Q3 2023 Manulife Financial Corp Earnings Call
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This conference is being recorded so it calls the homes that don't have as you see.
Please standby your meeting is ready to begin please be advised that this conference call is being recorded.
Good morning, ladies and gentlemen, welcome to the Manulife third quarter 2023 financial results Conference call.
I would like to turn the meeting over to Mr. Hong Kong. Please go ahead Mr. <unk>.
Thank you welcome to minimize earnings conference call to discuss our third quarter and year to date 2023 financial and operating results our earnings materials, including the webcast slides for today's call are available on the Investor Relations section of our website at many way dot com turning to slide four we will begin today's presentation with an overview of our third quarter results and strategy update by wide Cory.
Our president and Chief Executive Officer for any worries remarks, Colin Simpson, our Chief Financial Officer will discuss the company's financial and operating results. After the prepared remarks, we've moved to the live Q&A portion of the call. We ask each participant to here to a limit of two questions, including follow up questions. If you're happy to Jim questions. Please speak to you and we do our best to respond to it.
Before we start please refer to slide two for a caution on forward looking statements note that certain material factors or assumptions are applied to making forward looking statements and actual results may differ materially from what is stated.
I would also refer you to slide 35, when note on a non-GAAP and other financial measures used in this presentation, which includes an explanation of our use of transition that results for 2022 comparison.
With that I'd like to turn the call over to Roy Gori, Our President and Chief Executive Officer Roy.
Thanks, Sean and thank you everyone for joining us today.
Yesterday, we announced our third quarter 2023 financial results.
Let me first share with you some quick thoughts on the quarter.
We delivered growth across our global business, which is evidenced through the strong operating and new business results.
In the third quarter, we saw double digit growth in I T cells, and new business value compared with the prior year quarter.
We also generated solid growth in new business CSN of 6%, which contributed to an annualized organic growth of 5% on a year to date basis.
Since the adoption of <unk> for 17, we've been delivering steady year on year growth in core earnings over the past three quarters, including a 35% rise in core EPS this quarter.
We also reported core <unk> of 16, 8% hit about medium term target of 15% plus for the second consecutive quarter and.
And we continue to focus on allocating capital to our high return businesses to drive Roe growth.
Despite the impacts of the challenging macroeconomic environment on our net income we grew our eye for a 17 adjusted book value by over $1 per share in the third quarter, which translated to a 4% increase year on year.
And finally enabled by our strong capital position, we continued to deploy capital to further enhance returns to shareholders through dividends and share buybacks.
Turning to slide seven we are driving profitable growth, while focusing on the needs of our customers and returning capital to our shareholders, which contributed to our strong third quarter.
Asia continued to build on the momentum of the previous quarter capitalizing on the return of demand from mainland Chinese visitor customers.
<unk> delivered strong new business results with IP sales and new business CSM growth of 20% and 16% year on year, respectively.
In Canada, we delivered impressive IP sales growth of 51% compared with the prior year quarter, driven by a large affinity market sale and it translated into an increase in new business value of 72% in the segment.
We're also making decisions easier for our customers, notably to accelerate the growth of our global high net worth business.
We launched our unified Onboarding platform in the third quarter in Bermuda, Hong Kong, and Singapore to deliver a consistent high touch experience.
But distribute as end customers.
I'm encouraged by the continued growth across our global franchise.
Now, let me speak to our continued journey of becoming a digital customer leader and highlight some of the key initiatives across our businesses.
Starting with Canada, we continued our digitization efforts to meet growing demand for more personalized digital health care experiences for our group benefits members with a strategic partnership with league.
Leading health care technology provider.
This partnership will help our customers understand their health focus on prevention access care and better understand and optimize their benefits.
Global win we accelerated customer adoption of digital applications intended retirement through I'll say goodbye to a type of campaign, which contributed to a 165% increase in members converting to E statements over the three month campaign period, and an increase in satisfaction in their digital experience over the <unk>.
Good quarter.
Moving to Asia, we further automated our claims handling process in Hong Kong to deliver a better customer experience and drive operational efficiency.
Through continued leveraging of data to enhance our auto adjudication engine the initiatives drove a nearly two fold increase in straight through processing claims year on year.
In the U S. We continued to optimize our digital capabilities to create a more seamless digital customer experience through various initiatives, including an enhancement of the interactive voice response authentication, enabling 31% of inbound calls to be completed with no human interaction during the quarter.
These are just a few recent examples of how we're making decisions easier for our customers and meeting their personalized digital needs.
And part of our investment of more than $1 billion since 2017 to digitize our business.
Looking ahead, we will continue to build on our strong digital platform, while accelerating our adoption of new technologies, such as generative AI.
We're already piloting a number of initiatives that we will look to scale as we uncover their potential to generate top and bottom line benefits.
Moving to capital management.
We continue to maintain a strong capital position supported by a higher like cat ratio in the quarter of 137%.
We also generated stable growth in adjusted book value per share with a 4% increase year on year in the third quarter.
Coupled with the financial leverage ratio that is close to our medium term target of 25%. We are in a position of strength to weather the macroeconomic uncertainties and continue returning capital to our shareholders.
In fact, we've returned approximately $7 $7 billion of capital to our shareholders through dividends and share buybacks since we resumed our share buyback program in 2022.
