That’s particularly coming from the bank assurance channel, and while we may see some variability quarter to quarter in mainland China as a result of typical seasonality and other factors, I do feel confident about the future over the medium term. Now in our other emerging markets, Indonesia has been particularly important and is delivering very strong growth, and I look forward to sharing more about that as part of our upcoming investor day. We should not forget about Singapore as well – Singapore has had a really strong start to the year, and that’s a very important market to us in APE terms. It’s now very similar to Hong Kong in terms of volumes, so. Through the consistent growth in Asia other markets, and notably Singapore in recent years, we have diversified our portfolio and really developed a strong footprint within ASEAN.
Paul Holden: Okay, that’s great. Then my second question is just bigger picture – you know, a higher for longer interest rate scenario seems increasingly probable. The way I view it for Manulife, there’s probably some puts and takes, so where I’d like to particularly focus in on is what does that mean for the net investment result – it didn’t increase as much as I would have expected this year, so maybe you can address that as well, but kind of what we should expect for that line with higher for longer. Then two, what does that mean for the ALDA experience? Does that mean maybe a period of underperformance relative to long term returns for a little bit longer, so those two components, please.
Roy Gori: Yes Paul, that’s a great question, and let me start and I’ll sort of provide some high level comments, and then I’ll hand over to Steve, and then Scott might want to chime in as well, because there’s a lot to unpack with your question. I think the first comment I’d make is that higher rates are a positive for Manulife. We’ve said this in the past, and quite frankly, it’s a function of the fact that it means more attractive propositions for our customers in terms of the product that we offer, but it also talks to the fact that our surplus portfolio obviously benefits from the repricing of our fixed income portfolio, and that just simply flows through. If you look at 2023, we saw about a $200 million pre-tax year-on-year benefit from higher rates.
This year, if rates stay where they are currently, it’s probably about a $40 million benefit in ’24 versus ’23, so it moderates a little bit because of the big impact that we saw and the big uplift that we saw in ’23. Largely, we have hedged our portfolio and reduced the volatility and the reliance on movement in rates or, quite frankly, even equity markets, but it still is a very big positive for us as we look forward, and that doesn’t include any of the benefits from our URR, which is our long term assumption, which again where we stand today in terms of the 30-year is significantly higher, at least in some jurisdictions versus the ultimate reinvestment rate. In summary, what I’d leave you with is we’re a beneficiary of higher rates.
We’re not expecting that rates are going to go much higher from here. We think that possibly the short end of the curve will come down a little bit, but the long end of the curve may be a little bit more sticky. If you think about this from a multi-decade perspective, rates at the long end, whilst a little bit higher than where they’ve been for the last couple of decades, are still from a historic perspective quite reasonable, so we think that that again will be a bit of a tailwind for our business, both in terms of the earnings but equally importantly from the perspective of the attractiveness of our products in the market. Steve?
Steve Finch: Yes, I’d just emphasize a couple of things. Roy commented on where we saw the benefit of higher rates coming through – that’s largely in the surplus portfolio. We do have very robust hedging programs, so we don’t like to take interest, large amounts of interest rate risk, so you won’t see it coming through the segments so much. But one other emphasis is the URR. I used to get questions all the time because our URR was above where the long term rates are, and that was a potential headwind for the company. Now it’s a potential tailwind if rates stay where they are, because in our major geographies, we have URRs that are now lower generally than the current long term rates.
Scott Hartz: Paul, it’s Scott. I’ll follow up on how it affects the ALDA portfolio. Interest rates do have an impact – you know, a small move in rates won’t really matter, but when we see pretty significant rate moves, it will have an impact. We saw this when rates came down – when rates came down, that did provide a bit of a tailwind to current valuations, but you may recall at that point in time, we actually reduced the future expected returns because if it’s simply discount rates coming down, that means you get it today but then the prospective returns are going to be lower, and we’re seeing the opposite result today with higher rates. We’re seeing some valuations come down, but our expected future returns are now higher, and these are assets are backing very long liabilities.
We intend to hold these and we’ll get that back in higher future returns. Now it affects different asset classes a little bit differently within our ALDA portfolio. Private equity is not much affected by long term rates – actually, short term rates matter more there because that’s how the underlying companies finance themselves, so I do think as Roy mentioned, we would expect short rates to come down in the future, and that will be a bit of a tailwind for private equity, whereas the longer term rates more affect the real estate portfolio. Those are the discount rates that are being used, and we are not really expecting those to come down much going forward. In fact, they’ve gone up by 50-plus basis points so far this year, and that represents a little bit of a continuing headwind on the real estate portfolio for the remainder of the year.
Paul Holden: Got it, that’s helpful. Thank you very much.
Operator: Thank you. The following question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca: First on the global minimum tax, Colin, would it be fair to say that we’ll start to see the increase in the Asia and wealth management tax rates as early as next quarter, and should we be sort of budgeting for something like 15% tax rate in Asia?
Colin Simpson: Hey Mario, good to hear from you. Yes, you’re right – it all depends on when GMT is substantially enacted in Canada, and so our expectation is Q2 and effective 1/1/24. If that happens, we’ll have a catch-up in the second quarter for both the first quarter and the second quarter. You highlighted Asia – that’s right. You can see from our effective tax rate that we pay a little lower than average tax in our Asian businesses, and that’s predominantly in Hong Kong, so you would expect those rates to creep up. As we said before, and actually on the last call, a good guide for our future effective tax rate range is about 17% to 22%.
Mario Mendonca: Okay. A slightly different question – for two quarters, in the last quarter we saw the change in CSM, the methodology change, this quarter we’re seeing a greater allocation of investment income, I believe to Asia and wealth management. Now, what I’m trying to get at here is the greater allocation of investment to Asia and wealth management, is this something that’s happened before or is this a first-time thing?
Colin Simpson: You’re right, and just to be clear, what you’re talking about is the allocation of surplus across the businesses. We carry out an exercise every year, once a year, and we look at overall surplus and we allocate it to each of the segments accordingly. Now, because yields have increased and actually certain businesses have got bigger, some businesses are getting bigger allocations than others. Because we do it at the start of the year, there is a bit of a lag, so you won’t obviously notice it in Q2, Q3, Q4, so Q1 seems a little more outsized. But it really reflects the yield environment and the change in size of the businesses, completely unrelated to the CSM, the off-cycle basis change that happened last quarter.
Mario Mendonca: Yes, I appreciate that they’re not related, but I connect them because in both cases, they actually put Manulife in a better light. What I’m asking is, do you expect any other changes of this nature, that either maybe allocate more income to the high growth segments or speed up the pace of CSM amortization, or anything else of that nature?
Colin Simpson: It’s an interesting question. I mean, I wouldn’t argue that it paints Manulife in a particularly better light because when I look at everyone’s valuation models, no one really looks at us on a sum of the parts valuation methodology, so I don’t view it as a way for us to improve the Manulife performance but we’re very proud of our Asia and our GUM [ph] performance. In terms of an outward looking perspective, there’s nothing on the horizon that you would expect of this nature or magnitude.
Mario Mendonca: Thank you.
Operator: Thank you. The following question is from Lemar Persaud from Cormark Securities. Please go ahead.
Lemar Persaud: Thanks. Bigger picture question here for my first one, and probably if I’m running the investor day. The core ROE has been a heavier target for the past four quarters. Is there some specific factor that you expect to cause Manulife to move back down to that target, or is the mid-16% ROE an appropriate way to think about this company now? Any thoughts would be helpful on that one.
