Earnings Call Transcript - MFC Q3 2025

Operator, Operator

Please be advised that this conference call is being recorded. Good morning, ladies and gentlemen. Welcome to the Manulife Financial Second Quarter 2025 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Ko. Please go ahead, Mr. Ko.

Hung Ko, Chairman

Thank you. Welcome to Manulife's earnings conference call to discuss our second quarter 2025 financial and operating results. As part of today's call, we'll also discuss our acquisition of Comvest Credit Partners that was announced yesterday afternoon. Our earnings materials as well as material related to the transaction, including the webcast slides for each respective presentation, are available on the Investor Relations section of our website at manulife.com. Before we start, please refer to the slides containing a caution on forward-looking statements and a note on the non-GAAP and other financial measures used in each of the respective presentations. Please note that certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from what is stated. Turning to Slide 4. We'll begin today's presentation with Phil Witherington, our new President and Chief Executive Officer, who will provide a highlight of our second quarter 2025 results and a strategic update. Following Phil, Colin Simpson, our Chief Financial Officer, will discuss the company's financial and operating results in more detail before we hand it over to Paul Lorentz, our President and CEO of Manulife Wealth and Asset Management, who will discuss the acquisition of Comvest Credit Partners. After their prepared remarks, we'll move to the live Q&A portion of the call. I would like to remind each participant adhere to a limit of two questions including follow-ups and to requeue if you have additional questions. With that, I'd like to turn the call over to Phil.

Philip James Witherington, CEO

Thanks, Hung, and thank you all for joining us today. It is an incredible privilege to lead this great organization and a responsibility that I take very seriously. Before we begin, I would like to take the opportunity to congratulate Stephanie Fadous on her appointment as Chief Actuary and welcome her to the executive leadership team. I would also like to congratulate Steven Finch on his new role as CEO for our Asia segment. Both Stephanie and Steve bring a wealth of experience to their new positions, and I look forward to working closely with them and the entire executive leadership team as we build on our success. As I'm also new to my role, over the past few months, I've been focused on engaging with and listening to our customers, colleagues, partners, analysts, and investors. I visited our offices in Waterloo, Montreal, Halifax, Boston, as well as spending time with Steve and our team in Asia. This has been an informative experience, allowing me to receive very insightful, constructive, and encouraging feedback about our organization. Throughout, I've had one goal in mind: further improving how we serve our customers, support our colleagues and the community, and generate greater value for shareholders. Let me share a few key takeaways from these engagements. First, our transformation efforts since 2017 have laid a solid foundation for our next chapter of growth. We have an incredibly attractive business profile with market-leading operations in some of the highest growth markets and significant synergies across our segments. Our leaders around the world are excited about not only sustaining performance but taking it to the next level. Second, we have made and continue to make tremendous progress on our digital ambition, reimagining the ways we interact with customers and embedding market-leading AI capabilities across our businesses. These efforts are contributing to both growth and increased productivity. Finally, I remain committed to investing in our businesses to deliver high-quality, sustainable growth for the benefit of all stakeholders, including the investor community. Our capital deployment priorities remain unchanged, and we have ample capacity given our strong cash generation and financial flexibility. And as we've said on previous calls, we will continue to deploy capital strategically, assessing inorganic opportunities for their ability to enhance our strategic capabilities or allow us to scale our business. That's why I'm excited that we have announced that Global WAM has entered into an agreement to acquire a 75% stake in Comvest Credit Partners for USD 937.5 million with a predefined path to acquiring the remaining 25% interest in 6 years. Comvest is a highly differentiated, rapidly growing middle market private credit manager with USD 14.7 billion on its platform. This acquisition will scale our private markets business and expand and enhance our existing private credit capabilities, driving future growth across each of our Global WAM lines of business. The acquisition will reduce our LICAT ratio by less than 3 percentage points and is expected to be immediately accretive to our core EPS, core ROE, and core EBITDA margin. This is an example of how we're deploying capital to enhance shareholder value, and it will not impact the pace of our share buyback program. Paul will provide additional color on this exciting update shortly. Moving to Slide 7. At our Investor Day in Hong Kong last year, we demonstrated confidence in our ability to sustainably grow the business. We announced bold but achievable targets to allow you to measure and track our progress. I remain confident that we have a clear and credible path to achieve these targets, and we're executing on our plans to reach them. In the coming months, our leadership team will complete a review of our strategy with a view to assessing where we might refresh it to deliver on our longer-term ambitions. I look forward to sharing the output of those discussions with you in due course. Moving on to our quarterly results on Slide 8. Our second quarter results reflect continued strong momentum in our business growth while highlighting the diversity of our global franchise. Our continued top line growth was particularly encouraging, with each insurance segment generating over 30% growth in new business CSM, a key indicator of future earnings growth. And Global WAM once again generated positive net flows. From a profitability standpoint, core EPS grew 2% from the prior year, which reflects strong underlying business growth, though it was dampened by elevated U.S. mortality and a provision in our expected credit loss. Colin will dive into these in a few moments. Our balance sheet remains strong and provides financial flexibility with a strong LICAT ratio of 136% and a leverage ratio that is well below our 25% target. And we continue to grow our book value per share, which increased 5% from the prior year while returning significant capital to shareholders. Overall, I'm pleased with the operating results we've delivered this quarter despite a challenging operating environment. I'm excited about the opportunities that lie ahead, and I'm confident in our ability to deliver high-quality, sustainable growth through a focus on meeting the needs and expectations of our customers and other stakeholder groups, including the investor community. With that, I'll hand it over to Colin to discuss our quarterly results in greater detail. Colin?