And now a dividend per common share has grown an average of 10% annually since 2017.
In summary, I'm pleased with our strong results in the third quarter.
While we continue to operate in a tough and uncertain environment that presents challenges.
I see tremendous opportunities against the backdrop of higher rates and continued recovery in Asia.
Manulife is uniquely positioned to capture these opportunities given our financial strength business and geographic diversity and a leading insurance business that will continue to benefit from higher rates.
Thank you I'll now hand, it over to Colin to review the highlights of our financial results call. It.
Thanks, Alright, we are indeed delivered strong performance in the third quarter with growth in sales earnings book value and counsel all guns, a little more detail on our results before we move to Q&A.
I'll start with our top line on slide nine.
<unk> sales increased 21% from the prior year quarter as we continued to capitalize on the return of demand across Asia in particular Hong Kong.
In Canada, we delivered APE sales growth of 51% driven by large synergy market sale.
The strong growth in sales translated into an increase in new business value of 15% and contributed solid growth in new business CSM or 6%.
This reflects increases in sales of Asia, and Canada offsetting a decrease in the U S, which experienced a slowdown in demand for accumulation products.
Global <unk> net outflows of $800 million entirely due to a large case pension plan redemption in our U S retirement business year to date, we've generated net inflows of $5 8 billion.
I'm encouraged by the continued growth across our new business metrics compared with 2022 in the face of a relatively difficult economic conditions, a testament to the demographic tailwind in many of our markets, a broad product offering and our ability to execute.
Moving to slide 10, which shows the strong growth in our profit metrics core EPS increased 35% as we grew core earnings and bought back shares no. This growth was flattered by the hurricane related charge in our P&C reinsurance business in the prior year quarter, but normalizing for this core EPS still increased 12%.
Despite a significantly higher credit charge.
As Roy mentioned active capital allocation is a key priority for us and it is encouraging to see our third quarter core ROE increased to 16, 8% ahead of our medium term target of 15% plus for the second consecutive quarter.
Turning to slide 11, our net income was lower than core earnings this quarter caused by the challenging investment environment, but it is important to consider that some of this adverse result was offset by gains in other comprehensive income or ACI, which contributes to the increase in our book value.
Together with the contractual service margin, which also increased we reported an adjusted book value per share of $50 67.
Up 4% year on year.
But bringing back to our core earnings results Slide 12 shows all drivers of earnings analysis presented relative to the prior year quarter to give you a sense of our progress. The first point to note is the recovery in the core net insurance service yourselves. This was driven by the non repeat of last year's $256 million Hurricane charge.
But also improved insurance express.
The second point is that higher interest rates continued to benefit our net investment result through both higher expected investment earnings and higher returns of all surface sources. These two factors were partially offset by higher debt costs included another core earnings along with higher performance related costs and investments in technology across our businesses.
Finally, the increase in expected credit loss or E. C. L. A this quarter was primarily related to certain electric utility bonds impacted by the Hawaii wildfires and a handful of private placement lines.
These factors drove a 28% year on year increase in all core earnings as shown in the next slide which I'll move to and discuss on non core items.
The challenging macroeconomic environment led to a $1 billion market experience net charge in the third quarter. This included a $400 million charge from lower than expected returns on all of the $273 million charge due to lower than expected public equity returns during the quarter and the 206.
$6 million loss in derivatives, and hedge accounting ineffectiveness, driven by the significant increase in rates and steepening of yield curve with a 10 and 30 year rates increased more than 70 basis points, while the shorter rates between one and five years rose on average 30 basis points, we will continue to refine our hedge accounting program.
To better align with the economic hedges.
I'll also note that given the interaction between the fair value through OCI option on our assets and liabilities and derivative hedge accounting it will be important to look at the impact on this line in conjunction with movements in OCI to see the full picture of interest rate impacts.
For this quarter the impact was net favorable.
While we reported a net charge in ALDA, reflecting lower than expected returns the portfolio continued to generate a positive return in the quarter.
Our long term track record supports our ALDA return assumptions, but we shouldn't expect some parents such as now where it may underperform. The long term assumptions commercial real estate was again the biggest driver of all the underperformance as higher long term risk free rates are pressuring valuations.
Although high capitalization rates used by third party appraisers lowered current valuations. These high rates also indicate higher returns going forward, which further increases our confidence in achieving our long term assumptions prospectively over time.
It is important to reiterate that we continue to view a diversified all of the portfolio is well suited for insurance liabilities with attractive returns and low volatility relative to both credit and equity indices over the medium to long time horizon.
Outside of the market experiences all I would like to note that our annual review of actuarial methods and assumptions or basis change had a net neutral impact on net income attributed to shareholders.
This year's basis change resulted in a net favorable impact of $347 million pretax, reflecting a neutral impact in net income and increases in OCI in CSM.
Further information on the basis changes available in the appendix to the presentation.
Lastly, the $306 million gain and reinsurance transactions tax related items and other reflects a one off release of multiyear tax provisions.
The next few slides will cover the segment view of our results starting with Asia on Slide 14.
Both top and bottom line performances were strong.
<unk> sales increased 20% from the prior year quarter, reflecting a return of demand from mainland Chinese visitor customers, which you can see in our Hong Kong results as.
