Nigel D’Souza: Okay. Good. Yeah, that’s how I thought of it. So my first question was on expected investment earnings. I noticed that was lower quarter-over-quarter. And I assume that’s related to the impact from short-term rates, but I’m surprised that it outweighed the benefit on, I guess, your longer duration assets, given that cash and porter instrument is only about 5% of your invested asset portfolio. So could you kind of provide more color on the sensitivity to changes in the yield curve on the run rate of that number?
Colin Simpson: Yeah. Nigel, it’s Colin here. You’re right. It did go down by about $30 million quarter-on-quarter. I think I’d point you more to the year-on-year change, which shows quite a decent increase, and that’s driven by the increase in interest rates. You pointed out short-term interest rates being soft quarter-on-quarter. There’s a lot that goes into that number, to be honest, especially after a basis change. So while we are down quarter-on-quarter by $30 million, I would expect business growth to push that number back up closer towards where we were in the third quarter and to go from there onward.
Nigel D’Souza: Okay. Any comments on how the yield curve impacts is deepening versus parallel shifts, flattening inversion? Just any comment on sensitivity to changes in the yield curve?
Colin Simpson: You really wouldn’t expect to see that in that line. But clearly, the steepening of the yield curve in Canada benefited us in other parts of the P&L and balance sheet.
Nigel D’Souza: Okay. Got it. And my second question was on non-directly attributable expenses in the corporate segment. That seems to be trending higher. Any color on — is there just a noise this quarter? What’s the run rate of that going forward? And why is that moving higher?
Colin Simpson: Yeah, Nigel, Colin, again. A little bit of both, actually. Last year, there was a $42 million favorable pension true-up that benefited last Q4’s non-attributable expenses. And in this quarter, we had increased performance-related costs and as well as a couple of IT projects and just a bit more expenses in the center. When you put all that together, you do see quite a jump up in corporate costs. If you had to look at expenses overall, actually, the segment expenses are going great. And we were running at — and as a whole, we were running at 12% in Q2 and Q3, we’re down to 7%. GWAM took action, and so really impressive segment growth. And it is — it is something that happened in Q4 related to center and performance-related costs. And we’re set up for a good expense discipline in 2024. And if you look at our ratio as well, down to 45.5% from 60% five years ago. The story is good and it’s really important for us to be producing these types of numbers.
Nigel D’Souza: Okay. That’s it for me. Thank you.
Operator: Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca: Good morning. Colin, I had to go back to this tax thing, but I want to clarify something. Your guidance or the outlook of 15% to 20% previously, the benefit of looking at Manulife over the long term, I don’t think I’ve ever seen the tax rate approaching 20%. So is there something in your mind there when you talk about 20% or possibly even 22%, what would cause it to be that high? Again, I’ve just never seen it.
Colin Simpson: Yeah. Mario, I mean I think it’s a wide range for a reason. It depends on where the investment positives or negatives land, could cause volatility in the number. But really, I think the point to note is take this year’s tax rate, add 2 to 3 percentage points, and that’s a good go-forward piece. We give us lots of wiggle room with a broad range. Please don’t think that the current 14% is going to go to 22% overnight.
Mario Mendonca: Yeah, that’s — okay. The other thing I wanted to follow up on this global minimum tax, the 2% to 3%, presumably, it would affect the segments of the company with the lowest effective tax rate, which would be Asia and GWAM. Is that correct?
Colin Simpson: To be specific, Hong Kong, and also we operate the high net worth business out of Bermuda. So that would also be impacted Singapore as well. So yeah, broadly correct.
Mario Mendonca: So Asia and GWAM might see the — because Canada and the US looked like they’re pretty heavy tax rates anyway. And then the final…
Colin Simpson: Absolutely, in Japan.
Mario Mendonca: In Japan, right. And Roy, the final question is for you. This comment about the reinsurance transaction sort of reopening or establishing reinsurance market for long-term care. I want to make sure I understand what you mean by this. Are you seeing activity in the market? And I’m not asking about Manulife, but you’re closer to this than I am. Are you seeing activity like new players coming in, insurance companies, the other side of the reinsurance transaction, private equity, what’s happening that would make you believe this is established or starting to establish a reinsurance market for long-term care?
Roy Gori: Yeah. Thanks for the question, Mario. I’m going to start and then hand it to Marc. What I would say is we’re obviously — we have a very close finger to the pulse on what’s happening in the reinsurance market. And we’ve been constantly looking at our portfolio and specifically the assets where the returns, quite frankly, are lower than what we would expect to be generating from our capital. And we’ve been very active there. We’ve, as you know, freed up $10 billion worth of capital since 2017. And in ’22, we did the variable annuity transaction. And again, in that space, two or three years earlier, there was very little chance of a VA transaction actually taking place. And we saw the bid offer spread narrow. And we also saw many new players enter the market and actually want to engage with us in a conversation there.
