Q1 2021 Manulife Financial Corp Earnings Call
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Good morning, and welcome to the Manulife financial first quarter 2021 financial results Conference call. Your host for today will be Ms. Adrienne O'neill. Please go ahead Ms O'neill.
Thank you and good morning, welcome to Manulife earnings Conference call to discuss our first quarter 2021 result.
We are conducting this call virtually.
The earnings release financial statements and related MD&A embedded value report statistical information package and webcast slides for today's call are available on the Investor Relations section of our website at Manulife Dot com.
Turning to slide two I want to remind you that we are hosting an investor day on June 29th where we will share an update on the company's strategy with an emphasis on accelerating growth in our Asia and global land businesses as well as executing on our digital strategy.
To ensure a smooth viewing experience. Please register in advance by clicking the link on slide two or three of the Investor Relations section of our website.
Turning to slide five we will begin today's presentation with an overview of our first quarter highlight and an update on our strategic priorities by Roy Gori, Our president and Chief Executive Officer.
Following Roy's remarks, so wetherington, our chief financial Officer will discuss the company's financial and operating results.
And then Steve Finch, our chief Actuary will discuss embedded value.
After the prepared remarks, which were recorded in advance to ensure optimal sound quality, we will move to the live question and answer portion of the call.
We ask each participant to adhere to a limit of two questions. If you have additional questions. Please re queue and we will do our best to respond to all questions.
Before we start please refer to slide three for a caution on forward looking statements and slide 31 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, Adrian good morning, everyone and thank you for joining us today.
Turning to slide seven yesterday, we announced our financial results for the first quarter of 2021.
We're off to a strong start with double digit growth across a number of our key operating metrics compared with the prior year quarter.
Delivered record core earnings of $1 6 billion.
A 67% increase from the prior year with double digit growth across all our operating segments.
We reported net income of $793 million, reflecting the immediate impacts of the steepening yield curve and higher risk free rates.
Worth, noting that a higher interest rate environment is beneficial to manulife business from the long term.
New business volume increased 32% with double digit growth in Asia and the U S.
And our global <unk> business.
Core EBITDA margin increased 340 basis points as we continued to build scale and benefited from growth in higher margin markets.
And our core ROE increased by five five percentage points to 13, 7%.
Finally, we reported embedded value of $61 1 billion or $31 49 per share as of December 31 2020.
It's worth noting that embedded value only reflects a portion of the value of our businesses as it attributes no value to future new business and only tangible book value to our growing global Wham businesses as well as our P&C reinsurance operations and Manulife Bank.
Turning to slide eight and the progress we've made executing on our five priorities.
Our commitment to optimize Manulife legacy portfolio remains and we continue to seek opportunities to reduce risk and unlock value.
The first quarter, we free up $65 million of capital through the ongoing success of our variable annuity buyout program in the U S.
Expense efficiency is deeply embedded in our culture and I am pleased to see that reflected in our first quarter expense efficiency ratio of 48, 5%.
While there is still work to do in order to consistently achieve a ratio of less than 50%. We're on the right truck.
Our third priority is to accelerate growth in our highest potential businesses and we aspire to have these businesses generate two thirds of the total company core earnings by 2022.
Growth in our highest potential businesses has outpaced other areas for the last few years and we're on track to achieve our target by next year.
Our highest potential businesses accounted for 60% of total company core earnings in the first quarter of 2021.
In Asia and global win delivering exceptional results in fact, the combined contribution from our Asia and global wind businesses from annualized core earnings was 54% in the first quarter of 2021.
Sustainability is a priority for Manulife and our global land business expanded its ESG offerings with the launch of our sustainable Asia Bond Fund in Europe, and our global climate Pooled fund in Canada.
Our first climate change things from developed in alignment with the principles of the Paris agreement on climate change.
Our fourth parties about our customers and how we're using technology to attract engage and retain customers by delivering an outstanding experience. We've continued to make progress on our digital journey across all our operating segments to better engage with our customers.
Canada, we completed the migration of our group benefit clients to one administration system and launched a new advisor pool across our businesses to improve the advisor experience.
In the U S. We piloted a new portal for distributed to submit forms and client information for our international products and streamline our U S life insurance customer on boarding process, reducing the account opening time by as much as 80%.
Through our vitality offering we announced programs to reward customers in North America, who received a COVID-19 vaccine.
In Vietnam, we launched a digital sales platform that enables customers to purchase health insurance online.
And in global Wayne, We launched a money market fund with OVO, Indonesia's leading digital payments platform and a strategic partner, but Exxon, Indonesia first online mutual fund marketplace.
The result, combined digital money and online investment to reach a younger generation of invest up in a growing and important market for us.
Our final priority is around building a high performing team and culture.
Target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022, and we are proud to have achieved this ranking in 2020.
We continue to invest in our team and in April we launched the pursuit learning hub with Linkedin learning.
This hub is a world class online resource with courses taught by internationally respected subject matter experts.
This unified learning a development platform provides our team with the opportunity to learn new skills capabilities and ways of working which will enable us to further accelerate our digital customer obsessed culture.
To conclude we have the right strategy and continue to demonstrate great progress against that we.
We delivered strong results to start the year, despite ongoing headwinds and remain committed to our medium term financial targets, including a dividend payout ratio on.
I'm optimistic for the future and confident that Manulife is well positioned to outperform as the global economy transitions to recovery.
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 10, and our financial performance for the first quarter of 2021.
We started the year with the delivery of strong results, including a 14% rebound in <unk> sales on the highest new business value in any quarter of our company's history.
