, just given that little arithmetic that I did and I have a follow up thanks.
Thanks, Tom This is Phil and I can confirm your memory is correct. We did say I did say in May that we had injected approximately $2 5 billion into our operations in Asia.
On the topic of remittances one relevant point to note is that if I look at average remittances in the five years prior to 2020 day average level of remittance was $2 5 billion and so looking at 2020, we have generated $1 6 billion.
Remittances, that's below what we would normally expect and the main driver of that is the injection.
We have made in the <unk>.
First half of the year into our Asia businesses.
When I think about you.
Uh huh.
Thinking about where the rest of the remittances came from is largely coming from the U S from Canada, who both you know both of those businesses made substantial remittance contributions in 2020, but.
But when I step back and look at the overall remittance generation and remittance power of the organization I think it is a story of diversification.
And going back to what I said at the beginning but on average we have generated $2 $5 billion per year. When I look at that period 2015 to 2019 were those the remittances were coming from and of course $2. Five over five years is $12 5 billion of that $6 nine came from.
The U S $3 7 billion came from Canada, and Asia contributed $2 billion from that.
Gives me some confidence that we have a historic track record of remittance generation, but I'm also confident in the medium term remittance of our organization.
<unk> remittances are supported by strong earnings generation on a Canadian basis, but also on a local basis and while there may be variation in timing of remittances from quarter to quarter and year to year, we have sufficient flexibility was within MLR to compensate for that so I think the outlook.
As.
Favorable I don't have particular concerns when it comes to remittance generation Tom.
Okay, and then the follow up we've seen.
Block transactions with.
Private equity firms or.
Even the reinsurers just with respect to the annuity blocks, albeit it's.
Probably more related to fixed and equity index annuity blocks, but.
Maybe you can comment on some of the dialogues that you may have had.
With respect to reinsurers.
Book is four transactions in this environment.
And.
Yeah.
And I'll leave it there maybe just put some color on that thanks.
Yes, Thanks, Tom Let me start and then he then handover to innovate.
Portfolio optimization has seen a huge priority for us as we declared at our Investor day.
And we set a target of freeing up $5 billion on capital by 2022, and we were really delighted that by the end of 2019 were able to achieve that goal and actually further make progress in 2020. So this has been a big party for us focusing on transacting obviously.
The only doing that when it's in the best interest of shareholders and I think I would say that in the current environment with the excess liquidity with certainly seeing a lot of interest.
And that will continue to be the case, so I believe in 2021 and beyond but let me hand over to Nevada will provide a little bit more color and context.
Yes, Thank you right.
We're still exploring reinsurance transactions.
There's still some runway there for us.
What I said will trends on the best interest of shareholders.
The bully transaction from Q3 is a good example of this was a considerable reduction of interest rate risk as a result of that transaction.
As we've talked about debt.
There is definitely a lot of activity in the market and a lot of capital chasing deals.
Especially closely monitor the risk transfer markets.
For VA, and LTC and probably more robust than.
And then it is for LTC.
But.
I mean two to reiterate.
We're also heavily focused on organic work.
On all of our legacy blocks. This includes V rates buyout and transfer programs claims management and other enforce management initiatives. So really pleased with our success there, but again regularly monitoring the market.
Yes.
Thank you.
Thank you. The next question is from many common with Scotiabank. Please go ahead.
Hi, Good morning, just following up on the remittances discussion.
He is correct. The downstream it was tied to rate. So I'm wondering if you look out to <unk>.
'twenty one is there any chance that the rate environment could reverse.
What we saw in 2020 and could.
Could you see that to have a very positive impact on Robinson in 2021.
<unk>.
Thanks Manny. This is this is Phil you're right that the driver of the injections that I commented on in May into Asia was market conditions in particular interest rates, reflecting the very sensitive local basis.
Hong Kong sensitive to interest rates, but also that one of the drivers there was equity markets as well.
And I think it's fair to say that.
As the macroeconomic environment improves and if we do see a sustained improvement in interest rates that does become a tailwind for remittances and I would expect to get some of that capital back.
Thanks for that and then on.
On the subject of capital you continue to show a build in your capital over the supervisory target, but I think there's definitely some question marks about.
Exactly what Shneur deployable excess capital is out in the market. So I'm just wondering if you could maybe help clarify how we should think about it.
And sort of related point is just the centrality of buybacks in your capital plans for 'twenty one.
Yes.
Let me start and then I'll hand over to Phil.
As you rightly pointed out it is Phil commented in the opening remarks, we're in a very strong capital position like a ratio of 149 is where we ended the year and that basically translates into $29 billion worth of excess capital over a two day visitor a minute limit. This as you know has been a strong focus for our organization.
And as we've been really driving that agenda or have a strong capital position, which provides us significant financial flexibility at the same time over the last three years, we've reduced our leverage ratio average leverage ratio was north of 30% and now we've seen that come down quite significantly. So we really do feel good about the strong capital position.
