Doug Young

Doug Young inquired about the actuarial review, specifically the methodology change in Asia from PAA to GMM for health insurance contracts in Hong Kong, asking about its impact on CSM and core earnings. He also asked for clarification on the mechanics of the credit side, where parameter movements led to a reversal of credit provisions, and the significant impact of positive equity markets on the Expected Credit Loss (ECL).

Answer

Stephanie Fadous, Chief Actuary, confirmed the favorable impact of the annual review, largely due to moving health insurance contracts in Hong Kong from PAA to GMM, resulting in a modest favorable impact on core earnings and an increase in CSM amortization of approximately $30 million per quarter. Trevor Kreel, Chief Investment Officer, explained the ECL release was primarily driven by the market environment impact from strong equity markets, as a third-party model correlates various metrics to past credit experience.

Doug Young inquired about the actuarial review, specifically a methodology change in Asia from PAA to GMM for certain health insurance contracts, asking about the rationale, its impact on CSM and core earnings in the quarter, and future core earnings. He also sought clarification on the credit side regarding parameter movements causing a reversal of credit provisions and the mechanics of how strong equity markets influenced the Expected Credit Loss (ECL).

Answer

Stephanie Fadous, Chief Actuary, explained the methodology change in Hong Kong health insurance contracts from PAA to GMM aligns with industry practice, capitalizing cash flows and setting up CSM, resulting in a modest favorable impact on core earnings. The overall annual review will lead to an approximate $30 million per quarter increase in CSM amortization. Trevor Kreel, Chief Investment Officer, clarified that the $44 million ECL release was primarily due to a positive market environment impact, driven by strong equity markets, as captured by a third-party model that correlates various metrics (including equity markets, volatility, interest rates) to past credit experience.

Doug Young from Desjardins Capital Markets challenged the valuation of the Comvest acquisition, asked about the sales decline in Japan, and questioned if the eMPF earnings drag could be offset.

Answer

President & CEO Philip Witherington and Global WAM CEO Paul Lorentz justified the Comvest valuation based on future value creation, revenue synergies, and its alignment with high strategic and financial hurdles, including exceeding the company's 18%+ ROE target. Asia CEO Steven Finch attributed the Japan sales decline to a tough prior-year comparison. Paul Lorentz noted that the net eMPF impact already accounts for expense management actions.

Doug Young of Desjardins Capital Markets inquired about the drivers of strong sales in Japan and Hong Kong, and questioned the path to achieving the 15% medium-term earnings growth target for Asia.

Answer

Incoming CEO Philip Witherington explained that Japan's sales are largely USD-denominated (around 80%), driven by customer demand for diversification and yield. In Hong Kong, strong demand for savings solutions is driving growth across all channels. Regarding the earnings target, he noted that after normalizing for ECL and a prior-year reinsurance transaction, Asia's underlying growth was about 11%, and the strong organic growth in the Contractual Service Margin (CSM) supports future earnings potential.

Doug Young asked for a quantification of the reinsurance impact on the $7 billion of 2024 remittances and whether this puts Manulife ahead of its cumulative target. He also inquired if the quarter's low expected investment earnings represent a new run rate.

Answer

CFO Colin Simpson stated that $750 million from a reinsurance deal contributed to the $7 billion remittance, marking a strong start to the four-year plan, but reiterated the go-forward expectation of 60-70% of core earnings. Executive Trevor Kreel confirmed that Q4's expected investment earnings level is an appropriate base for future modeling, with the decline driven by recent reinsurance transactions.

Doug Young of Desjardins Capital Markets asked about the increase in non-directly attributable (NDA) expenses and the future run rate. He also requested an update on the long-term care (LTC) insurance book, its drivers, and the impact of the reinsurance transaction.

Answer

CFO Colin Simpson attributed the $37 million NDA expense increase to investments like AI and a reclassification, advising the current level is a good run rate. Chief Actuary Steven Finch explained the modest negative LTC result was due to higher care costs and lower claim terminations, noting this was the first negative result in nine quarters and that favorable incidence continues to be an offset.

Doug Young sought clarification on the US Medical stop loss business, specifically the Q4 experience and quantifying the negative impact. He also asked about strategies to temper volatility, such as more conservative reserve picks. Additionally, he inquired about Asia's underlying earnings, asking if the 16.2% growth was unusual or a new sustainable run rate, and the potential for future ROE.

