Awesome. We will get started here again. My pleasure to introduce our next guest speaker, Phil Witherington, Chief Executive Officer of Manulife Financial. Hey, Phil.
Hey, Mike.
Nice to see you, as always.
Thank you for hosting us. It is great to be back a year on.
Thank you for joining us today. I'd love to start with maybe just your high level reflections. I think you've been the CEO for about a year and a few months now. I know it's been an interesting journey for you, for sure. A lot of changes. Maybe just talk about some of the ups and downs as you reflect back on that first 18 months.
Wow, the ups and downs. It has been an action-packed year. A year ago we were here, I was three months into the role. Reflecting back on what we have achieved since then, one of the milestones was the release of a refreshed enterprise strategy, and that was very deliberate. It's a strategy that is right up to date with what's happening in the external environment, where Manulife is today, and it really emphasizes priorities such as being AI-powered, empowering customer health, wealth, and longevity. So right up to date. A year in from the release of that strategy, we are already seeing the emergence of strong financial and operating results. Just look at this year, for example. Year to date, core EPS up 14%. Year to date, contractual service margin, the value we generate from new insurance sales, up 16%.
This year, we've already returned CAD 2.6 billion of capital to shareholders through dividends and share buybacks. So really strong financial performance. The strategic milestones alongside that have been really important. We announced the entry into the India life insurance market through a joint venture with Mahindra. That's a really important, big strategic milestone. We announced and completed our largest acquisition in a decade with the acquisition of Comvest Credit Partners, and that's already accretive to our earnings and a material contributor to net flows of the organization. More recently, the list could go on, but I'll just give one more example. Last month when we released our second quarter results, we announced our third long-term care transaction, and that was an innovative transaction. It's good for shareholders, it's good for Manulife, and actually a very limited impact on ongoing future earnings. So that's all positive.
I think you were asking me to be balanced in my perspective, and what's gone right, what's not gone to expectations. One area that, in the interest of balance, that I will call out and own, is that relative to where I was a year ago when I sat on this stage, I am less, or we are as an organization, less far down the line on our progress towards 18% plus core ROE than I would like to have been at this stage. Our base scenario is still that we get to ROE of 18% in 2027. But there are certain things, certain headwinds that we had not anticipated when we set that target. We've had some long-term disability experience in our Canada segment.
We've seen a weakening of the Canadian dollar relative to the U.S. dollar, and we have more capital in U.S. dollar, so that's increased the denominator. And we've seen some variability in U.S. life experience as well. But to get to 18% over the course of the next 12-18 months, it's reasonable. I believe we can get there. It's a base scenario, and we essentially need Asia and Global Wealth and Asset Management to continue to grow at mid-teens growth rates. We need to see a normalization of disability experience in Canada, and we need to continue our deployment of capital, which share buybacks alongside dividends are important elements of that.
That's very helpful. Thanks for that insight. Maybe switching gears to the segments, and I'd love to start with the Asia business.
Sure. Yeah.
It's obviously very topical for investors these days. The segment's performed very well. Can you maybe talk about some of the larger trends and where you're most optimistic in your Asia business?
Yeah. We've seen very strong performance in our Asia business, and it's coming from multiple markets, and it's driving strong double-digit earnings growth, actually above 20%. I would expect typically mid-teens for our Asia segment. So that's been very strong. That's been supported by consistent new business growth, again, across multiple markets. The trends in the region, I think, are important in contributing to that growth. When I reflect on the trends, maybe I'll just highlight three. The first is the aging populations of Asia and the impact that that has in driving demand for the products and services that we offer. So driving demand for protection, driving demand for retirement solutions, driving demand for health solutions, wealth management solutions. So that demand is really important, that aging population dynamic.
