Earnings Call Transcript
MANULIFE FINANCIAL CORP (MFC)
Earnings Call Transcript - MFC Q4 2023
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the Manulife Financial Fourth Quarter and Full Year 2023 Financial Results Conference Call. I would now like to turn the meeting over to Mr. Ko. Please go ahead, Mr. Ko. Thank you. Welcome to Manulife's earnings conference call to discuss our fourth quarter and full year 2023 financial and operating results. Our earnings materials, including webcast slide for today's call, are available on the Investor Relations section of our website at manulife.com. Turning to Slide 4. We'll begin today's presentation with a highlight of our full year results and strategic update by Roy Gori, our President and Chief Executive Officer. Following Roy's remarks, Colin Simpson, our Chief Financial Officer, will discuss the company's financial and operating results in more detail. After the prepared remarks, we'll move to the live Q&A portion of the call. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 43 for a note on the non-GAAP and other financial measures used in this presentation. Note that certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from what is stated. With that, I'd like to turn the call over to Roy Gori, our President and Chief Executive Officer. Roy?
Roy Gori, President and CEO
Thanks, Hung, and thank you, everyone, for joining us today. Yesterday, we announced our fourth quarter and full year 2023 financial results. As you can see, our strategy and disciplined focus on execution are delivering even in uncertain market conditions. We generated double-digit top line growth with a record APE sales during the year. While Global WAM delivered another year of positive net inflows despite challenges in the retail fund market, that is the 13th year of positive inflows in the past 14 years. Core EPS grew 17%, supported by strong core earnings growth and the impact of share buybacks. Our core ROE increased to 15.9%, achieving our medium-term target. We delivered robust growth of 9% in adjusted book value per share, and our strong LICAT ratio of 137% and low leverage ratio provide ample financial flexibility. Turning to Slide 7. Today, we're a very different company from when we began our efforts to reshape our portfolio towards lower risk and higher returns, and 2023 was also a milestone year in that transformation journey. As part of that agenda, we further grew our highest potential businesses. In Asia, we saw double-digit growth across key new business metrics. We are a high-growth top 3 Pan-Asian life insurer. In Global WAM, we acquired CQS whose multisector alternative credit capabilities complement our existing fixed income and multi-asset solutions business and are a powerful addition to our global credit offering. We also generated remittances of $5.5 billion and returned $4.3 billion of capital to shareholders through dividends and share buybacks. And I'm pleased to tell you that yesterday, our Board approved a 9.6% increase in our common share dividend beginning in March. But first, it goes without saying that meeting our customers' needs and expectations is at the core of what we do. We've sped up our processing times, reduced costs and improved the customer experience. As a result of these and other actions, we've seen a 22-point increase in our Net Promoter Score since 2017, and we are leading or on par with our peers across the majority of our business lines. And none of this would be possible without our winning team and culture, and I'm proud that for the fourth consecutive year, we achieved top quartile employee engagement results. Finally, we ended the year with a significant milestone in our transformation journey, the announcement of the largest ever LTC reinsurance deal, which I'll touch on in the following slide. You'll remember that in December, we announced the milestone LTC transaction. We transacted at attractive terms, derisked our business and it will be accretive to core EPS and core ROE after deploying the capital released to share buybacks. The transaction, which we expect will close by the end of February, also contributes to establishing an active LTC reinsurance market. It's another example of the value we continue to unlock for shareholders as we reshape our portfolio to focus on lower risk and higher return businesses, and we aren't stopping here. We continue to work on opportunities to create shareholder value through organic and inorganic actions across our legacy and low ROE businesses. Moving to Slide 9. Our transformation journey began in 2018 when we started reshaping our businesses by reducing risk, improving ROE, strengthening capital, and growing high-return businesses. Thanks to disciplined execution, today, our high-return businesses represent a larger share of our earnings. These are impressive results considering that the transition to IFRS 17, which defers the recognition of new business gains into CSM resulted in a 2 percentage point reduction in 2022. In fact, Asia already represents over 60% of our CSM balance and 70% of our new business CSM, indicating its immense future earnings potential. And as we've changed our business mix over this time, we've significantly expanded our core ROE by almost 5 percentage points. We've also taken significant actions to reduce risk, including our US variable annuity reinsurance transactions in 2022. Our portfolio optimization actions, along with growth in our highest potential businesses, have reduced the core earnings contribution from LTC and VA significantly from 24% in 2017. And together with December's LTC transaction, this contribution is expected to further decrease to 11%. Returning capital to shareholders remains a priority. And since 2018, we've returned $18.9 billion through dividends and share buybacks. Those buybacks have generated a benefit of more than $1.3 billion as our average repurchase costs were well below our recent share price levels. In closing, I'm excited by the progress that we've made and by our momentum heading into 2024. Our unique and diverse geographic footprint, all-weather strategy, and focused execution position us well to continue delivering superior value. Given our strong capital position and cash generation, we will continue to look at opportunities to unlock shareholder value, including inorganic opportunities to deploy capital. I'll now hand it over to Colin to review the highlights of our financial results. Colin?
