Manulife Financial - Earnings Call - Q4 2020

Transcript

Speaker 1

Good morning and welcome to the Manulife Financial Fourth Quarter 2020 Financial Results Conference Call. Your host for today will be Ms. Adrienne O'Neill. Please go ahead, Ms. O'Neill.

Speaker 0

Thank you and good morning. Welcome to Manulife's earnings conference call to discuss our Fourth Quarter and Year-End 2020 results. We are conducting this call virtually. Our earnings release, financial statements, and related MD&A statistical information package and webcast slides for today's call are available on the Investor Relations section of our website at manulife.com. Turning to slide four, we will begin today's presentation with an overview of our Fourth Quarter and Year-End highlights and an update on our strategic priorities by Roy Gori, our President and Chief Executive Officer. Following Roy's remarks, Phil Witherington, our Chief Financial Officer, will discuss the company's financial and operating results. After the prepared remarks, which were recorded earlier this week to ensure optimal sound quality, we will move on to the live question and answer portion of the call. We ask each participant to adhere to a limit of two questions.

If you have additional questions, please re-queue and we'll do our best to respond to all questions. Before we start, please refer to slide two for a caution on forward-looking statements and slide 40 for a note on the use of non-GAAP financial measures 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.

Speaker 2

Thanks, Adrienne. Good morning, everyone, and thank you for joining us today. 2020 was an incredibly challenging year in many respects. Countless people were affected by illness and loss, as well as isolation from loved ones, putting stress on their physical and mental health and creating anxiety for their financial well-being. We offer our deepest sympathies to those who've been directly impacted by illness and loss and our immense gratitude to all frontline workers globally for their incredible efforts through this unprecedented time. I also want to thank every colleague, along with our agents and business partners, for all they have done to make decisions easier and lives better for our customers over the past year. Turning to slide six and our 2020 financial highlights. In 2020, we delivered net income of $5.9 billion, an increase of $269 million from 2019.

Core earnings of $5.5 billion declined 9% from the prior year, despite positive core earnings growth in three of our four operating segments, including Asia and Global Wealth and Asset Management. The decline was primarily due to the absence of $400 million of core investment gains in the current year. APE sales were $5.6 billion in 2020, down only 8% from the prior year, reflecting our ability to leverage digital capabilities to engage customers despite a constrained selling environment. Our capital position remained strong with a LICAT ratio of 149%, and we continue to have substantial financial flexibility. Manulife's total AUMA reached $1.3 trillion, the highest in our company's history, and Global Wealth and Asset Management delivered net inflows of $8.9 billion in 2020, an outstanding result in the current environment.

Turning to slide seven, as you've heard me say in the past, Manulife's global diversity is one of our greatest strengths, and I'm very pleased with the resilience that our franchise exhibited throughout 2020 and the results that we delivered despite significant headwinds. Manulife entered 2020 in a position of strength thanks to the hard work that we've done over the years to de-risk our product offerings, reduce the company's sensitivity to market movements, optimize our legacy portfolio, and strengthen the company's capital position, reduce our leverage, and last but definitely not least, make meaningful investments in digital capabilities whilst fostering a culture of expense discipline and efficiency. Our continued momentum and strong financial performance have resulted in a history of progressive dividend increases over the last five years.

Markets were extremely volatile throughout 2020, and the relatively small variance between Manulife's net income and core earnings is a testament to the effectiveness of our equity and fixed income hedging programs. We have a strong record of delivering robust growth in new business value, and while this figure declined versus the prior year, the fact that we generated new business value of $1.8 billion in 2020, despite significant headwinds, exemplifies the strength and diversity of Manulife's global business. I'd like to take a few minutes to comment on the outstanding results that our two growth engines, Global WAM and Asia, delivered in 2020. Turning to slide eight, our global wealth and asset management businesses performed very well in 2020.

AUMA reached a record high of $754 billion, an increase of 12% from 2019, benefiting from favorable markets and positive net flows, and our quarter-to-quarter margin has improved considerably over the last five years, up 470 basis points, which reflects healthy top-line growth and resilient fees, coupled with additional scale and a disciplined approach to expense management. Our global retirement business delivered strong growth in 2020, fueled by record growth flows in Indonesia and capturing 35% of Hong Kong NPF net flows, as well as the top market share position for our new business in our target markets in Canada and in our core small business market in the US. In Canada retail, our mutual fund business ranked number three in terms of net flows on a cumulative three-year basis, with bank-owned fund companies taking the top two positions.

