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 29, 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 the 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 highlights 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'll 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 the financial results for the first quarter of 2021 for.
We're also 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 of 67% increase from the prior year with double digit price 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, it's worth noting that of higher interest rate environment is beneficial to many of life's business in the long term.
New business value increased 32% with double digit growth in Asia and the U S.
Now of global win business, our core EBITDA margin increased 340 basis points as we continued to build scale and benefited from growth in higher margin markets.
And now of course ROE increased by five five percentage points to 13, 7%.
Finally, we reported embedded value of $61 $1 billion of $31.49 per share as of December 31, 2020.
It's worth noting that embedded value only reflects the portion of the value of our businesses as it attributes no value for future new business and all of the wheat tangible book value to outgrowing global Wan businesses as well as the 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 in the.
First quarter, we freed up $65 million of capital for the ongoing success of our variable annuity buyout program in the U S.
The 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 five per se.
While there's still work to do in order to consistently achieve a ratio of less than 50%. We're on the right track.
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 the highest potential businesses outpaced other areas for the last few years and we're on track to achieve our target by next year.
The highest potential businesses accounted for 60% of total company core earnings in the first quarter of 2021 with Asia and global Wang delivering exceptional results. In fact, the combined contribution from out of Asia and Global Wan businesses Dominion of lives of core earnings was 54% in the first quarter of 2021.
Sustainability is the priority for Manulife and a global Wan business expanded its ESG offerings with the launch of our sustainable Asia Bond Fund in Europe, and our global climate total funding Canada.
First of climate change things from developed in alignment with the principles of the Paris agreement on the 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 of our operating segments to better engage with our customers.
In Canada, we completed the migration of our group benefit clients to one administration system and launched the new advisor pool across our businesses to improve the advisor experience.
In the U S. We piloted a new portal for distribute it just the bit falls 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 the reward customers in North America, who received the COVID-19 vaccine.
In Vietnam, we launched the digital sales platform that enables customers to purchase health insurance online.
And in global Wham, we launched the money market fund with OBO, Indonesia, leading digital payments platform and its strategic partner, but Exxon, Indonesia first online mutual fund market plus.
The result, combined digital money and all on investment to reach the 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.
The 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 now team and the 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 of development platform for bonds out 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 it 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 the menu items will position to outperform as the global economy transitions to recover.
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, the Dol 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 the constant exchange rate basis.
This was driven by the favorable impact of markets on the 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.
The income from higher average of UMH.
And our global land 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 and 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 gains of $177 million in the quarter, reflecting higher than expected returns on older primarily driven by fair value gains on private equity investments the favorable impact of fixed income reinvestment activities in favor of.
Bold credit experience, partially offset by lower than expected returns on real estate.
This allowed us to report $100 million of investment related experience gains in the core earnings of $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 parallel 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 and narrowing corporate spreads.
<unk>.
It's important to recognize the the 80 basis point Steepening of the curve was an 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 in 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 'twenty 'twenty embedded value of results in a few minutes.
As we stated in the past getting our expenses into fighting shape is an integral components of our strategy on one that we must execute on in order to achieve our ambition. This.
This includes the low bringing on target of consistently achieving an expense efficiency ratio of less than 50 per cent by 2022.
So that's and 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 pretax of $115 million post tax relates to actions that are expected to result in recurring annual expense savings of $250 million pretax 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 and 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 the 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 the 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 low fixed income yields.
Turning to slide 13.
We delivered core earnings growth of 29% and a global one business, reflecting higher fees from higher average of you I may as the results 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 enforced 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 the improved policyholder experience, including the non recurrence of the first quarter of 2020, COVID-19 related travel insurance claims provision and higher in force business earnings, partially 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.
Hyatt enforce earnings increased new business gains from higher sales volumes and improved product mix and gains from the G. M. W. B annuities off of 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 market. Some seed money investments and core investment gains, partially offset by lower investment income due to lower fixed income yields.
Slide 14 shows our new business value generation and <unk> 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 and the U S.
In Asia, New business value increased 13, 9% 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 as the more favorable product mix offset the impact of lower sales in individual insurance.
In the U S and B the increased 30% from the prior year quarter, resulting in the strongest first quarter result in over a decade, driven by higher sales volumes and the more favorable product mix.
In the first quarter of 2021, we delivered eight the E sales of $1.8 billion.