Colin Simpson, CFO
Thanks, Roy. 2023 was indeed a milestone year for Manulife, marked not only by strong business performance and the announcement of a major reinsurance transaction but also a smooth transition to IFRS 17. We continue to deliver strong growth in new business metrics, earnings, and adjusted book value, and the fourth quarter contributed to that momentum. I'll go into a little more detail on the quarter's results before the Q&A. I'll start with our top line on Slide 11. Our fourth quarter APE sales increased 20% from the prior year with double-digit growth across each of our insurance segments. This increase was supported by the ongoing benefit of the return of demand across various markets in Asia, high large and midsized group insurance sales in Canada, and a rebound in demand from affluent customers in the US. The momentum in our sales growth contributed to strong increases in new business CSM and new business value of 41% and 20% respectively. Global WAM saw modest net outflows of $1.3 billion due to a large case pension plan redemption in our US retirement business. On a full year basis, we generated net inflows of $4.5 billion, which is creditable in a year in which investors kept money on the sidelines, benefiting from higher short-term interest rates. I'm proud of the growth we've achieved across our new business metrics compared to 2022 despite the uncertain economic conditions, which is testament to the strength of our global and diverse portfolio of businesses. Turning to Slide 12, which shows the growth in our profit metrics. Core EPS increased 20% as we grew core earnings and reduced share count. Looking at this quarter's results, we delivered a core ROE of 16.4%, above our medium-term target of 15% plus for the third consecutive quarter. Driving up ROE is a key priority, and our recent milestone reinsurance transaction did exactly that. You should expect us to continue evaluating in-force opportunities to improve our return on equity. When we transition to IFRS 17, we noted we expect to see more stable growth in our adjusted book value per share as it better aligns with the economics of our business. And Slide 13 demonstrates just that. A 9% increase over the year or 13% after excluding the effect of foreign exchange rate movements in adjusted book value per share to $32.19. A key driver of the CSM growth this quarter was an update to actuarial methods and assumptions. We targeted a risk adjustment for non-financial risk that is calibrated to a 90% to 95% confidence range, which is conservative relative to peers. We have been trending towards exceeding the top end of this range. And so during the quarter, we recalibrated our risk adjustment towards the midpoint of this range. This had the impact of increasing the CSM and reducing the risk adjustment, which still sits at $18.5 billion. We will continue to monitor risk adjustment target levels across the industry and expect these to converge over time. More information is available in the appendix of this presentation. Bringing you back to our core earnings results on Slide 14, I'd like to call out some of the highlights of the drivers of earnings analysis, focusing on the quarter relative to the prior year. There were three main drivers of the increase in core net insurance service results. Expected earnings on insurance contracts increased across each insurance segment, led by Asia, which benefited from the impact of basis changes in the third and fourth quarters. Secondly, business growth in our group insurance and affinity markets businesses in Canada improved our net insurance results. And lastly, our insurance experience was favorable due to a nearly $60 million release of provisions held in our P&C reinsurance business for catastrophes from prior years, mainly relating to Hurricane Ian. These factors contributed to a 25% increase in core net insurance service result. In terms of our core net investment results, we continue to see the benefits of higher interest rates and business growth year-on-year. We reported no increase in our expected credit loss provision over the quarter, which has improved investment results somewhat. Towards the bottom of the table, you'll see that Global WAM was a notable contributor to the results, supported by higher average AUMA. These factors were partially offset by higher performance-related costs included in other core earnings, along with an increase in certain corporate costs. Our market experience for the quarter saw offsetting impacts that resulted in a modest net charge and $114 million gap between core earnings and net income. We reported a $381 million charge from lower-than-expected returns on ALDA, largely reflecting the ongoing pressure on commercial real estate due to increasing cap rates, but this was partially offset by $182 million gain due to higher-than-expected public equity returns during the quarter. Our multiyear track record in ALDA as shown in the appendix is a testament to our strong capabilities in managing these assets and supports our long-term return assumptions. You will also see a positive contribution to net income from the basis change that I mentioned on the previous slide. The next few slides will cover the segment view of our results, starting with Asia on Slide 16. Both top and bottom line performance were once again strong. APE sales increased 11% from the prior year quarter as we continue to capitalize on the return of demand from MCV customers. The increase in sales contributed to a 27% and 5% growth in new business CSM and NBV, respectively. We delivered strong core earnings growth of 14% year-on-year with a meaningful increase in the contribution from Hong Kong, our largest in-force business. We have made great progress shifting our portfolio towards our higher potential