Colin L. Simpson, CFO

Thanks, Phil. The second quarter was a solid one for Manulife, where the strength and stability of our diversified global franchise helped us deliver resilient results despite some short-term earnings headwinds. I'm particularly encouraged by our continued top line momentum and strong underlying business growth in Asia, Canada, and our Wealth and Asset Management business. Let's start on Slide 10. Our continued top line growth reflects our strong business fundamentals, evidenced by double-digit year-over-year growth across APE sales, new business CSM, and new business value. Our APE sales increased 15% from the prior year, with more than 30% growth in both Asia and the U.S. The strong sales supported significant growth in value metrics, with 37% growth in new business CSM and 20% growth in new business value. In fact, each insurance segment delivered over 30% growth in new business CSM, which bodes well for our future earnings growth. Global WAM delivered another quarter of positive net flows at nearly $1 billion, demonstrating the strength of our diversified platform with institutional and retirement inflows partially offset by outflows in our retail business. I'll walk you through the key earnings drivers on Slide 11, comparing them to last year. Our insurance businesses continued to grow, with Asia and Canada driving impressive growth in insurance service results. However, this was offset by overall unfavorable insurance experience reported in earnings, which was mainly driven by the U.S., where we saw an elevated number of claims on large policies in our Life business. Given the nature of the business, there can be variability in large claims from time to time. Despite the magnitude of the charge this quarter, we believe it is normal claim volatility rather than an unfavorable mortality trend. Moving to our net investment result. Solid business growth in Asia was more than offset by a net charge in the expected credit loss or ECL provision. We continue to expect $30 million to $50 million of an ECL charge a quarter on average, though there can be variability. The charge this quarter was primarily related to certain below investment-grade loan investments in the U.S., and we do not see any extrapolation from this across the rest of our portfolio, particularly our investment-grade book, which represents 96% of our fixed income portfolio and continues to perform well. Given the benign credit environment last year and the resulting neutral ECL impact, the year-over-year comparison was elevated. Excluding the impact of ECL, our core earnings growth would have been 2% compared with the prior year. Global WAM continued to generate strong results, achieving its seventh consecutive quarter of over 20% growth in pretax core earnings and highlighting the strength of our global platform. Finally, I would also add that our two recent reinsurance transactions with RGA reduced core earnings by $20 million across multiple lines of the DOE. Turning to Slide 12. You'll note that core EPS increased 2%, reflecting the modest decline in core earnings and the impact of share buybacks. If you were to normalize for the impact of the higher ECL provision, core EPS would have grown 7% compared to the prior year quarter. We reported $1.8 billion of net income this quarter, an increase of $747 million compared to the prior year quarter, which included positive overall market experience, largely driven by a $217 million gain from higher-than-expected public equity returns. This was partially offset by a charge of $172 million in our ALDA portfolio from lower-than-expected returns. While ALDA experience improved from the prior quarter, we continue to see headwinds from lower-than-expected returns on commercial real estate and private equity investments, partially offset by strength in infrastructure. Turning to the segment results. We'll start with Asia on Slide 13. Our high potential Asia segment continued to generate strong growth across all new business metrics. APE increased 31% from the prior year, led by broad-based growth in Hong Kong across all distribution channels, alongside strong contributions from Mainland China and Singapore within Asia Other. The overall increase in sales contributed to significant growth in value metrics with new business CSM and new business value increasing 34% and 28%, respectively. And while new business value margin was approximately in line with the prior year quarter, it increased 1.9 percentage points quarter-on-quarter, driven by expansion in Asia Other and Japan. We also generated a 13% year-on-year growth in core earnings in Asia, reflecting continued business growth momentum and favorable claims experience, partially offset by strength in ECL provisions. Over to Global WAM on Slide 14. Global WAM had another great quarter with a strong 19% growth in core earnings. This was again supported by higher average third-party AUMA, higher performance fees, and our ongoing focus on expense management. We delivered positive net flows for the quarter of nearly $1 billion, reflecting the continued strength and diversity of our platform. Strong inflows in institutional and across all regions in retirement