A 14% increase from the prior year quarter.
In Asia, a P E sales increased by 22% driven by strong growth in our Hong Kong Bank channel and double digit growth in both bancassurance and the 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, APE sales decreased by 6%, reflecting the non recurrence of a launch of finicky market sale 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 the recently launched international savings plan products.
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 asset management business benefited from the favorable impact of the 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 in 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.
The institutional asset management low.
Our 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 our 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 dollar of 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 of.
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 U S dollars of debt on June 23rd 2021.
500 million, 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 light cat 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 ste.
Steve.
Thanks, Phil 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.
The one 9 billion dollar 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 of that.
This was partially offset by the favorable impact of of new affiliate reinsurance agreement for Hong Kong and by a change in methodology on the Hong Kong the 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 in.
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 all of the tangible book value to a growing global wealth and asset management businesses as well as our P&C reinsurer.
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 of projected fixed income yields of our 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 have a question. Please press star one on the device Keypad, you said anytime you wish to cast for 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.
Yeah, Thanks very much.
Maybe question for Phil here, just looking at slide 16.
And then when we look at this.
Pro forma capital above the supervisory target of.
The $20 billion pro forma at 23 billion in the first quarter. If you look at that slide sort of ease.
The third round trip to where you were light cat started in.
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.
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.
No.
And the capital constraints.
If there are some associated with the other jurisdictions and then how much do you actually free up in terms of the capital assuming kind of on a more of a normal environment.
On a on an annual basis.
Thanks.
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.
The $23 billion of excess.
<unk> the supervisory target at 137%.
Like cat ratio.
One thing that just contextual and you touched on this Tom in your question over the course of the past 18 months with we're seeing an increase.
In the interest rates of course in the first quarter, but then in 2020, we'd seen a decrease in interest rates.
On the decrease last year gave rise to a benefit to the light cat ratio in the order of.
15 points, we saw of rise from 140% at the end of 'twenty 2019 that went up to 155% of <unk>.
During 2020, and then we've seen that moderate down to 137% at the end of the first quarter, what we're seeing in the first quarter is the reversal of the.
The impact of interest rates that had flat of the ratio in 2020, and I always cautioned in fact that the ratio had been flat of bi.
On the market factors that we'd seen in 2020.
If we think about specifically your question on the excess capital I've consistently commented that there is no magic number of.
Both of which we would say the capital is excess 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 fast for me to elaborate a bit further than I have in the past and say that we do have and we do.
Managed to on internal operating range and the you know the the low points in the upper point of that operating range is determined with reference to stress scenarios that are calibrated.
Two particular levels of profitability and with a light cat 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 the demonstrate that we're really happy with the 137% Black cat ratio and it is without doubt a strong ratio.
You also touched on on.
Where we've how we've evolved since we adopted <unk> in the first quarter of 2018.
At that point, we were at the 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.
And just one.
It may be a couple of things I'll point to the one would be the consistent increase in the dividend that we've provided.
CAGR of 11%, we increased the dividend by 12%.
Last year, we got in the before the also the restrictions came into place, but we also.
Over the course of 2018 2019 completed net share buybacks of the $4 $9 billion.
So moving on to the second the components of your question, Tom and really looking at.
On the elements of capital management in particular.
How much capital will be freed freed up on a local basis.
The.
Maybe just some term is is there a rule of thumb in terms of like cat capital of 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 should be thinking about capital, let's gets freed up annually or is there a rule of thumb. We can think about in terms of the like cat point for the are are like cat points per year.
Oh, thanks to on the so just to clarify the primary basis upon which we manage continental is the like cats ratio. So we do we do look up on my account first and of course that may be some short term elements that we would ask to look through us. We saw on 2020. The the ratio was flattered, but do do focus on like.
That remittances of also important in terms of providing fungibility of campus of little but we do have a couple of of elements to highlight that one is that our annual earnings generate capital on that that provides flexibility, but also we have the flexibility within and the lie to of <unk>.
On the day for any timing differences that we may see in the near two of them relating to remittances.
Okay. Thank you very much sense, though.
Thanks for Tom.
Thank you. The next question is from home Feely from Dowling and partners. Please go ahead.
Oh, good morning, and thank you for for taking my questions. My first question is related to the new business games in the in Asia, which were very straw again in the quarter and the thing it's probably at the record level.