businesses of Asia and Global WAM, but the combination of the pandemic in IFRS 17, which has changed Asia's earnings profile, has led us to extend our target for Asia region to make up 50% of total core earnings by 2025 by two years. Moving over to Global WAM's results on Slide 17. We recorded modest net outflows of $1.3 billion for the quarter. This was due to a large client redemption in US retirement. We also saw elevated retail mutual fund redemption rates in Canada, but this was offset by continued strong inflows in our institutional business. Excluding the large case redemption during the quarter, we generated net inflows of $1 billion. The business also delivered strong core earnings supported by higher average AUMA, which increased 5% year-on-year, along with higher fee spreads and a lower effective tax rate. Also of note, severance costs related to restructuring announced during the quarter are excluded from core earnings and will generate expense saves beginning in 2024. Heading over to Canada on Slide 18. We delivered another strong quarter of new business and profit metrics. APE sales increased 44% year-on-year, primarily due to higher large and also might add the highest on record mid-case sales in our group insurance business, which were also the main contributors to our growth in new business value of 60%. Core earnings increased 19%, mostly driven by business growth and a lower ECL provision as well as more favorable insurance experience in our group benefits business. Moving to Slide 19 on our US segment's results. In the US, higher APE sales were driven by a rebound in demand from our affluent customers, which contributed to strong NBV and new business CSM results. Our US business delivered strong core earnings, which increased 16% year-on-year, mainly reflecting higher yields and business growth as well as improved insurance experience. On to Slide 20 and our balance sheet. We ended the year with a strong LICAT ratio of 137%, which was $22 billion above the supervisory target ratio. Our financial leverage ratio declined by 0.9 percentage points from the prior quarter and is within our target ratio of 25%, adding to our ample financial flexibility. Remittances of $5.5 billion in 2023 were a result of strong operating cash generation and favorable market moves. With remittances in excess of dividend and interest payments, we were able to return capital to shareholders even after organic investments in our business and bolt-on M&A such as the CQS acquisition. Over the last three years, our remittances have averaged over 85% of core earnings. While this percentage is somewhat flattered by the favorable market moves in 2023 and the US variable annuity transactions in 2022, it's a testament to our ability to generate strong cash flow. In aggregate, we have returned approximately $8.7 billion of capital to shareholders through dividends and share buybacks since we resumed our buyback program in 2022. As previously announced, we plan to launch a new program in early 2024 that would allow us to purchase up to 2.8% of our common shares. And as Roy mentioned, yesterday, our Board approved a 9.6% increase in our quarterly common share dividend. Moving to Slide 21, which summarizes how we are tracking against our medium-term targets. Our new business CSM grew 12% in 2023, modestly below our target. We generated CSM balance growth of 21%. While this was flattered by the basis change, we still generated a solid 5% growth in organic CSM. Our core EPS growth and core ROE was strong in 2023, exceeding our target ranges. All in, we are pleased with our progress and delivered strong results with focused execution. 2023 was a milestone year. And while we continue to face an uncertain macroeconomic environment, I'm confident that we are uniquely positioned to drive and execute on our transformation agenda in 2024 and beyond. And finally, turning to Slide 22, we're hosting an Investor Day in Hong Kong and Jakarta from Tuesday, June 25, to Thursday, June 27, 2024. It has been some time since we hosted an Investor Day in Asia, and we're excited to showcase our quality franchise. Please save the date, registration details will follow shortly. This concludes our prepared remarks. Before we move to the Q&A session, I'd like to remind each participant to adhere to a limit of two questions, including follow-ups, and to re-queue if they have additional questions. Operator, we will now open the call to questions.
Operator, Operator
And your first question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi, good morning. I wanted to ask about the global minimum tax and whether it will have a material impact on you if you could provide us any sort of guidance in terms of how big that impact would be?
Colin Simpson, CFO
Yeah. Thanks, Meny. It's Colin here. So we've looked at the draft legislation in Canada, and we're participating in the consultation process. There's really a lot to be done before the draft rules are fully integrated within existing Canadian tax law. But saying that, should the legislation become substantially enacted, we would expect to incur higher taxes just from the nature of some of the jurisdictions we operate in. We think it's going to add about 2 to 3 percentage points to our effective tax rate. And we'll start incurring that once the legislation becomes substantially enacted, potentially Q2, maybe Q3 this year.
Meny Grauman, Analyst
Thank you very much. Regarding the risk adjustment you made, I would like to gain a clearer understanding of what is influencing that change. The risk adjustment is moving towards the higher end of the target range, and I want to know what process is behind that. Are you being too conservative with your assumptions, or is there another reason why it is tracking higher than anticipated?