And that we're in.
In terms of deployment of capital I think one of the things that I believe with his debt.
Our geographic footprint puts us in a bit of an enviable position that we don't need M&A to deliver on our medium term goals of 10% to 12% core earnings per share growth. So I think that really is a source of strength, which ultimately means that when we do deploy capital for any M&A, we will do that Opportunistically and we'll do that when we've got a high degree of <unk>.
Confident that we can execute against that agenda.
And we will be very very disciplined on that front, our priorities from a capital deployment perspective, as we've said in the past.
Clearly organic growth continuing our strong track record of dividend increases.
And buybacks buyback.
Buybacks have been a key source of value enablement for us in fact.
We returned $1 2 billion worth of capital to shareholders by buybacks Thats net of the drip and when the all speed restrictions are released that will be again another priority for us.
I'll sort of pause at that and see if bill wants to supplement with any thoughts, yes, I'm happy to add a couple of points and Roy talked about capital deployment priorities, given the financial flexibility and.
On dividend is very high on the list.
Thousand 17 through 2020, our dividend CAGR has been 11% a year ago on the call last year, we announced a 12% increase to the dividend.
And I think it's also worth recognizing that from an NCI deepest perspective, you specifically mentioned this many.
On the.
We had through the program on this is a net capital deployment. So net of the drip that we had in place we deployed $1 $2 billion of capital on the NCI B and we were actually in the market buying back shares until the 13th of March when all see put in place the restrictions on dividend increases and.
In CIB programs so ultimately.
Dividends on the on.
The idea of decisions that the board the Manulife Board will make but I can assure you that it's something that is considered on a quarterly basis, we sit down with the board and discuss capital deployment and the level of the dividend and I think that quarterly.
Yeah.
Of course, the routine that we are in puts us in a position to respond in a timely manner to changes in the external environment.
Thank you.
Thank you.
The next question is from Paul Holden with CIBC. Please go ahead.
Good morning first question is with respect to the book for individual insurance sales on I guess.
Sort of across geographies, namely Hong Kong, Canada, and Asia. The reason I ask is you've put a lot of effort and focus on improving digital sales channels as well as making it easier for people to.
To buy insurance from the lack of medical exams, but we continue to see sales down year over year. So just wondering like what is the catalyst for sales per I'm ready to go higher or is it just as simple as the lifting of social distancing restrictions or are there other catalysts that could take sale.
Higher on a year over year basis.
Yes, Paul Thanks for the question Roy Here, Let me start and then I'll hand over to Aneel and Mike to provide a little bit more color and texture as it relates to Asia business and in our Canada business.
I guess as we said in the opening remarks since the onset of the pandemic.
Business has demonstrated I think really strong resilience and the fact that our IP sales are only down eight percentage given the headwinds that we saw in 2020 I think is quite remarkable and I think that's a function of three key things. The first was our global diversity I think we're really benefited in 2020 from the <unk>.
Global diversity of our franchise, that's not just across the three broad geographies of Canada, The U S and Asia, but even within Asia. The geography on the geographic diversification that we have across the different markets, there, which really meant that when we saw some markets entering more restrictive.
<unk> then environments, we saw others that were loosening or relaxing and that diversity really was a source of strength and bode well for us and quite frankly, I think day to be the case in 2021 as we see it.
Still marketed in varying degrees of Lockdown and easy the second key factor for us on the sales front was the digital infrastructure. We've invested heavily in the last three years in fact more than $650 million in income.
Lansing, our digital infrastructure it wasn't because we knew COVID-19 was coming but.
But we knew that there was going to be a big shift and push towards engaging with consumers in a digital way and Thats. The reason why we made those investments and we saw our agenda of digitally engaging with customers accelerate significantly in 2020, and thankfully that was a function of the tool that we had in place.
Which would suddenly supported that and.
And again I think that's going to continue to be the theme and the flavor for 'twenty. One we will certainly want to capitalize on that momentum and we want to make sure that we leverage that infrastructure that we have the flow I don't think I'd say is that we're benefiting significantly from the strength of our sales channel, but just sort of highlight Asia and then it will talk about.
This.
We've been very focused on growing our agency pools, but also on making sure that we had the most professional agency force in Asia in Asia, We grew our agency by 21% to 115000.
And at the same time, we've also invested significantly in our bank of distribution were certainly one of the leaders in Bangkok.
Asia and that was started many many years ago and with <unk> Bank.
Transaction closing.
Have we will have 10 exclusive bank partnerships over 100.
Partners in general and the 10 exclusive gives us access to 30 million clients. So I really feel that 2020 was a really important year for us and it was a demonstration of the resilience of the business to demonstrate the results that we have and I feel thats going to continue in 'twenty, one, but let me hand over to Aneel and then Mike to provide a little.
More color on fixed.