And we’ve seen the same, I guess, trend on the LTC front. I think we’ve seen new players looking at that portfolio. The fact that we’ve got more credible data and as data matures, we’re able to have greater confidence around the assumptions, that’s made it more interesting to different stakeholders or different third parties, reinsurers in particular. So that trend line, I think, is a good trend. I’ll be honest, the higher rate environment isn’t hurting either on that front. But — so we do feel that, that’s been the trend line. Completing our transaction, we think, was a milestone for our company, but also we think it does open up an opportunity to have conversations. And quite frankly, since doing the transaction, we’ve had a lot of folks want to come and talk to us about LTC and other parts of our portfolio.
But let me quickly hand to Marc, who can provide a little bit more color.
Marc Costantini: Thank you. Good morning, Mario. I guess I’ll take us back a few months where our objective was to reset the dialogue with respect to our balance sheet, how we provision, how we’ve kept our assumptions current in this block of business and to demonstrate that we could trade the block at very close to book value given that. And I’ll remind everybody that the negative seat on it was the risk return profile of the buyer and the actual underlying expected assumptions were pretty much lined up. And as you mentioned, we had a great partner there in Global Atlantic in the transaction. And I would say, following the transaction, which was, as you say, a bit of a surprise and tied to everything that Roy just mentioned, we’ve had a lot of activity inbound about the transaction from various players.
There were other companies that were involved in the process as we had discussed and we’re reengaging with some of those players. And we feel that this block is representative of the rest of the business we have. And as we had discussed, there was over 65% of the lives that were active lives. We have other blocks of business that have a very similar profile. Some of the components of the benefits were relatively more aggressive than the rest of our block. And we — this has spawned a lot of curiosity, I would say, in the market, a lot of curiosity as to how we went about what we did. And we feel quite confident that it’s restated the profile of our business and it’s restated the profile of our balance sheet and the ability to have Manulife to execute the first of its kind transaction in this space.
So we’re hoping that, that obviously spawns very good things to come. So, thank you.
Mario Mendonca: Thank you.
Operator: [Operator Instructions] And the next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Darko Mihelic: Thank you. Good morning. Just a couple of questions. They are modeling ones, and I’m sorry to get into deep into the weeds here. Probably for Steve. With respect to some of the disclosures we got on an annual basis, one of the things that we can see is the sort of roll forward for the contractual service margin. And I am curious about how I should look at it because if I look at that annual disclosure, it would have suggested for example, that you would have had about $1.6 billion of CSM in 2023. And in fact, you had almost $2 billion. Now we just heard about the $40 million, presumably new business CSM added to that. But is there anything else that helped this year’s CSM relative to the sort of, I suppose, guidance we get out of the annual disclosure?
Steve Finch: Yeah. Thanks, Darko. I know which disclosure you’re talking about and what that really is, I think of it like our embedded value disclosure, where we show the runoff of the in-force like when will that embedded value emerge. That’s how I think about that CSM disclosure. So it gives you buckets of years as to when the in-force CSM will amortize into income. It does not include any new business, and it doesn’t include interest on the CSM as well. So I’d be happy to walk you through it in more detail. But I think, broadly speaking, use it to look at when will our existing in-force CSM show up in earnings.
Darko Mihelic: Okay. All right. Fair enough. The second question is with respect to the commercial real estate. And clearly, another mark. But what was interesting to me, typically, when I’ve been listening to commentary on commercial real estate, the suggestion is that we have high-quality real estate. We don’t dislike real estate. We’re in it for the long term. All these things that suggest these are just marks and you’re holding the commercial real estate possibly for decades. It’s a cash flow thing and so on. But one thing also in the annual statements is it does show that you’ve lowered your risk appetite for commercial office space. I wonder if you can provide any commentary on that because I would have thought and I have heard from some others that there might be opportunities in the office space to pick up properties.
But in your case, you actually lowered your risk appetite for office commercial real estate. I wonder if you can just provide some commentary around that? Thank you.
Scott Hartz: Sure, Darko. Thanks for the question. It’s Scott. And yeah, I think what we’ve seen happen to real estate over the last year or two is a couple of things. One has been sort of the secular headwinds in office in North America, in particular. And the second has been rising interest rates and the rising discount rates, which has hit all property types. And that second part is, it reduces values, but it increases prospective returns. So with the long-term hold, we don’t see that as value destroying at all. Within office and you’re right, we have reduced our office. 10 years ago, it used to represent 40% of our overall ALDA portfolio, North American office, and currently it’s down to 10%. So we’ve reduced it significantly as a percent.
Part of that is growing other parts of the ALDA portfolio, but we have sold a lot of office over that time period as well. And I remain — if I look across the portfolio, where do I have the most concerns going forward? It is probably North American office. We’ve — it’s still unclear on the return to office. I do think there are other secular headwinds. AI will probably reduce white-collar jobs that sit in offices. So I think there are areas in office that still work, brand-new offices in certain locations in cities have done pretty well. But overall, as an asset class, I think we will continue to sort of deemphasize office going — North American office going forward.