Steve Finch, Analyst
Thanks, Meny. It's Steve here. So yes, our disclosed confidence level range for the risk adjustment is $90 million to $95 million. And we are trending to go higher. And in fact, without the change, we would have reported over that confidence level range in Q4, which is really driving the decision. We're comfortable with the range that we selected at transition. And the move was simply to move back closer to within that range. What we saw was relative to peers, we included in the appendix, you can see some of the benchmarking versus peers, and we are more conservative than global peers here and particularly in Asia. That's what was driving the growth above that target end of the range. So we made the adjustment primarily in Asia was the largest impact. And that leaves Asia actually at the high end of that disclosed $90 million to $95 million range. So fairly simple in terms of just moving back towards the midpoint of the range.
Meny Grauman, Analyst
And then does that have any implications for core earnings going forward, just thinking through the change, how it impact results on a look-ahead basis in terms of the core results?
Steve Finch, Analyst
Yes, there was a modest impact on core earnings. Although we reduced the risk adjustment by just over CAD2.8 billion, this primarily contributed to an increase in the CSM. Since the CSM amortizes slightly faster than the risk adjustment releases, we experienced a modest benefit of just under $20 million to our run rate core earnings, which was also reflected in our Q4 results.
Meny Grauman, Analyst
Got it. Thanks so much.
Operator, Operator
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Actually, that was the question I was going to ask. Is the $20 million amount for a quarter, annually, or something else?
Steve Finch, Analyst
It's a quarter, $20 million per quarter, Gabe.
Gabriel Dechaine, Analyst
Okay. Great. And just really dumb it down, I mean, just throwing out, we're exceeding our 90% to 95% range. What does that mean? What was going on in the business, in the Asia business in particular, that created this variation and then caused the reshuffling of one liability category to another because it could happen again, right?
Steve Finch, Analyst
Yeah. And if we back up the risk adjustment, you can think of it as the non-economics or the non-investment PFADs under the old IFRS 4, that's what it is.
Gabriel Dechaine, Analyst
Okay.
Steve Finch, Analyst
Under IFRS 17, we calibrate and are required to disclose the confidence level range. We base this on LICAT shocks and then calibrate from there. The process is fairly straightforward. For Asia, we were actually above the top end of the range, which was driven by the profitable business we write in the region. As a result, Asia was higher than the upper limit of the range, affecting the total company. We have calibrated down, primarily in Asia, and we anticipate more stability going forward regarding our position within the range.
Roy Gori, President and CEO
Gabriel, Roy here. I might just add that, obviously, with the transition to IFRS 17, we had to make a whole lot of assumptions as did everyone else in the industry. And it’s only through 2023 that we started to see where the industry started to land with their risk adjustment confidence levels and so on. We're quite pleased that we are very conservative relative to our peers. And the calibration that Steve talked to was just to bring it back into the range, which was, as he highlights and is articulated in the document that we published, very conservative relative to others. We're happy that that's where we typically land at the conservative end.
Gabriel Dechaine, Analyst
I understand what you're saying. I'm just trying to get a grasp on this. In Asia, non-economic risks like mortality seem to be surpassing your worst-case assumptions or something similar. It could be something else entirely. By moving it from risk adjustment to CSM, you're able to release those reserves sooner, likely because you have more confidence in that assumption. I realize this sounds complicated, but I'm trying to explain it in simpler terms for better understanding.
Steve Finch, Analyst
We hold the risk adjustment, which is similar to the old PFADs, and we've calibrated it based on the standard to indicate that this is at the 90 to 95th percentile in terms of confidence. The key takeaway is that this should provide you with high confidence in the quality of the CSM since you establish the CSM after completing all the risk adjustments. This is a relatively modest shift. Risk adjustments also release into income, which explains the slight impact on core earnings. Overall, this is just a straightforward recalibration.
Gabriel Dechaine, Analyst
All right. Well, thanks.
Operator, Operator
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Doug Young, Analyst
I apologize, but I need to explore the risk adjustment further. Steve, I'm curious about why it was initially set at 90 to 95, as that seems high and reflects a certain confidence level. There must have been a reason for establishing that range. Why would it differ from peers? Is it a matter of capital versus risk adjustment? Could it be related to the mix of business? I understand it's straightforward to compare Manulife to its peers as shown in the slide, but I'm trying to understand more deeply why it was set at that level and what might account for these differences.
Steve Finch, Analyst
Yeah. I think under the standard, it's principles based. So you've got a range of judgments, and Manulife has typically been conservative in terms of setting our risk margins. I should be really clear. If you look at Asia peers, because we hold a higher risk adjustment does not mean we take more risk. We write very, very similar profile of business. So you should actually look at it as we're holding higher risk adjustment for similar risks. The other thing is it's such a significant change in accounting, right? And there's a lot of policy decisions. There's a lot of disclosure under IFRS 17. So I would expect, over time, you might see a convergence of practice on this subject and perhaps other policy decisions as the results are digested and analyzed.
