All right, welcome everyone. I'd like to introduce to the stage Colin Simpson, Manulife's Chief Financial Officer, here for the second year in a row. Thanks for, I guess the last year wasn't that bad. Thanks for joining us today. You know, let's start with, you know, the big picture ROE question, because every life insurance company in Canada anyway has been hiking their ROE targets. You started the trend, I guess, in Hong Kong last year. The difficulty for, you know, people like myself and others is, you know, understanding the building blocks to get from where you are and to that 18% +. To be simplistic, it's like, oh, yeah, yeah, I know you got to grow at 15% + or whatever in Asia, but, you know, what else is there that, you know, can put some more tangibility, I guess, to that target?
Yeah, okay, and good to be back. It's an awesome conference, actually. We really enjoy the interactions with investors at the setting. It really is fantastic. Thanks to you and National Bank. You know, there's no real secret sauce behind our ROE trajectory. If you look at where we're growing the fastest, last year we grew earnings in our wealth and asset management business by 30%. That's generating a 27% ROE. We grew earnings in our Asian business by 27%, and that's generating a 19% ROE. If we continue to grow our high ROE businesses faster than our other two businesses, which are effectively North American, we'll naturally get an uplift in our ROE. We went from a 15.9% ROE to a 16.4% ROE in one year. If we continue that trajectory, we will get to 18% by 2027.
I think, you know, where I really like IFRS 17, and for those of you who are not insurance specialists in the room, we have a new accounting standard, and it's IFRS 17. I continue to claim that the market underappreciates the stability of our earnings. You know, if behind your question there's a, well, are you going to pull a rabbit out the hat on earnings and just say, oh, we sold a lot more product than we thought, that's not going to affect IFRS 17 earnings. It's really about the smooth trajectory on earnings. Where we have a little bit of a lever is on capital on share buybacks. Clearly, you know, we did a 5% buyback last year. We've announced a 3% buyback this year.
The more we continue to return capital to shareholders, obviously that gives us a little bit of flexibility on our ROE. The last point I'll make is, you know, we didn't set this target because it was easy. It is a stretching target. I don't want you to walk away saying, you know, we're just all sitting back and, you know, it's in the bag. It's going to be a lot of work, but we're very confident in our ability to achieve it.
You give me too much credit. I don't have a hat and I lost my rabbit. You did highlight Asia and wealth, and those are the obvious ones to high ROE, faster growing businesses. If I just pick business drivers, if you will, Asia, you got to generate sales of X. If you keep hitting that, overall scale and profitability of those sales will contribute to that. Is that the main driver? Wealth, I mean, markets last year were very favorable and not so favorable this year. Outside of market influence, what's the, you know, what is the main business driver for that one to contribute?
Yeah, I mean, the beauty of wealth is it's really simple. You have assets under management and you earn a spread. You know, we are generating great flows last year, $13 billion of flows. Actually, 14 out of the last 15 years, we've generated positive net flows. That is continuing to grow our AUM. We are over a trillion dollars of external third-party AUM. That is going really great. There is a margin expansion. While other asset managers are really seeing margin pressure, we are seeing really decent margin expansion. That is not because we are able to charge our clients a lot more. We have a very diversified offering of businesses throughout North America, Europe, and Asia. What is really important, and I have got the CFO of the wealth business with me, is we have been very disciplined on cost reduction and cost execution.
We took our EBITDA margin all the way up to just under 29%. That was 300 basis points expansion last year at a time when other asset managers are really facing margin compression. Now, that trajectory of margin expansion is not going to continue forever, but it demonstrates that we're a very execution-focused business. We're not just sitting back and saying, oh, well, flows are what flows are, and isn't it great that markets are up and we're making a lot more money? That's absolutely not what we're doing. We're enjoying the better markets last year, which have taken our AUM up a lot, but we're working really hard on flows and then on operational excellence. That operational excellence piece is really key to us getting to a decent ROE. You know, you talked about storm clouds around the horizon.