Answer

David Healy, President of Sun Life U.S., projected a single-digit US dollar million negative impact for Q4 stop loss, based on current projections, noting that 30% of claims are seen by Q3. Brennan Kennedy, SVP and Chief Actuary, stated that current methods lead to observed volatility but that refining practices is an ongoing discussion. Manjit Singh, President of Sun Life Asia, highlighted strong fundamentals, investments in digital and client experience, and execution focus as drivers of Asia's 20% year-to-date growth, acknowledging some quarterly favorability but expecting strong fundamental performance. Kevin Strain, President and CEO, emphasized the broad momentum across Asia's markets.

Doug Young sought clarification on the U.S. medical stop loss business, specifically quantifying the expected Q4 loss ratio shortfall and exploring ways to temper volatility through more conservative reserve picks. He also asked if Asia's 16.2% underlying ROE is a new sustainable run rate and its future potential.

Answer

David Healy, President of Sun Life U.S., clarified that Q4's stop loss impact would be smaller (single-digit U.S. dollar millions) due to Q3's reserve updates, noting that 30% of claims are typically seen by Q3. Brennan Kennedy, SVP and Chief Actuary, acknowledged ongoing discussions about refining reserve pick methodologies. Manjit Singh, President of Sun Life Asia, attributed Asia's strong performance (20% YTD growth) to fundamentals, partnerships, distribution, and investments, noting some Q3 favorability from high net worth mortality and security gains, but expecting strong fundamental performance to continue.

Doug Young from Desjardins Capital Markets inquired about the long-term earnings outlook for the U.S. Dental business, the potential for goodwill write-offs, the reasons for a specific contract termination, and the impact of Hong Kong's MPF changes.

Answer

EVP & CFO Tim Deacon reforecasted the dental earnings trajectory but reaffirmed the U.S. segment's 12%+ medium-term growth objective, with dental contributing at least one-third. President - U.S. Dan Fishbein explained the contract loss was a unique situation and that repricing has been slowed by Medicaid funding uncertainty. President - Asia Manjit Singh quantified the MPF impact at approximately CAD $10 million per quarter.

Doug Young from Desjardins Capital Markets inquired about the long-term earnings evolution for the U.S. Dental business, the status of its goodwill and intangibles, the reason for a specific contract termination, and the impact of Hong Kong's MPF changes.

Answer

EVP & CFO Tim Deacon explained that while the 2025 dental earnings target is no longer expected, the business is projected to contribute at least one-third of the U.S. segment's 12.5%+ medium-term earnings growth. He confirmed the goodwill has ample cushion. President - U.S. Dan Fishbein attributed the contract loss to a unique situation with a nonprofit client and noted that repricing is slowed by uncertainty around U.S. Medicaid funding. President - Asia Manjit Singh quantified the MPF impact at approximately CAD $10 million per quarter.

Doug Young asked about the weaker U.S. group dental sales, the underlying earnings outlook for that business amid potential regulatory changes, and the rationale for renewing the NCIB at $10 million instead of the previous $15 million.

Answer

Daniel Fishbein, President of Sun Life U.S., attributed weaker dental sales to uncertainty around Medicaid funding, which is slowing RFP timelines, but noted the sales pipeline remains robust. EVP & CFO Timothy Deacon and President & CEO Kevin Strain explained the smaller NCIB renewal provides flexibility, balancing share buybacks with upcoming capital needs, such as the ~$2.3 billion SLC affiliate buy-ups, and maintaining prudence in an uncertain economic environment.

Doug Young sought confirmation that the stop-loss business renews 100% annually, asked to quantify the morbidity impact, and questioned if the claims impact could be smoothed. He also asked for details on a onetime ASO reimbursement payment in U.S. Dental.

Answer

Daniel Fishbein (executive) confirmed that virtually 100% of the stop-loss business renews annually and that the morbidity loss estimate of ~USD 50 million was "spot on." He explained that while reserving already involves estimation, unanticipated events must be reflected quarterly. He clarified the dental provision was to reimburse ASO clients for services where Sun Life overpaid claims on their behalf, with no impact on loss ratios.