Income.
Thanks Joanne.
Rightly pointed out I think the diversified nature of our geography of channel mix of our products has led to the significant resiliency that we've been able to show during during the crisis I think the investments that we are continuing to make in expanding.
Our footprint both on the agency as well as on <unk>.
As shown on this channel that allows us a great mix and diversified.
Our diversification strength to what channel it was absolutely pivotal in kind of driving the kind of success that we saw in 2020 again just to kind of illustrate that point by by taking one market and Thats Hong Kong on your effort that in your question.
So again challenges have not been new to Hong Kong.
If you go back to quarter two of 2019 vivo witnessing challenges due to the disruptions on account of protest rights on debt on and I think one of the things that we have been able to do well is showed the execution rigor that has helped us win through some of the prices on the challenges.
Debt, we have witnessed in fact in Hong Kong.
YTD quarter, three 2020 on market share actually grew by 50% and this is on top of the fact that we have been enforcing.
On a strong focus on enforce management.
Being very disciplined about expenses very disciplined about about our product pricing and kind of responding pretty much instantly to some other macro conditions, specifically the lower interest rate environment. So that we continue to protect value and towards that as you can tell a Hong Kong core earnings both on part of four <unk>.
As well as per the fully registered a double digit double digit growth. So on many counts as I said a basis the investments that we made in our technology platform and our distribution and our people, we feel very confident to be able to see.
The opportunity in Asia on again, drawing mentioned in his opening remarks that we weren't able to gain market share in six of our geographies and I think that was a great evidence as to how we've been able to outperform on outpaced our key competitors.
Okay, Ken its Mike here I'll, just add a few comments on won't hit on a lot of the similar themes that are impacting the Canadian business I mean at a high level, we do know that coming out of the Sars crisis. We did see an increase in interest in life insurance and I think that is one trend that we'll see around the globe frankly is as we move.
Forward, we certainly seen it already.
From a Canadian perspective I'll just.
We're certainly we certainly have also taken advantage of the pandemic to digitize a lot of our processes and I think that will help with the ability to process sales and make it easier for both customers and advisors going forward. That's similar to some of the themes that Roy mentioned I'll just remind you on candidate we actually have a quite a diverse product shelf. So we sell.
Individual health and dental that was actually up.
This year, our affinity business from our mortgage creditor business was up we had a very strong first half in our sort of traditional individual life sales that suffered.
Our pipeline really got depleted at the first part of the pandemic. When there was a lockdown in terms of being able to get paramedical testing, we've seen that pipeline building backup you would've seen in our results a nice increase from Q3 up about 17%. So we do expect that business is going to come back as that pipeline.
Builds up.
Over the next couple of quarters.
That's helpful. Thank you second question is also a big picture one.
And going back to the earlier discussion regarding transaction activity in the U S.
A lot of folks are also talking about the Prudential Jackson national pending transaction.
Your answer has been talking about doing what's best for shareholders I think it would be helpful for everyone to understand.
With a little bit more granularity, how you view that loans like how are you viewing this balancing act between engaging in transactions and what is best for shareholders like what are the key metrics or items that youre considering.
Yes, Thanks, Paul Let me, let me answer that.
And the short answer on the metrics is that we look at a wide variety of lenses or metrics and financials as well as non financials to determine on what's in the best interest of shareholders and the philosophy that we've employed.
Quite frankly since we embarked on the new strategy was that we wouldn't take anything off the table and you've seen through the portfolio optimization focused on activity that we've achieved a lot of.
Great results from that that focus and attention.
At the same time, what I will say is and we saw this in 2021 of the core strengths of our franchise is our global diversity and the fact that we have business operations that are globally diverse across U S, Canada and Asia.
Really put us in a very strong position in 2020 and quite frankly I.
And I expect that will continue to be the case in 'twenty, one and beyond so we've said all along that we would never rule out anything or any transaction.
But what I would say is specifically as it relates to the Prudential transaction, that's not high priority for us.
We really do believe from a global diversity of our business is a key strength.
And there is incredible opportunity for us to unlock through the agenda that we're executing today be it.
Inorganic transactions and as <unk> mentioned earlier the tremendous.
Opportunity through organically, managing our business with greater outcomes and results.
Thank you.
The next question is from Mario Mendonca with TD Securities. Please go ahead.
Good morning, if I can go to the Asia business for another obviously.
Im sorry, not net Asia wealth management, obviously, the last couple of quarters have been very good markets strong on the margin continues to improve what I observe though is that.
The expense level in the wealth business really hasnt changed in almost two years. So obviously the company has done good job of keeping a lid on expenses and benefiting from.
And a better environment.
With this is is there any reason why.
<unk>.
Would it be appropriate to suggest that manulife does not need to make any big investments on the wireless business as you continue to grow assets or could we see sort of a step up in expenses. Once you cross over say the $800 billion per line or $900 million are truly do you see in the horizon any real.