As we've mentioned previously the pace of economic recovery in Asia is uneven and the strength of our diversified business in the region continued to shine through the.
The increase in sales contributed to a 16% and 7% growth in new business, CSM and new business value respectively.
We delivered strong core earnings growth in Asia of 33% year on year, primarily driven by higher investment yields and business growth as well as product actions, but I would add that core earnings also benefited from an increase in amortization of CSM and our Hong Kong business as a result of the basis change.
Moving out of the global wealth segments results on slide 15.
Our global wine business recorded net outflows of $800 million. This was driven entirely by large case pension plan redemption U S retirement, which more than offset continued strong inflows in our institutional business. Excluding this large case pension plan net inflows were $4 billion for the quarter.
Retail net outflows in the quarter reflected low demand as investors continue to favor short term cash and money market instruments amid market volatility and higher interest rates.
This backdrop, our U S retail net flows outperformed the industry average.
Our global wine business also delivered resilient Corning supported by high average <unk>, which increased 4% year on year and higher than usual institutional performance fees.
Our core EBITDA margin of 26, 9% was improved sequentially since the first quarter of 2023, driven by steady growth in average <unk> and higher institutional performance fees.
Heading over to our Canada segment on Slide 16, which had another strong quarter AP sales increased 51% compared with the prior year quarter, primarily due to a large affinity market sale, which was the main contributor to our significant growth in new business value I would like to remind you that the majority of the affinity market.
<unk> are classified as premium allocation approach or P. A a contracts, which do not generate CSO.
Core earnings increased by 4% compared with prior year quarter, mostly driven by more favorable insurance experience in our group benefits business.
Moving to slide 17, which illustrates our U S segment's results.
In the U S. Lower AP sales were driven by the backdrop of a continued high rates environment adversely impacting our accumulation insurance products in particular, especially for our affluent customers lower sales contributed to the low end new business results.
We're actively broadening our product base to mitigate the headwinds, including the recent expansion into the employer market by introducing a multi line product.
Our U S business delivered resilient core earnings, which decreased 2% compared to the prior year quarter, mainly reflecting the increase in ECL.
Insurance experience improved year on year from net favorable claims experience, which provided a partial offset to the credit impact.
Onto slide 18, we continue to maintain a strong balance sheet and capital position.
This underpins the commitment we make to our customers every policy sold and gives us financial flexibility.
At the end of the quarter, we had $22 billion of capital above all supervisory target ratio and I'll highlight that ratio of 137% remains strong.
Our financial leverage ratio declined by <unk> six percentage points year on year, largely driven by higher adjusted book value during the quarter and this continued to track closer to our medium term target of 25%.
Enabled by our strong capital position, we continue to return capital to shareholders.
We have returned approximately $7 $7 billion of capital to shareholders through dividends and share buybacks. Since we resumed our buyback program in 2022, including approximately $420 million of buybacks or nearly 1% of our outstanding common shares during the third quarter.
And finally, moving to slide 19, which shows how we're tracking against our medium term targets.
Our CSM growth metrics, so below our medium term targets, partly due to the impacts of market and foreign exchange movements. We continue to explore our products and business enhancements to improve CSM growth and I'll still optimizing our performance in a post eye for a 17 well.
Core EPS growth and core ROE would have been strong in the first nine months of 2023 and above our target ranges.
All in we've delivered strong oil pricing and new business results and echoing <unk> earlier remarks, as we continue to face an uncertain global macroeconomic and geopolitical environment I am confident that we are well positioned to deliver for our customers shareholders and colleagues.
This concludes our prepared remarks before we move to the Q&A session I would like to remind each participant to adhere to a limit of two questions, including follow ups and re queue. If they have additional questions.
Operator, we will now open the call to questions.
Thank you.
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So the question Please press star two.
Star one at this time, if you have a question there'll be a brief pause the participants register thank you for your patience.
And your first question is from many common from Scotiabank. Please go ahead.
Hi, good morning.
Business benefited from higher than normal performance fees.
In the institutional business I was hoping you could provide us a little more color in terms of.
What was driving that.
Wondering if you could scale back in terms of <unk>.
Yes, Thanks, Benny it's Paul here, Yeah in the quarter, we did have a strong performance here was on our timber business.
The performance fee was $23 million post tax this quarter and help contribute to the positive results, but if you look at the underlying core earnings they were strong without the performance fee. If the comparison to Q2, if I back out the performance fee completely core earnings would have been 338 million up 6% from Q2, EBITDA margin would've been 25, 6% which is a.
100 basis points up from Q2, and that's relative to average a M may up 1% from Q2.
Now, having said that performance fees can be lumpy, but we would expect to generate a certain level on a regular basis historically for us over the last four years, that's been between on average $10 million to $15 million post tax.
On a 12 month basis this year year to date, we're sitting at 27 posted 20.
27 million post tax a little bit higher than.
Than normal, but if you're trying to get a sense of run rate. You should include some portion of performance fees on an ongoing basis.
Thanks for that and then just wanted to talk about CSM, new businesses and growth in TSM balanced growth both year to date coming in well below our medium term target. So I just wanted to revisit.
What what's driving that and then trying to think through the implications in terms of.
Earnings and book value growth going forward.
So.
What would be the two questions on CSM.