On double digit core earnings growth across all of our operating segments resulted in core earnings of $1 $6 billion, which is also a quarterly record.
I will highlight the key drivers of our first quarter performance with reference to the next few slides.
Turning to slide 11, we generated core earnings of $1 $6 billion in the first quarter of 2021 up 67% from the prior year on a constant exchange rate basis.
This was driven by the favorable impact of markets on seed money investments.
New business gains in Asia, and the U S.
The recognition of core investment gains in the quarter.
Favorable net policyholder experience.
Fee income from higher average AUR, maybe in our global lab business and.
And in force business growth across all operating segments.
Net income attributed to shareholders was $783 million in the first quarter, reflecting strong core earnings on investment related experience gains, partially offset by a net charge from the direct impact of markets as well as a restructuring charge.
Of note, we delivered investment related experience guidance of $177 million in the quarter, reflecting higher than expected returns on older primarily driven by fair value gains on private equity investments and the favorable impact on fixed income reinvestment activities on favor.
Both credit experience, partially offset by lower than expected returns on real estate.
This has allowed us to report $100 million of investment related experience gains in core earnings on $77 million outside of core earnings.
The direct impact of markets in the quarter was a net charge of $835 million, reflecting the impact of non powered on yield curve movements, primarily driven by the steepening of the yield curve in the U S and Canada as well as higher risk free rates on narrowing corporate spreads.
<unk>.
It's important to recognize the 80 basis point Steepening of the curve was on unusual event and by far the greatest Steepening, we have seen since we implemented our hedging programs in 2012.
While net income was adversely impacted by interest rates from the first quarter higher interest rates on a positive for manulife from the long term and Steve will elaborate on this when he presents on 2020 embedded value results in a few minutes.
As we've stated in the past getting our expenses into fighting shape is on <unk>.
Integral components of our strategy on one that we must execute on in order to achieve our ambition. This.
This includes delivering on our target of consistently achieving an expense efficiency ratio of less than 50% by 2022.
To that end, we monitor and evaluate our expense space continuously and take action, where we see opportunities to operate more efficiently.
The restructuring charge of $150 million pre tax $115 million post tax relates to actions, which are expected to result in recurring annual expense savings of $250 million pre tax by 2023.
$100 million of these savings are expected to emerge in 2021 growing to $200 million in 2022.
These actions pertain to a wide variety of manulife businesses and functions, including the U S on Japan.
Slide 12 shows our source of earnings analysis.
Expected profit on in force increased by 11% on a constant exchange rate basis, driven by in force business growth in Canada, The U S, Japan, Hong Kong and Vietnam.
The year over year increase reflects business growth in Asia, as well as Canadian group insurance and a modest benefit from the impact of the annual actuarial review.
We continue to view, 6% is a reasonable annual growth rate for our expected profit on in force with high single digit growth in Asia being balanced out by low to mid single digit growth in North America.
New business almost doubled compared with the prior year quarter, reflecting higher sales and favorable product mix in mainland China, Vietnam, Hong Kong, the U S and Singapore.
Net policyholder experience in the first quarter was favorable reflecting the impact of higher claims terminations in the U S. Long term care, partially offset by mortality losses in U S life and Canada individual insurance.
Core earnings on surplus increased compared with the prior year quarter, largely due to favorable returns on seed money investments, partially offset by lower investment income due to lower fixed income yields.
Turning to slide 13.
We delivered core earnings growth of 29% and our global <unk> business, reflecting higher fees from higher average are you I may as a result of strong market performance and net inflows.
Core earnings in Asia increased by 21% driven by higher new business volumes favorable product mix in Hong Kong and Asia other and in force business growth across Asia, partially offset by less favorable policyholder experience and lower investment income on Alex.
<unk> capital.
Core earnings in Canada increased by 11%, primarily reflecting improved policyholder experience, including the non recurrence of the first quarter of 2020, COVID-19 related travel insurance claims provision.
Higher in force business earnings.
We offset by lower investment income on allocated capital and unfavorable policyholder experience in retail insurance.
Core earnings in the U S increased by 28%, primarily driven by the impact of COVID-19 on policyholder experience.
In force earnings increased new business gains from higher sales volumes and improved product mix and gains from the G. M. W. B annuities offer program were offset by lower investment income on allocated capital.
Core losses in corporate and other decreased by $348 million.
Primarily driven by the favorable impact of markets on seed money investments and core investment gains.
This should be offset by lower investment income due to lower fixed income yields.
Slide 14 shows our new business value generation and APE sales.
Our insurance business delivered very strong new business value of $599 million in the first quarter of 2021, an increase of 32% versus the prior year quarter, driven by double digit growth in Asia on the U S.
In Asia, New business value increased 39% from the prior year quarter, driven by higher sales volumes and product management actions in Hong Kong.
And higher sales volumes and favorable product mix in Asia, other partially offset by lower sales volumes and unfavorable product mix in Japan due to a shift to lower margin coli products.
In Canada, NPV was consistent with the prior year quarter.
A more favorable product mix offset the impact of lower sales in individual insurance.
In the U S NPV increased 30% from the prior year quarter, resulting in the strongest first quarter result in over a decade, driven by higher sales volumes and a more favorable product mix.
In the first quarter of 2021, we delivered <unk> sales of $1 8 billion.
A 14% increase from the prior year quarter.
In Asia, <unk> sales increased by 22% driven by strong growth in our Hong Kong Bank channel and double digit growth in both Bancassurance and agency channels, and Singapore mainland, China, Vietnam, and Indonesia, partially offset by lower sales in Japan as a result of.
The adverse impact of COVID-19.