Need to invest more aggressively in the wealth business and take it to the next level.
Great. Thanks barrel. This is Paul speaking.
I'll just start by saying, we actually did make quite a big investment in the global infrastructure through our <unk> program years ago, which moved all of our business on a global platform and we're really seeing the benefits of that as we scale what youre starting to see in our results. We've also as we brought the organization together a couple of years ago really found opportunities.
For efficiency to run the business better to get better collaboration and we've had a lot of the early wins I would say is showing up in the results. We still think theres tremendous opportunity in the business to drive out efficiencies as we look at our global scale and make sure we leverage that per our local businesses I mean, one of the things we do try and watches just our expense growth relative.
On to revenue growth and I think I've said, this historically try and try and live within half of half of our revenue growth with expenses to make sure. We can manage fee compression continue to expand the margin et cetera.
We do today in that expense line already significantly invest in the business ever.
Every year and it's really a question of priorities and so for us.
We would expect debt.
We will see growth in expenses as the business growth, we won't be able to keep it flat forever, but we do expect we're going to be able to do that in the context of the revenue growth and continuing to move the other metrics forward yes.
Yes, Mark.
If I could just add.
I think you've touched on perhaps one of the biggest opportunities that we see in our global wealth and asset management business and that is that we've got on infrastructure.
And a foundation that can support a business that's much larger without having to make significant investments beyond the ones that we've already made so we feel that this is a key driver of not just improving our margin, but improving our profitability trajectory for our global wealth and asset management business going forward Paul highlighted some of the system investments that we've made but we are also.
<unk> been investing significantly on the digitalization front as well in terms of the way we interact with customers. So this is one of the reasons that we're most excited about the prospects that we see and have in the wealth and asset management business as we continue to grow and build out our global footprint there.
Okay.
We can now go back to your answer to Paul's question.
It probably was asking about the sort of the lens of the gold price you look at.
And assessing.
A transaction that would free up capital now without providing any numbers because I know you can't negotiate a sale or a reinsurance transaction on a call like this but would I be correct in saying that on the one hand. The company has to look at what kind of earnings would be given up and what sort of book value charge might arise that would be one one.
One part of the scale and on the other side, what kind of capital relief would be achieved in what that capital could be put to use is that.
On a very simplistic way the decision and the balancing act that the company faces when making decisions like this.
Yes, Thanks Maria.
It's somewhat simplistic the way you have mapped it out but I think you've just touched on some of the different.
Components as it relates to making an assessment of whether we would make we transact on us.
And the two aspects that you've highlighted is certainly front and center for US as we look at whether we would transact going on and again the length for US is best interest of the shareholder and that will include.
The value that is placed by the street in relation to each of our businesses and the capital that is being consumed by them. So certainly not a single dimensional decision point and you've touched on at least two of the key aspects that we are we always consider when we decide on whether to transact on there or.
But you're broadly right.
Thank you.
Okay.
Thank you and the next question is from John Aiken with Barclays. Please go ahead.
Good morning, Phil.
Don't want it with my line of question I don't want to downplay the success you've had on on the expense efficiency on a reduction on expenses, but when I take a look at what happened in 2020, you did have expense reductions and all of the operating segments, but we actually have seen inflation in our corporate and other and I was wondering if you could talk about what's driving that.
Yes.
Is this the cost of digital initiatives being absorbed by corporate or is there just some change in terms of how the cost allocations have been.
Being made.
Thanks, John that's a good question and a good.
<unk> from our results.
What youre seeing in corporate and other on the expense line is an increase in expenses in the order of $50 million on what's driving that is a one time.
Charge relating to the write down of some assets on the balance sheet and really that's it's nothing to be alarmed about in the context of everything that's going on in the.
Backdrop of the pandemic.
I was looking very hard at our digital strategy and pivoting projects in certain ways as we prioritize.
Certain digital investments in this environment, we've looked hard at everything we've got capitalized on the balance sheet.
Britain certain items down.
But thats a one time exercise so not something that you should project forward I think just touching on the question of corporate and other one point that I do want to be transparent about is I referenced. This in my remarks that we are in a lower interest rate environment and that does impact the yields that we can generate on the surplus.
On the surplus asset portfolio not if we compare the Q4 2020 with Q4 2019, the headwind berries in the order of $50 million.
Thanks, Sean and when we take a look at the write down on a piece of it.
When you talked about this being one time. This is then still included in your definition of what your core earnings are.
Correct, Yes, yes, we are very disciplined about what we include in core earnings.
Transparent what we decided to do in this cases report them in aggregates being corporate and others. So that we don't distort the underlying operating results of our businesses, but absolutely as part of core.
Understood. Thanks, I'll re queue.
Thank you. The next question is from Doug Young with Desjardin capital markets. Please go ahead.
Hi, good morning.