Yeah, Yeah, Thanks, Manny and it's calling here. So we're actually really pleased with our new business ASM growth in the quarter, 80% is coming from Asia and Asia is up 16% year on year. So there's good momentum coming from Asia and that will feed through into the CSM balanced growth. If you look at the CSM balanced growth in the quarter on an organic basis, it's up 5%.
Realized that's yet to date actually annualized 5%. So we have got momentum or CSM balanced growth it isn't quite at the 8% to 10% target that were going for but we're very focused on this because as you know this is a store of future earnings and this will drive through into future.
Earnings So really nothing new to say on our target we continue to.
Operating and I for a 17 environment, there's only three quarters of reporting.
We were still were still getting used to that as a reporting regime, but remain very confident in our medium term targets.
Just adding as well I think Colin summarized it well, but we were still very much committed to our medium term targets for both new business CSM NCA. Sam obviously, we're still in the early days of Vipers 2017, and it's a challenging environment as Colin highlighted but there's a lot for us to be encouraged by particularly the fact that our E business see a temporary Asia was 16% in the quarter.
And 12% year to date and as Colin highlighted.
More than 70% in fact, 80% of our new business CSM coming from Asia.
So we still feel very confident in our medium term targets, which are through the cycle and there's a lot to be optimistic about as we look to the next year and beyond.
And just a follow up in terms of.
Obviously reacting to a market environment, but is there anything any levers that you can pull and trying to lead in order to boot.
Boost those.
Those growth numbers. So curious about so actions that you can take or are taking to do that.
I think many of you know for us, it's really about more customers through the door more sales and better margin if we get that.
Taken care off then everything else flows from there. So that's really what we're focused on.
Thanks, Paul.
Thank you. The next question is from Doug Young from de Sal. Thank capital markets. Please go ahead.
Yeah.
Hi, Good morning, just maybe starting with Asia Asia.
It looks like there was last one was an issue again in Vietnam I think thats been the case for a few quarters now I mean can you maybe delve into a bit of what the issue is and the reserves need to be adjusted on that business and then I guess on the flip side you have in Asia. It also looks like there was some negative claims experience and taking this from.
Slide 25, if you can kind of dig into that a little bit.
What drove that.
Hello, Doug This is Phil I'll make a start and then hand over to Steve Finch, who may wish to comment further.
But to your first point on Vietnam. The market has been experiencing challenges and we've referenced this in previous quarters.
But it really is a reflection of the underlying challenging economic conditions in Vietnam, and we're seeing that translate into lower new business volumes, but also lower levels of persistency and when you look at the movement in policyholder experience and the CSM, that's really a reflection.
And almost in its entirety and if the challenging persistency that the entire industry is seeing in Vietnam, and where we're seeing that as well in our business.
You also referenced paal.
Honestly holder experience our experience elsewhere in the P&L you do see a negative $20 million in Asia I do want to clarify that that exclusively relates to maintenance expenses. So our policyholder experience there are positives and negatives across the region, but it all.
Balances out to a net neutral position and when you look at the impact of expenses and compare the overall expense position relative to the third quarter of 2022, what you'll notice is there's been a reallocation.
Of unattributed expenses to maintenance expenses, so that $20 million is actually geography, rather than a deterioration in the expense position, but I will hand over to Steve to see if he wants to comment further, particularly on the balance sheet impacts sure. Thanks, Bill and also adding that clay.
EMS was neutral for Asia across the region overall.
Specifically, Doug with respect to your question on reserving.
Still noted.
The persistency challenge across the industry in Vietnam, that's expected to be short term in nature. We don't think it's a structural issue and we've got a strong position. There. So it's not really a long term assumption balance sheet issue and that's why it's not reflected in the basis change.
Okay, and there's people that have got you just on the long term care insurance I know it was a net modest positive exactly like last quarter, a little negative in the P&L a little positive in.
And the CSM can you unpack a bit about what's going on through to the P&L to what do the CSM what youre seeing is it exactly the same as last quarter.
Is there something that we should expect to continue for this block of business, where we see a little drag on earnings, but a little bump NCS I'm just trying to understand how to think about the moving pieces with this business.
Yes sure Doug.
Yeah and on long term care in total which is really how I think we need to look at it at experience to understand the drivers.
LTC was a modest positive. It's also been a modest positive since the assumption review in.
In 2022.
And just take the chance to to emphasize you know how we've been managing this business overtime regularly updating to reflect experience and we've been doing that.
For a couple of decades, whereas under the new U S. GAAP standards that's.
A new requirement so we've been managing it that way for years in terms of specifically, what's what's going on in the quarter. We do see what goes through the through net income is cash variances. So it's higher utilization for customers on claim, but that's more than offset by favorable incidents.
<unk> and termination experience.
And that particular trend is likely to continue over the short term, but again I look at the the.
<unk> and <unk> in aggregate, which has been positive.
The termination when you say favorable termination is that Martin lapses that.
It's the combination of lapse and mortality.
Our active life and that was on claim.
Okay perfect great. Thank you very much.
Thank you. The next question is from Tom Mackinnon from BMO capital markets. Please go ahead.
Yeah, Thanks very much.
Two one quick question on the affinity sale.
Can you quantify the amount.
Yeah.
Yeah, Hi, Thomas if they've either sat here. So this was our largest affinity sale ever with the Ontario Medical Association 36000, new customers $150 million to $160 million premium.