Doug Young, Analyst
I'm surprised that there is such a range allowed between players, but I’ll move on. Roy, any comments from you? It seems you emphasize considering all options for capital deployment, including inorganic growth. Has mergers and acquisitions become a higher priority for you with your current capital position? Given that you've mostly completed IFRS 17, have excess capital, and are engaging in reinsurance transactions, is M&A moving up in priority beyond just smaller deals to include larger transactions?
Roy Gori, President and CEO
Yeah, Doug, thanks for the question. And you're right. We have been very focused on our capital. Our capital position is very strong. Our LICAT ratio is 137. And obviously, as we transition to IFRS 17, we're still trying to figure out, as was the industry how LICAT would move and how the transition would work? So it was obviously very sensible for us to be prudent in that environment. But with a LICAT ratio of 137%, we have $22 billion above our supervisory minimum, $10 billion above our internal operating range. And we have been very actively buying back shares. In fact, since 2018, in fact, $5.5 billion, which has generated $1.5 billion of shareholder value. When we talk about our priorities for capital, obviously, number one for us has always been dividends and organic growth. We announced the dividend increase yesterday, which again further consolidates our position that dividend should be a way that we create value for shareholders. But given our unique footprint, the organic growth for us is a huge priority, and it's an area for significant growth. The second tier of priorities for us from a capital deployment perspective has always been buybacks and M&A. And we have been judicious about M&A and we'll continue to be. So for us, the focus areas that we'll look at when it comes to M&A is, a, is it strategic? And b, is it financially valuable for the franchise? We don't want to do anything that obviously doesn't create value. And as we see the uncertainty starts to decrease, then obviously, our appetite for M&A will increase as well. So we're pretty optimistic about the outlook organically to grow our franchise. And having the financial flexibility through our strong capital ratio and low leverage, I think really makes the M&A option one that's available to us, but we're going to be disciplined. So I just want to again reassure you that we would not be reckless.
Doug Young, Analyst
Yes. Maybe a follow-up. Are you seeing more opportunities these days?
Roy Gori, President and CEO
Look, again, we've got a good scan of what is available. And I think in the higher rate environment, it has put some pressure on certain businesses. I think we obviously stand to benefit in a higher rate environment. Again, we don't think that necessarily we're going to see a massive increase in the longer end of the curve. But it does place opportunities for us, and we'll continue to look at them. So yeah, I think that the opportunities have perhaps increased in recent years, which means it's perhaps more interesting for us to focus in this space.
Operator, Operator
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
Thank you. Good morning. Going back to the risk adjustment discussion. I just want to understand if there are any potential implications for insurance experience going forward? Is there now a potential for more negative experience because of the lower risk adjustment?
Steve Finch, Analyst
Paul, it's Steve. No, this does not impact the insurance experience going forward at all. You shouldn't expect any impact there.
Paul Holden, Analyst
Thank you for that information. My second question is about Asia, where we are seeing significant success in Hong Kong. However, when I analyze the sales and earnings excluding Hong Kong, there is a slight decline compared to last year. I have two questions regarding this situation. First, what do you believe is necessary to reverse this trend and achieve our growth targets in Asia outside of Hong Kong? Second, did the trend over the past year affect the adjustment in our earnings contribution goal from $25 million to $27 million?
Phil Witherington, Analyst
Thanks for the question, Paul. This year has been strong for our results in Asia, with continued double-digit sales growth in the fourth quarter. Hong Kong has played a significant role in that success. However, we focus not only on sales volume but also on the quality of those sales, and we’ve made substantial progress in that area throughout 2023. You can see this in our value metrics, with earnings growing by 14% and new business CSM increasing by 27%. While Hong Kong has been a key driver, we also witnessed notable growth in the core domestic business there in the fourth quarter and across the full year. I've mentioned that the pandemic recovery has been uneven across Asia, with some markets improving and gaining momentum, particularly in the fourth quarter. We’ve noticed positive trends in new business momentum in Indonesia, Vietnam, Malaysia, and Singapore, which had a record year for APE sales, along with Mainland China. Looking ahead to 2024, I see several encouraging tailwinds. We anticipate the MCV customer segment will continue its growth and expect a normalized growth rate following the reopening of borders. I am also optimistic about the domestic segments in Hong Kong, especially given the GDP growth of over 4% in the second half of 2023, compared to around 2% in the first half. This trend looks promising for 2024. Moreover, the uneven recovery outside of Asia signifies that we still have room for growth as we move into the next year. Our focus remains on driving quality new business, so I am particularly interested in the value metrics of new business CSM, new business value, and earnings, rather than just APE sales. That said, we do expect APE sales to grow as well in 2024.