The second trend that I will call out is the rise of Asia regional financial centers on the world stage. So Hong Kong and Singapore, and the role that they play in global wealth management, in capturing wealth flows is incredible. Actually, just this year, Hong Kong has overtaken Switzerland as the largest cross-border wealth hub in the world. That's an incredible milestone. The third trend that I will highlight that we are seeing across Asia is the emergence of third-party distribution channels more strongly than we have seen before. So we have, as an organization, very well-established channels in proprietary agency, in exclusive bancassurance. We've seen third-party channels become more relevant, and that's built, if you like, a third leg of the stool. That we have balanced distribution across agency, bancassurance, and third-party channels.
That actually creates more opportunity because it provides more access to a wider range of customer segments. So I actually see that as a positive and a strategic opportunity. So they're the key trends that I will highlight. When I think about what's happening in some of the key markets, Hong Kong is doing incredibly well. There's strong domestic demand, and that's the majority of our business in Hong Kong. The strong demand from mainland Chinese visitors to Hong Kong, it's about 25% of our business. That's a stat that we gave on our recent earnings call. But Hong Kong remains a very attractive market because it has become this global financial hub on the world stage. If we think about Japan, we have a big business in Japan. Hugely successful. The Japan outlook has become more positive over the course of the last year.
The macro factors from interest rate, yield curve to equity markets, public policy encouraging the people of Japan to not just hold cash, but invest for the long term. That's favorable to our business. We doubled new business in Japan. You look at our Q2 results, doubled over the course of the past year. Mainland China, an interesting market. Huge potential in mainland China. I referenced earlier the emergence of third-party distribution channels. We have expanded over the course of the past five years from agency distribution channels into non-exclusive bank channels. That's a big opportunity, can create some variability in new business from quarter- to -quarter, but the long-term trends remain intact. Singapore, really important financial hub in Asia. We're a market leader in Singapore, generate significant value.
And just to give an indication of the pace of growth that we are seeing in Singapore at the moment, in the second quarter, or if you look at this year, we've seen new business CSM growth close to 40%. Really strong momentum in these businesses, and they're just examples of what we're seeing across the region. Asia's a key driver of growth.
Okay. Phil, how should investors think about the mega trends that are clearly favorable for Manulife and all your peers in that region, versus what Manulife is doing specifically differently than peers winning market share? It's not an easily quantifiable dynamic, but between mega trends and what you're doing specifically, what's the balance there?
This is actually something I feel very strongly about, that just being present in Asia is not the key to success. It is necessary to differentiate ourselves and actively unlock the opportunity that exists. When you look at the refresh strategy that we have, a new strategic priority that we called out is superior distribution. We are investing in our distribution, not only to get access to a broader range of customers, but to help make our distributors more productive. We can actually sell more business, as well as being able to, of course, satisfy our customers, please customers, get them to a decision more quickly, and that's in their interests and it's in our interests. I think that's one important strategic unlock. Another example of a strategic unlock is our AI-powered priority.
Again, one of our five enterprise-wide strategic priorities, investing in AI enables us to make decisions more quickly, say, underwriting decisions. If we can get back to our customers with an underwriting decision instantly, they are much more likely to buy a Manulife policy than either forget about the whole thing or go with a competitor. I think these factors are investments that we're making that will help drive value to our Asia business and win in a region that is naturally growing from those mega trends we discussed.
And then maybe if you can just, sticking to Asia, just touch on the MCV business in Hong Kong. I think you guys were clear on the call that it's structurally, the demand is there. This is not going to get derailed because of the tax dynamic that's happening now. That was never the driver of why these sales were happening in the first place. I feel like the market's treated Manulife better than some of your non-domestic peers on that specific dynamic, and I think a large part of that is the message that was clear on the Q3 call, or Q2 call, sorry. Maybe just remind investors, what are the structural dynamics that will keep that business growing in the long term?