were partially offset by net outflows in our retail business, primarily in North American intermediary. We again generated positive operating leverage with a core EBITDA margin of 30.1%, which expanded 380 basis points from the prior year or 170 basis points sequentially, reflecting the impact of our proactive expense management. One of the key drivers of margin expansion has been expense management, some of which has been taken in advance of our upcoming transition to the new eMPF platform in Hong Kong later this year. We expect our core EBITDA margin to decline post transition and then grow in line with the targets set out for Investor Day. This new platform, which will see the Mandatory Provident Fund Schemes Authority take on increased administrative responsibilities, ultimately centralizes and digitizes all eMPF schemes, reducing the fees earned. Currently, the MPF schemes authority has successfully onboarded more than half of the trustees in the market, and we are expecting to commence our transition during the fourth quarter of this year. Assuming our transition proceeds as planned, starting in the fourth quarter of this year, we expect to see some impact to core earnings in our retirement business, with the full quarterly run rate impact of approximately USD 25 million beginning in the first quarter of 2026. We're committed to the market. And given our scale and unique capabilities, the MPF business continues to be an attractive business for our Global WAM franchise. Next, we head over to Canada on Slide 15, where we delivered solid results during the quarter. APE sales decreased 34% from the prior year, which reflects strong double-digit growth in our individual insurance business, primarily due to higher par sales, but this was more than offset by the nonrecurrence of a large case sale in our group insurance business in the prior year. As there is no CSM on our group insurance, our individual insurance sales drove very strong new business CSM growth of 32% year-on-year. Core earnings increased by 4%, thanks to the continued growth in our group insurance business and higher investment spreads. However, this was partially offset by the nonrecurrence of a release in ECL provision in the prior year and, to a lesser extent, the impact of the RGA Canadian universal life reinsurance transaction. Lastly, our U.S. segment's results on Slide 16. In the U.S., we delivered strong APE sales growth of 40%, with the demand for accumulation insurance products from affluent customers remaining firm. We also generated strong growth in new business CSM and new business value of 59% and 12%, respectively. Core earnings decreased 53% from a year earlier due to unfavorable mortality experience in our life business, lower investment spreads, as well as strengthened ECL provisions. While the U.S. core earnings are undoubtedly disappointing this quarter, as I noted earlier, we view the claims experience and ECL impacts as short-term headwinds that do not represent a trend. We remain confident in the U.S. segment's ability to deliver steady earnings given the strong growth in our new business metrics this year. Bringing to our book value on Slide 17. You can see we are continuing to grow our adjusted book value per share with 7% growth from the prior year quarter to $35.78, even after returning over $6.4 billion of capital to shareholders through dividends and share buybacks over the past year. On a stand-alone quarter basis, we returned nearly $1.4 billion of capital to shareholders, including both dividends and share buybacks during the period. You'll notice our book value per share declined modestly quarter-on-quarter, but the majority of this was attributed to the currency translation of foreign operations, which does not reflect the fundamental performance of our business. It's worth noting the year-over-year impact of changes in foreign exchange is largely immaterial as the strengthening of the Canadian dollar this quarter reversed the depreciation we saw late last year. Slide 18 provides an overview of our robust balance sheet. Our LICAT capital ratio remained strong at 136%, and our financial leverage ratio was 23.6%, continuing to stay well below our 25% medium-term target. Despite the heightened market volatility we've seen this year, I'm encouraged that these metrics continue to reflect our strong financial resilience, underpinned by our strong balance sheet, providing ample flexibility in navigating an evolving macroeconomic environment. And finally, on Slide 19, you will see the overview of how we're tracking against our 2027 and medium-term targets. In summary, while some short-term headwinds impacted our core earnings growth this quarter, I'm proud of our overall financial performance, supported by our top line momentum across all of our segments, demonstrating the strength and diversity of our underlying business. As Phil highlighted earlier, we remain focused on executing against our targets, and I'm confident that we're well positioned to continue to deliver through the economic cycle and sustainably grow our business. I will now pass it over to Paul to discuss our acquisition of Comvest Credit Partners in more detail. Paul?