So you talked about some of the the business makes and and and in terms of kind of sales of in the corner of helping that but I was just wondering if you can't go into all of the deeper in terms of of what were the drivers for for the for for that level of new business gains in Asia and how sustainable.
Is it.
I am free this is on the Internet and thanks for the question, so you're absolutely right that.
The new business gain go through it was indeed, a very strong and it was backed by a few factors. We've got the strong sales momentum as the fill alluded to is the opening comments.
But 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 on expense at our expense efficiency now to come to slightly below the 45% Mark as we look for.
Howard.
Given the diversified nature of our franchise.
If you look at the geography mix, if you look at the product mix or for that matter the channel make.
We feel that we are in a very strong position to be able to capture the growth.
In Asia I do want to emphasize at the spine that you will have two accounts for some of the seasonality factor that's associated with kind of want specifically the door opening impact in China, but if you were to kind of.
If you were to normalize for that.
We believe that <unk>.
Given the diversified nature of our geography product and channel. We are very very well positioned I do want to make one more point and then I'm going to hand, it over to Steve to see whether he has any further comments to add.
Based on the the comments you have made it sounds like maybe of what we've seen in the past couple of quarters, maybe the floor of been kind of the the the the what we saw in the first quarter, maybe kind of the the upper and based on your ex the same footprints on too.
Two two boys point about Asia. Other continued of Grove, maybe that band May may trend high overtime for at least maybe in the near term.
Having the the the past couple of quarters of the lower end and the the the the current quarters. The upper end is that the the right way to think about it.
Yeah, I'm free that [laughter], that's a slightly difficult.
For for for me to kind of afraid of that but but the point being that I. Just said the last couple of of Carter's 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 a driver of momentum right. So if you look on on active agent call.
On all for that in the amount of the momentum on a bancassurance partnership those are critical of for us to be able to drive the growth agenda that behalf in Asia and again, we've kind of mentioned this in the past as well the second of trends in Asia of continued to be very <unk>.
<unk>, the Underpenetrated <unk> and specifically in the Asia. Other market. We continue to see that we have a fair amount of runway to be able to kind of grow on a new business, a new business momentum in in the in the future part of it sounds.
For Ya.
Got it and then just a quick second of all of looking at the EBITDA margin in global Wham definitely you how does the being very strong given the your your current scale and then assuming a cooperative mark of condition do you feel like the $30 seven per cent as of some.
Paying the bill level of going forward for at least for the near term or do you see any kind of upward or downward pressure.
Yeah. Thanks, I'm free it's Paul Paul here and I'll take that question as you've noticed it's been the third quarter I think in a row of we've delivered above the 30 and we provided that is one of our you're kind of medium term goal for the business doing to improve our operating leverage and you can see in the quarter just the strong strength without it in our in our topline results positive.
<unk> clothes. Despite you know of single mandate redemption, and just you know underlying the momentum across all of our Geography's in business loans. If you take that redemption. We were positive net flows in every business lawn and ever geography, and I think that speaks just to be the.
The two on a three year in 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 asked in particular, because we have talked about that in previous quarters U S. Reaching out of the best sales quarter ever. It was our third straight quarter of 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 brought offering that we have the the the the.
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.
Improved and it's also an opportunity for us to make those offerings available within our retirement platforms and other record keeping plot for them. 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 of returns on on real estate.
I'm, assuming that's office and retail and maybe you can confirm that and when you talk about that lower soon returned is that referring share long term assumption.
Yeah. Thanks, Scott for the question.
I am I have set on prior quarters I am worried in the near term about achieving are assumed returns on real estate an office in particular I would be concerned with the retail as well, but we have virtually no retail. So that's that's not an issue.
Multifamily and industrial idea of performing quite well in this environment. So the big concern of course has been when will people come back for the office how much space will they take up so what is the demand what are the what are the lease rates going to be and while I continue to be concerned it has yet to play out I would.
Say relative to prior quarters, I'm I'm, feeling a bit better we're seeing green shoots for seeing a lot of companies announce coming back to the office now, albeit in a bit of of hybrid way, but the offset for 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 is in the office on a given day. So it becomes really hard to release space and in that environment. So I continued should be cautious and we need to see the display out, but I'm feeling a little bit better, but and all of that is really of commentary on the next year or two.