Roy Gori, President and CEO
I will address the second part of your question, Paul. To build on Phil's comments, despite the uneven recovery he mentioned, we achieved an 18% growth in core earnings for the full year in other Asia, highlighting the strength of our diverse franchise. We are proud of our performance in Asia, even with the short-term challenges we've faced. To answer your second question, we take pride in our Asia franchise, which has been established for 127 years. We have moved up to being one of the top three Pan-Asian players, increasing from number six in 2014. Our diversity across various markets differentiates us, and we have a strong G-WAM business encompassing retail, retirement, and institutional sectors that synergizes well with our insurance business. We will discuss this further at our Asia Investor Day. The delay in reaching our goal of 50% is attributed to three factors. First, there are short-term headwinds related to COVID. Second, the transition to IFRS 17 means new business gains previously reported in core earnings are now allocated to CSM, posing a short-term challenge. Third, we've experienced significant growth in North America, which is a positive issue to have. We remain committed to our 50% goal and are confident in our trajectory towards that target. It's important to note that Asia accounts for 60% of our CSM and over 70% of our new business CSM.
Operator, Operator
Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.
Lemar Persaud, Analyst
Hi. I'd like to start by discussing the basis change. Is the increase above the risk adjustment target range something that might happen again? It seems like it could. Should we view this as a one-time issue or is there a possibility of seeing this type of adjustment repeatedly? Could this potentially occur annually? Any insights you have would be appreciated.
Steve Finch, Analyst
Thanks, Lemar. It's less likely to exceed the upper limit again due to the adjustments we made to align Asia with that range. Moving forward, we'll typically consider this as part of the Q3 changes along with other assumptions. However, we realized in Q4 that we would have surpassed the upper limit, which is why we opted to recalibrate this quarter.
Lemar Persaud, Analyst
Okay. That's helpful. And then I want to come back to a comment made on the industry converging over time. Do you think the industry is going to come up to your 90% to 95% level? Or is Manulife more likely to move down to, I don't know, the Canadian peers at 80% to 85% or 85% to 90%, like how should we think about the convergence there? And if you guys do move down, what impact would that have on the shift from risk adjustment to CSM? So any numbers would be helpful.
Steve Finch, Analyst
I would like to start by discussing significant accounting changes. It's common for industries to converge over time on various policy decisions, particularly when following a principles-based standard. While it's reasonable to expect this, we currently have no plans to adjust our approach. We will continue to monitor the situation. If we do decide to make a change, it would likely manifest in the same manner, such that a reduction in the risk adjustment would be reflected in CSM, resembling the modest impacts you are observing this quarter.
Roy Gori, President and CEO
Lemar, I believe that due to IFRS 17 and the necessary assumptions from that transition, we will likely see increased reporting and benchmarking industry-wide along with greater transparency. This is a positive development. We generally aim to take a more conservative and cautious approach, which has benefited us in the past and will keep doing so. This enhanced reporting and benchmarking will continue to evolve, which is not a bad thing; in fact, it's beneficial. This will extend beyond risk adjustments to factors like discount rates and others.
Lemar Persaud, Analyst
That's helpful. But I'm considering that if you exceed the upper end of your target range, let's say 97%, and then adjust it to around the midpoint of 90% to 95%, which is about 92.5%, that's a 5% difference with a $2.8 billion rebalancing. When I compare this to your Canadian peers, if you were to align with them, that could lead to a significant figure, perhaps down to 82.5%. Can you provide any insight on whether this kind of alignment is feasible in the coming years, or is it more likely to happen over a longer period, like 25 years? Any thoughts on this would be helpful.
Steve Finch, Analyst
It's important to note that this is a liability on the balance sheet, influenced by geographic factors and some secondary effects. Ultimately, if we were to adjust by 5 points, it could result in about $3.5 billion in additional impact. I'm not able to predict how this will evolve over time, as it's not currently determinable. However, as Roy mentioned, ongoing benchmarking will be interesting to observe and may influence industry actions.
Lemar Persaud, Analyst
Okay. Thanks. And then one quick one, if I may. How should we think about the core tax rate for modeling purposes for 2024 and 2025?
Colin Simpson, CFO
Thanks, Lemar. In the past, we've indicated a tax rate of between 15% to 20%. If the global minimum tax is implemented as the legislation suggests, I expect this range to adjust to 17% to 22%.
Operator, Operator
Thank you. The next question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Nigel D’Souza, Analyst
Thank you. Good morning. This wasn't one of my questions, but I think it's an important point of clarification. On the risk adjustment, would it be right to think of it as that the profitability of the license or the insurance policy does not change over the lifetime of that contract, what this does do, the calibration, is changing the timing of the recognition of those profits by having more of it sit in the CSM balance. And the fact that your confidence level is higher than peers is just the difference in the recognition and the timing of that profit and the fact that you're at a higher level. It's conservative because the reduction would just improve the run rate of profitability. So I think it's just an important distinction. Is that the right way to think about it?
