Doug Young: Just the termination, when you say favorable termination, is that more lapse? Is that…?
Steven Finch: It’s the combination of lapse and mortality or active life and those on claim.
Operator: The next question is from Tom MacKinnon from BMO Capital Markets.
Tom MacKinnon: One quick question on the affinity sale. Can you quantify the amount?
Naveed Irshad: It’s Naveed Irshad here. So this was our largest affinity sale ever, was the Ontario Medical Association. 36,000 new customers, $150 million to $160 million of premium.
Tom MacKinnon: Sorry. $150 million to $160 million?
Naveed Irshad: Between $150 million to $160 million of premium.
Tom MacKinnon: With respect to the US, like we’re having some negative sales momentum here. If I look back in the history of Manulife, it was a second to die, no lapse guarantee, then moved into vitality. The consumer is changing here, just rate environment is changing. Your sales are slipping here. What are you trying to do in order to revamp sales? And what is your competitive advantage?
Brooks Tingle: It’s Brooks Tingle. 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 of steadily increasing margins, increasing sales. This year, and Q3 in particular, has definitely been a challenging market. And Colin touched on it earlier. If people buy life insurance in the US, generally, for two reasons, protection against loss of income or state taxes, what have you, or accumulation, particularly wealthy people that may have maxed out their 401(k) and so forth will put money into life insurance and accumulate it for retirement.
Higher interest rates, which 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 US.
Colin Simpson: I might just also add that, despite the challenging quarter, NBV for our US business year-to-date is up 4%, core 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 US business. Challenging market at the moment with higher rates, as Brooks highlighted, but we feel optimistic about the outlook bear as well.
Tom MacKinnon: And if I could, just a quick one with respect to the actuarial review, lapse continuing to be an issue in the US, did you revisit the lapse assumptions for your no lapse guarantee or secondary guarantee products in the US? Was that part of that review? Or is that come next year?
Steven Finch: The US 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. Reminder that before the pandemic, our lapse assumptions were up to date. Experience was consistent with our assumptions prior to the pandemic. During the pandemic, we saw lapse rates on protection products drop in Canada and the US. And that would include NLG and other protection oriented products. 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 level cost of insurance UL products, which is quite similar to the US no lapse guarantee. It’s happened in seg funds and variable annuities.
And then in the US, while lapse rates remain low, in the past couple of quarters, we have seen on some of our protection products, those lapse rates trending up. So 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.
Operator: The next question is Gabriel Dechaine from National Bank Financial.
Gabriel Dechaine: I’ve just got one question actually about the ALDA portfolio where another 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 goes through your DOE, the component that’s tied to ALDA? It looks like you assume a 9.5% return going forward. And historically, that’s fine. It’s supported by that, but those were ultra-low interest rate periods. And you do give some sensitivities about a 10% sudden drop. My question is, what if you brought that return down to 8%, to the 9%? Would I just apply that decline to the $40 billion alternative portfolio and divide by 4 and that would be the reduction to your expected investment income?
Scott Hartz: It’s Scott. We, over time, expect the ALDA returns to be the 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 and periods of over performance. And if you look over history, about half the time our performance is above, about half the time the performance is below. We’re in one of those periods right now where the performance is below the last five quarters. We’ve been a bit below now. Now, our gross returns are still positive. We just have not achieved the long term target returns. But the eight sequential quarters before that, returns were above our long term targets.
So we think those long term targets are still appropriate if [Technical Difficulty]. I’m sorry, something happened to my mic. Let me wrap this up a bit. 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 what’s driven that are a couple of things. One office, as we know, has performed poorly. But the second big driver, 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’ve put through core to reflect – even though we had hit the target returns, we were less confident we would achieve them going forward, given the cap rates had come down.
We’re actually now in the opposite situation. And the underperformance in the last few quarters 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’re more confident than ever of achieving those long term returns.