I think it was Phil.
And I think its in the report as well, but you're all day experience you mentioned that real estate returns fell short of expectations and maybe Scott can touch on.
Was this related to the office real estate book I think that's something that you mentioned you have some concerns with on a go forward basis, just trying to get a bit of an update on that.
Okay.
Sure. Thanks, Doug It is Scott.
And.
Yes.
<unk>.
We didn't have a what's in that portfolio, but as you know if we don't achieve our assumed returns and they fall below that watsco show up.
For our income statement and that that's what happened in the fourth quarter and for the full year effect, our real estate returns were about a half a percent in the fourth quarter. So still positive but below the assumed return and Youre also correct office is the biggest driver of that on.
Offices, two thirds of our portfolio and we're just not seeing sort of the appraisal gains that we have historically seen and would need to see to get to those assumed returns. The income returns are still on.
There are still.
Where they were so it is something that we're watching going forward I think it's still to be determined how this will play out.
I would say a protection on that part of the portfolio is that 25% of our real estate portfolio.
In Asia.
We're not seeing the same dynamics of the work from home in Asia. So less concerned there and then in North America. I mean, it is still to play out there are folks that believe that there will be more spacing, which will create more demand.
And we just have to see once we can all get back from the office, where the demand will settle out we do have.
A little over a six year average remaining lease term and 92% occupancy in the portfolio. So those should help us weather sort of the debt.
Short term here.
But yes, basically we're not seeing the appraisal gains we need and on the office portfolio, even slight appraisal losses that give us that half a percent total return in the fourth quarter.
And just can you remind us how much of your office portfolio Manulife actually.
Occupies.
Yes.
About two thirds of the portfolio is in office about just under 50% is non.
Occupied and and I should add debt the rest of the portfolio.
Largely.
Australia, warehouses and multifamily where we have much less concern there is only about 3% on retail which would obviously be a much bigger concern if we had significant net retail holders.
Okay, and then just second Steve.
There was negative lapse experience again in the U S debt offset some of the gains in long term care insurance am I right and can you quantify and can you talk a bit about what you're seeing I think you took a reserve charge for lapse.
Last year, sorry last Q3, I think in Q3, you had some negative lapse experience just hoping to get an update on that front.
Yes.
Sure Doug.
Yes, so one of the things that we're seeing in the U S.
And again in the context, we've seen diversification in terms of business results. So some of the sort of more second order impacts of the pandemic we've seen.
Our medical and health business as we've seen people not going to receive care and we've seen gains there in the U S life business. What we've seen is that in our protection oriented products. Our customers are hanging on to their day value of the coverages, they've got they're hanging onto it longer than what we saw free.
Pandemic.
And we've seen that.
Our lapse rates on that business is 20% to 25% lower than pre pandemic trends.
And that's roughly a $25 million impact in the quarter from what we saw.
We do anticipate debt.
These trends will revert back towards pre pandemic levels over time, I'll watch those trends very closely but youre pointing on one of the things that we're seeing is what we consider short term operations as a result of the pandemic.
Okay I'll leave it there thank you very much.
Thank you. The next question is from Darko <unk> with RBC capital markets. Please go ahead.
Hi, Thank you I have two questions. The first one I think is fulfill on maybe Steve not sure, but it should be relatively straightforward.
I think Phil on your prepared remarks, you mentioned, 6% EBIT growth is still reasonable, but I did see it fall in Canada. So I wonder if you could talk quarter over quarter and I Wonder if you could talk a little bit about.
EPS growth by segment really Asia, Canada and U S.
Any kind of help there would be would be much appreciated.
Sure.
I'll take that.
Darko. Thanks, So Phil commented in his remarks that debt.
We expect roughly 6% growth in earnings on in force on an annual basis.
We expect higher growth close.
8% to 9% on Asia, and then lower expected growth in in Canada, and the U S.
As we've got higher proportion of legacy business.
What we what we saw in the in the quarter, specifically in Canada, you mentioned quarter over quarter, we do see some seasonality, we see stronger expected profit in our group business in Q3, so the drop from Q3 was really seasonality.
The other thing that.
It's not a big driver of the trends but.
As you talk about by segment in the basis change last year.
We pushed through all the changes mechanically we saw a modest increase in our earnings on in force in Asia, and the U S and a modest decline in Canada total company. It was not a material change. So those are some of the drivers and expectations that we're seeing on earnings on in force.
Okay. Thank you for that my second question relates to portfolio optimization.
It was good to hear <unk> talk about transactions and organic opportunities.
But when I sit back now and I think about other things apart from lowering long term care exposure of variable annuity is one thing that pops out in this kind of market environment is perhaps is it time to revisit all debt.
I'm sitting here reading about Wall Street, that's I've got crypto currencies going crazy equity market's going nuts youre on.
The portfolio is down I acknowledge it's a nine 5% now I think.
