Gabriel Dechaine: I get that. If we are in a higher for longer rate environment or moving towards that, seems to be the case today anyway, some of these asset classes, not just CRE, might not be able to generate the returns you have historically. And if investors want to take a more conservative view, I’m just trying to mechanically figure out what would your expected investment income look like. If that ALDA portfolio return was lowered from 9% to 8%, is there any way you can ballpark that?
Colin Simpson: It’s Colin here. We’re very transparent about all the sensitivity. You will see the number in the – and you actually pointed it out. So you can take a rule of thumb and divide that 10% sensitivity by however much you want to do to analyze the impact of a reduction in expected long term returns on ALDA.
Roy Gori: The other thing I would add, Gabriel, is that our ALDA portfolio is 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 helpful. And, yes, higher rate is certainly providing a headwind from a cap rate perspective on the commercial real estate portfolio, which, as Scott highlighted, should actually give us more confidence around our return assumption in the future. The other components of our ALDA portfolio actually benefit from a higher rate environment. And in fact, in 2005 and 2006, we saw higher rates as an environment. And our ALDA portfolio outperformed assumptions. So, again, I’d just remind you that ALDA is a long term assumption. It’s through the cycle, and we have strong conviction with our assumption.
Operator: The next question is from Paul Holden from CIBC.
Paul Holden: First question, continuing with ALDA, is maybe you can give us a sense of how much cap rates have been revised, whether it’s year-to-date or 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.
Scott Hartz: It’s Scott again. So far, year-to-date, we’ve seen in North America cap rates rise about 60 basis points. And we’re now at nearly 6% 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 9% sort of on average return that we have. Now, going forward, it’s a good question. What are cap rates 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 you’ll see the cap rates stabilize and at some point probably compress.
Paul Holden: 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 to year growth rates, right, 24% on the core per DOE versus a 5% increase in the income statement. I think about that and I look at the 24% 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.
Colin Simpson: It’s Colin again. 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 there’s a couple of ins and outs from – as we adopted IFRS 17. So there’s a lot of things going through that business line, but the combination of interest rates and growth is really driving the overall increase.
Roy Gori: And again, just adding, the go forward, we’re at a good jumping off point. And that’ll continue to grow as our business grows as the balance sheet grows.
Operator: The next question is from Lemar Persaud from Cormark. Securities.
Lemar Persaud: I want 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? Or 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? What’s your provisioning against that? Any additional color would be helpful.
Scott Hartz: It’s Scott. ECL was a bit higher this quarter than we normally would expect. And I’ll just remind you that when we look at ECL, we’re not looking at gross credit losses. Under IFRS 4, we looked at credit losses versus expectations. So you should expect to see credit losses on an ongoing basis. That’s sort of why we put it into core. It doesn’t net to 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 the increase. And that was due to Hawaii Electric getting downgraded significantly, and so moved to stage 2 lifetime reserve. And is that enough? Our experience with senior utility bonds, I don’t think we’ve ever had a loss on senior utility bonds, went through a fairly similar experience with Pacific Gas and Electric and ended up with a complete recovery after they – and they actually filed for bankruptcy because of the wildfires.
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.
Lemar Persaud: And these private placement loans, are they kind of related to this electric utility bonds? Like, are these separate exposures?
Scott Hartz: No, these days would be separate. There’d be a bunch of different bonds across the portfolio.
Lemar Persaud: My next question is, is it plausible that we could go through 2024 and 2025 with ALDA continuing to drag down reported EPS? So we should kind of think of the starting point for reported EPS to be below core? Or it’s plausible for it to be below core for an extended period of period of time? And then, of course, we layer everything in on – everything else that impacts the rest of the macro factors in and above that starting point for an ALDA charge, is that the right way to think about the gap between reported and core looking forward for the next couple of years.
Scott Hartz: 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 with our ALDA experience. I guess I would be a little concerned for the next quarter or two that we see cap rates go up and continue to weigh on the real estate portfolio. Beyond that, my hope and expectation, unless we see a recession or something like that, that we would get back to our long term returns.
Operator: The next question is from Darko Mihelic from RBC Capital Markets.
Darko Mihelic: Just a couple of questions on Asia. Maybe if you could provide a little bit of color. This is 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 confirm that [Technical Difficulty].
