Roy Gori: Yes Lemar, Roy here. Let me tackle that. You are to some extent frontrunning our investor day, so certainly I welcome everyone, A, to join that; but B, to highlight that we’re going to be talking about core ROE and our outlook for that in the future. ROE and the improvement of our returns has been a huge focus for us over the last six years, and I’ve mentioned this on prior calls, but we’ve been very deliberate about [indiscernible] and the risk profile of our franchise and improving the returns. Our ROE back in 2017 was circa 11%, and we took that up to almost 16% at the end of ’23. That story has continued into ’24 off the back of really solid momentum and good results. We delivered a core ROE in Q1 of 16.7%, 2% up on prior year.
We’re really pleased with that progress, and it’s been a function of a couple of things. The first is that we’ve divested low ROE businesses. We’ve freed up $11 billion worth of capita over the last six years, and that is capital that was being dedicated towards low ROE franchises, and obviously deploying that capital towards buybacks, and in fact we’ve bought back $5.5 billion worth of shares over the last five years, has been obviously a tailwind to our ROE story. At the same time, we’ve increased our capital buffers, so that’s been something that again we’re very proud of and it give us ammunition for future actions in the future. The second big focus for us is that we’ve improved the ROE on our new business across the board.
Every segment has improved the lifetime return on capital of all of our new business, which means that as we write new business, it’s going to improve our earnings and our return outlook for the future. As we grow those higher ROE businesses, as you’ve seen and heard Asia and WAM in particular, that changes the portfolio mix of our franchise and has been, again, another big positive. The final thing I’d say is that on the expense front, we’ve driven a much greater focus on efficiency, which again is accretive to ROE. In summary, I wouldn’t that we would expect to go backwards from where are to the 15%-plus guidance. We think that what we’re able to deliver in ’23 is a baseline, and we see further upside for improvement. I’m going to have to ask you to wait to hear more about that at our investor day.
Lemar Persaud: That’s fair, thanks. Then my second question, just continuing on the credit losses from an earlier question, you guys mentioned $30 million to $50 million build being kind of normal and explained the reasoning for the release this quarter. But I’m wondering, does Manulife make use of expert credit judgment to smooth out credit loss provisioning, or is it simply whatever the model spits out is what makes its way into the DOE, so we should expect more volatility in the ECL line? Thanks.
Scott Hartz: Hi Lemar, it’s Scott. There is a model which is formulaic, which is from Moody’s, that we and a number of other people use; but we also have a process to go through it and apply judgment on top of that. We have applied that judgment in the past, we tend to apply it in a more conservative nature, I would say, particularly if things are happening after the end of the quarter. If you looked at the first quarter of last year, I believe the model suggested we should have a release, and we were a bit concerned given what was going on with Silicon Valley Bank and so forth, so we overrode the model not to do that. So yes, we do have a governance process and apply expert judgment on top of the model.
Lemar Persaud: Thanks, that’s it for me.
Operator: Thank you. The following question is from Tom MacKinnon from BMO Capital Markets. Please go ahead.
Tom MacKinnon: Yes, thanks very much, and good morning. I think Roy, you mentioned higher rates are a positive and the surplus portfolio is benefiting from this repricing. If I look at expected earnings on surplus, though, at 253 in the quarter, that’s down over the last five quarters, so help me understand that. Obviously your surplus portfolio must be growing, your LICAT is growing and your remittances are increasing as well, so help me understand why that earnings on surplus is falling sequentially and has fallen over the last four quarters, and how we should be thinking about earnings on surplus going forward. Thanks.
Colin Simpson: Hey Tom, it’s Colin. You’re right – earnings on surplus fell $11 million quarter-on-quarter, and actually $30 million year-on-year. There’s two things happening here. The first is the share buyback is reducing surplus, and that had a $20 million impact throughout the entire year. The second item, you’ll see this in the last quarter, the line item that you refer to doesn’t capture the earnings on surplus for our GUM business, and so as part of the surplus allocation exercise that I talked to Mario about, GUM got a little bit more surplus allocated to that, so that’s reduced the line item that you’re referring to. But you’re right in terms of the yield going up – yields went 2.8% to 2.9% during the quarter, but because of all the allocation and inter-account balance settlements, the actual surplus amount fell from $39 billion to $38 billion.