$920 or 10%, but is it possible that we could perhaps free up capital.
And reduce ALDA and is that something that you would be considering.
Going forward given I think you mentioned excess liquidity in the marketplace. Whatever it is is there a chance here that manulife might consider.
Once again, reducing all the as a proportion of investments and if not why not.
Yes, Doug let me start and then I'll hand over to Scott.
As you know we did take.
Some actions to reduce our older return assumptions and I'll remind everyone that the all in padded assumption for up to six 1% annual return.
And again, we wouldn't rule anything out, but one thing that we will say is that older is an incredibly valuable asset class for us.
I think certainly the case, even maybe more so now in an environment of lower interest rates, so having a diversified investment portfolio and having the experience and knowledge of alternatives. I think has been a huge source of strength for us other several decades, and I think actually that'll come to the floor even more so in the decade ahead with a lower interest rate environment.
So for US diversification is really critical having asked if they can back out long term liability and deliver through the cycle is.
Suddenly a huge priority for us so let me hand over to Scott to provide some further commentary.
Yes, Thanks, Ryan and that's really well said I mean, it's really the right way to invest for long term liabilities speaking as an investment person and youll see that at the pension pension funds that we have very long liabilities that don't have liquidity issues. So backing them with all the mix a lot more sense and as Rob points out in the.
Current environment, where fixed incomes returning that much lower it makes that much more sense and we're starting to see peers talk about doing doing more of it.
So.
Unfortunately, it comes with accounting noise as we saw this year, we saw it in the financial crisis. We saw at this time, so periodically we're going to have some bad quarters.
When markets are upset but relative to our fixed income strategy.
The long term earnings are much higher and.
And trickier embarks on Gamestop in Bitcoin Theyre definitely bubbles out there but.
We're not seeing bubbles in are all of the portfolio. So it's not like we feel like this is a good time to be liquidating. Your ALDA portfolio. We think there is still.
Rick.
Relatively reasonably valued and.
We will be able to achieve our expected returns going forward.
I guess, where I was going with that is if we did see bubbles in the ALDA portfolio would you consider.
I mean, when I think of the pushback I get on Manulife as long term care variable annuity that all day. So the question is we are seeing bubbles.
If we start to see stuff and all that wouldn't this be an opportunity to reduce <unk>.
And I guess the answer it sounds like almost flat on no.
The way I would interpret your index.
No the way I would put it more is we value diversification significant way. So we are in six different all the categories and we're always looking at new opportunities. So if we were to see <unk>.
<unk> in in one particular category we would.
We deemphasize that we would look to sell down now it's not the most liquid portfolio. So it takes time to do that but we are always evaluating the value in each of the categories. As you saw we sold nal and that was for other reasons not because it was in a bubble.
We're constantly looking at the portfolio on determining where the best value has been focusing on that.
Thank you.
Thank you. The next question is from David low to Madden with Evercore ISI. Please go ahead.
Hi, Thanks. Good morning, Thanks for fitting me in here just a question for Phil.
Good.
I was just one excuse me I was just wondering if you can just update us on the.
On the amount of.
Excuse me the amount of capital and earnings.
You still have tied up in legacy businesses.
That can be unlocked you.
You guys have obviously made good progress.
So I.
I think you said in 2018, it was around $23 billion of capital on I think $2 billion of earnings.
Just wondering where that stands today.
I can take that question.
Yes.
So David Thanks for the question.
As you can see.
We've taken considerable action on the capital front.
On the legacy side.
On the exact.
Exact number but the.
Total capital allocated to the legacy business is a bit lower than what we showed.
In 2018.
And the earnings despite.
On the give up on something on the transactions is sort of in line with where it was in 2018.
So that.
So that gives you some reasonable guidance.
And just to just to add to that when we regrouped for the Investor Day later in the year I think thats a good time for us to provide a more holistic update on execution of each of our strategies, including portfolio optimization.
Okay great.
And then I guess just another question for Phil.
Just circling back on the 6% growth in expected profit on in force.
I guess I'm kind of scratching my head because thats the largest component of core earnings.
70% to 75% of core earnings if I assume that you guys have 400 million of investment gains so on.
I'm just trying to bridge between 6%.
And you guys getting to the 10% to 12% medium term EPS growth target.
I guess I'm, just wondering how to bridge that 6% growth on 75% of your core earnings.
And how you guys plan to get to that 10% to 12% EPS growth target. If that's that's the case.
Yes, Thanks, David and it's a good question to ask we are committed to the 10% to 12% target and with EPS EPS.
Growing consistently with our expectations, we would expect 6% over the medium term.
The components that will be accretive to that we've got the impact of new business in our insurance businesses around the world in particular.
In Asia, where we're seeing substantial growth as well as the opportunity to generate value through.