Paul Raymon Lorentz, President and CEO, Global WAM

Thanks, Colin. As you highlighted, Global WAM delivered another strong set of results this quarter, a continuation of our tremendous growth. At our Investor Day last year, we highlighted how scaling our alternatives platform is one of our key value drivers, which is why I'm thrilled to announce our acquisition of Comvest Credit Partners. Let me share with you a few of the highlights. First, the transaction will scale and enhance our private markets business, adding highly complementary private credit capabilities and when aligned with our existing direct lending business results in a world-class private credit manager with USD 18.4 billion on the platform. There's significant demand for private credit products today, and by leveraging our global distribution capabilities, we see a significant opportunity to provide our 19 million clients across our retail, retirement, and institutional channels with Comvest's best-in-class products. Second, Comvest has a differentiated rapidly growing private credit platform, which has delivered strong risk-adjusted returns for investors through the cycle and is a strong strategic fit for our existing credit business. While we are primarily focused on sponsor-backed lending, almost half of Comvest's fee-paying AUM is deployed to nonsponsor-backed direct lending opportunities, providing us with a go-to-market ready platform that we can offer to third-party investors. Third, Comvest is a strong cultural fit, and our interests are fully aligned. Comvest employees will retain a 25% interest, allowing them to participate in the future value creation of the firm, and their management team will continue to manage the daily operations and investment decisions. Looking forward, we have a predetermined path to full ownership in 6 years. Finally, this transaction creates value for shareholders as it is immediately accretive to core EPS, core ROE, and core EBITDA margin while providing a source of predictable capital-light recurring fee revenue for our Global WAM franchise. Moving to the next slide. Founded in 2006, Comvest Credit Partners has a deep history of providing debt capital to the market with a focus on non-institutionally controlled businesses. Their product offering has resonated with the market, and Comvest has a track record of achieving remarkable growth, compounding fee-paying AUM at an annual rate of 50% since 2020. They have been able to consistently raise flagship funds that are successively larger, and their current flagship fundraising round is on track to nearly double their previous fund. These efforts are underpinned by a measured underwriting process, allowing them to effectively manage downside risk. We are thrilled to have such an exceptionally talented team join Manulife and are energized to work to jointly grow the business together, which takes me to the next slide. This deal immediately scales our private credit capabilities, creating a world-class credit manager, resulting in nearly USD 100 billion on our private markets platform. Comvest's focus on nonsponsored-back lending complements both our existing private credit business and the recently acquired semi-liquid credit strategies managed by CQS, allowing us to provide a broad range of credit solutions to our clients. With minimal investor overlap on the aligned platform, and given Comvest has been primarily focused on North America when raising capital, our scale distribution globally and strong presence in Asia create meaningful upside for our private markets business. On to the next slide. This transaction offers extensive benefits to both Global WAM and Manulife. On the asset management side, the transaction instantly strengthens our platform by offering access to deal origination, underwriting infrastructure, and a more diversified set of client solutions, which will allow us to attract both new clients and potential strategic partners going forward. We will also be able to leverage our distribution to offer credit solutions across our retail, retirement, institutional, and insurance affiliate channels globally. In closing, I'm incredibly excited about this opportunity and look forward to welcoming the Comvest team. We believe that combining Comvest's existing offerings, investment expertise, and strong track record with Manulife's extensive private equity-sponsored network, operating presence, and financial resources will create significant value for both firms. We are seeing growing demand for private assets and are uniquely positioned to meet our customers' needs, and with the transaction being immediately accretive to core EPS, core ROE, and core EBITDA margin, we are supporting our growth ambition and delivering value for shareholders. More details on the transaction are available on our website. With that, this concludes our prepared remarks. Operator, we will now open the call to questions.