Our success was driven by superior investment performance and the impact of Manulife Securities, the second largest investment dealer in the financial advice channel in Canada. Turning to slide nine, which showcases the diversity and resilience of our businesses in Asia. Our strong and diversified presence across 11 markets in Asia was a key factor in delivering solid 2020 results in the region despite significant headwinds. You will notice that Asia Other, which includes many of Asia's fastest-growing emerging market economies, delivered exceptional results, including record core earnings and MVV, along with impressive margin expansion as we continued to build scale. The prominence of Asia Other has grown considerably in the last few years, with Asia Other contributing 43% of Asia's MVV in 2020, compared with 29% in 2016.

Strong execution was another crucial driver of our success, and I could not be more proud of how the team stepped up to quickly adapt to the changing needs of our customers throughout the region. Turning to slide ten, which displays our market rankings and distribution capabilities. Our Asia franchise emerged from 2020 in a stronger position, with higher market rankings in six markets, and Manulife ranked in the top five in seven markets in Asia. Manulife has a well-established agency force, which is reflected in our top ranking for agency sales in Hong Kong, China, Vietnam, Indonesia, and Cambodia. Through the organic deployment of capital, we continued to recruit high-quality agents throughout 2020 and increased our agency force by 21% to over 115,000 agents. In addition to agency, our nine exclusive bancassurance partnerships and more than 100 bank partners have been key drivers of our success.

During 2020, we entered into an exclusive bancassurance partnership with VietinBank, one of the largest banks in Vietnam, and we renewed our exclusive agreement with Bank Danamon Indonesia, extending our partnership to 2036. The deal with VietinBank is pending approval, and once it closes, we'll have access to over 30 million customers through exclusive partnerships, cementing our position as one of the leading insurers in bancassurance distribution in Asia. Outstanding distribution capabilities are the backbone of success for an Asian insurer and serve as a leading indicator of growth potential. Based on the quality of Manulife's distribution capabilities, as well as our increasing scale and improving market rankings, I'm confident that we will achieve our 2022 target of two-thirds of core earnings generated from our highest potential businesses. Turning to slide eleven, our strategy is sound, and we continue to execute on our five strategic priorities throughout 2020.

We generated $780 million of additional capital benefits from our legacy businesses in 2020. The portfolio optimization initiatives announced to date have resulted in cumulative capital benefits of $5.9 billion, and we will continue to pursue opportunities to further optimize our legacy portfolio. This will include both organic and inorganic initiatives, and we will execute if they are in the best interest of our shareholders. We have a mature expense efficiency program with processes in place that enable us to be responsive to headwinds, such as those encountered throughout the pandemic. As a result, our core expenses declined by 3% in 2020, and our expense efficiency ratio of 52.9% exhibited resilience when compared with 52% in 2019. I'm pleased to announce that we have successfully completed our 2022 target of delivering $1 billion of expense efficiencies two years ahead of schedule, which Phil will discuss in more detail.

Our first priority is to accelerate growth in our highest potential businesses, and we aspire to have these businesses generate two-thirds of total company core earnings by 2022. Our highest potential businesses accounted for 66% of total company core earnings in 2020. However, it's worth noting that this figure benefits from the absence of core investment gains in the denominator. Normalizing for this item, our highest potential businesses would have contributed 62% of total company core earnings, which is a five percentage point increase over 2019. Our fourth priority is about our customers and how we're using technology to attract, engage, and retain customers by delivering an outstanding experience. We've invested over $650 million in digital capabilities since 2018, and the impact of these investments on our operations is visible on slide 29, which shows our digital KPIs.

At the start of 2020, I mentioned that our NPS score will be the ultimate test as to whether our digital capabilities are working. I'm happy to report that we achieved a net promoter score of +12 in 2020, which is an 11-point improvement from the 2017 baseline and a 4-point improvement from 2019. This is a reflection of our ability to quickly adapt to the current environment, listen to our customers, and leverage our digital capabilities to better serve our customers. Our final priority is around building a high-performing team and culture. Our target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022, and I'm proud to say that we made significant progress on this front in 2020.

We ranked in the 80th percentile amongst global financial services and insurance peers on our employee engagement survey, a top quartile position, and a significant improvement compared to 2019. Manulife was voted one of the world's best employers by Forbes, ranking in the top 100 globally, and one of only three financial services companies ranked in the top 100. Finally, we've committed to invest more than $3.5 million to promote diversity, equity, and inclusion through expanding hiring commitments, education, and community support for organizations helping Black, Indigenous, and people of color. Moving to slide 12. To conclude, I'm pleased with our fourth quarter and full year 2020 performance, which continues to showcase our consistent track record of execution. We delivered strong results in 2020 despite significant headwinds and remained committed to both our dividend and medium-term financial targets.