In Canada, <unk> sales decreased by 6%, reflecting the non recurrence of a large affinity market sales in the first quarter of 2020, partially offset by robust sales of low risk segregated fund products.
In the U S. <unk> sales increased by 13% driven by domestic indexed Universal life products and they recently launched international savings plan product.
Additionally, sales of customer solutions with the John Hancock vitality, plus feature increased 20% compared with the first quarter of 2020 as this offering continues to be a key differentiator for us.
Turning to slide 15, our global wealth and investment management business benefited from the favorable impact of market performance and delivered net inflows of $1 4 billion with gross flows of nearly $40 billion during the first quarter.
In Asia net outflows of $7 4 billion compares to net inflows of $6 billion in the prior year quarter.
This decrease was driven by a $9 4 billion redemption and institutional asset management, partially offset by higher gross flows across all business lines.
In Canada, net inflows were $4 $5 billion compared with net inflows of $2 8 billion in the prior year quarter.
The increase was driven by higher net inflows across our retail products, partially offset by the non recurrence of several large equity mandate sales and institutional asset management in the first quarter of 2020.
In the U S. Net inflows were $4 $2 billion in the first quarter of 2021, compared with net outflows of $2 billion in the prior year quarter, driven by retail inflows from strong intermediary sales and lower mutual fund redemptions as well as lower redemptions.
Institutional asset management.
Low net inflows in retirement were a partial offset.
Overall global ones average of UMH increased by 18% compared with the prior year quarter, driven by the favorable impact of markets and higher net inflows.
And our core EBIT margin was 37% in the first quarter of 2021 up 340 basis points from the prior year quarter.
Turning to slide 16.
We continue to maintain a strong balance sheet and resilient capital position.
We have $23 billion of capital above the supervisory target and on light cat ratio of 137% is strong.
The 12 percentage point decrease compared to the prior quarter was driven by the impacts of the meaningful rise in risk free rates on the narrowing of corporate spreads partially offset by the $2 billion capital issuance of limited recourse capital notes.
Our financial leverage increased 290 basis points from the prior quarter, driven by $1 7 billion of net issuances, which we view as pre financing upcoming redemptions.
The reduction in the value of available for sale debt securities due to higher interest rates and the unfavorable impact on equity of a stronger Canadian dollar, partially offset by growth and retained earnings.
It's worth noting that in April we announced our intention to redeem $2 $1 billion of securities, including $1 billion of debt on June 20, <unk> 2021.
500 million in Singapore dollars of debt on May 25th 2021 and.
425 million Canadian dollars of preferred shares on June 19th 2021.
The impact of these redemptions will be reflected in the line and leverage ratios for the second quarter of 2021.
We have reflected these impacts and the pro forma metric on the slide all else being equal.
Slide 17 outlines our medium term financial and operating targets and recent performance.
Core EPS growth core ROE and expense efficiency, all exceeded our medium term targets in the first quarter of 2021, and our dividend payout ratio remains within the target range.
On targets remain relevant supported by our strategic priorities and we remain confident in our ability to continue to deliver them.
I would now like to turn the call over to Steve Finch, who will discuss embedded value.
Dave.
Thanks, Bill and good morning, everyone yesterday, we released our 2020 embedded value report on slide 19 illustrates the change in embedded value for the company.
We reported embedded value of $61 $1 billion as of December 31, 2020, an increase of 5% from the prior year.
In 2020 contributions from new business and in force, which are characterized as EV operating profit by some of our peers increased embedded value by $6 billion or 10%.
Of note Manulife EV operating profit has grown at a compound annual growth rate of 12% since 2015.
New business accounted for $1 $8 billion of the 2020 increase an impressive outcome given the challenging environment.
One 9 billion reduction in embedded value in other was driven by the overall negative impact of movements in interest rates and by market impacts on equities and all that.
This was partially offset by the favorable impact of a new affiliate reinsurance agreement for Hong Kong and by a change in methodology on the Hong Kong risk discount rate.
Organic growth in embedded value was partially offset by the normal course payment of common shareholder dividends as well as currency impacts.
Importantly, embedded value of $61 1 billion or $31 49 per share reflects only a portion of the value of our businesses as it attributes no value to future new business and only tangible book value to our growing global wealth and asset management businesses as well as our P&C reinsurer.
<unk> operations and Manulife Bank.
Before I conclude I'd like to draw your attention to the interest rate sensitivities published in the EV report.
The sensitivity illustrates that in a scenario, where all projected fixed income yields are increased by 50 basis points. We would expect the present value of future earnings to increase by $1 $85 billion.
This concludes our prepared remarks, operator, we will now open the call to questions.
Thank you we will now take questions from the telephone line. If you have a question on you're using a speaker phone. Please get your handset before making your selection you can have a question. Please press star one on your device Keypad, you said anytime you wish to cast your question. Please press star two.
Please press star one at this time, if you have a question there'll be a brief pause while participants register thank you for your patience.
And the first question is from Tom Mackinnon from BMO capital markets. Please go ahead.
Yes, thanks very much.
Maybe a question for Phil here, just looking at slide 16.
And then and when we look at this.
Pro forma capital above the supervisory target of 20 billion pro forma at 23 billion in the first quarter. If you look at that slide sort of.
In the third round trip from where you were light cat started and.
In the first quarter of 2018, it shows 16 billion above the supervisory target.
Freed up close to $6 billion. So I'm, just maybe you can give us some context, perhaps as to.
How we should be looking at this in terms of how much actual excess capital you have because.