Sorry, 150 260 million between.
Between 150 $160 million of premium okay.
Okay. That's great. Thank you and.
With respect to the U S.
Like we're having some.
Some negative sales momentum here.
If I look back in the history of Manulife It was.
Second to die no lapse guarantee then moved into vitality.
You know the consumers changing here interest rate environment is changing.
Your sales are slipping here.
What is it that you are.
What are you trying to do in order to revamp sales and what is your competitive advantage.
Sure Tom its Brook single. Thank you so much for the question over the past few years, we've really worked to significantly improve the new business profitability.
The profitability of our new business franchise, and notably we've been able to grow sales during that period and that was really on the back of our unique differentiator vitality, which you mentioned.
So we've had a few years now steady and steadily increasing margins increasing sales. This year in Q3 in particular has definitely been a challenging market and Colin touched on it earlier if people buy life insurance in the U S. Generally for two reasons protection against <unk>.
Lots of income or state taxes, what have you or accumulation.
Particularly wealthy people that may have maxed out there for <unk> and so forth will put money into life insurance and accumulate it for retirement.
Higher interest rates, which you know obviously good for our business in a range of ways.
Challenge those accumulation sales, they're attractive alternatives for wealthy people to put cash right. Now so protection sales have held up pretty well, but our accumulation sales have really been hit hard and that's been a strength for us in the high end of the market.
I will say, we've maintained margins throughout all of that and we actually feel really good about our competitive position coming out of Covid vitality continues to be extremely popular both with brokers and consumers and specifically in terms of what we're doing Colin touched on a notable action as we enhance and revamp our product lineup to reflect the current market.
We launched this multi life solution, which is a protection based solution.
With vitality integrated in it and we've seen a very very positive and strong market reaction to that and feel quite good about our ability to deliver profitable growth in our new business franchise in the U S. A tomo I might just also add that despite the challenging quarter MBV for four U S business year to date is up 4% or.
Earnings is up 6% year to date and as Brooks highlighted our vitality proposition actually is a significant differentiator for us and has allowed us to outperform the market over actually quite a number of years. So we feel really good about our U S business challenging market at the moment with higher rates as Brooks highlighted but we feel optimistic about the outlook there as well.
And if I could just a quick one with respect to the actuarial review.
Lapse continuing to be an issue in the U S. Did you do did you revisit the lapse assumptions for your no lapse guarantee or secondary guarantee products in the U S was that part of that review or is that come next year.
Thanks, Tom it's Steve so.
The U S lapses were not part of the review this year. They are part of next year's review and let me give you a little context for what we're seeing.
A reminder, that before the pandemic.
Assumptions were up to date experience was consistent with our assumptions prior to the pandemic.
Hi.
During the pandemic, we saw lapse rates on protection products drop in Canada, and the U S and that would include MLG and other protection oriented products.
What we what I expected to see over time is that those lapse rates would trend back to pre pandemic levels and indeed that is what has happened in the Canadian <unk>.
Level cost of insurance UL products, which is quite similar to that the U S. No lapse guarantee it has happened in Sag funds in variable annuities and then in the U S. Well lapse rates remain low in the past couple of quarters, we have seen on some of our protection products those lapse rates side trying to get.
Up so.
So that all of this informs my expectation that over time, we do expect the lapse rates to return to pre pandemic levels and this type of phenomenon is also something that we observed.
In the global financial crisis, and coming out of the global financial crisis.
Okay. Thanks for the color Steve.
Thank you.
The next question Gabriel Deschaine from National Bank Financial. Please go ahead, Yeah I've just got one question actually about the all the portfolio.
Other.
Negative.
Performance period here, we get what's going on with CRE in particular.
My question is about the.
When would you start to review the expected investment income the thing that go through it.
The component that's tied to ALDA.
It looks like you're assuming 9%, 95% return going forward than historically, but that's fine it's supported by that but those were ultra low interest rate period.
And you do give some sensitivities about 10% sudden drop my question is.
What if you brought that return down the 8% seven 9%.
Apply that declined to $40 billion alternative portfolio and.
Divide by four and that would be the reduction to your expected investment income.
Yeah, Gabriel Hi, it's Scott. Thank you for the question.
We over time expect the ALDA returns to be somewhat volatile, we're not going to hit our expected return every quarter.
And as you mentioned over time, we have achieved those returns.
That we put into core.
We will have periods, however of underperformance in periods of over performance and if you look over history about half the time our performance is above about half the time that performance is below where in one of those periods right now where the performance is below the last five quarters, we've been a bit below now our gross returns are still positive. We just have not achieved the long term.
Target returns, but the eight eight sequential quarters before that returns were above our long term targets. So we think those long term targets are still appropriate.
Hello.
Okay.
Sorry, sorry, something happened to my mic, but so so let me let me wrap this up a bit but the big driver in the last five quarters of the underperformance has been our real estate portfolio. As you mentioned, it's about two thirds of the underperformance and whats driven that are a couple of things one office as we know has performed poorly but the second big dry.
Ever and the Big driver more recently has been rising cap rates, reflecting the higher interest rate environment.
And.
As cap rates go up that does depress current returns, but it portends higher returns into the future.