Yeah. So where I will start is actually Hong Kong. Hong Kong in total, you look at our business, we're well-diversified across channels. The majority of our business is our domestic business. The mainland Chinese visitor component, the stat we gave on the call was approximately 25% of sales in 2026. So I think all of that provides for robust resilience. Now, just for clarification, the tax enforcement news we had seen being reported early in August, that was reports of mainland tax authorities pursuing tax enforcement for individuals that held assets internationally. I think some of the clarifications since then have been very helpful. Clarification that there are no new tax rules. This is about enforcement of existing rules, and it's not targeted at Hong Kong, and it's not targeted at insurance.
For reference, that is exactly what we see in other jurisdictions, such as here at home in Canada. The tax authority is pursuing enforcement of tax collection where individuals hold international assets. So I actually think that is a good example of what we should expect to see as markets continue to develop and the regulatory environment becomes more robust. When I think about the fundamentals that will drive future demand for insurance solutions by mainland Chinese visitors to Hong Kong, I think the drivers of demand remain intact, and they are compelling when you reflect on them. So the opportunity to invest in and find protection in U.S. dollars, which comes with it higher yields than RMB yields in mainland China.
The opportunity to deploy their capital into long-term saving solutions that are supported by diversified participating portfolios that have access to real estate, other categories of private assets such as private equity, public equities, international bonds. The sophistication of the products in the Hong Kong market that enable generational wealth transfer of accumulated wealth. Policies can pass from one generation to the next in a simple and efficient manner. Currency denomination of policies can be switched at policy anniversary dates. So Hong Kong is a very sophisticated insurance market, and therefore, its natural pull, not only for mainland Chinese, but for other international wealthy individuals as well.
Thanks for that color. Maybe just on the LTC transaction with Munich Re. Obviously, structured differently than the previous two. Just maybe walk investors through why that was the right structure. Then you can maybe sort of dovetail that into some of the organic initiatives that you are taking to reduce risk in the LTC historical legacy blocks and maybe what the upside is on those initiatives.
Yeah, I am happy to touch on that, Mike. For us, it was actually important to have a third LTC transaction within three years, but we did not want it to be something that simply does what we had done with the first two. So this is different because it is a standalone long-term care transaction of biometric risk only. What that means is that we have reinsured the morbidity risk to Munich Re, but we have retained the asset portfolio that attaches to those liabilities. So when we think about the earnings impact of this transaction, yes, there is CAD 30 million of forfeited earnings that reduces over time as the portfolio runs off. That effectively goes to Munich Re.
But the earnings on the assets we retain, the capital release that will come from the maturity of the asset portfolio we retain, and the margin uplift or the yield uplift opportunity through the potential opportunities to look at how we manage that portfolio stays with Manulife. So I think this is a really good deal for Manulife shareholders, and it demonstrates that we can de-risk or reduce risk in our portfolio with actually very modest earnings implications for shareholders. You think about the impact of retaining those assets. We continue to generate earnings on the assets, we continue to generate capital and capital release on those assets as the portfolio matures. That is a great scenario in the context of our strategy, which is to deliver long-term growth for Manulife shareholders and sustainable growth for Manulife shareholders.
Thanks for that color. That is helpful. Maybe switching to GWAM, just in terms of the flows. You had net inflows last quarter, mostly on institutional strength, obviously some pickup with Comvest and CQS. Then when you think about going forward, the segment has taken a little bit of a step down in earnings a couple of quarters ago, bit of a rebound last quarter. What is the trajectory from here? I know there was some one-time-ish items in Q1 that impact the results, but just getting back to that 500+ and then resuming that
Right
Strong growth trajectory that you had previously. What gets you back there?
Yeah. Thank you for listening so carefully to our messaging. I appreciate that, Mike. The performance in GWAM has been very strong. I think Q2 is a good run rate indicator for where we go from here. There was a slight dip in Q1 for various reasons. As expected, that came back in Q2. Year-on-year earnings growth, 6%. That is after the impact of the transition to eMPF in Hong Kong, which was a one-time reduction in earnings. I think shows tremendous resilience. We are coming up to the one-year anniversary. Soon that will drop out of the run rate, which has depressed the year-on-year growth rate. But performance has been good. I will highlight that we have already achieved our investor day target of 30% plus EBITDA margin. That is a measure of efficiency in the portfolio, and it is naturally a margin measure.