Certainly all of the capital of the supervisory target wouldn't be classified as excess and if he can and giving that answer perhaps taken into accounts.
Any.
Any capital constraints.
If there are some associated with the other jurisdictions.
And then how much do you actually free up in terms of capital assuming kind of on more of a normal environment.
On a on an annual basis.
Thank you Tom for the question. This is Phil and thanks for getting us kicked off today.
Good questions.
And I'll start with your first question on specifically on the capital point, you do highlight that.
$23 billion of excess.
The supervisory target at 137%.
A light cat ratio.
One thing just contextual and you touched on this Tom in your question over the course of the past 18 months, we've seen an increase.
And interest rates of course in the first quarter, but then in 2020, we'd seen a decrease in interest rates.
The decrease last year gave rise to a benefit to the light cat ratio in the order of.
15 points, we saw a rise from 140 percentage at the end of 'twenty 2019 that went up to 155%.
During 2020, and then we've seen that moderate down to 137% at the end of the first quarter.
We are seeing in the first quarter is a reversal of the.
The impact of interest rates the hotspots of the ratio in 2020, and I always cautioned in fact that the ratio has been flattered by.
On the market factors that we'd seen in 2020.
If we think about specifically your question on excess capital I've consistently commented that there is no magic number.
Both of which we would say capital is excess so I think the capital position as always contextual and we will always manage the balance sheet conservatively, but having said that I think it is fair for me to elaborate a bit further than I have in the past and say that we do have and we do.
<unk> managed to Don internal operating range.
On the the low points in the upper point of that operating range is determined with reference to stress scenarios that calibrated.
Two particular levels of profitability.
With a <unk> ratio of 137% we are approximately $10 billion above the upper end of that operating range.
So I think that does demonstrate is one of the points that I can make demonstrate that we're really happy with the 137% Black card ratio and it is without doubt from a strong ratio.
You also touched on them on.
Where we've how we've evolved since we adopted <unk> in the first quarter of 2018.
At that point, we were at 129% like at $16 billion of capital above the supervisory target and that was a strong capital position and since then of course, we've released capital through portfolio optimization, but we've also deployed capital over that peer.
<unk>.
Just one.
From the favorable to a capital positions in the Asian region and that means that at this point, we are in a very strong position from a local capital point of view and that does provide a potential tailwind two remittances in the near term, we haven't pulled any of that capital back on.
Yet, but if we see these conditions being sustained we do intend to.
Pull some of that back later this year.
Mm, okay, thanks for that and.
The <unk>.
Maybe just some term is is there a rule of thumb in terms of like cat capital points that might be generated or should we more or less focus on you know a combination of like at points and and capital from other jurisdictions I E. Remittances is that the key thing to look at it in terms of how we.
You should be thinking about capital, let's get screwed up annually or is there a rule of thumb. We can think about in terms of the light cat point or the or a light cat points per year.
Okay. Thanks to on so just to clarify the primary basis upon which we managed continental is the like cats ratio. So we do we do look up my account first and of course, there may be some short term elements that we would ask to look through as we saw in 2020. The the ratio was flattered, but do do focus on.
My Cat remittances are also important in terms of providing fungibility of campus a little but we do have a couple of.
Elements to highlight that one is that our annual earnings generate capital on that that provides flexibility.
But also we have flexibility within an ally to accommodate for any timing differences that we may see in the near term relating to remittances.
Okay. Thank you very much sense, though.
Thanks, Tom.
Thank you. The next question is from home Feely from Downing and partners. Please go ahead.
Good morning, and thank you for taking my questions. My first question is related to the new business games in Asia, which we're very strong again and a quarter and I think it's probably at a record level.
We have seen a very broad level uptake in volume across different markets are in in Asia. Our sales were up by 22% year on year on product mix and specifically on health and protection mix was up in fact that contributed to 32% of.
The overall mix as compared to 28%.
Quarter, one of 2020, and again, just kind of gross to highlight that the health and protection needs our absolute top of mind for our clients. In fact, we are seeing that in many of our conversation with our customers I did mentioned about the discipline on repricing actions as well as the expense.
Disciplined management has resulted in expense on our expense efficiency now to come to slightly below the 45% Mark as we look forward.
Given the diversified nature of our franchise.
If you look at the geographic mix. If you look at the product mix all for that matter. The channel make we feel that we are in a very strong position to be able to capture the growth.
Huge focus for us as we look to diversify our business mixed in Asia and in Q1 of 21 those markets Asia on the more broadly contributed 50% of value business value up from 29% in 2016, so and he'll focus on really providing a much more diverse contribution.
From a geographic perspective, as well as from a product perspective is really starting to gain traction and we're seeing the benefits of that in queue on and we expect to see that continue throughout 2021 and beyond.
So just to clarify.
On the come on.
You have made it sounds like maybe what we in the past couple of quarters may be the floor.
Kind of the the what we saw on the first call on maybe kind of the the upper and based on your existing.
Footprint, but to voice point about.
Asia. Other continued growth maybe debt may may trend high overtime for at least maybe in the near term.
Having to you that the past couple of quarters at the lower end in the day. The current quarter has the upper hand is that through the right way to think about it.
Hey, I'm free that.
That's.
A sliding difficult.
Far far far me to kind of frame that but but the point being that as I said the last couple of quarters would be would be a good good indication I think the important for one for you to note is that we continue to invest in on driver momentum right. So if you look at on active agent.
On all for that matter the momentum on a bancassurance partnership.
Are critical all for us to be able to drive the growth agenda that behalf.
In Asia and again.
Kind of mentioned this in the past as well as a secular trends in Asia continue to be very strong on.