Operator, Operator

The first question is from John Aiken from Jefferies.

John Aiken, Analyst

Paul, I guess, congratulations on the Comvest acquisition, looks very intriguing. Can you just remind me what other areas you may want to bulk up in your operations, whether it's organically or inorganically like you've done with Comvest? What other areas or strategies do you want to increase or improve upon?

Paul Raymon Lorentz, President and CEO, Global WAM

Yes. Thanks, John. It's Paul here. Yes, thanks for the congratulations. We're super excited about the transaction. I just think there's a tremendous fit as we outlined on the call. In terms of capabilities, I guess I'd start with what I shared at Investor Day is we feel really good just about the organic opportunities of what we have today. We've got a very broad platform across liquids, public privates. We're one of the few firms that have on-the-ground people in terms of a lot of the Asia-specific strategies, which differentiates us. And then with CQS and Comvest, it really builds out some of the credit side of our privates platform and alternatives platform. In addition, we already have strong capabilities within that private markets platform, whether it's our timber business, whether it's our infrastructure business. We've got a real estate team. So we feel we have a lot of the capabilities, and our focus is on organic. But we are continuing to look at where there are opportunities that could accelerate that, where are opportunities where we can add aspects to our business to accelerate the organic growth. And I think this is a good example. This is a firm that has been self-sufficient. They're raising third-party capital without the need of a large company like ourselves. And when we bring the two together, it not only enhances our platform, but we have expanded distribution, but there are real synergies between the businesses and, more importantly, a culture and alignment set. So we're very excited about the opportunities here and really just look forward to moving to close and seeing the value we can create for end investors.

John Aiken, Analyst

That's fantastic. And just one quick follow-on. Colin, your commentary around the impact of the eMPF, MPF. You said USD 25 million. Was that annual? Or was that quarterly?

Colin L. Simpson, CFO

John, yes, it's USD 25 million a quarter.

Tom MacKinnon, Analyst

With respect to GWAM margins, I think, Colin, you said that they will decline and then increase. I think you have a 30% target for 2027? Maybe you can give us a little bit more color as to what you see the GWAM margins declining to and then increasing to?

Paul Raymon Lorentz, President and CEO, Global WAM

Tom, it's Paul here. I'll take that one. So in terms of the margins, the transition to eMPF, while we didn't have the exact timing, was considered in terms of the targets we shared at Investor Day. So we've always kind of anticipated this drop and then growing back forward. And I think the fact we've achieved the 30% this quarter, hopefully, for us, gives us a lot of confidence that we're on the right track. In terms of the impact as we shift to the centralized provider, we would expect an impact on margin of about 150 basis points approximately, and then we would expect to grow from there. But if you just look at how much we've grown the margin just over the last year, just in terms of market growth, positive flows, and then prudent expense management, we feel very confident that we can achieve those objectives we set out.

Tom MacKinnon, Analyst

It seems that you're planning to revise the core definition by excluding the amortization of intangibles acquired in business combinations. I assume this is related to the Comvest acquisition, which will have some of that. Could you share what the current amortization of intangibles from acquired business combinations is and what the impact was this quarter?

Colin L. Simpson, CFO

Yes, you're correct. We are shifting the amortization of acquired intangibles below core earnings, which aligns with the practices of others both in our sector and beyond. Currently, we have very little amortization of acquired intangibles impacting core earnings, which is why you won't notice a significant effect. The Comvest acquisition is expected to contribute around $30 million to that figure, and you will begin to see that reflected in non-core after the close.

Tom MacKinnon, Analyst

That's $30 million annually?

Colin L. Simpson, CFO

$30 million annually, yes.

Tom MacKinnon, Analyst

Okay. Can you share more details about the Comvest deal being immediately accretive? Specifically, could you provide any additional metrics, dollar amounts, or percentages for 2026 or 2027?

Colin L. Simpson, CFO

Yes. I think the best way to look at this is that the acquisition is in line with industry multiples at mid-teen EBITDA multiples. That translates to roughly $0.02 to $0.03 of core EPS accretion.

Tom MacKinnon, Analyst

Okay. Annually, I assume that again.

Colin L. Simpson, CFO

Again, annually and forward from 2026 onwards.

Gabriel Dechaine, Analyst

Yes. Let's focus on that acquisition. I wanted to confirm if the $0.02 to $0.03 of accretion per year is the correct figure.

Colin L. Simpson, CFO

Yes.