The impact of scale, but in addition to new business, we've got wealth and asset management, which we anticipate being accretive to our overall level of earnings growth. We have expenses expense efficiency as you've seen over the past three years expense efficiency is something that is accretive.
To the bottom line and just to highlight as well.
When we talk about 10% to 12% that is growth in earnings core earnings per share and so to the extent that we are permitted to do so on that it's appropriate given the external environment.
Would also consider.
Going back shares in order to increase the per share component.
<unk> contribution to that 10% to 12% growth rate.
Got it thank you.
Thank you.
The next question is from Humphrey Lee with Dowling and partners. Please go ahead.
Good morning, and thank you for taking my questions just to stay on the topic of EPS growth I know that the medium term target of 10% to 12%, but looking for 2021 kind of versus 2020.
Phil.
It looks like you are kind of positioned to see a little bit stronger growth.
Given the the income per.
A positive inclusion of core earnings.
Our core investment gains and then some of the Covid related headwinds.
Abate.
Any reason why 2021.
Not be higher than the longer term target.
Yeah. Thanks, So on pre let me start and then I'll hand over to Phil who could supplement.
Again, we obviously spent a low time thinking about 2021 and the first thing I'd say is that there is obviously a lot to be optimistic about when we think about the year ahead, but theres still a lot of uncertainty and I think we're going to see a tail off.
Certainly two hub and it may be even more challenging in the second half than what many are expecting and I think that uncertainty, it's really going to come from a couple of.
The first is the vaccine deployment at the speed of the vaccine deployment Thats, a key critical enablers or lockdown restrictions being eased and I think the other big factor and everyone is across this is really a big question Mark around the effectiveness of the vaccine against the various mutations. So the first thing I'd say is that there.
Is certainly a lot to be optimistic about but there is still a lot of uncertainty as to how 2021 will unfold and that level of caution is something that we're absolutely focused on having said that.
We are feeling incredibly optimistic about our future and I highlighted a few things earlier.
But I'll report on first is around the fact that we have a very globally diverse franchise and we've demonstrated in 2020, the resilience of our business.
Debt and overcome headwinds the second one was around our efforts to digitize I think that again will be a critical enabler for us in 2021.
In the third and Mike highlighted this we're seeing.
The increase in value and importance being placed on insurance protection and wealth that obviously those are our businesses on that I think is going to be an incredible driver for us.
And the last thing I'd say is that we do have.
Quite frankly, one of the core competencies of our franchise.
An incredibly strong presence in many of the fastest growing economies of the world, which had by the way the lowest insurance of wealth penetration on Asia. We've described this.
Jewel in the Crown.
Has become a really big part of our franchise. When you think about Asia Asia geography in there on grouping both insurance and wealth.
And when you normalize fiscal core investment gains in 2016 Asia represented about 35% about earnings in 2020.
They represented 41% and our expectation is that by 2025, the Asia geography, again insurance and wealth.
We will represent 50% of op ranch on it so it is.
That we're incredibly optimistic about but at the same time. There is a degree of uncertainty that makes us somewhat cautious around putting down a firm commitment on how earnings per share will unfold and we think we think of that more through the medium term and through the cycle, but let me hand to Bill C y.
He has any other supplements at.
I think you've covered it really well that ROI and just to reinforce I think there is a lot to be optimistic about we've seen a lot of.
Challenges over the course of the last 12 months, but.
Since the last time, we spoke the fact that there is now a number of vaccines, having being developed and put to market and being rapidly manufactured and deployed I think that's one just one example of that.
The many things that ought to be optimistic about that given the overall backdrop of uncertainty I think it is hard to call a central scenario for the next 12 months, which is absolutely why we're looking at it from a medium term perspective.
Got it I appreciate that color.
Looking at kind of the fee.
The growth aspiration for Asia, and then, especially thinking about how Asia. Other has grown over the past few years.
Given the opening of the regulations in China for foreign Hong Kong insurers do you have any appetite to take on a higher stake in your China, JV or even ticket.
Take a full ownership.
If you were to do so like how much kind of core earnings contribution from Asia Auto would go up.
Thanks for the question Humphrey So I guess the short answer is yes, we would but we.
Have two joint ventures.
In China, So let me kind of start with talking about on joint venture on the insurance side, but Simon Kevin and I will then ask Paul to chime in on the on the data side. So as you know on the on the insurance side, we have a joint venture with Sinochem, maybe have management control they have been an excellent partner and.
Really a big contributor to the success on the trajectory that we've kind of set for ourselves.
In China as you know in China, we have extensive access in terms of distribution. So we have.
Now with the approval of the recent Xiaomi brand 52 cities and across 15 15 provinces in terms of access so really we would begin to increase our share holding humphrey, but as I said, we have to necessarily kind of aligned.
Our objectives of debt.
Without the Das Schaffel, Linda just before I hand, it over to Paul in terms of Asia. Other again Asia. Other is the fastest growing part of our business and again no surprises. There you mentioned, the fact that as Roy alluded to that as well, we have markets like China, Singapore Vietnam.