Steve Finch, Analyst
I believe you're mostly correct, Nigel. It slightly alters the profitability run rate, and I think that's a good way to consider it.
Nigel D’Souza, Analyst
Okay. Good. Yeah, that's how I thought of it. So my first question was on expected investment earnings. I noticed that was lower quarter-over-quarter. And I assume that's related to the impact from short-term rates, but I'm surprised that it outweighed the benefit on, I guess, your longer duration assets, given that cash and porter instruments is only about 5% of your invested asset portfolio. So could you kind of provide more color on the sensitivity to changes in the yield curve on the run rate of that number?
Colin Simpson, CFO
Yeah. Nigel, it's Colin here. You're right. It did go down by about $30 million quarter-on-quarter. I think I'd point you more to the year-on-year change, which shows quite a decent increase, and that's driven by the increase in interest rates. You pointed out short-term interest rates being soft quarter-on-quarter. There's a lot that goes into that number, to be honest, especially after a basis change. So while we are down quarter-on-quarter by $30 million, I would expect business growth to push that number back up closer towards where we were in the third quarter and to go from there onward.
Nigel D’Souza, Analyst
Okay. Any comments on how the yield curve impacts is deepening versus parallel shifts, flattening inversion? Just any comment on sensitivity to changes in the yield curve?
Colin Simpson, CFO
You really wouldn't expect to see that in that line. But clearly, the steepening of the yield curve in Canada benefited us in other parts of the P&L and balance sheet.
Nigel D’Souza, Analyst
Got it. My second question is about non-directly attributable expenses in the corporate segment, which appear to be increasing. Can you provide any insight on whether this is just noise for this quarter? What is the expected run rate going forward, and why is this number rising?
Colin Simpson, CFO
Yes, Nigel, Colin here again. It's a combination of factors. Last year, we saw a $42 million favorable pension adjustment that positively impacted last Q4's non-attributable expenses. This quarter, however, we've experienced increased costs related to performance and a few IT projects, along with additional expenses in the center. When combined, these factors have led to a noticeable increase in corporate costs. Overall, segment expenses are actually performing well. In Q2, we were at 12%, and now in Q3, we've reduced that to 7%. GWAM has taken action, resulting in impressive segment growth. The increase in Q4 can be attributed to costs related to the center and performance. We are positioned for strong expense management in 2024. Additionally, our ratio has decreased to 45.5% from 60% five years ago. The overall situation is positive, and it is crucial for us to continue delivering these results.
Nigel D’Souza, Analyst
Okay. That’s it for me. Thank you.
Operator, Operator
Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca, Analyst
Good morning. Colin, I had to go back to this tax thing, but I want to clarify something. Your guidance or the outlook of 15% to 20% previously, the benefit of looking at Manulife over the long term, I don't think I've ever seen the tax rate approaching 20%. So is there something in your mind there when you talk about 20% or possibly even 22%, what would cause it to be that high? Again, I've just never seen it.
Colin Simpson, CFO
Yeah. Mario, I mean I think it's a wide range for a reason. It depends on where the investment positives or negatives land, could cause volatility in the number. But really, I think the point to note is take this year's tax rate, add 2 to 3 percentage points, and that's a good go-forward piece. We give us lots of wiggle room with a broad range. Please don't think that the current 14% is going to go to 22% overnight.
Mario Mendonca, Analyst
I wanted to follow up on the global minimum tax of 2% to 3%. It would likely impact the company segments with the lowest effective tax rates, which are Asia and GWAM. Is that correct?
Colin Simpson, CFO
To be specific, Hong Kong, and also we operate the high net worth business out of Bermuda. So that would also be impacted Singapore as well. So yeah, broadly correct.
Mario Mendonca, Analyst
So Asia and GWAM might be affected because Canada and the US are facing relatively high tax rates. And then the final...
Colin Simpson, CFO
Absolutely, in Japan.
Roy Gori, President and CEO
Thank you for the question, Mario. I will begin and then pass it to Marc. We are closely monitoring the reinsurance market and continually assessing our portfolio, particularly the assets that are generating lower returns than we expect from our capital. We have been quite proactive in this area, having freed up $10 billion in capital since 2017. In 2022, we executed the variable annuity transaction, which, a couple of years prior, seemed unlikely to happen. However, we observed the bid-offer spread narrowing and an influx of new players wanting to engage with us. A similar trend has been evident in the long-term care space, where new entrants are taking interest in that portfolio. The availability of more credible data and the maturity of that data have increased our confidence in the assumptions, making it more appealing to various stakeholders, especially reinsurers. The overall trend is positive, and the current higher rate environment is also advantageous in this regard. We believe completing our recent transaction was a significant milestone for our company and has created opportunities for dialogue. Since then, many parties have expressed interest in discussing long-term care and other areas of our portfolio. Now, I will hand it over to Marc, who can provide additional insights.