Tom MacKinnon: So should we be thinking that this number should–with increases in buybacks, that it should continue to decline going forward, or does it just stabilize what you lose in the buyback and is offset by what you’re gaining from just generally having more surplus? How should we be thinking about that going forward?
Colin Simpson: The first point – and sorry, you did ask this in the first part of the question, is Q1 is a good run rate to consider for the rest of the year. Yes, as we make money and we’re returning capital through dividends and buybacks, you would expect a fairly stable surplus balance, so no great movements there. Just to remind you, for every 50 basis points increase in interest rates, we will see $25 million of earnings coming through this line, so those numbers are also quite modest relative to movements in interest rate.
Tom MacKinnon: Then to follow up, with the expected investment earnings, that’s flat year-over-year. Now, what you end up having here is you’ve got higher rates, so I think this is kind of net of the discount on the reserves. But still, you would assume that that spread is probably–if anything, has picked up. How should we be thinking about that expected investment earnings line going forward, and why it’s just relatively flat year-over-year?
Steve Finch: Yes, hi Tom, it’s Steve. There is a couple of things going on in this quarter. One is we do see a reduction from the Global Atlantic transaction of about $20 million in the quarter, and then as we implemented IFRS-17 last year, there were a couple of methodology and refinements which is a bit of a headwind on that investment earnings. There is a partial offset where a portion got moved, actually, up into the insurance service result in the short term insurance business. The Q1 of this year is a good run rate that we expect to grow as the business grows over time.
Tom MacKinnon: Okay, thanks so much.
Operator: Thank you. The following question is from Nigel D’Souza from Veritas Investment Research. Please go ahead.
Nigel D’Souza: Thank you, good morning. I wanted to touch on your ALDA dispositions this quarter. I noticed that the sale of ALDA assets, they’re comprised of private equity, [indiscernible] and infrastructure, so it’s not proportional to your current ALDA portfolio. What I’m getting at here is if that continues as you go through more ALDA dispositions, is that going to result in an ALDA portfolio that becomes more indexed to real estate, and does that have any implications for expected investment returns or volatility of ALDA experience going forward?
Scott Hartz: Sure Nigel, it’s Scott. Thanks for the question. Yes, as you point out, we’ve largely covered off the amount of ALDA sales we need for the Global Atlantic transaction, and I’ll point out we did it at values a bit above where we had last valued those investments. A couple of thoughts went into what parts of the portfolio to sell. One was we really did want to lean into private equity – it is the most volatile part of the portfolio, and it has grown over the years given the good performance there, so that was sort of a proactive move to reduce the size of that portfolio. As you would expect, we did not do anything in real estate given the bid-offer in that market is wider than anywhere else, and we do expect that bid-offer to narrow.
We have seen it start to narrow already, and we certainly would have plans to continue to rebalance the portfolio away from these transactions, based on the sizes we want, and I would expect over the next couple years, while we didn’t do anything in the really short term given the disruption in that market, that we will rebalance the portfolio to where we want it, so I do not see real estate becoming really a bigger proportion of the ALDA portfolio going forward.
Roy Gori: Nigel, Roy here. I just want to chime in and add a couple of thoughts. The first is that the $1.7 bill sell-down of ALDA that relates to the GA reinsurance transaction, reduces our ALDA weight about 6%, and we have through Scott’s leadership worked very hard to diversify our ALDA portfolio over the years. ALDA comprised of about 50% real estate, commercial real estate some 10 years ago, and now it represents approximately 30%, or slightly less than that, so actually our portfolio is actually quite diverse, and actually that’s what we like. We like to see a diverse portfolio because it allows us to weather all sorts of economic environments, which I think puts us in a very strong position.