On the penetration.
And specifically in B R. Asia other market, we continue to see that we have a fair amount of runway.
To be able to kind of grow on new business.
New business momentum.
In the future cortisone free.
Got it.
And then just a quick second flow of.
Looking at the EBITDA margin in global Wham.
Definitely you hide is being very strong given the your current scale and then assuming a cooperative market condition do you feel like the 37% is a sustainable level going forward all at least hold on near term or do you see any kind of upward or downward pressure.
Okay.
Yeah. Thanks, Scott So maybe I'll, just give a little bit of cover on color on the flow perspective, and then do a deeper dive on the U S.
Yeah, we talked to really just on a strong growth clothes. We've seen the 39.7 billion that was a record quarter for us in terms of top line growth. So we are really seen the momentum and and even on the net clothes.
Was really driven by retail at 6.5 billion in in a retirement.
Business and what's driving a lot of that is just the strong underlying investment performance. If we look at the percentage of our assets above here's our benchmark, 67% is above the minimum on on one year 72 on a three year and 79 and a five year basis. So it's backed up by strong performance of of the offerings that we have in the market and look into you ask them to.
Because we have talked about that in previous quarters U S. Retail on its best sales quarter ever. It was our third straight quarter a positive net flows in R. U S retail business and we improved our market share position. So we have been slowly building momentum.
In that business and a lot of that has to do just with the broad offering that we have that the.
Quality of the capabilities that we bring to the market and we try and make sure we have capabilities for all types of market cycle.
And we really benefited from that is our performance of improve.
Improved and it's also you know an opportunity for us to make those offerings available within our retirement platforms and other record keeping platform. So we do get some leverage across our franchise as well for that business.
Thanks, and the second question May be first thought Eli any kind of talked about lower than assumed returns on on real estate.
I'm, assuming that's office and retail and maybe he can confirm that and when you talk about that Lois and returns is that referring chair longterm assumption.
Yeah. Thanks, Scott for the question.
I I am I have set on prior quarters I am worried in the near term about achieving are assumed or turns on real estate an office in particular I would be concerned with retail as well, but we have virtually no retail. So that's that's not an issue.
Multifamily and industrial performing quite well in this environment. So the big concern of course has been when will people come back to the office how much space when they take up so what is the demand what are the what are the restraints going to be and while I continue to be concerned that has yet to play out I would.
Say relative to prior quarters.
I'm feeling a bit better we're seeing green shoots we're seeing a lot of companies announce coming back to the office now, albeit in a bit of a hybrid way, but the offset to the hybrid way is that I think that'll be looking for more space per employee and and a lot of cases coming back on a hybrid manner where everybody.
As in the office on a given day, so it becomes really hard to release space and in that environment. So I continued to be cautious and we need to see this play out, but I'm feeling a little bit better, but and all of that is really a commentary on the next year or two with respect to real estate you know long term.
I continue to have confidence good asset class to be in and we should be able to which you are long term return on assumptions.
And thank you very much on if I could if I could just add Scott.
Couple of points of resilience one is that on average on remaining least it's about five years and also a meaningful components of real estate portfolio is owner occupied which will so.
It provides points of resilience and.
Allows us to have some confidence as well, but that this is something that is more stable than may be the case full of portfolios that don't have an owner occupied element.
Okay, great. Thanks so.
Thank you. The next question is Shim gave me on the Shank on National Bank Financial. Please go ahead.
Good morning, just a couple of quick questions here, one I know like the interest rate. The sensitivity was negative this quarter I don't Wanna go on to that necessarily but Ah Ah Ah Ah Ah Ah cut off guard by equity market the sensitivity of the car.
Tiny insignificant the game.
Game and I'm wondering why that wasn't a bigger number given your your state is stated the sensitivities.
And to [noise].
Book value for sure I know, there's a big a O C I.
Component, there and I tried to fact, there's some of the impact of ethics and rates into decline this quarter, but still it was a a sequential drop a 6% in which was more than I I forecasted and I'm wondering if there's any.
Particular characteristics of your a first portfolio that yielded the both.
The claim such.
Subject decline thanks.
Sure. Thanks, Gabriel that's Scott maybe I'll start with your first question on the impact of equity Marcia snapped financials. So the the breeching item.
Relative to the sensitivities is the results in a variable annuity hedging program, but we saw charge of a little over $100 million and that was really driven by two major factors. The the first one and the biggest one is we tend to think of variable annuity is hedging.
<unk> equity market, but Ah liability is really pushed around by interest rates as well. So we do have a significant part of that program is hedging interest rates and as Phil had mentioned earlier on the call. We saw a really significant move in interest rates this quarter, a bigger upward rise and we've seen since since we've been.
[noise] hedging and so we did see it.
Did see some rebalancing cos in the interest rate hedging that we did during the quarter. So so interest rates were.
We're we're volatile and upward moving a second component is on the equity side, where.
You know markets were much more stable, there and and were positive, but we saw implied volatilities on our options that we do use options fairly extensively to hedge the equity part of the book.
The Empire golf came down which reduced the value of those equity options. So unstable times, we tend to see that although we had.
Very little in the way of rebalancing costing equity side. So those two components really drove the the charge of over $100 million I would I would point out however that the liability move significant way so even with that charge. The program was 96% effective in in offsetting the change in the liability.
Okay.
Thank you for another.
Yep.
So thanks, Scott and Gabriel Thanks for the question, maybe I pick up on the book value cash.
Point on I think that's really a story that's told in the statement of changes in equity, which is especially on page 10 of us. It on the books I need to share metrics provided on page seven is the ZIP really what's going on is that the the set value movements on the.