And to your point, we did benefit from lower cap rates historically over the last 10 years, but you may recall that in 2018, we did reduce those assumptions that we put through core to reflect even though we had hit the target returns we were less confident we would achieve them going forward given given the cap.
Rates had come down we're actually now in the opposite situation and the underperformance excuse me in the last few quarters is due is largely due to these rising cap rates and.
That will lead to higher returns going forward. So as Colin mentioned in his introductory remarks, we are more confident than ever of achieving those long term returns.
David if I could just yes, I get that I was just.
If we earn a higher for longer rate environment. They are moving towards.
It seems to be the case today anyway.
Some of these asset classes, not just theory might not be able to generate the returns they have historically.
Investors wanted to take a more conservative view I'm, just trying to mechanically figure out.
Uh huh.
What would your expected investment.
Income will look like if you know, but I'll, let portfolio return was lowered from nine to eight is there any way you can ballpark that.
Yeah, Gabe, it's calling him we were very transparent about our oldest sensitivity you'll see the number in and you actually pointed it out so you can take a a.
Rule of thumb and divide that 10% sensitivity by however, much you want to do too.
Analyze the impact of a reduction in expected long term returns on all the the other thing I would add Gabriel Gabriel is that the older portfolio has a diversified portfolio. We've got real estate. We've also got private equity timber agriculture infrastructure energy. So the diversification of our portfolio is very hopeful and yes higher rates are certainly providing a headwind from a cap rate.
<unk> on the commercial real estate portfolio, which as Scott highlighted should actually give us more confidence around our return assumption in the future a lot about the other components of our older portfolio actually benefit from a higher rate environment and in fact in 2005 and 2006, we saw higher rates as a as an environment.
And our older portfolio outperformed assumptions. So again I'll just remind you that older is a long term assumption is through the cycle and we have strong conviction with our assumption.
Alright, thank you.
Thank you. The next question is from Paul Holden from CIBC.
Go ahead.
Alright, Thank you good morning.
First question continuing with all of that is maybe you can give us a sense of how much cap rates have been revised whether it's year to date are sort of over the next 12 months.
Just to give us I guess also a sense of how much further they may or may not change.
Sure Paul It's Scott again.
Yes, so far year to date, we've seen in North America.
Cap rates rise about 60 basis points.
We're now at nearly 6% on go forward cap rates and if you think about the return on the portfolio. It should be the cap rate plus the growth and so with that sort of math, we are above our long term expectations. Our long term expectations for real estate are among the lower ones. We have so they're below that 99 <unk>.
<unk> sort of on an average return that we have now going forward.
It's a good question, what our cap rate is going to do from here and while I don't have a crystal ball I would say that if rates stay high.
We probably will see continued pressure on cap rates I think the appraisers sort of need to get confident that central banks are going to start to reduce rates and once they get that I think youll see the cap rates stabilize and at some point probably compress.
Got it okay.
And then just looking at the.
Core expected returns and then kind of comparing it to the investment income reported on the income statement, there's a pretty big difference in the year on year growth rate 24%.
On the core per Boe versus a 5% increase in there.
The income statement I, just I think about that and I look at the 24% and for what I think would be a long duration fixed income book. It seems high so I'm just wondering how I can reconcile the two and really understand the rapid or significant increase in core investment income year over year.
Thank you.
Yes, Paul this is Carlin again, it's a good question. The if you look at interest rates the actual interest rate impact coming through that line is only $43 million year on year. There is quite a large component from business growth and then theres a couple of ins and outs from as we adopt to die for a 2017, so theres a lot of things going through that business line, but the comp.
The nation of interest rates and growth is really driving that driving the overall increase.
And again.
Just adding that.
The go forward, we're at a good jumping off point and that will continue to grow as our business grows as the balance sheet grows.
Got it thank you for that.
Thank you.
The next question is from EMR per sought some cormack securities. Please go ahead.
Yes, Thanks, I wanted to turn to the credit losses would it be fair to suggest that you're adequately reserved for both the electric utility bonds and private placement loans are.
Could there be additional losses on these exposures moving forward and then can you provide some additional color on the nature of these private placement loans like what's the size of the portfolio provisioning against that and any additional color would be helpful.
Sure Omar Scott.
Thanks for the question. So yeah ECR was was a bit higher this quarter than we would normally would expect and I'll just remind you that when we look at ACL. We're now looking at gross credit losses under <unk> four we looked at credit losses versus expectations. So you should expect to see credit losses on an ongoing basis thats sort of why we put it into core it doesn't.
Two zero.
So you should expect some credit losses this quarter. It was a bit high and you pointed out the primary reason was Hawaii electric and its subsidiaries and so.
That was about half of half of the increase and.
That was due to Hawaii electric getting downgraded significantly and so move to stage two a lifetime reserve.
And is that enough.
Our experience with senior utility bonds, but I don't think we've ever had a loss on senior to the bonds went through a fairly similar experience with Pacific gas and electric and ended up with a complete recovery after they land and they actually filed for bankruptcy because of the wildfires. So I think with so we.
Feel good about it with that said you can never be sure.
As to what happens here.
But we feel pretty adequately provisioned at this point the rest of the provisions I would say are on a variety of different none of them are extremely large and are kind of more in the normal course, and I would say.
We tend to be conservative when we put up provisions or downgrade securities. So I feel very comfortable with where we have the ECL at this point.