I think that is a positive move. In the second quarter, positive net flows, and I think that is a really important milestone. I do expect variability in net flows from quarter to quarter. But to your point, when I look at the overall portfolio, Global Wealth and Asset Management portfolio that we have across different lines of business, retirement, retail, and institutional, as well as the geographical mix, I do see a portfolio that supports medium-term generation of positive net flows. Why is that the case? We consistently see positive net flows from Asia. We consistently see positive net flows from our institutional business. Look back over the past 21 quarters, 20 of those quarters have delivered positive institutional net flows. The Canadian wealth business consistently delivers positive net flows.
The areas of the Global Wealth and Asset Management portfolio where flows are negative or offset some of that positive flow. If we look at the North American retirement businesses, given where demographics are, retirement schemes are in outflow mode. The nature of the aging population, the maturity of the pension schemes, withdrawals are a real thing. We still have contributions, but withdrawals and redemptions are where we are in that life cycle. I do not think any of us would deny that the active management, retail active management has been facing pressures in recent years. I think what will define success is our ability to innovate. For example, the shift away from mutual funds to ETFs. The second quarter was our highest ETF flow quarter on record.
That does illustrate that it is necessary to be innovative, creative, and some of the emerging developments, the shift to tokenization are ways in which it is possible to win in North America retail.
Appreciate that color. Maybe just on the Comvest platform, you did allude to the opportunity there. Now that some of the perceived risk around private credit has diminished, in terms of the investment community and how they think about it, what is your long-term ambition to scale that combined business now in the private credit?
Yeah. Comvest was a great acquisition. The business is thriving as part of Manulife. There are so many synergies that we are able to unlock. We said on the earnings call actually that Comvest was delivering or contributing approximately CAD 30 million to core earnings in the second quarter. That is already financially accretive to the organization. I talked about positive net flows in institutional business. Comvest is a really consistently, really important contributor to our institutional net flows. Anyone following the news, just last week, we announced the closure of our latest private credit fund and capital commitments of CAD 5.4 billion for that fund. That is very significant. That does not immediate flow into net flows because we recognize those commitments as and when we receive the funding. I think it shows that the momentum in Comvest is very strong and there is more to come.
Okay. Thanks for that. Switching to the U.S. business, you have alluded to the type of earnings that you are generating in the U.S. It is less investment spread and more from the insurance policy themselves. Maybe just talk about the U.S. and where you see things going from here. You have obviously repositioned the business in a meaningful way the last couple of years.
Yeah.
What is in store for the U.S. for Manulife?
The repositioning is a really important point. As we refreshed our enterprise strategy, one of our priorities is diversified portfolio. Yes, Asia and GWAM important drivers of growth, but we clarified that both Canada and the U.S. are important markets in our portfolio and markets that we have the appetite to invest in. Specifically on the U.S., we are investing in building continued differentiation. Differentiation in wealth transfer solutions, differentiation in protection solutions, and critically important, differentiation in wellness solutions so that we encourage longevity. We help customers live longer, healthier, and better lives. That is something that in the U.S. market, I believe genuinely differentiates John Hancock from its peers. In terms of earnings shift, we have already seen very strong momentum in new business generation as we expand into product adjacencies and customer segment adjacencies and have built a deeper presence in distribution.
Those strategic actions are delivering new business growth. We have seen eight quarters of consistent new business growth in the U.S., double-digit new business growth. This really sets us up for success in terms of future core earnings because we have seen the contractual margin, the CSM and the balance sheet grow, that will support CSM amortization into the earnings statement, higher earnings in the future. Your comment on mix of earnings, yes, we will continue to see this shift from core investment margin to core insurance margin in the years to come. That will be a gradual shift, but it is a natural outcome of the new business transition that we are making.