There continues to be a high degree of uncertainty as we enter 2021. However, the long-term fundamentals and demographics underpinning our strategy remain unchanged, and I'm optimistic for Manulife's future. I believe that we will unlock significant shareholder value by continuing to deliver strong results, executing against our five strategic priorities, and making progress against the targets that we've established. Thank you, and I'll hand over to Phil Witherington, who will review the highlights of our financial results. Phil. Thank you, Roy, and good morning, everyone. Turning to slide 14 and our financial performance for the fourth quarter and full year. As Roy discussed, in 2020, we delivered solid operating results and made consistent progress against our five priorities, demonstrating our resilience amid a challenging environment. I will highlight the key drivers of our fourth quarter and full year performance with reference to the next few slides.

Turning to slide 15, core earnings remained solid at $1.5 billion in the fourth quarter of 2020, largely in line with the prior year quarter on a constant exchange rate basis, reflecting the absence of core investment gains in the quarter and lower investment income in Corporate and Other. These items were offset by the favorable impact of inforce business growth in Asia and the US, higher average AUMA in our global WAM business, and lower general expenses. Net income attributed to shareholders of $1.7 billion in the fourth quarter was up $0.6 billion from the prior year quarter on a constant exchange rate basis, primarily due to higher investment-related experience gains, gains from reinsurance transactions compared with losses in the fourth quarter of 2019, and a lower charge from the direct impact of markets.

Of note, we recognized a gain of $585 million from investment-related experience in the fourth quarter of 2020, reflecting the favorable impact of fixed income reinvestment activities, higher than expected returns on our older portfolio, primarily driven by fair value gains on private equity and the value of proceeds from the sale of NAL, and favorable credit experience, partially offset by lower than expected returns on real estate. The loss of $674 million in the fourth quarter from the direct impact of interest rates was driven by narrowing corporate spreads, primarily in the U.S., partially offset by realized gains on available-for-sale bonds. The gain of $351 million from the direct impact of equity markets reflects the strong performance of global equity markets in the fourth quarter of 2020. Slide 16 shows our source of earnings analysis.

Expected profit on inforce increased by 7% on a constant exchange rate basis, driven by inforce business growth across Asia and the US. As I mentioned last quarter, we continue to view 6% as a reasonable annual growth rate for our expected profit on inforce. New business gains were in line with the prior year quarter, reflecting favorable product mix in Hong Kong and Vietnam, offset by lower sales volumes in our international high-net-worth business related to COVID-19 and lower sales from both group and individual insurance in Canada. As a reminder, our international high-net-worth business rolls up to the US segment. Overall policyholder experience in the fourth quarter was unfavorable, reflecting mortality losses from excess deaths in US life, partially offset by the impact of higher claims terminations in long-term care and favorable claims experience in long-term disability in Canada.

Core earnings on surplus declined compared with the prior year quarter, largely due to lower yields and change in asset mix, partially offset by higher average asset levels and the favorable impact of markets on seed money investments. Turning to slide 17, where I will comment on fourth quarter results compared with the prior year quarter. Core earnings increased by 15% in our global WAM business, reflecting higher average AUMA and continued disciplined expense management. Core earnings in Asia increased by 16%, driven by inforce business growth from across Asia, new business gains relating to more favorable product mix in Hong Kong and Vietnam, and disciplined expense management, partially offset by lower new business volumes in Hong Kong. Core earnings in Canada increased by 10%, driven by favorable policyholder experience in insurance.

In the US, core earnings were at a similar level to the prior year, reflecting higher inforce earnings and lower expenses, offset by unfavorable policyholder experience and the non-recurrence of tax benefits in the fourth quarter of 2019. Core losses in our corporate and other segment increased by $137 million compared with the prior year quarter, reflecting the absence of core investment gains and lower investment income, partially offset by the favorable impact of markets on seed money investments. Slide 18 shows our new business value generation and APE sales. Our NBV and APE results improved in the fourth quarter of 2020 relative to earlier in the year, and while much uncertainty persists regarding how and when global economies will emerge from COVID-19 containment, we are nonetheless encouraged by this trend.