Gabriel Dechaine, Analyst

So, I mean that's a small percentage. I mean what's the justification? My real question here is you can just use that money to buy back stock and get substantially more accretion that way. I'm just wondering what the future outlook is like for that figure?

Philip James Witherington, CEO

Gabriel, this is Phil. Thanks for the question. On the acquisition of Comvest, I think it's really important to highlight that strategic and intentional allocation of capital towards our highest opportunity growth businesses is critical. And that's exactly what we're doing with this acquisition. For many years, we have identified GWAM as a high opportunity growth business. And then, as Paul said in his remarks at Investor Day last year, we had identified private markets as a sweet spot within Global WAM. And then within private markets, private credit is a fast-growing and in high demand strategy from our clients. And so this is not only about the accretion that occurs in year 1, which is robust. But then, it's the growth that will arise over time. And I feel very optimistic about the impact that Comvest will have in scaling our existing successful private credit platform into something that is relevant to each of our Global WAM lines of business. In terms of other comments on the transaction, I might hand over to Paul actually to find out his perspective.

Paul Raymon Lorentz, President and CEO, Global WAM

Maybe just 2 things to add. The first would be if you just look at the market, this is a market that's expected to double in the next 4 to 5 years in terms of potential opportunity to Phil's point. And if you just look at the track record of Comvest, they've grown their fee earning AUM by a CAGR of 50% since 2020. So this is a very fast-growing business. So I think point in time versus future value and making the platform stronger for investors is really what you need to look at here.

Gabriel Dechaine, Analyst

Okay. I'm sure we can talk about it some more in the future. But in the meantime, your Asia segment had another very strong quarter for sales. And just wondering about, there will be some tougher comps going forward, which will affect that. But the Hong Kong regulator put in some caps on return illustrations or illustration of returns. I'm wondering what Manulife's approach has been vis-a-vis those new caps and if there's maybe a potential impact on your sales going forward?

Steven Andrew Finch, CEO, Asia

Thanks, Gabe. It's Steve here. Yes, we're really pleased to see the broad-based sales momentum continue in Asia. In Q2, APE was up 31%, and NBV and NB CSM increased by 28% and 34%, respectively. As you mentioned, the comparisons will be tougher moving forward. We did see a noticeable increase in sales starting in Q2 last year, particularly in Q3, so the year-over-year growth will face more significant challenges ahead. Regarding the Hong Kong regulation you mentioned, there is a sales cap on our products that took effect on July 1 of this year. This cap applies at the time of sale and does not affect how much the industry can pay out over time. Therefore, we don't anticipate any material impact to Manulife from this regulation. Our products are not significantly affected by the sales cap, and we've experienced similar regulations in other markets globally.

Gabriel Dechaine, Analyst

Okay. So you don't have to suddenly show that the illustrations aren't as promising or exciting for sales. There's not a significant difference between what you were promoting and what you can promote moving forward.

Operator, Operator

The next question is from Doug Young, Desjardins Capital Markets.

Doug Young, Analyst

Just back to the acquisition of Comvest. Yes, I guess the comments, when I originally saw it in the comments that I've heard is that strategically, it looks like it makes sense, the valuation looks rich. And you've given some good statistics here. But maybe, Paul, how would you defend the valuation that you paid, the valuation multiple, whether it's on AUM, percentage of AUM, or EBITDA? How would you defend that in terms of what you paid for this business?

Paul Raymon Lorentz, President and CEO, Global WAM

Thank you for the question, Doug. It highlights the future value we anticipate from this acquisition and our shared interest with Comvest. We believe that together, our firms can generate significant value. Consider how quickly they have scaled their platform, primarily in the U.S. market, which indicates their ability to provide strong returns for investors. With our expanding reach in Asia, we see a significant opportunity to extend these capabilities there. Additionally, there has been considerable discussion around alternative investments, particularly within retail and retirement, and we have a global platform that will support future distribution for these and other capabilities, benefitting investors. By aligning our senior loans business, we can enhance our operations, allowing these teams to pursue larger deals in the market efficiently. We continue to identify more opportunities, with minimal overlap between our businesses, presenting a promising potential for revenue synergies as we move ahead.