Obviously, the big one for us is market movements having an impact on asset manager earnings. We have got such great diversification. I am sleeping pretty easy at the moment.
The flows have been good. I don't think it's entirely related to markets, because if I compare your wealth business to, you know, some businesses that are more traditional, that have been struggling with outflows for a number of years, you're diverging away from that in a positive sense. Where are you generating the bulk of your flows, both in terms of, you know, type and region, I suppose?
Yeah, and I mentioned the $13 billion of flows. About $5.7 billion of that is coming from institutional. Within that, actually, last year, Europe and the U.S. were really good. Part of the Europe success story was actually a business we bought, CQS. That was about $1 billion of flows. I'm not telling you this because it's really going to dramatically change your earnings projection, but I want to leave with you this concept that Manulife is so well diversified. We talk, and it shows up in our asset management business quite a lot. We bought an alternative credit manager in the U.K., CQS, and we're able to now distribute its funds throughout the U.S. We bought it in the U.K., sorry. That has given us an element of diversification.
Last year, roughly half of the, well, $13 billion of net flows, roughly half of it, $5.7 billion of that was institutional. Within our institutional, we had great growth in North America. And then when you look at what type of asset classes are selling really well, it is private markets. Our infrastructure fund had a fantastic fundraise. We have had some good raises on private equity and private credit. Again, you know, nothing that makes us over-reliant on any particular asset class, back to that diversification point. The asset classes that are in vogue right now, privates, illiquids, are doing really well for us. We have got great franchises in them. That helped, yeah. If you rewind maybe two years, we had some great results in our Japan business and even in our China business.
I think it's just, it's no particular strategy are we overly dependent on.
I do want to ask about some of the other regions, but while we're talking about investments, I guess there's two things that spring to mind. One, you sounded more optimistic on the, you know, the return outlook for your alternatives portfolio this year. You know, what's driving that? Is it primarily things were bad and they're just not as bad now, or is there something else to that? I'll stop there and we'll ask about the surplus after.
Yeah, and for those in the room who might not be following us as closely, we've had a lot of pain in our illiquid portfolio. Some of that is due to commercial real estate, and that's kind of obvious. I'm proud of the fact that we take a very proactive approach to marking our assets down. We're down over 40% peak to current on U.S. office, which I think is appropriate. We're certainly not saying now is the time to buy into that space. We see some real structural challenges in that market. That has caused us to have quite a big drag on what we report our investment returns versus what we would expect. We've got a great portfolio of illiquid assets, and it should earn 9%-9.5% in any given year.
Quite frankly, it hasn't, and mostly because of commercial real estate. Given the pain that we've taken in commercial real estate, we feel that that can't continue at that pace. We had, you know, it was our best quarter in two years last quarter with ALDA losses of just under $100 million relative to our long-term expectations. Our CIO thinks that we're going to get to roughly flat by the middle of this year. Obviously, market volatility is not helpful, but these are illiquid assets that should, you know, through the cycle perform really well regardless of public market volatility. Yeah, we are, long story short, we are more confident. We are confident in our trajectory on our illiquid assets. We think we've taken most of the pain in commercial real estate.
Actually, as the world is looking at public markets, I think we continue to see demand for privates, and that is supporting valuations. You know, we're never going to be a company that's going to shoot it out, hit it out the park on investments, because it's just not our style. We invest for the long term, and these are great long-term assets.
I guess the allocation of that class, the older portfolio overall, should that move in lockstep with, you know, the exit of legacy businesses?
Yeah, you're absolutely right. As we do reinsurance transactions and offload liabilities, we will look to offload assets. Generally, the liabilities that we are offloading are long-term in nature. That has allowed us, or that has necessitated us to offload some of our illiquid portfolio at the same time. We've been really successful at that, actually. We've offloaded all our illiquid investments so far at carrying value or slightly higher. Again, another point that we try and be prudent when we mark these assets on our balance sheet, and that hopefully gives investors confidence that we're not carrying anything that is not clear to all and a representation of the outside world.