With respect to real estate of you know longterm.
I continued to of confidence that sort of good asked the class to be in and we should be able to what you are longterm return assumptions.
And the thank you very much of it if I could if I could just add Scott. So just a couple of points of resilience. One is the on average Ah remaining least it's about five years and also of meaningful components of a real estate portfolio is owner occupied which also provides.
Provides that the point of resilience and it allows us to have some confidence as well, but that's this is something that is the most stable then maybe the case for the portfolios that don't have an owner occupied element.
Okay, great. Thanks for all.
Thank you for the next question of some 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 of this quarter I don't Wanna go on to the necessarily but the the cut off guard by equity market the sensitivity of of the.
Kind of insignificant the gay.
Game I'm wondering why that wasn't a bigger number of given your your state of the state of the sensitivities.
And to [noise] book value for sure I know, there's a big a O C I <unk>.
Component, there and I tried the fact, there's some of the impact of ethics and rates and two of decline this quarter, but still it was a of sequential drop of six per cent in which was more than I I forecast it and I'm wondering if there's any particular characteristics of your a of first portfolio of that.
The yoga the.
But the claim subject of decline thanks.
Sure. Thanks, Gabriel It's Scott maybe I'll start with your first question on the impact of equity Marcia snapped financials. So the the bridging item relative to the sensitivities is the result of inner variable annuity hedging program, where we saw charge of a little over $100 million.
And that was really driven by two major factors. The the first one of the biggest one is we tend to think of variable annuity is hedging 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 I still had mentioned earlier on the call. We saw a really significant move and the interest rates this quarter of bigger upward rise and we've seen since since we've been hedging and so we did see it did.
Did see some rebalancing cos in the interest rate hedging that we did during the quarter. So so interest rates were.
<unk>, where volatile and upward moving on a second component is on the equity side, where.
You know markets were much more stable, there and and were positive, but we saw in pie volatilities on our options that we do use options fairly extensively the hedge the equity part of the book the the imply balls came down on which reduced the value of those equity options. So unstable.
The times, we tend to see that although we had.
Very little in the way of rebalancing costing equity types of 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 per cent effective in in offsetting the change in the liabilities.
Okay.
Thank you for that and other.
The.
So the <unk>, thanks for <unk> and Gabriel Thanks for the question, maybe I pick up on the book value share point on I think that's really the story. That's told in the statement of changes in equity, which is especially on page 10 of us it on the books on the <unk> metrics of provided on page seven of the Zip really.
What's going on is the the the set of value movements on the available for sale bond portfolio. It was one of the the small available for set of equity portfolio that's having.
An impact on the overall book value of the company that flows directly through equity rather than P&L as well as the more modest impact from the currency translation. The the impact of translating non Canadian dollars subsidiaries to Canadian dollars. So just to put some numbers around those and.
And the first of course, the I F. S portfolio Uhm, the moved down in terms of valuation by $2.6 billion the impact of the C. T. A.
It was the negative impact of the point $8 billion, but that of course those impacts all all set by the retained earnings that was generated in the period as well as the the 2 billion dollar in flow from the Uhm capital issuance from the first of course, if we look at the sequence.
<unk> movement in Uhm books on your <unk>, excluding I O C. I, it's actually very stable period on period. So the 21.8 for dollars in the first of course of compared to 21.7 $4 in the fourth quarter of last year.
Thank you Dean.
The next question is from Doug Young from day, all day and cancelled on markets. Please go ahead.
Hi, Good morning, just going to the head on net earnings from interest rates and and correct me if I'm wrong I think of 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 get the dishes in something that happens the.
The movement of every corner, but we had seen it in the past is there anything you can do to soften the blow from the shift of the yield curve on the go forward basis.
Thanks, Doug it's it's Steven I'll I'll take that question.
I think the important context worth reiterating is the fact that higher interest rates are good for the the company over the long term in terms of the product portfolio. We can offer to our customers higher earnings as we've highlighted the and the sensitivities disclosed in the embedded value of report. So overall, it's positive in terms of the.
The the impact in the quarter.
Yes, it be the the.
The charge was driven roughly half of it was from the the non parallel yield news, primarily the steepening of the yield curves, which filled pointed out where an unusual move over 80 basis points of steepening between the one on the 10 year.
<unk>.