Doug Young asked a high-level question about whether the quarter's $1.72 in underlying EPS represents the company's true earnings power. He also inquired about the U.S. stop-loss business, questioning the cause of negative morbidity experience and seeking details on pricing trends.

Answer

Kevin Strain, President & CEO, characterized the previous quarter as an anomaly and stated that the current quarter's results are a return to expected levels of underlying earnings. Daniel Fishbein, President of Sun Life U.S., explained that the stop-loss experience reflects a normalization of hospital utilization back to pre-COVID levels. He noted that year-to-date results are consistent with pricing targets and that Sun Life anticipates a firming pricing environment heading into next year.

Doug Young of Desjardins Capital Markets asked about credit performance, seeking to reconcile higher U.S. commercial impaired loans with a performing allowance release. He also requested details on the $600 million trade policy reserve and the drivers of U.S. ROE improvement.

Answer

Ajai Bambawale, Chief Risk Officer, explained the higher impaired loans were from a few specific borrowers and not a trend, while the performing release was a small adjustment to the macro outlook. He detailed that the $600M reserve was built over three quarters based on tariff assumptions. Leo Salom added that the U.S. ROE improvement has so far been driven primarily by earnings growth.

Doug Young of Desjardins Capital Markets asked about the connection between higher U.S. commercial impaired loans and a performing allowance release, sought details on the $600 million trade policy reserve, and questioned the drivers of the U.S. ROE improvement.

Answer

CRO Ajai Bambawale clarified the impaired loans were from a few specific borrowers and not a trend, while the performing release was a small macro-driven adjustment. He detailed the $600M reserve was built over three quarters for tariff risks. Leo Salom added that the 140 bps U.S. ROE improvement was primarily an earnings story, with more balance sheet impact to come.

Doug Young of Desjardins Capital Markets asked for clarification on the specific point-of-sale business being exited, inquired about other potential business wind-downs, and questioned the cause of a sequential drop in Canadian banking non-interest income.

Answer

Leo Salom, President and CEO of TD Bank AMCB, clarified the exit pertains to the Retail Card Services (RCS) business, not the strategic co-branded cards like Target. CEO Raymond Chun deferred comments on other exits. Sona Mehta, Group Head of Canadian Personal Banking, attributed the non-interest income dip to fewer days in the quarter, moderated FX spend, and lower merchant fees.

Doug Young from Desjardins Securities inquired about the drivers behind the 50-basis-point drop in the CET1 ratio, specifically seeking details on credit migration and a quantification of the upcoming operational risk impact from legal provisions.

Answer

Ajai Bambawale, Chief Risk Officer, detailed that credit migration was observed in U.S. Retail commercial and auto, Canadian consumer auto and commercial, and across various wholesale industries. Kelvin Tran, CFO, specified that the operational risk RWA impact from these items in Q3 is expected to be approximately 12 basis points.

Doug Young from Desjardins Capital Markets asked about the improving trends in Canadian personal unsecured credit and how potential risks from USMCA renegotiations are being factored into the bank's performing loan allowances.

Answer

Frank Guse, Senior EVP & Chief Risk Officer, stated that while credit performance is strong and resilient, the bank remains prudent. He confirmed that potential macroeconomic headwinds, including the risk of USMCA renegotiations, are reflected in their models by maintaining a cautious weighting on downside scenarios, which contributes to a moderate build in performing allowances.

Doug Young of Desjardins Capital Markets asked about the path to achieving the bank's 15%+ target ROE, given the current 13.9% level, and whether this target is achievable with a 13% CET1 ratio. He also requested a quantification of severance costs incurred during the quarter.

Answer

Victor Dodig, President & CEO, affirmed that the bank is on a clear path to its 15%+ ROE target, driven by deepening client relationships, efficiency gains, and capital deployment. Robert Sedran, Senior EVP & CFO, declined to quantify severance costs, describing them as a regular, run-rate item embedded in their operating philosophy rather than an unusual item.

Inquired about the path to achieving the 15%+ ROE target and asked for quantification of severance costs mentioned in the expense discussion.

Answer

The CEO outlined the path to the ROE target through deepening client relationships, continuous efficiency improvements, and disciplined capital deployment. The CFO stated that severance costs are considered a normal run-rate expense and are not quantified separately.