Now, so those are the investments to back, you know, the policyholders. Now as far as your equity and your capital that you're investing, I guess over the past few years, it's been a big tailwind as rates were hiked to stem inflation. We saw bigger returns on the short-term component of your portfolio. The concern now is that with rates on a downward trajectory, at least now, that tailwind becomes a headwind. You know, maybe help illustrate how maybe that's not a concern. Have there been any tactical decisions in that portfolio to extend duration such that, you know, I shouldn't be worried too much about that?
Yeah, I think philosophically, we are a company that doesn't believe it's easy to make money from interest rate bets. You know, maybe you could say we're smart, or maybe you could say we learned that the hard way during the global financial crisis. The reality is we're not looking to take any duration bets. What's really important to us is the long end of the curve. Not so much if the long end of the curve goes down, that's really bad for our economics because we're well hedged. A large part of it is capital flowing into the industry and looking to take liabilities off us at an attractive price, as we've seen with the reinsurance transactions. We will keep a close eye on the long end of the curve.
Some of the recent policies have clearly been inflationary, and so that's kept the long end high, and that's brought capital into the industry. You would have noticed a lot of deals in the U.S. And part of that is investors looking to park their capital long-term liabilities that need long-term assets that are going to earn them a lot of money for a long time and at levels not seen for some time. The other point is, you know, when the long end of the curve is high and the short end is down, the products that we sell, the guarantees that we offer are really attractive relative to putting your money in the current account. For once, you know, in a long time, life insurance is actually kind of in vogue. We're seeing our sales reflect that. That is another great thing.
In terms of, are you worried that, you know, some of these interest rate movements that we've been seeing, whether it be in the short end on the downward trajectory, you know, or the long end sort of moving around with inflation fears, no, absolutely nothing that you're going to probably see through our financials. We have a small bank. We've got the number eight bank in Canada, and you'll see a little bit of earnings pressure when the short end comes down as our NIM gets a bit compressed. But that's, you know, you're definitely not going to notice it in a $7 billion earnings company.
You said that, you know, you're not a company that takes duration or interest rate bets. That's, you know, perfectly rational. However, there are entities that do. If I segue that into the legacy dispositions you've already announced, the outlook for those transactions, if, you know, you think about government spending increasing, like Europe's going on a stimulus spree, for instance, and just it seems likely that interest rates will be, you know, higher. There's probably more interest for your, you know, long duration, high guarantee kind of blocks of businesses that, you know, have been problematic in the past.
It's kind of funny. You know, I think for the last, if you rewind maybe three years and think about the 10 years prior, you know, we've been running around going, oh my gosh, life insurance, it's got illiquid liabilities, you know, stay away. It's got all these problems on the balance sheet. And that's what we love.
Now we're like this.
Now it's like, oh my goodness, these are illiquid liabilities. I need more of them. The world has turned on its head. You know, I really want to encourage people, if you're not close to life insurance, you know, do the work. It's a complicated sector, but it's got some really interesting dynamics going on at the moment. Part of that is the long end of the curve, which is just not something that we've seen for a long time. You sort of wonder, what's the buzz with Japan and life insurance at the moment? It's like, you know, look at the 20-year in Japan. It's presenting opportunities for companies that just haven't been on the headlines. We feel like the run on, you know, the opportunities for life insurers going forward is great.
What I do not want to see and what is maybe you could argue is happening is the private equity backed reinsurers coming in and taking the space and crowding out the public markets. Really, we should own our justified space of it and make good money because they trade at very high multiples. Their investors give them, you know, the benefit of the doubt when they come into the space. I want to see that for us.
Now, more specifically, we've seen a few long-term care transactions in the past couple of years and a UL block and a number of others for that matter. Is 2025 going to, is it shaping up to be another, I guess, eventful year from that standpoint? Could we see different blocks of businesses start to become transactable? Like I get questions every now and then about the secondary guarantee UL block in the U.S., which gets overlooked a bit.
