Paul Holden: Okay. Got it. Thanks for that. And then second question is related to Asia, obviously doing extremely well in Hong Kong. But if I look at sales and earnings ex-Hong Kong, they’re down slightly year-over-year. Two-part question to that. One is what do you think is required to turn that around and get back to targeted growth in Asia outside of Hong Kong? And two, did that trend over the last year influence at all the change in earnings contribution target from [$25 million to $27 million] (ph)?
Phil Witherington: Paul, this is Phil. Thanks for the question. And it has been a strong year for our results in Asia. And we — in the fourth quarter, that continued double-digit growth in sales. And as you highlight, Hong Kong has been particularly important in that. But for us, it’s not just about the volume of sales. It’s about the quality of those sales as well, and that’s something that we’ve made substantial progress on as we’ve moved through 2023. And you can see that in the improvements in value metrics that we’ve reported, so the 14% growth in earnings, the 27% growth in new business, CSM. And you rightly point out that Hong Kong was a very important driver. That was — in 2023, we saw the reemergence of the MCV customer segment.
It’s not just the MCV customer segment that’s driving the Hong Kong results. We saw a notable growth in the core business, in the domestic business in Hong Kong in the fourth quarter as well as we saw a full year improvement in the domestic business. But what I have said throughout 2023 is that the recovery from the pandemic has been uneven across Asia. There have been some markets that have grown and we’ve seen improved momentum in some key markets, especially in the fourth quarter. We’ve seen improvements in new business momentum in Indonesia, in Vietnam, in Malaysia, for example. And Singapore, it’s been a record year for APE sales as well as Mainland China. Now as we look forward into 2024, I am encouraged by a number of tailwinds that exist.
And we do expect the continuation of the MCV customer segment. I think we’ll see a normalized rate of growth as we go into 2024, one year after the reopening of the borders. But I’m also optimistic that the domestic segments in Hong Kong will continue to grow. We saw economic GDP growth in the second half of 2023 in Hong Kong, above 4% in the first half, it was about 2%. So I think that bodes well for 2024. And then outside of Asia, that uneven recovery means that there’s further to go as we go into 2024. And our focus is very much on driving quality new business. And so I’m really keen to look at the value metrics of new business CSM, new business value and earnings and less so at APE sales, but we do expect APE sales to grow in 2024 as well.
Roy Gori: And I might take the second part of your question, Paul. I’ll just add to Phil’s comments that despite that uneven recovery that Phil mentioned, in other Asia, we did grow core earnings for the full year by 18% in other Asia, which again just talks to the strength of our diverse franchise. So really proud of our Asia performance despite the short-term challenges that we’ve seen there. And to your second question, obviously, we are really proud of our Asia franchise. We’ve been in Asia for 127 years and we are the — we are a top three Pan-Asian player, actually up from number six in 2014. And what differentiates us is that we do have a very diverse business across the various markets. And we’ve also got an enviable G-WAM business that really spans retail, retirement and institutional and has actually great synergies with our insurance business.
We’ll talk a bit more about that when we get you out to Asia for our Investor Day. But the delay in our goal of getting to the 50% is a function of three things. Firstly, it is the short-term headwinds related to COVID that Phil sort of highlighted. The second factor was IFRS 17. Obviously, the transition to IFRS 17 means that new business gains that were in core earnings are now no longer reported in earnings and go to CSM instead. And that obviously is a bit of a headwind in the short term. But the third factor is we’ve had tremendous growth in North America. So that’s really a good problem to have. So again, we’re very committed to our 50% goal and target, and we feel very confident that, that’s the direction we’re going in, and we’ll get there.
Again, I’ll just remind everyone that Asia represents 60% of our CSM and more than 70% of our new business CSM.
Paul Holden: All right. Thanks, Roy. Thanks, Phil.
Operator: Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.
Lemar Persaud: Hi. I want to go to this basis change start there. Is this creep above the risk adjustment target range something that could reoccur? It sounds like it is. Or should we kind of think of this as a one and done? And then what frequency could we see this kind of adjustment? Like, is this — could this potentially be an annual thing? Any thoughts would be helpful.
Steve Finch: Yeah. Thanks, Lemar. Less likely to creep above again given the changes that we just made to bring Asia down towards — at the top end of that range. Going forward, we would look at this typically just along with other assumption changes as part of Q3 basis changes. But like I said, Q4 was when we saw that we would have exceeded the top end of the range. So we decided to make that recalibration in this quarter.