Part of the cause of that is accounting differences between how we value of the liabilities under the I F. R. S standards and the valuation of the assets, which come through on the mark to market basis, and some of those accounting differences create discharge when rates at Steven we do see the offset.
Impact if rates where 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 of Steepening, you can see that we've largely immunize the company.
Against parallel of changes in yield curves of the the impact there are quite nominal given the overall size of the book, but that's really the the drivers of of what's going on in the corner.
And don't you think if I can just chime internet another day to point sleeve mentioned on the fact that interest rates, increasing is obviously of Thailand for our business and something that we're obviously very positive and optimistic about I'd just for 32, the embedded value report, where I'll sensitivity to illustrate the the 50 basis point of increasing rates translates into of 1.8 billion.
The increase in the Peavey of future earnings now that increase will dripping of the time, but that really I think it will give you at least the a bit of an indicator of how can interest rates actually ultimately benefit out of business and the medians along with the.
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 the function of the accounting noise does confused a lot of people.
And maybe second and maybe this is for sale and then and I know you went into a little bit of boat 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 of decline in like because it was bigger than that because then you add it in the L. R. C. On him. So I'm just trying to get a sense of how much of that decline came.
From from rates in a little bit more detail on that thank you.
Thanks for <unk> that sort of thing so I'll get I'll take that one this is Phil.
So at 12 point movement and like Cat. If you were to apply the published sensitivities that the we include the not queue for results. The the interest rate sensitivities and then of just for the I lost the N issuance in the first quarter, you just need to work out to a movement of nine points what.
It actually happened was the movement of 12 points on the really the difference between nine and 12 points is I think the best described as the friction on impact of a bit arises from hedge rebalancing on the hedge rebalancing activity that has been carried out in the first quarter.
In response to the quite significant movements I'm in the right environment that we've seen in it when we when we rebalance hedges. This this inefficiency elements of that but there's also an impact on the amount of required capital of that that needs to be held so I I'd say, that's the main drive for us the residual.
Free percentage points.
Okay. Thank you.
<unk>.
Thank you for the next question is from Paul Holden from CIBC. Please go ahead.
Good morning from I have another question for you on the on the like Cat ratio.
And thanks for the additional color you provided on sort of how you calibrate for operating weight range.
For I want to ask a question on and it's got a better understanding.
Standing of that operating range changes for into.
Interest rate movements similar to the reported like cat ratio or if that operating range is more of a sticky number. So he will that gap between actual like cat and operating range change with the interest rates moves or.
Will it be a little bit more consistent.
People. Thanks for the follow up question on the like Cat generally speaking of the operating range itself is that in the stable. We do review it at least on an annual basis as part of the overall stress scenario of testing that we carry out but on the whole it tends to be.
The stable, having said that I think the operating range is is one day disappointed and an internal operating range. The we apply and I do think of the amount of capital that we hold is always contextual then I I personally on I know the company of my colleagues also have the conservative ski when it comes.
To management of capital, we do value the flex the flexibility that the holding high levels of capital provides the market for.
Flexibility does allow for capital deployment as and when the opportunities to deploy uhm, 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.
Refer to to say above which that is what we would distribute out but I I do think it's it's all contextual and that's why when we look back at the the course of the last 12 months, we looked through some of those short term factors in determining how much we would really articulate as being true access.
Understood the TOEFL. Thank you.
It's Steve I'll add one comment there just to illustrate one example of of the things that we do take into account you would have seen that are like cats sensitivity to interest rates actually decreased and the quarter. So the the sensitivity to the increase in the interest rates decreased and that's a function of the underlying value.
Tech 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 of looking at the operating ranges.
Got it. It's also helpful. 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 them interest on the part of reinsurers and how you're waiting that that option today just to see if anything's changed for the last a couple of months.
Hi, Paul this on the <unk>, you're sat here I'll take that one certainly there's an active market for variable annuity reinsurance in the U S. Just something we follow very closely I think we're seeing the private buyers of V blocks recognize that the public markets may not be appreciating the value within those blocks.
Let's say, we're very connected to the market, we talked to the players and the associated bankers on a regular and ongoing basis and we regularly explore inorganic options to understand some of the bid ask spreads and we'll translocative and the <unk>. The best interest of shareholders Uhm that said R. V of business continues to perform well.