Yeah, I think if I start at the beginning, you know, we did the first long-term care reinsurance transaction. We also did the second long-term care reinsurance transaction. Recently, Unum has done another long-term care transaction that looked like our first one. We feel that we've got a desirable book of long-term care, all relative to the demand out there for that business. If there's a good transaction out there, I think people will come to us. I think we probably have more transactions in us on long-term care. You mentioned the secondary guarantee universal life. That's a much more simple product. What you end up doing is, you know, you don't have as much arguments over assumptions because it's just what is the very long-term lapse rate that you think your customers are going to exhibit.
You know, given how low our lapse rates are, it does not really become much of a debate. You end up just swapping our risk premium for their risk premium. I do not know if there is a whole lot of value that we can give our shareholders by doing those transactions, but we will continue to look at different blocks of business. I think that long-term care remains, you know, really, really a high priority. I am sure we have got another transaction left in us. It does introduce, you know, an element of volatility in our financials. It is not economic. You know, I will take when we do long-term care transactions, we do have to dispose a portfolio of fixed income securities that realizes losses and creates P&L volatility. With this last transaction, we said $500 million. With interest rate moves, it is $750 million.
It all gets offset in OCI. There is no economic impact. I do want to just say, you know, transactions do introduce volatility that do impact the trajectory of our earnings.
Going in the other direction, the, you know, narrative around Manulife has been, you know, overall positive. It's been more of a shrinking the company. What about, you know, as you, you know, you're generating a ton of remittances and the capital position is, you know, very healthy. You know, is M&A at all on the horizon? I'm sure, you know, smaller stuff we might not appreciate, but anything large potentially?
Look, we're undergoing a CEO transition at the moment, and Phil gets in place in May. It would be a little odd if, you know, I was announcing a very big M&A transaction anytime soon. You know, the world's not stopping. We're looking at great opportunities to do bolt-on acquisitions in places that we want to scale up. We don't need to do anything in M&A. You rightfully mentioned we've got a lot of capital. You know, we want to use that to grow in a sensible way. You know, a lot of the focus is on, you know, are you growing or are you shrinking? I really want people to appreciate the quality of Manulife. That's the point that I still think is underappreciated. You know, we saw with the tariff noise, you know, our stock behaved like a high beta company again.
You know, we still have not got that message through that we are, you know, I believe we are a higher quality company than people give us credit for. You know, that to me is a little bit more important than, are we going to grow or are we going to shrink? Because often in life insurance, you only know if your growth is playing out five years later.
You mentioned, you know, the new incoming CEO is Phil anyway. And he moved from running Asia to the CEO job. Now, Steve, Chief Actuary for a number of years, now running Asia. How, you know, I guess Chief Actuary going to run a, you know, a business that is very sales-focused and growth-oriented. How's that transition?
Yeah, I think, and you will know Steve very well from his time as the Chief Actuary, but he's 32 years at Manulife. He's run some fantastic high-growth businesses in the U.S. He's been a CFO. He's just got a great all-round understanding of insurance and Manulife. I think the expertise he's going to bring to Asia are tremendous. Because he's seen the transition in the U.S from, you know, bundled products to more simplified products, he's seen the transition of distribution channels from agency to independent. You know, he will just be able to bring a wealth of expertise. I think the important point to note is he's supported by so many country-specific CEOs that he's not going to, you know, that you might think, you know, does Steve really understand the intricacies of, you know, Philippines culture?
We have a CEO there to do that. Steve's going to provide some great insight. He's a fantastic asset to the firm, you know, and has delivered so much market cap appreciation in his tenure as Chief Actuary and kept us, you know, on the straight and narrow. I think it's a great move for us. He's really excited, and we're really excited.