Nigel D’Souza: Okay, that makes sense. If I could just ask some general questions about Asia, that’s a strong growth driver for you. You want that, I believe, to get to–you know, Asia and wealth to get to 50% of your core earnings. Just two question here – could you remind us on the number of agents, that’s declining in Asia. What’s the trend that’s driving that, given the growth, and then the second aspect is just more recent market volatility, regardless of the Japanese yen, are there any implications for your franchise in Japan from the yen volatility, other than currency translation?
Phil Witherington: Thank you, Nigel, for the questions – this is Phil. I’ll start with your question on agent numbers, and what we’ve seen in the first quarter is actually stability with the fourth quarter. Year on year, you’ll see a decline, and that’s being driven by Vietnam and mainland China. But I think what’s more important than absolute agent numbers is actually the productivity of agents, and this is consistent with our strategic focus and we’ve been talking about this for many years – professionalism, full time agents that are equipped with digital tools in order to be highly productive, and we see that as being consistent with the notion of helping customers identify more complex financial planning needs that they have, which we believe is good for customers but it’s also good for us in terms of the quality of business that we write and the quality of agents that we attract, so new business value per active agent is actually up by 41% year-on-year, despite the year-on-year decline in number of agents.
The second thing that you asked about was Japan and the impact of the weaker yen. Now, as you may know, most of our business in Japan is foreign currency-denominated business, largely U.S. dollars, some Australian dollars as well, and what we see is as the yen declines, actually there is more interest in diversification within investment portfolios of our customers in Japan. Now, we’re naturally very cautious when it come s to our sales process here, but we have launched some new products in Japan over the course of the last quarter. That has driven quite a strong rebound in sales and value metrics as well, so I do feel optimistic about the prospects for Japan. But just a reminder, when we think about Japan, our strategy is one of value maximumization.
We’re seeing that strategy being very successful in terms of earnings generation and value metric generation, and I expect that to continue. Our medium term expectations for Japan are high single digit growth in key value metrics and core earnings.
Roy Gori: And Nigel, while we might have some earnings currency translation, and by the way, the larger part on that is the U.S. appreciation, which is obviously a positive for us from a currency translation perspective, in each of the markets that we operate in, we typically match our asset currency with our liability currency, so we don’t like to take foreign currency risk in terms of matching our liabilities with the assets in the markets that we operate in.
Nigel D’Souza: Okay, that’s very helpful. That’s it for me. Thank you.
Operator: Thank you. Once again, please press star, one at this time if you have a question. The following question is from Tom Gallagher from Evercore ISI. Please go ahead.
Tom Gallagher: Thanks. Just a few questions on U.S. life insurance. Steve, just a follow-up on the [indiscernible] lapse rate question, I know you mentioned that your ultimate lapse rate assumption is below 1%. Can you be a little more specific, and the reason I ask is if it’s around 90 basis points, I think that would still probably be at a level above the industry study that was conducted a few years ago. From what I understand, the average lapse rate that they were implying was about 40 to 50 basis points, and if you’re on the higher end, like above the 40 to 50, would that still imply you may have an impact if there a reset made with the actuarial review?
Steve Finch: Yes, sure Tom, thanks. As I’m sure you can imagine, it’s not as simple as one lapse rate, which is why I referred to less than one. It varies by single, survivorship, size of policy, etc., so there’s a variety in there. In terms of our ultimate lapse rates, when I look at it, I think we’re in line with what the industry’s got overall. I think what we’re seeing more right now is what’s happening in the current environment with respect to the pandemic and how does that trend out over time.
Tom Gallagher: Got you, so you’d be more in line with, let’s say, that industry study that had come out and the implication there, you’d be at least directionally close to that level. Is that fair to day?
Steve Finch: That’s my view, yes.
Tom Gallagher: Okay, great. Then the second question is this last quarter, we’ve seen kind of a number of reinsurance and litigation charges for the U.S. life insurance business. Some insurers took charges for cost of insurance litigation, others due to arbitrations with reinsurers for rates increases. Curious if you have either one going on, and if so, whether you’ve provisioned for these.