Marc Costantini, Analyst
Thank you. Good morning, Mario. I want to take us back a few months where our goal was to reshape the conversation around our balance sheet, how we provision, and how we've maintained our assumptions in this area of business, while showcasing that we could trade the block at nearly book value. It's important to note that the risk-return profile of the buyer aligned well with the expected underlying assumptions. We had a strong partnership with Global Atlantic in this transaction. Following the surprise transaction, we've seen significant inbound interest from various players. Other companies were part of the process we previously discussed, and we're reconnecting with some of them. We believe this block represents the overall business we operate. As we mentioned, over 65% of the lives involved are active. We have additional business blocks with a similar profile. Some benefits were slightly more aggressive compared to the rest of our block. This has generated considerable interest in the market regarding our approach. We are confident that this has clarified our business profile and balance sheet, demonstrating Manulife's ability to execute unique transactions in this space. We hope this will lead to positive developments in the future. Thank you.
Operator, Operator
And the next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.
Darko Mihelic, Analyst
Thank you. Good morning. Just a couple of questions. They are modeling ones, and I'm sorry to get into deep into the weeds here. Probably for Steve. With respect to some of the disclosures we got on an annual basis, one of the things that we can see is the sort of roll forward for the contractual service margin. And I am curious about how I should look at it because if I look at that annual disclosure, it would have suggested for example, that you would have had about $1.6 billion of CSM in 2023. And in fact, you had almost $2 billion. Now we just heard about the $40 million, presumably new business CSM added to that. But is there anything else that helped this year's CSM relative to the sort of, I suppose, guidance we get out of the annual disclosure?
Steve Finch, Analyst
Yeah. Thanks, Darko. I know which disclosure you're talking about and what that really is, I think of it like our embedded value disclosure, where we show the runoff of the in-force like when will that embedded value emerge. That's how I think about that CSM disclosure. So it gives you buckets of years as to when the in-force CSM will amortize into income. It does not include any new business, and it doesn't include interest on the CSM as well. So I'd be happy to walk you through it in more detail. But I think, broadly speaking, use it to look at when will our existing in-force CSM show up in earnings.
Darko Mihelic, Analyst
Okay. All right. Fair enough. The second question is with respect to the commercial real estate. And clearly, another mark. But what was interesting to me, typically, when I've been listening to commentary on commercial real estate, the suggestion is that we have high-quality real estate. We don't dislike real estate. We're in it for the long term. All these things that suggest these are just marks and you're holding the commercial real estate possibly for decades. It's a cash flow thing and so on. But one thing also in the annual statements is it does show that you've lowered your risk appetite for commercial office space. I wonder if you can provide any commentary on that because I would have thought and I have heard from some others that there might be opportunities in the office space to pick up properties. But in your case, you actually lowered your risk appetite for office commercial real estate. I wonder if you can just provide some commentary around that? Thank you.
Scott Hartz, Analyst
Sure, Darko. Thank you for your question. It's Scott. Over the past year or two, we've observed a few significant trends in real estate. Firstly, there are persistent challenges particularly in North American office spaces. Secondly, rising interest rates and increasing discount rates have affected all types of properties. This rise in rates leads to reduced values but also enhances potential returns. Therefore, from a long-term perspective, we don't see this as a loss of value at all. Regarding our office holdings, you're correct that we've made reductions. A decade ago, North American office represented 40% of our overall ALDA portfolio, but now it's decreased to 10%. That reduction is a result of both shrinking our office assets and expanding other areas of the portfolio. If I assess the portfolio, my main concerns moving forward revolve around North American office spaces. The situation regarding the return to office remains uncertain. I believe there are additional long-term challenges; for instance, AI may lead to a decrease in white-collar jobs traditionally found in offices. While new office developments in certain city locations are performing well, as an overall asset class, we plan to continue to reduce our focus on North American office spaces.
Roy Gori, President and CEO
Darko, I just want to add a couple of quick comments to Scott. So I would say that one of the big focuses for us, not only across our ALDA portfolio, but certainly across our real estate portfolio is the diversity of our portfolio. And 38% of our real estate portfolio is US, but 32% is Canada and 26% is Asia. And 30% of our office portfolio is also Asia, which, again, provides us good diversification. So we feel that having a diverse portfolio is a really important part of our strategy in a way that we can, a, reduce volatility, but also optimize returns.
Operator, Operator
Thank you. There are no further questions registered at this time. I'd like to turn the call back over to Mr. Ko. Thank you, operator. We'll be available after the call if there are any follow-up questions. Have a good day, everyone. Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.