Lemar Persaud: Okay. That’s helpful. And then I want to come back to a comment made on the industry converging over time. Do you think the industry is going to come up to your 90% to 95% level? Or is Manulife more likely to move down to, I don’t know, the Canadian peers at 80% to 85% or 85% to 90%, like how should we think about the convergence there? And if you guys do move down, what impact would that have on the shift from risk adjustment to CSM? So any numbers would be helpful.
Steve Finch: Yeah. I’d start with significant accounting changes. It’s not uncommon for industries to converge over time on — we’re talking about one specific topic, but on any number of policy decisions, especially when it’s a principles-based standard. So you’ll see, but it would not be unreasonable to expect that. We don’t have any plans to recalibrate now. We’ll just continue to watch. If we were to make a change, you would see same type of thing, if we were to reduce the risk adjustment, it would show up in CSM, and it would look similar to what you’re seeing this quarter in terms of knock-on impacts, which are quite modest.
Roy Gori: Lemar, I’d just add that I do think, obviously, as a result of IFRS 17 and the assumptions that were required as part of that conversion, I think we’re going to see much more reporting and benchmarking across the industry and more transparency. I think that’s a good thing. Again, we typically want to be more conservative and prudent. That has worked to our advantage in the past and will continue to. But — and this kind of reporting and benchmarking, I think, is going to continue to step up. And I think that’s, again, not necessarily a bad thing. I think it’s a good thing. And it won’t just be on risk adjustment. It will be on discount rates, for example, and so on and so forth.
Lemar Persaud: Okay. That’s helpful. But like I guess the way that I am kind of thing about this is, if you guys are going to exceed the upper end of your target range, let’s say pick a number, let’s say it would have been 97%. So you brought it down to probably the midpoint of this 90%, 95%, so 92.5%, let’s say. So 5%, and you had a $2.8 billion rebalancing here. Well, if I look at where your Canadian peers are at, if you guys were to converge down there, that would be a very big number. If you were to go to like 82.5%. So is there any way that I can kind of think about how the industry — or is there — or is it just not reasonable that this is going to happen in the next couple of years? Is this something that’s going to happen over the next 25 years? Anything around that would be helpful? Any thoughts?
Steve Finch: Yeah. And just a reminder that this — it’s a liability on the balance sheet. So it’s geography and there’s some knock-on impacts. But at the end of the day, if we were to move 5 points in the range, it’s about $3.5 billion in terms of further impact you could see. I won’t predict how this would trend over time. It’s not knowable now. But to Roy’s point, I think ongoing benchmarking, it would be interesting to see what that drives the industry to do.
Lemar Persaud: Okay. Thanks. And then one quick one, if I may. How should we think about the core tax rate for modeling purposes for 2024 and 2025?
Colin Simpson: Yeah. Thanks, Lemar. In the past, we’ve guided to a tax rate — effective tax rate of between 15% to 20%. I would expect if global minimum tax is enacted as the legislation suggests that this range of 15% to 20% goes to 17% to 22%.
Lemar Persaud: Thank you. That’s helpful.
Operator: Thank you. The next question is from Nigel D’Souza from Veritas Investment Research. Please go ahead.
Nigel D’Souza: Thank you. Good morning. This wasn’t one of my questions, but I think it’s an important point of clarification. On the risk adjustment, would it be right to think of it as that the profitability of the license or the insurance policy does not change over the lifetime of that contract, what this does do, the calibration, is changing the timing of the recognition of those profits by having more of it sit in the CSM balance. And the fact that your confidence level is higher than peers is just the difference in the recognition and the timing of that profit and the fact that you’re at a higher level. It’s conservative because the reduction would just improve the run rate of profitability. So I think it’s just an important distinction. Is that the right way to think about it?
Steve Finch: Yeah. I think you’re largely right, Nigel. It’s just — it modestly changes the run rate of profitability. And yeah, I think that’s a good way to think about it.
Roy Gori: And Nigel, I think you hit the nail on the head to be perfectly frank. And I would say that our peers who have got perhaps a lower confidence level, and therefore less risk adjustment, are benefiting from that slightly faster amortization.