I want to see him at a sales conference. Now, you know, we had the banks in yesterday, and obviously we're in Canada, that the whole Canada fired up to become a, you know, a vibrant economy, more resilient, all that stuff. You know, if I think life goes in general, I would say this for almost all of them, the Canadian business gets overlooked. You know, take Manulife for, okay, Asia, wealth. And Canada, you know, conference calls rarely gets the question, I guess. What's there to get excited about with regards to the Canadian business?
I think we have a huge role to play in the direction that Canada is going to take, where it's, you know, the ability for us to invest in infrastructure here in Canada is phenomenal. You know, the government's really excited about understanding the potential for us to do that. We've got big balance sheets. You know, can we be a part of the growth? Can we be part of the growth agenda? I think, you know, the reality is that our earnings come from policies already written. We can't turn on the taps and all of a sudden transform this business into a high-growth company. People don't wake up every day and just go, well, I fancy a bit more life insurance. Doesn't quite work like that. You know, our earnings trajectory is going to be steady in Canada. But steady is great.
It speaks to that quality point that I mentioned. Let's not forget that we've got a health business. You know, whether you take a one, two, or a 20-year view, you know, health is an important part of our future economy and how it, and we can be a solution to that. Our health business is growing fast. We've got some great expertise that we've leveraged from the U.S. You know, we want to be a part of a fantastic Canada. We love being part of Canada. We have a lot of respect for OSFI and a great relationship with OSFI and feel like it's a great industry. We have a lot of respect for our competitors. It's great to compete against the likes of the names that you know.
Great place to be, and we want to be a part of its success.
I guess it's not a hyper competitive, it's competitive, but not an irrational.
Irrationally competitive. No, like I said, we think the two main, well, three main competitors that we have are fantastic. And we watch them closely. When they do something, we take note.
Couple of quick ones to wrap it up. Corporate expenses. I mean, I look at that unallocated corporate overhead. You know, that's a, you know, what does that number really represent? And where should it trend overall? Because it's a pretty big number and could be an earnings driver if, you know.
Yeah, we have spent a bit more money in the center over the last few years. Part of that has been our IT infrastructure, our GenAI activities. Some of it has actually just been, you know, better performance of the business has meant the compensation number has just been a little bit higher. It's important for us when we report segment results that it's comparable. What we were finding is actually we had put a bit more expenses into the segments than maybe others who report that we compare ourselves to. Trying to get consistency has been one of those drivers. I think you've got to look at corporate expenses in the realm of total expenses. We've been on a great trajectory with expenses coming down. I think, you know, to your point, what is the right number of corporate center expenses?
We were roughly $350 million last year. We're probably going to stay at that level going forward. That is broadly consistent with some of our large competitors.
Okay. The last one, the remittances figure, what was it?
$7 billion.
$7 billion, yeah. I guess to make that a little bit more easy to understand what it represents, can you give us X numbers for dividend, X numbers for, you know, organic growth, and X number for, you know, reinvestment?
Yeah, I think put aside the $7 billion headline number, because we had some great one-offs. We've been working on capital optimization, and that's really juiced up our remittance number. We should generate 60%-70% of our earnings in cash every year. That's, you know, we effectively did 100% last year. If you take that 60%-70% of $7 billion, we've got a dividend payout ratio of 35%-45%. We've got another 10% of debt costs and corporate expenses. Then you've got this buffer of between 5% and 25% of earnings for investing in the, well, no, it's not even investing in the business, because the remittance is after investing in the business, but further buybacks or M&A. At the same time, we've got a lot of existing excess capital. I think the point is it's great.
Manulife is great because we're growing our earnings, and those earnings are cash-like that are made available to us so that we can grow our dividend. We grew our dividend 10% last year. We know it's important to investors. We still have this buffer to do great things with. Feeling great about earnings trajectory and feeling good about the cash conversion.
That's a wrap. Thanks again for coming to the conference this year. I'm sure you'll have a bunch of great meetings today.
Awesome, Gabe. Thanks a lot.