Okay, and these private placement bonds or they were kind of related to this electric utility bonds like us that are.
Are these like separate exposures no. These would be separate there'd be a bunch of different bonds.
Across the portfolio.
Okay Fair and then my next question is it plausible that we could go through 2024 and 2025 with all the continuing to drag down our reported EPS. So we should kind of think of the starting point for reported EPS to be below core plausible for it to be below core for an extended period of peers.
At a time and then of course, you layer everything in on everything else that impacts that.
The rest of the macro factors in and above that starting point for an all of the charge is that the right way to think about the gap between reported and core.
Looking forward for the next couple of years.
So I would suggest that.
It's hard to forecast the future of course and the shorter your time period. The harder. It is we feel very confident in the long term that reported and core will be the same without all the experience I I guess I would be a little concern for the next quarter or two that we we see cap rates go up and continue to weigh on the real estate portfolio beyond that.
You know my my my hope and expectation unless we see.
<unk>.
A recession or something like that that we would get back to our long term returns.
Thanks, that's it for me.
Thank you. The next question is some darko <unk> from RBC capital markets. Please go ahead.
Hi, Good morning, just a couple of questions on Asia, maybe if you could provide a little bit of color I. Just wanted to just ask more of a modeling question actually.
The basis change that.
Ended up creating a higher CSM amortization, maybe if you could provide a little color on that and is this new higher level sustainable and similarly, I believe you did some pricing action, but I just want to make I just want to confirm that.
Okay. Darko. This is Phil Thank you for the questions I'll make a start and then hand over to Steve with respect to the basis change.
I think what you're getting at is the very strong contribution to core earnings Colin referenced this in his remarks, we've seen a 33% growth in <unk>.
Core earnings in Asia in the quarter, that's 13% sequentially and one component of the growth that was the impact of changes in actuarial methods and assumptions, but I think it's really important to put that into context that also 33 percentage points of growth. It was about seven percentage points of growth it was cut.
From basic change items, the remainder of the growth was coming from commercial factors and I think what we see in the third quarter is a very good foundation. That's a project project from for the future and when you reflect on a year to date core earnings growth for Asia, that's being 10%.
Do think there is upside to that 10% rate of growth from factors such as.
The opportunity for stronger productivity and our agency channel as well as the continued emergence of AMC the channel post pandemic.
I think there are of course always headwinds we've talked about the ongoing challenges that the industry has seen in Vietnam, we're seeing new <unk>.
<unk> is coming from.
The regulator in China, which we expect to impact short term bank of momentum, but overall I see I do feel positive about the sustainability not just a Q3, but also growth from there Steve did you want to touch on the basis change factors sure. Thanks, Phil.
And thanks Darko.
What we're seeing in Asia from the assumption review.
It falls in that bucket that we called other methods and assumptions and what this primarily relates to is.
Under Ifr 17, we've been refining some of our models and in particular the cost of guarantee calculation on power, which is a new requirement under Ias 17. So.
Through the year, we we actually changed how we manage the business in terms of how we pass experience back through dividends to customers. We updated the models, we reflected higher interest rates and that resulted in a net release of liabilities a large portion of which is coming through the CSM. So as Phil noted the basis change is.
Packaging positively the Asia earnings through higher CSM balance and a slightly faster amortization of C. S. M that was more mechanical as opposed to anything that we did on the amortization.
Okay, and then sorry, Steve just to follow up on that so the faster amortization of CSM is a.
It is a.
Permanent thing or is it just did it just effect this quarter.
I know that would be an ongoing run rate okay perfect. Thank you.
Yeah.
Thank you.
The next question is from Nigel D'souza from Veritas investment Research. Please go ahead.
Thank you good morning, I wanted to dig into the actuarial review of this quarter and I noticed that.
When it comes to.
Experienced experienced since the COVID-19 pandemic.
I believe was excluded.
From the review and I'm, just trying to get a center.
How do you determine which experienced since 2020 was an outlier versus what could be more.
Indicative of post Covid experience and how that factored into the review of this quarter.
Thanks, Nigel it's Steve.
So how we dealt with Covid and the review is for.
Long term insurance products, where we felt that.
The experienced during Covid was not indicative of long with long term trends would be we excluded that experience and thats consistent with industry practice and.
Yes, I would just point to a comment that I made on one of the earlier questions for instance in Canada.
Level COI lap study that we did we did not include the Covid experience there, but as I noted experience has already trended back towards the pre pandemic levels, where we did reflect more recent experience was on certain morbidity assumptions, where we believe that the <unk>.
We experienced more recently is indicative of future trends and that actually strengthened reserves on.
The morbidity side in.
In Vietnam and was partially offset in Japan. So that's the approach that we took and as I noted is concerned it's consistent with industry standards as well.
Any comments on mortality and lapse.
And morbidity, but any thoughts on the mortality experience.
Yeah.
Yes sure.
And.
So the review that we did in U S life, we updated mortality.
Assumptions that was based on our own experience before the pandemic as well as an additional industry study I would remind you that it was a modest change in our in my view in total.
I would remind you that we have a really diversified book of business when it comes to longevity.
This mortality and we saw that through the pandemic with higher claims in life insurance fully offset by gains in long term care in annuities from from the mortality trends. So just a reminder, that we are well matched on mortality overall.