Bailable for sale bond portfolio. It was one of the small available said equity portfolio, that's having an.
An impact on the overall book value of the company that flows directly through equity rather than P&L as well as a more modest impact from currency translation the impacts of translating non Canadian dollar's subsidiaries to Canadian dollars. So just to put some numbers around those and.
In the first quarter.
S portfolio.
<unk> down in terms of valuation by $2.6 billion the impact of C. T. A.
The negative impact of point $8 billion, but that of course, those impacts offset by the retained earnings that was generated in the period as well as the 2 billion dollar in flow from the company.
Capital issuance from the first quarter, if we look at the sequential movement in.
Books on you per share excluding I O C I, especially very stable period on period. So the 21.8 $4 in the first course of compared to 21.7 $4 in the fourth quarter of last year.
Thank you.
The next question is from Doug Young from day, I think I pulled on markets. Please go ahead.
Hi, Good morning, just going to the head on net earnings from interest rates and.
Correct me, if I'm wrong, I think a big chunk of that is related to your hedge book, which is obviously really important to your risk management strategy, but what I'm wanting to understand is there and I got that this isn't something that happens. This type of movement every corner, but we have seen it in the past is there anything you can do to soften the blow from the shift that.
The yield curve on a go forward basis.
Thanks that gets it Steven and I'll I'll take that question.
I think it's important context worth reiterating is the fact that higher interest rates are good for the company over the long term in terms of the product portfolio, we can offer to our customers.
Higher earnings as we've highlighted in the sensitivities disclosed any embedded value report. So overall, it's positive in terms of the the impact and a quarter.
Yes, it be.
Be charged was driven roughly half of it was from the the non parallel yield news primarily to steepening of the yield curves, which filled pointed out where and on.
Unusual move over 80 basis points of Steepening between one and a 10 year and.
Part of the cause of that is accounting differences between how we value the liabilities under the I F. R standards and the valuation of the assets, which come through on a mark to market basis, and some of those accounting differences create discharge when rates at steepen, we do see the offset.
Impact if rates were to flatten so either if short term rates were to increase or if longterm rates were to to come down we would see the offsetting impact and there was accounting differences do make it difficult to match those hedges for Steepening you can see that we've largely immunize the company.
Against parallel changes in yield curve that the day impacts there are quite nominal given the overall size of the book.
But that's really the drivers of what's going on in the corner.
And don't you think if I can just chime internet another day to point, Steve mentioned on the fact that interest rates increasing is obviously a tailwind for our business and something that we're obviously very positive and optimistic about I'd. Just refer you to the embedded value report, where I'll sensitivity to illustrate in a 50 basis points increasing rates translates into a 1.8 billion.
Increasing the peavey of future earnings now that increase will dripping over time, but that really is I think it will gives you at least a bit of an indicator of how interest rates actually ultimately benefit our business in the millions along with them.
Yeah, no I totally get that I just it from the questions I'm getting I think there's just some frustration with some of the noise that's been coming through and I guess that was the gist of my question, but it doesn't feel like there's much you can do I mean I get why you approach. It. This way, it's just a function of the accounting noise does confuse on a lot of people.
And maybe second and maybe this is for sale and then and I know you went into a little bit about on on the like out in the first question, but can you itemize a little bit more of what drove the 12 basis point quarter over quarter decline in like because it was bigger than that because then you added in the LRC on and so I'm just trying to get a sense of how much of that decline came.
From from rates and a little bit more detail on that thank you.
Yeah.
Thanks, Scott that's sort of thanks dog, Yeah, I'll take that one this is Phil.
So at 12 point movement and like Cat. If he were to apply the published sensitivities that the we include is not queue full results. The interest rate sensitivities and then adjust for the I lost C. N issuance in the first quarter, you just need to count to a movement of nine points what.
Actually happened with some movement of 12 points on Monday, the difference between nine and 12 points is I think best described as the frictional impact of a bit arises from hedge rebalancing in the hedge rebalancing activity that has been carried out in the first quarter and.
In response to the quite significant movements I'm in the right environment that we've seen and then when we when we rebound on Cinches, there's an efficiency elements of that but there's also an impact on.
The amount of required comparable that that needs to be held so I would say that's the main drive was the residual free percentage points.
Okay. Thank you.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you good morning from I have another question for you on on the like half ratio.
And thanks for the additional color you provided on sort of how you calibrate operating weight range.
I want to ask a question on and it's got a better understanding of that operating range changes for intra.
Triste right movement similar to the reported like cat ratio or if that operating range is more of a.
Nikki.
Number so he will that.
Between actual like Cat and operating range change with interest rates.
<unk> or will it be a little bit more consistent.
Hi, Paul Thanks for the follow up question on like Cat.
Generally speaking the operating range itself is fairly stable, we do review it at.
At least on an annual basis as positive.
Overall stress scenario testing that we carry out but on the whole it tends to be fairly stable.
Having said that I think the operating range is is one day as a point, it's an internal operating range that we apply and I do think the amount of capital.
Hold is always contextual and I personally on I know the company. My colleagues also have a conservative skew when it comes to management of capital, we do value the flex the flexibility that I'm holding high levels of capital provides.
Flexibility does allow for capital deployment as and when there are opportunities to deploy.
But we also value having that flexibility, which means that if we want to deploy we might also replenish. So I don't think there is any particular magic number that we can.
Referred to just say above which that is what we would distribution out but I do think it's it's all contextual and that's why when we look back at the <unk>.
Since the last 12 months.