We have a market leadership position in Indonesia.
All growth growing at a fast clip and have huge runway for us given the under penetration.
On on insurance and towards that we have been doubling down in terms of increasing our distribution in fact on agency growth in Asia. Other is even faster than what you kind of see at an overall on Asia.
And again, no surprises debt and importantly, we are also experiencing a 17% growth in active agent count a lot of our bank partnerships, including the one that we signed recently.
Bank.
In Asia. The early renewal of denim on again, a key force for us to kind of grow our business.
Indonesia, So theres a lot going on for us in in Asia Other and as you can tell in part of for Asia contributed to an excess of 35% of our core earnings. So it is likely to be an even bigger growth engine for us as we look into into the future. So another on one hand, it over to Paul for his comments on debt.
Yeah. Thanks, Aneel on very similar themes to it on the ill just share it in China from our wealth and asset management perspective is a very important market for us.
And we do operate with our own.
Wholly owned foreign entity, there will be but it does allow us to bring in some international capabilities as well as private market capabilities, but our partnership with <unk> is also really important pillar for our growth there in terms of the ability to bring domestic equity and fixed income capabilities to both local investors and foreign investors and we've had a great partnership where.
A very committed to that market and really look forward to continuing to grow China by leveraging that relationship and all the other aspects we have in the region.
And this is Phil if I could just add when we look at our businesses in China I think the future is more relevant than the current state.
You asked the question about earnings Humphrey and.
In the ballpark of $140 million.
Came from China in 2020.
Full year 2020 earnings.
But I think it's not really about the $140 million, it's about what that could grow to in the years to come.
I appreciate that thank you.
Thank you.
On the next question is from Nigel D'souza with Veritas investments. Please go ahead.
Thank you good morning, I wanted to touch on core investment gains and when I look at the last challenging year, you had on core investment gains in 2015.
On those gains and fully recover or get recaptured until 2017. So I wanted to get a sense of your expectations for 2021 do you expect to fully recaptured the.
On <unk> million per quarter core investment gains.
Yes, Thanks, Nigel it's Scott Thanks for the question.
Our core investment gains as an assumption over the cycle and it's really difficult to predict in any given year.
So as Roy highlighted.
2021 is still going to be a very uncertain year trajectory looks good at this point, but who knows theres lots of risk out there. So.
We are going to have periods, where we will underperform largely driven by although which is mark to market as you know.
But as we look at last year, we saw underperformance in the first two quarters and then.
I feel like we got a lot of that behind us and in the third quarter and fourth quarter, we achieved an over achieved our $100 million per quarter run rate. So my best estimate at this point is that we will but.
It continues to remain a lot of uncertainty and it is really a number we expect to achieve through the cycle not necessarily on any given quarter or any given year.
Nigel This is Fred if I could just add the methodology that we apply it does reset at the beginning of the calendar year. So the reason in Q3 and Q4, we didn't recognize.
The investment gains through core earnings is because we were behind from Q1 and Q2.
As we now on a new calendar year, if we generate.
Favorable investment experience up to a $100 million would flow through core earnings per.
Quarter.
Thanks, that's helpful and the second question I had if I could touch on earnings on surplus funds and I wanted to get your sense on what the pathway is to getting that number back to 2019 levels. In other words is the only way you get there through higher yields or can you get there through changes in asset mix of asset levels.
Thanks, Nigel let me make a start Scott my wish to comment on this as well I touched on it earlier there is there is a headwind.
Exists when it comes to any earnings on surplus on that as the interest rates have fallen and we do take a conservative view quite rightly on how the surplus investment portfolio is managed.
A large proportion of it is held in U S treasuries.
As part of our overall interest rate risk management strategy.
And that does give rise to a very real headwinds in the order of $50 million per quarter. If we compare Q4 2020 compared to the fourth quarter of 2019, and Theres not really a way of getting that back without interest rates coming back on the impact of that flowing through to yields over time.
I think that is one of the headwinds that we need to accept and we don't really have an awful lot of appetite for materially increasing the risk of the investments in our surplus portfolio. The reason that the hours to provide stability and resilience.
In times of uncertainty and Thats exactly what we saw happen in 2020, Scott I don't know, whether you have anything to add.
I really don't that was a very very good and complete answer.
Obviously, what will turn it around as if we get higher yields.
And that will grow the earnings on surplus, but absent that we do.
Do hold those long liquid government bonds.
Hedge against market risk and we'll continue to do that.
Thanks, that's very helpful. I appreciate the color.
Okay.
Thank you there are no further questions registered at this time I will turn the meeting back over to Ms O'neill.
Thank you operator will be available after the call. If there are any follow up have a nice morning, everyone.
Thank you.
The conference has now ended please disconnect your lines at this time and we thank you for your participation.