Okay. That is great. On the ALDA portfolio, ALDA exposure, I get questions from investors on this often, just in terms of the assumptions that are used, that 9% to 9.5% return long-term. I know it is through the cycle, it is a long-term view. Can you maybe provide us some color on your confidence in that number today versus maybe a year ago? It is just the consistent negative experience is something that has been flagged by a few investors, and how do you sort of see that
Yeah.
Gravitating to a positive contribution at some point in the future?
It's a great question, and the alternative long duration asset portfolio is a great match for our long-term liabilities. It extends the duration of the overall asset portfolio. We have seen in recent years lower than target returns. When I reference target returns, they are very long-term expected return assumptions. Over the long term, we expect a 9%-9.5% return. What we've seen this year and over the past few years has been closer to 6% than 9%, so still generating positive returns, but lower than we would expect. I think it's really important to highlight the impact of the interest rate environment, because for asset classes such as real estate, such as private equity, and even infrastructure, the higher interest rate environment does create a short-term headwind. The cost of debt, for example, is higher for those equity-like vehicles.
In the long term, higher interest rates support higher returns. So I do expect a convergence to our long-term assumptions over the medium term. You asked how my view has changed from a year ago. The fact that we have seen higher long-term rates and if anything, pressure on interest rates to rise over the course of the past year rather than stabilize or fall, my expectation is that short-term, there continue to be some headwinds when it comes to all the returns. But my confidence in medium and long term has not changed.
Okay, thanks for that. I'd love to ask you about capital and M&A potential. Obviously, a LICAT of 136, very strong number currently. Leverage could move up potentially. We've seen it higher in the past. When you think about capital deployment, you've been very clear on your priorities, but is it a really high bar on M&A? I know your preference is for organic growth, but if it doesn't present itself and you could potentially do something inorganically, how are you thinking about tuck-ins versus that bar for something a bit more transformational?
A great challenge. When I reflect on our capital position, we are in a really strong position. To put a number behind it, the capital that we have above the upper end of our operating range is around CAD 10 billion. On top of that, we have the leverage flexibility. Our leverage ratio at the moment is around 22%. Medium-term target for leverage, 25%, and of course, we could go above that. There is substantial flexibility. Organic capital deployment is always our highest priority. Supporting a progressive dividend is also up there as a high priority. We currently have an active share buyback program, 2.5% share buyback program in place. We are on track to deliver on that. Inorganic deployment, yes, that is possible. I think we have demonstrated through the largest acquisition in a decade with Comvest Credit Partners, we are prepared to do that.
What I would call out when we have done that, it is a transaction that is financially accretive and strategically relevant, and that is the bar that we would be looking at for any further deployments of inorganic capital. We do like Global Wealth and Asset Management as a place to deploy capital. We like the fee income and the diversification that that provides. We do look for financial accretion and strategic accretion, and it is not really about bolt-ons or larger transactions. It is much more about whether there is the right transaction that delivers against those criteria. We have the capability to move, and we have got the financial strength to move if there is the right opportunity.
Great. Thanks for that synopsis. Maybe I will turn it back over to you, Phil. Any sort of key messages you want to leave with investors?
It is a great question. Look, what I will leave with you is that we have refreshed our strategy. It is right up to date, and we are moving at pace in the execution. We have demonstrated some key milestones, the entry into India Life Insurance, the Comvest acquisition, the long-term care transaction, and there is much more that this management team wants to deliver. The final point that I will make is our portfolio is diversified, and I do believe it is an envious portfolio. We have the growth in Asia and global GWAM, but we also have the stability as well as growth opportunity here in North America. I speak on behalf of Manulife and the leadership team when we are incredibly excited about what we can achieve in the years ahead. Watch this space.
Great. Thank you, Phil, for joining us, and thank you for all the insights. Super happy to have you, and appreciate your time.
Thank you, Mike. It's great to be here. Thank you.
Thanks, Phil.