<unk> looked through some of those short term factors in determining how much we would really articulate as being true access.
Understood. That's helpful. Thank you.
It Steve I'll add one comment there just to illustrate one example of the things that we do take into account you would've seen that are like cash sensitivity to interest rates actually decreased and a quarter. So that the sensitivity to any increase in interest rates decreased and that's a function of the underlying like.
Heck calculations and if interest rates were to increase further that sensitivity would also further decrease that's the type of thing that we one of the things that we would factor into in terms of looking at the operating ranges.
Got it.
For a second question I Wanna see if there's any updated thoughts on the.
Possibility and opportunities within U S variable annuities and what we're seeing there in terms of interest on the part of reinsurers and how you are weighing that that option today just to see if anything's changed from the last couple of months.
Hi, Paul it sudden or sat here I'll take that one certainly if there's an active market for variable annuity reinsurance from the U S.
Which is something we follow very closely.
I think we're seeing that private buyers a V blocks recognize that the public markets may not be appreciating the value within those blocks.
I'd say, we're very connected to the market, we've talked to the players and the associated bankers on a regular and ongoing basis.
And we regularly explore and organic options to understand sort of the bid ask spreads.
And we will translocative in the best interest of shareholders that said R. V. A business continues to perform well generate earnings and cash we're well hedged.
The hedging programs holding up quite well two periods of high volatility the block isn't it.
Ah mature stage.
He has a policyholder uncertainty or decreasing is R. G M b customer starts to take income.
The block relatively more attractive to manage for example, 55% of our U S. VA block is now taking income.
So actually the feedback we get when we talked to third parties as they like our block and they liked the way we're managing it.
We're also pretty pleased with the success, we're having on organic initiatives like a buyback program. We're in the midst of running one right now talking about 40% of the U S. Jim Jim there'll be blocked so cause the bottom line is that where we're evaluating options, but we have a lot of strategic options here.
Thank you.
Thank you. The next question is from many Grandma from Scotiabank. Please go ahead.
Hi, Good morning question on leverage pro forma twenty-seven from 1% I'm just wondering how you expect that trend through the range of ear and when you expect to get back to that medium term target range and and I was kind of as a follow up there as well is there any changing the way you're viewing leverage.
These days yeah.
7.1% definitely better than the 29.5% reported but.
Quite a bit higher than anything we've seen over the past few years.
Thanks. Many this is so so on the second part of your question first and then come back to the first part.
There's no change in the way with looking at the leverage ratio.
Some target remains 25% and we expect to manage to that over the medium term and the and the short term I think 27.1%. So that we reported in the first quarter.
On a pro forma basis, reflecting the.
The impact of the redemptions that we've already announced that's a sally goods.
Case scenario I think for.
The the next couple of quarters.
Expecting leverage ratio to move around from quarters of course, reflecting on the level of equity.
But also reflecting the timing of issuances and redemptions I think there is an opportunity.
Presented.
In volatile markets to raise capital and redeem certain instruments and that's exactly what's happened over the course of the past 12 months and just looking at the.
The redemptions issuances and redemptions this year there is.
A 12 million dollar benefit to us so overall issuances and redemptions in 2021, so far as being approximately neutral net.
Net redemptions, it's $400 million, if we look to the end of the second quarter.
Box, we've been able to reduce the cost of that borrowing by $12 million per on him.
So I expect it to move around the middle but grade towards 25% in the medium term.
So when when all of a sudden done for 21 would would you expect the leverage ratio to be higher and lower than what you ended 2020 is that something that you can.
So I'm coming from.
Yeah, I would expect it to be at a similar level true.
Context of Asia in one day.
The key elements of the margin improvement that are that we're being able to deliver around the world is not only being disciplined when it comes to managing costs, but also.
The the improvements we're making in terms of.
Providing scalable growth in a cost efficient manner.
So overall just in terms of those paybacks $250 million by 2023, that's an ongoing benefit that will be in the run rate by 2023 for $150 million investment in <unk>.
2021, and you will see $100 million start to emerge this year and then another 100 next year.
Okay. That's very good color. Thank you very much from that on my second question is respect to.
Okay. I appreciate that you guys have put out a statement.
Saying that you had a favorable outcome in the Boston litigation.
But as I see it the contract was overruled the appeals court, which means there could be possibility for a similar type of type of sort of action outside of places with the Saskatchewan regulation is this should I not be true should people not be worried about that do you not have contracts.
In other jurisdictions.
People can try on copycat what.
What Boston tried to do.
Is there a reason that that risk is very low and youre not concerned about it or should we be concerned about it and what is the possibility of appeals here.
That on.
On a lawyer, but I understand you have 60 days to.
To appeal the ruling.
So that does possibly open up.
The debt.
From a probability of that.
The regulation itself is overturned so.
Maybe just a statement or two on why we shouldnt be concerned about this kind of behavior outside of provinces with regulation of similar to Saskatchewan.
Yes, Doctor I really here. Thanks for the question look a couple of comments that I'd make.
I, we've said quite consistently all along but we feel that we would ultimately and felt that we will ultimately prevail in this matter and that we felt that the the case didn't make any sense at all and we're therefore pleased that the court of appeal, specifically rule, but the government of Saskatchewan is regulation applied to all UL policies in Saskatchewan.
Including those in this litigation and that for US really again continues to validate our position and it effectively means that the scheme that was being proposed by the plaintiff is really not actionable.
In terms of other provinces, we've seen them also implement similar legislation to that which was enacted or similar legislation or regulation or similar to that which was enacted in Saskatchewan and those provinces, including Ontario.
Hi, Albert.