Philip James Witherington, CEO

And Doug, this is Phil. If I could just add as well. Our bar when it comes to inorganic capital deployment is high. And as well as the strategic relevance that we had called out earlier, the bar is high when it comes to the value-generation criteria as well as our ability to execute. And while we look at a good number of potential acquisition opportunities, we walk away from many of them. And the situation with Comvest is that it satisfied all of those criteria. And there were multiple intangible factors as well, such as the talent within the team, the cultural fit with the organization, the synergy with our existing private markets capability, and the opportunity to create further synergies through the deployment of these strategies in our GWAM lines of business around the world. So I wouldn't just look to accretion in year 1 to see the financial significance of this one. I think it's highly relevant to GWAM's future performance. And it's accretive to the targets that we had laid out.

Doug Young, Analyst

And then just maybe a final detail. Are you buying carried interest on the existing or just the new filings? I'm just trying to think of the economics here.

Paul Raymon Lorentz, President and CEO, Global WAM

Yes, it's Paul here, Doug. Regarding that, carried interest is excluded from the incentives. If you examine the earnings going forward, most of it will come from management fees and annual incentive fees related to carry. It's not as significant in this business compared to some other businesses you might know.

Operator, Operator

Next question is from Paul Holden, CIBC.

Paul David Holden, Analyst

Another question on Comvest. So I get the EPS accretion and maybe the ROE hurdling over the medium term. We also stated that ROE accretion is expected to be positive immediately. I'm just kind of wondering if you could help me wrap my head around that math.

Colin L. Simpson, CFO

Paul, it's Colin. Yes, it's quite simple, really. We're using existing resources. Currently, our surplus earns about 2.8%. So if you take surplus of roughly USD 1 billion and 2.8%, and we swap that for an acquisition of Comvest, which will earn more than that. You can see that it's immediately accretive.

Paul David Holden, Analyst

Okay, okay. So you're talking about, okay, ROE versus ROI on the investment itself?

Colin L. Simpson, CFO

Yes, we're talking about ROE as a company basis, not talking about the ROI of the lifetime of the business.

Philip James Witherington, CEO

Yes, this is Phil. Just to supplement, Paul, Comvest is an existing at-scale platform that is profitable. So we're actually buying into an earnings stream. And it's not just accounting earnings; it's cash-generative fee income that generates remittances. So I think there are multiple financial angles that the transaction satisfies.

Mario Mendonca, Analyst

Can we just go to one sort of a specific question around the U.S. because of the reinsurance transactions, the risk adjustment release, the CSM, the expected investment earnings have all trended down. I think I understand why. Where I'm going with this now is at Q2 '25 this current quarter, are we pretty much now steady state? Or should we see further declines in those 3 lines going forward?

Brooks Eric Tingle, Analyst

Mario, it's Brooks. Thanks for the question. I would look at Q1 of this year for a general frame on steady state post all of that activity that you mentioned. And frankly, if you look at the difference between Q1 and Q2, the big drivers were this unusual variability in large claims in ECL. So I would point to Q1 '25 in that regard.

Mario Mendonca, Analyst

So those 3 lines that have historically been impacted by the reinsurance transactions were done unless, of course, you do more reinsurance transactions.

Colin L. Simpson, CFO

Yes. Sorry, Mario, it's Colin here. Just to bear in mind, we still have the impact of the latest RGA, LTC transaction to come through, but that was very modest, and it's $70 million for the full year.

Lemar Persaud, Analyst

I want to come back to the credit losses and the spike this quarter from these below investment-grade loans. Was there a specific sector that drove this loss? What was special about Q2 that caused these losses in the quarter? It's just a bit peculiar, given some of the large banks we are talking about how kind of credit is evolving more positively than expected relative to expectations. So to see deterioration from you guys this quarter kind of begs the question as to why.

Trevor Kreel, Analyst

Thanks for the question, Lemar. The $82 million post-tax charge this quarter was indeed higher than what we saw in the first quarter and in recent periods. We have enjoyed a strong credit experience over many years, and our portfolio remains 96% investment grade. However, credit losses tend to be quite variable, leading to quarterly fluctuations, particularly within our relatively small investment-grade portfolio. Looking at the Q2 results over the past three years, we are at the lower end of our guidance of $30 million to $50 million per quarter that we've discussed previously. Specifically for Q2, most of the additional impact came from U.S. credit experience, primarily related to a few below investment-grade loans and mortgages. Furthermore, significant growth in our overall balance sheet invested assets contributed to an increase in the expected credit losses. Analyzing the charges reveals they were concentrated in a few names, with no common themes to address. We've seen some legacy office mortgage exposures that were written down and faced some business-specific issues, but again, there's nothing significant to highlight, and our broader portfolio is actually performing well. Regarding the outlook, which is at the core of your question, quarter-to-date has been less volatile, yet it's still a bit early to make definitive predictions. The portfolio remains in strong condition at 96% investment grade, and we continue to believe that a quarterly run rate of $30 million to $50 million is appropriate. So, I have no substantial concerns. Thanks again for the question.