January earnings and cash, we're well hedged the hedging programs holding up quite well two periods of high volatility.
Uhm the block isn't the is reaching of a mature stage.
Area of the policy holder uncertainty or decreasing is R. G. M does the customers trying to take income, making the block relatively more attractive to manage for example of 55 per cent of our U S. V. A block is now taking the income.
So it's actually the feedback we get when we talk to third parties as they they like herbal luck and the like the way we're managing uhm.
We're also pretty pleased with the success for having on organic initiatives like the buyback program when the mist of running one right now talking about 40 per cent of the U S. G M. They'll do the block so because of the bottom line is that where we're evaluating options, but we have a lot of strategic options here.
Kind of thank you.
Thank you and the next question is from many Grandma from Scotiabank. Please go ahead.
Hi, Good morning question on leverage pro form of 27.1 per cent I'm. Just wondering how you expect that to trend for the remainder of the year and when do you expect to get back to the medium term target range and and I was kind of of as of follow up there as well. It is there any change in the way you're viewing leverage.
These days, you know, 27.1% definitely better than the 29 45 per cent reported but.
Still quite a bit higher than anything we've seen over the past few years.
Yeah.
Thanks for many this is Phil so on the second part of your of question first and then come back to the first part the there's no change in the way with looking at the left for each ratio on medium. Some target remains 25 per cent and we expect to manage the that over the medium term and the and the short.
I think 27.1 per cent that we reported in the first quarter.
On the pro forma basis, reflecting the.
Uhm the impact of the redemptions that we've already announced that's a sad the goods. The base case scenario I think for the the next couple of quarters.
Do expecting leverage ratio to move around from quarters of course, the reflecting the level of equity, but also reflecting the timing of issuances on redemptions I think there was 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 the redemptions issuance isn't redemptions. This year. There is the 12 million dollar benefit to us so overall issuances and redemptions.
2021, so far as being the approximately neutral the net net redemptions of of $400 million. If we look to the end of the second quarter box, we've been able to reduce the the cost of borrowing by $12 million per on them.
So I expect it to move around the middle but grade towards the 25 per cent of the medium term.
So when the with all of a sudden done for 21 would would you expect the leverage ratio to be higher or lower than what you end of 2020, that's something that you can.
Sort of comment on.
The other expect it to be but the some of the level to the the we've reported on the first quarter. So I wouldn't expect it to move materially, but the royal other factors of course that kind of impact leverage.
Capital deployment the level of accuracy is one of those of course, so the timing of issuances.
The only thing I would just add if I. If I may of many is still of highlighting we're very comfortable with a leverage ratio is significantly down.
From where it was three years ago and that has been of focus for us to create greater flexibility in relations of how we manage our business and the balance sheet.
It will be in the run rate by 2023 for $150 million of investment in <unk>.
2021, and Youll see a $100 million of that emerge this year and then another 100 next year.
Okay. That's very good color. Thank you very much for that zone.
My second question is respect to.
And again I appreciate that you guys have put out of statement.
Saying that you had a favorable outcome in the mosque in 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 on regulation.
Is this it.
Should I not be true people not be worried about that do you not have contracts.
In other jurisdictions, where people can try and copy cat.
What Marston 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 the.
On the lawyer, but I understand you have 60 days.
To appeal the ruling.
So it does possibly open up.
The public from a probability of that.
The regulation of itself is overturned so.
Maybe just a statement or two on why we shouldnt be concerned about this kind of behavior outside of the provinces with regulation of similar to Saskatchewan.
Yes, Doug I really here. Thanks for the question look a couple of comments that I'd make.
Price over time as the hedge instruments mature is that still the case, the or perhaps did I misunderstand you in the past.
Thanks, Mario at Steve Uhm.
A good way of looking at this as if we look over the last five years and we look of direct impact of of markets interest rate moves all in corporate sprouts and so on that's been roughly neutral over the last five years. So we view. These you know the.
Particularly steepening and flattening those are things that occur at points in time, but the largely we view our hedging programs as as hedging the overall movement in the yield curve. So we view that these temporary we view these impact is temporary that normalize overtime.
But if the ilker of of the state of steep over the life of of the the the hedge instrument than the the charge wouldn't reverse is that true.
So yeah, sorry, the so the impact of having higher interest rates as of positive and again, we point back to the embedded value of results. So we see that over time, we will see higher earnings if rates stay higher than they were at Iraq. It's the.