In the fourth quarter of 2020, we delivered new business value of $489 million, down 7% from the prior year quarter. In Asia, new business value decreased 5% from the prior year quarter due to lower sales volumes in Hong Kong and a less favorable product mix in Japan, partially offset by higher sales and a more favorable product mix in Asia other. In Canada, new business value increased 10% from the prior year quarter, primarily driven by higher margins across all business lines, partially offset by lower volumes in both group and individual insurance. In the U.S., new business value decreased 26% from the prior year quarter, reflecting lower sales in our international business. In the fourth quarter of 2020, we delivered APE sales of $1.4 billion, down 5% from the prior year quarter.

In Asia, APE sales increased by 2% from the prior year quarter, as growth in Japan from Coli and growth in Vietnam and Singapore was partially offset by lower sales in Hong Kong due to the tightening of COVID-19 containment measures. In Canada, APE sales decreased by 10% from the prior year quarter, primarily driven by lower group and individual insurance sales due to the adverse impact of COVID-19, partially offset by higher sales in our lower-risk segregated funds. In the U.S., APE sales declined by 28% from the prior year quarter, as sales in our international high-net-worth business were adversely impacted by COVID-19, and domestic universal life sales decreased compared with the strong prior year quarter, which benefited from higher sales in advance of anticipated regulatory changes.

The modest decline in NBV and APE sales when compared to the prior year quarter reflects our digital capabilities, which have enabled us to continue to engage with our customers in this challenging environment, and we stand ready to capture growth from demand as COVID-19 impacts diminish. Turning to slide 19, the benefits of our geographic and line of business diversification are evident in our results despite the challenging backdrop in 2020. Our global wealth and asset management business generated net inflows of $2.8 billion in the fourth quarter compared with net inflows of $4.9 billion in the prior year quarter. In Canada, net inflows were $2.2 billion compared with net inflows of $1 billion in the fourth quarter of 2019. The improvement was driven by lower plan redemptions in retirement and higher gross flows across the product lineup in retail.

In Asia, net inflows of $2.2 billion were higher than net inflows of $0.2 billion in the prior year quarter, driven by lower redemptions in institutional asset management and higher gross flows of retail money market funds in Indonesia. In the U.S., net outflows were $1.6 billion in the fourth quarter of 2020 compared with net inflows of $3.7 billion in the fourth quarter of 2019. This decrease was driven by higher redemptions across all business lines, lower new plan sales in retirement, and the non-recurrence of several large sales in institutional asset management in the fourth quarter of 2019, partially offset by higher net inflows in retail from strong intermediary sales. Turning to slide 20, our average global WAM AUMA increased by 10% compared with the prior year quarter and 6% on a full year basis, driven by the favorable impact of markets and higher net inflows.

Our core EBITDA margin was 30.7% in the fourth quarter, up 340 basis points from the prior year quarter, reflecting our scale and commitment to expense efficiency. Turning to slide 21, we delivered over $300 million of incremental expense efficiencies in 2020 and $1 billion programmed to date, thanks to the success of previously announced expense initiatives, including digitization, vendor management, employee costs, and real estate optimization. Turning to slide 22 and core expenses, our expense efficiency program is mature, and efficiency is now embedded in our culture. We continue to take action to drive efficiencies and successfully reduced core expenses by 4% in the fourth quarter and 3% on a full year basis. As a result, our 2020 expense efficiency ratio was resilient at 52.9%, despite core earnings declining 9% year over year.

Despite headwinds related to the global pandemic, we remain committed to achieving our expense efficiency ratio target of less than 50% by 2022. Turning to slide 23, our capital position remained strong throughout 2020, and we ended the year with a LICAT ratio of 149%, representing $29 billion of capital above the supervisory target. Compared with 2019, the ratio increased by 9 points, driven by market movements primarily from lower interest rates, net capital issuances, and a capital benefit from the reinsurance of a block of US bank-owned life insurance business. Slide 24 outlines our medium-term financial operating targets and recent performance. As expected, we fell short of our medium-term targets in 2020 as a result of unprecedented levels of disruption related to COVID-19. While it's reasonable to expect COVID-19-related headwinds to persist for the foreseeable future, we believe that our medium-term financial targets remain appropriate.

This is well supported by both geographic and line of business diversification. In addition, we anticipate continued contributions from our well-established expense efficiency program and robust digital capabilities. Before we open the call to questions, I will turn this over to Adrienne for some brief remarks on Investor Day. Adrienne. Turning to slide 25, prior to concluding our prepared remarks, I wanted to let you know that we will be hosting an Investor Day on Tuesday, June 29, 2021. The event will be conducted virtually, and please save the date, and registration details will follow later this month. Operator, we will now open the call to questions. Certainly, thank you. If you have a question and you're using a speakerphone, please lift your hands up prior to making your selection. If you have a question, please press star one on your device's keypad.