Doug Young asked about the path to achieving the 15%+ target ROE, questioning if the current quarter's 13.9% was a reasonable starting point and if the target is achievable with a 13% CET1 ratio. He also requested quantification of severance costs included in expenses.

Answer

Victor Dodig, President and CEO, affirmed the bank is on a path to its 15%+ ROE target, driven by deepening client relationships, ongoing efficiency gains, and disciplined capital deployment. Robert Sedran, CFO, stated that severance costs are not quantified as they are considered a regular, run-rate expense embedded in the bank's operating philosophy and were not an adjusting item.

Doug Young of Desjardins Capital Markets questioned the path to achieving the 15%+ target ROE from the current 13.9%, asking if Q2 was a reasonable baseline and what levers would be pulled. He also asked for quantification of severance costs.

Answer

CEO Victor Dodig outlined a three-part strategy to boost ROE: deepening higher-return client relationships, continuing efficiency initiatives, and deploying excess capital. CFO Robert Sedran stated that severance costs were not quantified as they are considered a regular, run-rate operating expense and not an adjusting item.

Doug Young of Desjardins Capital Markets asked for an explanation for the counter-intuitive decline in consumer net write-offs and delinquencies in Canada, and also questioned the disconnect between rising gross impaired loan formations and stable impaired PCLs.

Answer

Chief Risk Officer Frank Guse credited the strong consumer credit performance to a strategic focus on the resilient mass affluent segment and enhanced risk management infrastructure. He explained that the rise in gross impaired loans is primarily in the mortgage portfolio, which has very strong collateral with low loan-to-value ratios, and is therefore not expected to result in significant write-offs.

Doug Young asked about the path to achieving CIBC's premium ROE target of 16%+, seeking details on the key drivers and the expected timeframe.

Answer

President and CEO Victor Dodig clarified that on a like-for-like basis with current capital rules, the target is closer to 14.5%. He outlined a multi-pronged strategy to improve ROE over the 'medium-term': deepening premium client relationships, enhancing cross-business connectivity, operating with a more optimized CET1 ratio, and scaling prior technology investments to drive returns and efficiency.

Doug Young of Desjardins Capital Markets sought more detail on the cautious outlook for impaired PCLs, despite Q3 results being better than expected, and asked about a reasonable through-the-cycle target for internal capital generation.

Answer

CRO Phil Thomas explained the caution is due to macroeconomic uncertainty, particularly regarding trade, even as credit trends in specific portfolios like auto are improving. CFO Raj Viswanathan stated that a reasonable target for internal capital generation through 2026-2027 is 15 to 20 basis points per quarter.

Doug Young asked for details on the CET1 ratio movement, specifically the drivers behind the positive impact from LGD parameter updates and the increase in operational risk RWA. He also sought to quantify the expert credit judgment (ECJ) overlay related to trade uncertainty.

Answer

CFO Rajagopal Viswanathan explained the LGD parameter update was a regular process reflecting updated loss experience, while the operational risk RWA increase was a minor adjustment. President and CEO Scott Thomson confirmed 12.5% is the comfortable floor for the CET1 ratio. Chief Risk Officer Philip Thomas quantified the ECJ, stating it constituted over 60% of the performing PCL build over the last two quarters.

Doug Young sought clarification on the drivers of the CET1 ratio, specifically the impact of parameter updates and operational risk RWA. He also asked for a quantification of the expert credit judgment (ECJ) overlay used in the PCL build.

Answer

Raj Viswanathan, CFO, described the LGD parameter updates as a routine process and the operational risk RWA increase as minor. Scott Thomson, CEO, confirmed that 12.5% CET1 is the bottom end of the bank's comfortable operating range. Phil Thomas, CRO, quantified the ECJ, stating it accounted for over 60% of the performing PCL build over the last two quarters.

Doug Young pressed for details on the impact of potential tariffs, asking where the PCL rate guidance would go if tariffs are implemented as proposed, seeking a potential range.

Answer

Chief Risk Officer Philip Thomas declined to provide a specific range, citing numerous variables like the size, duration, and government response to tariffs. He emphasized that if tariffs are imposed in Q2, the bank will make a 'sizable, but manageable build' to allowances, expressing confidence in the bank's strong capitalization to navigate the impact.