That's not what I was asking what what I asked was if the yield curve remains of the steep.
Does the significant charge when you saw this quarter does it remain there or does it reverse as the edges as much mature.
So we we do see the impact of the higher rates coming through over time, perhaps we can follow up and turn on <unk> I want to make sure I I answer your question.
Appropriately in terms of reversing I'm I'm, saying that we do see the benefit of higher rates coming through over time through our earnings.
Okay.
Thank you for the next question is from nine till the Susan from very Taos investment Research. Please go ahead.
Thank you good morning Uhm. My first question was on the dividend payout ratio so when I look at.
The payout ratio of this quarter to <unk>. The mid point of your target range and we're not in a normal to call on economic environment, just yet, but you know, let's say your core earnings of closer to of 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 of the dividend differently.
Yep. Thanks, a lot of good let me, let me start I guess I'll read the right one of the points of film I'd earlier and that is that we did in fact increase the dividend in Q1 of 2020 before the the the new restrictions were put in place by I'll see and in fact that was the 12% increase the now dividend and as you highlight uhm.
Target dividend payout is 30 to 40 per cent of cool running. So we're we're pleased that we've been able to achieve that consistently over time.
And again, you know our expectation would be the when the restriction of the lifted that we'd get back into a regular cadence of increasing a dividend to be.
Be able to deliberate not on any consistent increases the nail dividend, but to make sure the wearing that payout range, but again it all clearly the uncertainty of of markets and the environment are a fact of it will also consider when we're thinking about dividend increases and so on.
Okay. That's helpful and then on the embedded value you know I think the message the really is perhaps the look past the near term cash.
Capital headwinds on me to look ahead to the long term benefits from the higher rate environment I think what might be helpful. Is if you can maybe provide more color on the timing of the benefits the corona from higher interest rates I know you mentioned medium term, but do you expect some of the benefits starts trickling through in 2022 core earnings or is it for the up and down the cat.
Then perhaps you could touch on you know I can understand like cat right now might be restrictive inorganic options, but maybe you can touch on how you intend to pursue organic options to to January 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 we've got longterm businesses. So you know I think of it as emerging over to.
20 years is how we should think about the the benefit of higher rates coming through our earnings overtime.
Yeah. This is still just to supplement the it's really coming through from the on wind of <unk> of of time and that that will be over a period of 15 20 years and I suppose the the link here Tomorrow's of your question is the.
That would be that would assume that they scenario things stay as they call. It the off of it in a scenario where the yield care of some of our steepening of the yield curve reverses and we see.
Interest rates of the sort of around increase giving rise to of flattening some of the the or the market value charges. The the direct.
The amount of impact charges that we've seen in the kind of in the first of course it would the reversal, possibly with so steepening is steepling gives rise to the charge flattening gives rise to the game.
Right no. So I will have those on it sort of <unk>.
Go ahead go ahead right. So I mean, just the touch on that so if we have no central bank policy moving the higher than 2022 of that can actually be a a benefit to you I understand it correctly.
Yeah, that's the reasonable expectation.
Okay, great rest of your <unk>.
Alright, I think he also asked the question narrow by around the appointment of capital and uhm opportunities to pursue of organic growth as well and that's something that the organic growth along with the sustainable the increases in a dividend key elements of on capital deployment strategy and you should expect us to focus on those.
In the meantime.
Okay. Thanks for the.
Thank you for the next question is from.
<unk> <unk> from Evercore I S. Alright. Please go ahead.
Good morning, Thank you.
Two part question Uhm 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.
And but also the current capital position, they're in potential remittances that were mentioned for later this year you know how can we think about that free cash flow ratio. Thanks.
It's it's Steve I can start in terms of capital of deployment in in Asia.
You know, 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 the capital of the free cash flow of that are in force business is generating we also make sure that the cat.
Little investments that we're making in the products that we see a return through a free cash flow generation in a reasonably short period of time to make sure that we're earning inappropriate 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 it on another day to 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.
Of growth business, and we're aware of deploying a lot of organic capital.
Thank you.
Thank you.
There are no for the questions registered at this time I'd like to turn the meeting back all the time is O'neil.
Thank you Donna will be available after the call. If there are any follow up question have a nice morning.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.
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