Notice, Nova Scotia, and New Brunswick.
So again, we feel that there is a very consistent perspective in relation to what was being proposed both from a regulatory perspective and from a legislative perspective. So we feel again very confident in our position here and we don't think this is the amount of debt.
Is the risk for our franchise at all.
Okay. Thanks for that.
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Good morning, I'll try to be really brief here.
In prior years when the companies reported.
Charges of the nature that we saw this quarter with the Steepening yield curve I think.
I sort of remember the company, saying that these charges reverse over time as the hedge instruments mature or is that still the case here, perhaps did I misunderstand you in the past.
Thanks Mario.
<unk>.
I guess a good way of looking at this is if we look over the last five years and we look at direct impact of markets interest rate moves all in corporate spreads and so on that's been roughly neutral over the last five years. So.
We view these.
<unk>.
Particularly steepening and flattening those are things that occur at points in time.
Largely we view our hedging programs. This is hedging the overall movement in the yield curve. So we view that these temporary we view these impact is temporary debt.
Normalize over time.
But if the yield curve were to stay this deep over the life of the.
The hedge instrument than the charge wouldn't reverse is that true.
So yes, sorry.
The payout ratio this quarter, it's near the midpoint of your target range and we're not in a normal.
<unk> economic environment, just yet, but you know I would say your car earnings closer to a normalized.
Run right. So would it be fair to say that we should expect the dividend increase the move in line with core earnings or do you think of the dividend differently.
Yep. Thanks, Doug Let me, let me start I guess I'll reiterate one of the points. It til night earlier and that is that we did in fact increase out dividend in Q1 of 2020 before the the new restrictions were put in place by all fee and in fact that was a 12% increase in a dividend and as you highlight.
Target dividend payout is 30% to 40% of cool running so we're we're pleased that we've been able to achieve that consistently over time.
And again on our expectation would be that when the restrictions are lifted that we'd get back into a regular cadence of increasing a dividend to.
Be able to deliver not only consistent increases until dividend, but to make sure that we're in that payout range, but again it all clearly the uncertainty of of markets and the environment are affected that will also consider when we're thinking about dividend increases and so on.
Okay. That's helpful and then on the embedded value I think the message really is perhaps to look past the near term cash.
<unk> headwinds on me to look ahead to the long term benefits from a higher rate environment.
Think what might be helpful is if you could maybe provide more color on the timing of the.
The benefits Corona from higher interest rates I know you mentioned medium term, but do you expect some of the benefits start trickling through in 2022 core earnings or is it for the up and down and then perhaps you could touch on.
Can understand like cat right now might be restrictive on inorganic options, but maybe you can touch on how.
Tend to pursue organic options to to generate recordings broke going ahead.
Sure it's Steve in terms of how the the higher income higher earnings will emerge. It really is over time, so we won't see one one big change but.
Not long term businesses, so I think of it as emerging over 20 years is how we should think about the benefit of higher rates coming through our earnings overtime.
This is Phil just to supplement it's really coming through from the on line of defence over time and that that will be.
Over a period of 15 20 years and I suppose the link here to Mario's earlier question is that.
That would be that would assume the base scenario things day as they currently offered in a scenario where the yield curves from about steepening of the yield curve reverses and we see.
Interest rates at the shorter end.
Increase.
Giving rise to a flattening some of the.
Or the market value charges, the direct market impact charges that we've seen in the <unk> in the first quarter wood reversal, possibly with us so.
Steepening is steepling gives rise to a charged flattening gives rise to a game.
Right and also asking perhaps clothes on it.
Sorry go ahead go ahead.
Right. So I mean, just to touch on that if we have central bank policy moving a bit higher in 2022 and that could actually be a benefit to you I understand it correctly.
Yeah, that's a reasonable expectation.
Okay, maybe I think you also asthma.
I think it also asked a question Arab around deployment of capital and opportunities to pursue organic growth as well and that's something organic growth along with sustainable increases on a dividend are key elements of on capital deployment strategy.
Should expect us to focus on those in the near term.
Okay. Thanks for that.
Thank you and the next question is from.
Uh-huh slash mature Alice from Evercore ice Alright. Please go ahead.
Good morning, Thank you.
Two part question is there a simple maybe rule of thumb to think about how much capital is required for.
$100 of sales in Asia.
And then second on the free cash flow conversion ratio, if we think about the growth in the region.
But also the current capital position, they're in potential reminiscences that were mentioned.
For later this year, how can we think about that free cash flow ratio. Thanks.
It's it's Steve I can start in terms of capital deployment in in Asia.
We.
We don't look at a simple rule of thumb in terms of how much capital is required to support the business.
We do have we do make organic capital investments to write the new business, but we look at it holistically in terms of day capital of the free cash flow that are in force business is generating we also make sure that the capital investments that we're making an products that we see a return through free cash flow generation in.
A reasonably short period of time to make sure that we're earning an appropriate return on that capital and we are generating free cash flow in Asia. When you consider both the all and impact of new business and and are in force.
I would just add if I if I make an on another data point for you to look at is that if you look at the five year period from 2015 to 2019 Asia remitted $2 billion, despite very significant growth over that period. So we feel actually very good about the cash.
Generation, that's coming out of all of our businesses, including Asia, which is obviously a growth business and we're we're deploying a lot of organic capital.
Thank you.
Thank you.
There are no further questions registered at this time I'd like to turn the meeting back over to Ms O'neill.
Thank you Donna will be available after the call. If there are any follow up question have a nice morning.
Thank you the conference cash now ended please disconnect your lines at this time and thank you for your participation.