Doug Young requested details on the recent uptick in PCLs in Mexico and an update on the strategic plan for the bank's operation in Colombia.

Answer

Chief Risk Officer Philip Thomas attributed the PCL increase in Mexico to a single commercial account in the retail sector. Francisco Aristeguieta, Head of International Banking, explained that the Colombia operation's losses reflect a challenged local market. The current strategy is disciplined expense reduction and selective credit deployment, but he reiterated that capital will be redeployed if a path to acceptable returns does not emerge.

Doug Young from Desjardins Capital Markets sought to clarify if management's comments implied that the current quarter's PCL level represents a peak that will improve going forward. He also asked if BMO is more confident in its U.S. outlook compared to Canada.

Answer

CEO Darryl White positioned PCL normalization as one of several factors in the bank's ROE rebuild strategy. Chief Risk Officer Piyush Agrawal stated that while great progress has been made, external uncertainties remain, and PCLs will likely be 'plus or minus' the current level. He expressed confidence in the loan books of both countries but noted Canada faces more economic uncertainty.

Doug Young asked for clarification on what 'moderately' higher impaired PCLs means and inquired about the drivers behind the sequential decline in non-interest revenue.

Answer

CRO Piyush Agrawal clarified that 'moderately' implies a potential increase of a 'couple of basis points' due to trade uncertainty, not a return to 2024 levels. CFO Tayfun Tuzun attributed the lower non-interest revenue to the U.S. card portfolio sale, the shift of certain fees to NII in Canada, and the impact of three fewer days in the quarter.

Doug Young from Desjardins Capital Markets sought clarification on the comment that impaired PCLs might rise 'moderately' and asked about the drivers behind lower non-interest revenues in Canada and the U.S.

Answer

CRO Piyush Agrawal explained that 'moderately' higher PCLs implies a few basis points of increase due to the prolonged uncertainty from trade policies, but not a return to 2024 levels. CFO Tayfun Tuzun clarified that the non-interest revenue decline was impacted by the loss on the U.S. card portfolio sale, the shift of BA fees to net interest income in Canada, and fewer days in the quarter.

Doug Young asked for details on the liability-side optimization within the U.S. ROE improvement plan, the assumed CET1 ratio for the U.S. business, and the ultimate long-term ROE goal for the U.S. segment beyond 12%.

Answer

CFO Tayfun Tuzun explained that liability optimization focuses on improving the funding mix by growing consumer deposits to reduce reliance on higher-cost funds. He suggested modeling the U.S. business with a CET1 ratio similar to the enterprise target of 12.5%-13%. Over the long term (5+ years), he stated the goal is for the U.S. ROE to get closer to its pre-Bank of the West acquisition level of 15%.

Doug Young questioned the higher-than-guided Provision for Credit Losses (PCLs), asking what surprised the bank and seeking clarity on the timeline for returning to long-term averages in fiscal 2025.

Answer

Chief Financial Officer Tayfun Tuzun and Chief Risk Officer Piyush Agrawal explained that the PCL increase was driven by unexpected variability in a few large wholesale accounts, not systemic issues. They confirmed PCLs will remain elevated for the next 1-2 quarters before trending down towards their long-term average by the end of fiscal 2025, with the current 50 bps level being a reasonable starting point for the elevated period.

Doug Young of Desjardins Capital Markets inquired about the significant sequential increase in the seg fund component of the LICAT ratio, the amount of capital dividended from operating companies to the holding company, and the forward-looking run rate for earnings on surplus.

Answer

Group CFO Jon Nielsen explained that new OSFI guidance on seg funds impacted the LICAT ratio by approximately 2 percentage points. He also confirmed that $1.1 billion was dividended up to the Holdco during the quarter. Regarding earnings on surplus, Nielsen noted that a sustained interest rate drop has an ~$80M annualized impact, with half coming from surplus, primarily in Canada and at Lifeco.

Doug Young asked about the significant sequential increase in the seg fund component of the base solvency buffer, its impact on the LICAT ratio, and the amount of capital dividended from the operating company. He also inquired about the future run rate for earnings on surplus.