Lemar Persaud, Analyst

It'd be appropriate to stick to that kind of $30 million to $50 million with volatility. That's kind of the bottom line?

Trevor Kreel, Analyst

Yes. Yes, exactly.

Gabriel Dechaine, Analyst

Just continuing along the lines of the questioning on this call, it sounds like there's a big growth in cross-sell opportunity. Paul, I'm wondering if there's anything you could do to quantify those revenue synergies just to wrap our heads around the price? Because it seems like that's really the bottom line, big opportunity here. So anything you could offer just to put some numbers to that would be helpful.

Paul Raymon Lorentz, President and CEO, Global WAM

Yes. Thanks for the question, Lemar. I don't have any numbers I'm going to share today, but I would say that we're very optimistic. We're not going to wait for the transaction to close to start thinking of those opportunities and getting the teams together so that we can hit the ground running. But once it closes and we start reporting on results, we can share how that progress is working and how that's comparing to our expectations.

Operator, Operator

Next question is from Mario Mendonca, TD Securities.

Mario Mendonca, Analyst

Can we just go to one sort of a specific question around the U.S. because of the reinsurance transactions, the risk adjustment release, the CSM, the expected investment earnings have all trended down. I think I understand why. Where I'm going with this now is at Q2 '25 this current quarter, are we pretty much now steady state? Or should we see further declines in those 3 lines going forward?

Brooks Eric Tingle, Analyst

Mario, it's Brooks. Thanks for the question. I would look at Q1 of this year for a general frame on steady state post all of that activity that you mentioned. And frankly, if you look at the difference between Q1 and Q2, the big drivers were this unusual variability in large claims in ECL. So I would point to Q1 '25 in that regard.

Mario Mendonca, Analyst

So those 3 lines that have historically been impacted by the reinsurance transactions were done unless, of course, you do more reinsurance transactions.

Colin L. Simpson, CFO

Yes. Sorry, Mario, it's Colin here. Just to bear in mind, we still have the impact of the latest RGA, LTC transaction to come through, but that was very modest, and it's $70 million for the full year.

Lemar Persaud, Analyst

I want to come back to the credit losses and the spike this quarter from these below investment-grade loans. Was there a specific sector that drove this loss? What was special about Q2 that caused these losses in the quarter? It's just a bit peculiar, given some of the large banks we are talking about how kind of credit is evolving more positively than expected relative to expectations. So to see deterioration from you guys this quarter kind of begs the question as to why.

Trevor Kreel, Analyst

Thanks for the question, Lemar. The $82 million post-tax charge in this quarter was indeed higher than what we experienced in Q1 and in recent times. We have had strong credit performance for many years, and our portfolio remains 96% investment grade. However, credit losses tend to be quite variable, which can lead to quarterly fluctuations, especially given the relatively small size of our investment-grade portfolio. Over the last three years, our Q2 results fall at the lower end of our previously communicated guidance of $30 million to $50 million per quarter. Specifically regarding Q2, most of the additional impact stemmed from U.S. credit performance, primarily affecting a few below investment-grade loans and mortgages. We also experienced significant growth in our overall balance sheet invested assets, contributing to a reasonable increase in expected credit losses. Looking into the reasons behind those charges, they originated from a few specific names with no overarching themes. We noted some legacy office mortgage exposures that were slightly written down and some unique business-related issues, but nothing that affects the broader portfolio, which continues to perform well. As for the outlook, it has been relatively stable so far this quarter. However, it might be premature to predict how things will evolve. The portfolio is in good condition, still at 96% investment grade, leading us to believe that a quarterly run rate of $30 million to $50 million continues to be appropriate. I have no significant concerns at this moment. Thank you for your question.

Lemar Persaud, Analyst

It'd be appropriate to stick to that kind of $30 million to $50 million with volatility. That's kind of the bottom line?

Trevor Kreel, Analyst

Yes. Yes, exactly.

Operator, Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.