Okay and just last question on this.
Any color you have on if.
If they were some of the trends that ended up being a bit more persistence, maybe not indicative of future trends switches.
Maybe a slight adverse or favorable change from pre COVID-19 trends any sensor.
But the net impact might have been or could be just to gauge what.
The sensitivity would be to somebody's got to try.
Yeah.
I noted the mortality trends, we've got good offsets.
Lapse experience is generally trending back towards pre pandemic levels. So.
I'm not going to quote a number we do provide some sensitivities.
In the MD&A on our.
On our liability assumptions.
And as you know, we we regularly and routinely update based on emerging experience and our view of the future. So we will continue to do that and be transparent about.
What judgments that we're that we're making.
Okay. That's really helpful. Thank you.
Yeah.
Thank you. The next question is some Mario Mendonca from TD Securities. Please go ahead.
Quickly first on wealth management.
I honestly.
Among other things focus on the operating leverage in that segment and while it's it's been improving its also been negative now for some time.
Because expense growth has been so high.
It's not the top line the top line looks pretty solid so could you speak to what these expenses are and is there a period. When we would expect expense growth to return to something more sort of normal in the mid single digits.
Yes. Thanks for the question Mario its Paul here, Yeah, just just on the overall margin relative to last year. Just a couple of things that we mentioned on last quarter's call that or just impacting the year over year. One is just a reduction of repatriation of seed capital and some private assets that brought down the core earnings and then they step up acquisition of our.
Of our China JV Fund management also.
Had an impact overall on the margin year over year, but a third impact was expense growth as you noted coming out of Covid. We did see an increase in expense growth to support the growth of our business, but we recognize that in Q1 of this year.
And just looking at the uncertain market started taking actions than internally here and you've seen that come through the expense growth. Since then it was down from Q2 to Q1 and Q3 was.
Pretty flat with Q2, what I will say is that.
Expense growth is a continued focus for us in the business.
Thing that we're looking at how do we get leverage out of the global franchise and more importantly, you've heard where I talk about our digital ambition and the investments, we're making there and we expect that to pay dividends for us. So we are.
<unk> had more muted expense growth go forward for our business based on those efficiencies that we see and then just looking forward from a margin perspective.
Can't control markets, obviously and that drives a lot of our fee income, but if you look at some of the other metrics. The top line. As you mentioned has been very strong five 3 billion year to date 12 or 13 years.
And then the other thing I'd say is our our net interest fee yield has also been pretty stable. So when we look at that our focus on expenses and net flows we feel very optimistic that we'll continue to improve this margin over time.
Moving to oil again, and it's a different kind of question.
How much economist you speak T. We'd expect rates to start to come down.
Overnight rates are coming down say around April or may.
The question is how soon after.
Rates start to drop the short end of the curve or the long into the curve I sit after.
Do you actually start to report some gains on the ALDA.
The returns that are above your long term expectations does that is that a reasonable expectation as rates start to fall.
Yes, Mario Thanks.
So it's not all about interest rates, but interest rates, obviously have been pressuring returns this year and to the extent.
The fed does start to lower rates that will certainly be helpful and I think appraisers will actually.
Reflect that pretty quickly.
Even based on sort of market expectations. So, yes, I would think on the on the real estate side, you should see that sort of reversal of course theres. Other factors at play has the general economy doing and so forth that will also have an impact.
Okay.
Yeah.
Yeah.
Operator, do you have any further question.
And the next question is from Tom Mackinnon from BMO capital markets. Please go ahead.
Yeah. Thanks, just a.
Follow up on all the all the discussions I mean, we've been focusing here talking a lot on cap rates, but obviously the return on the portfolio is not just the cap rates the growth and that's the dynamics of sort of the commercial real estate or changing how.
What are your thoughts on that growth I mean, it hasn't been.
It's a different world post Covid here now in terms of commercial real estate. So.
How does that factor in just your comments with respect to that.
Yeah, So as I talked about earlier for commercial real estate cap rates plus growth to your point are what drive the total returns and.
Our portfolio is.
His office industrial multifamily and.
I would say on the office side I would say growth could be challenged it's hard to say for sure. This return to office is still not played out.
But that's something we're keeping a watching brief on but our office has become a pretty small part of our all of the portfolio. The U S office is only 5% of the overall all the portfolio at this point, whereas I think the other the other property types, you really have pretty good tailwind behind them and industrial we've seen.
I mean, a lot of growth there would expect that to continue.
And then on multifamily there's there's certainly a shortage of housing, which I think bodes well in the long run so I'm feeling pretty positive on the growth of two of the three <unk>.
Sectors that we have and for office I think the jury is still out Hey, Tom Roy here I might just also chime in and add that our real estate portfolio is actually quite.
Globally diverse as well, 38% is in the U S, 33% in Canada and 29% in Asia, we've seen on the point of valuations Asia hold up actually quite well. So the diversity of the portfolio is also another factor that just needs to be in the back of People's minds.
Thanks.
Thank you.
There are no further questions registered at this time I would like to turn the meeting back over to Mr. <unk>.
Thank you operator will be available after the call. If there are any follow up questions have a good day everyone.
Yeah.
Thank you. The conference has now ended please disconnect your lines at this time and we thank you for your participation.