Answer

Group CFO Jon Nielsen explained that new OSFI guidance on seg funds had a 2-point negative impact on the LICAT ratio. He confirmed strong capital generation and a dividend of approximately $1.1 billion from the operating company to the Holdco. Regarding earnings on surplus, he noted the sensitivity to lower rates is about $80 million annually, with half impacting surplus, principally in Canada and at Lifeco due to shorter duration. CEO Paul Mahon added that the company's seg fund book is relatively low-risk.

Doug Young asked about the significant sequential increase in the seg fund component of the base solvency buffer, its impact on the LICAT ratio, the amount of capital dividended from Opco to Holdco, and how to model future earnings on surplus.

Answer

Group CFO Jon Nielsen explained that new OSFI guidance on seg funds created a 2-point impact on the LICAT ratio. He confirmed that approximately $1.1 billion was dividended up from Canada Life Assurance to the holding company. For modeling, he provided a sensitivity of an $80 million annualized impact to base earnings from lower rates, with half of that affecting earnings on surplus, primarily in Canada and at Lifeco.

Doug Young of Desjardins Capital Markets inquired about the rationale and potential limitations of the new stock buyback program. He also asked about the drivers behind the significant pickup in structured product sales in the Capital and Risk Solutions (CRS) segment.

Answer

President and CEO Paul Mahon and CFO Jon Nielsen described the buyback as one tool in a broad capital allocation toolkit, emphasizing that organic and inorganic growth investments remain priorities. They noted the company has significant financial flexibility and other tools available. Jeff Poulin, EVP of Reinsurance, attributed the strong CRS results to typical Q4 seasonality, two large asset-intensive transactions, and a successful long-term partnership approach with ceding companies.

Doug Young asked for more detail on City National Bank's performance, seeking quantification of non-core losses and PCL releases to understand if its adjusted earnings represent a sustainable turning point. He also inquired about the intentionality of the decline in market risk RWA.

Answer

Interim CFO Katherine Gibson clarified the non-core charges relate to simplifying the business. CEO David McKay added that significant cost take-out (nearly 500 FTEs) and balance sheet repositioning are underway. Chief Risk Officer Graeme Hepworth explained the PCL release was due to more favorable rate cut expectations. Regarding RWA, Derek Neldner, Group Head of Capital Markets, stated there has been no material shift in risk appetite, and the reduction is due to tactical capital optimization.

Asked about the impact of lower interest rates on base earnings, the duration of the surplus portfolio, and the cause of negative insurance experience recorded in the Contractual Service Margin (CSM) related to the longevity business.

Answer

A 50 basis point decrease in interest rates would negatively impact base earnings by approximately 1%. About half of this sensitivity comes from the surplus portfolio, which has an average duration of 2-3 years. The negative CSM experience was due to normal, non-systemic claims volatility in the longevity business for the quarter, not a fundamental change in risk.

Sought clarification on the scope of Empower's growth guidance, the sustainability of Capital and Risk Solutions (CRS) earnings, the profitability of structured products within CRS, and the remaining impact of asset repricing on surplus earnings.

Answer

The company confirmed the 15-20% growth guidance is for the entire U.S. division. CRS earnings were described as having some lumpiness but being supported by a stable structured business, which contributes about $100 million in earnings per quarter. They noted that while much of the asset portfolio has repriced to higher rates, there is still more to come, particularly in the 2-3 year duration Empower portfolio.

Inquired about the strategy and returns for the business in Germany, the target ROE for Empower and the timeline to achieve it, and details on the U.S. office commercial mortgage book's risk profile and provisions.

Answer

The German business is described as having reasonable scale and good returns via a focused broker distribution model. Empower's ROE is expected to reach the 13-14% range next year and align with the corporate target within a couple of years. Regarding U.S. office exposure, the recent impairment was on an idiosyncratic loan, and while headwinds remain, the overall book has LTVs below 70% and spread-out maturities.

Asked for details on the drivers of insurance experience gains in Europe, the reasons for the decline in expected investment earnings, and for quantification and commentary on credit impacts.

Answer

The positive insurance experience in Europe was driven by favorable mortality and expense fluctuations. The decline in investment earnings was due to lower trading activity compared to the prior year, as spread assets were used to support new business growth (building CSM) rather than boosting in-period earnings. Credit impacts were modest (~$20M pre-tax) and the portfolio remains high quality.