If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time. If you have a question, there will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Gabriel Dechaine with National Bank of Canada. Please go ahead. Good morning. First one on mortality, the losses in the U.S. life block. Can you tell me what you're seeing there? And if that's a trend that could result in a reserve charge later on Q3, typically, because we're hearing from other insurers that there's excess mortality, but it's not necessarily in the insured population. So wondering what your experience has been. Thanks, Gabriel. It's Steve here. I'll take that one. I'll get to your question.

I think it's important to remember the context of what we're seeing from the impact of COVID on claims across the company. We are benefiting from the diversification that we've got. As you note, we're seeing losses in our life insurance business, particularly in the US on claims, but we're seeing gains in other lines of business, and that's coming through the overall company experience. With respect to US life, just a reminder that in 2019, our claims experience was in line with expectations, in line with our evaluation best estimate assumptions. We also did a deep dive and trued up our mortality last year, and we strengthened our mortality assumptions on older ages. I feel good about our mortality assumptions in the US life business. What we've seen in 2020 is COVID-related claims. We have seen COVID claims experience come through.

We've also seen some variability in large cases, but I would chalk that up to normal experience. As you've noted, as you've seen, we've had very meaningful offsets in our long-term care business, one of the points of diversification. We will continue to watch the US life claims experience, but I think that's the context, and I feel good about our assumptions. Okay. The other question I have is the expense reduction of you're up to $1 billion now. That's great. If I look in your notes to financials, you do talk generally about the various assumptions and how your business performed favorable, unfavorable, and expense has been an unfavorable outcome, I guess, for several years now, including 2020.

I'm wondering, is there another amount of cost cutting you need to do, or what needs to happen for that expense experience across the company to turn favorable or neutral? Thanks, Gabriel. This is Phil. I'll make a start, and then I might turn over to Steve to talk about experience when it comes to expense assumptions. You're absolutely right. We've made substantial progress. As Roy said in his remarks, we have achieved the billion-dollar target that we set ourselves, but we are not done. I recall very clearly at the Investor Day in 2018 when we stood up and said that we have two targets. We've got the billion-dollar cost target as well as the expense efficiency ratio target. We do remain committed to achieving that 50% or less expense efficiency ratio consistently by 2022. That means there is work to be done.

The ratio, if you look at 2020, was 52.9%, which I think is good in the environment. It was really resilient against a backdrop of revenue challenges. As we look forward, there are a couple of ways to achieve that 50% cost efficiency ratio target. One is to lower expenses. For every $150 million of expenses we can save, that does take a percentage point off that ratio. The other way to achieve the ratio, of course, is growing our revenues. $300 million of revenues would have a 1% impact on the ratio. Specifically, with respect to experience, I'll hand over to Steve to comment. Thanks, Phil.

Gabriel, one place that you can see where the expense actions are coming through our experience, if you look at the total company core experience on our source of earnings in the supplement on page four, what's in that core experience, its policyholder experience, that was neutral relative to Q4 of last year. That is not explaining the significant improvement that we're seeing in core experience. The primary driver is expenses and expense actions that we've taken that is showing up in that line. That's the primary driver. All right. Thank you. Thank you. The next question is from Tom McKinnon with BMO Capital Markets. Please go ahead. Yeah. Thanks very much. A question about the remittances, $1.6 billion in 2020. And I believe you had downstreamed $2.5 billion into Asia in the first four months of 2020, due in part to the unusually low interest rate environment.

Does that mean in more normal times, the remittances would be, if we add back that $2.5 billion, would be $4 billion or above? Maybe you can just comment on the outlook for remittances kind of going forward, just given that little arithmetic that I did. I have a follow-up. Thanks. Thanks, Tom. This is Phil. I can confirm your memory is correct. I did say in May that we had injected approximately $2.5 billion into our operations in Asia. I think on the topic of remittances, one relevant point to note is that if I look at average remittances in the five years prior to 2020, the average level of remittance was $2.5 billion. Looking at 2020, we have generated $1.6 billion of remittances. That's below what we would normally expect.

The main driver of that is the injection that we had made in the first half of the year into our Asia businesses. When I think about where the rest of the remittances came from, it was largely coming from the U.S. and Canada, who both of those businesses made substantial remittance contributions in 2020. When I step back and look at the overall remittance generation and remittance power of the organization, I think it is a story of diversification. Going back to what I said at the beginning, that on average, we've generated $2.5 billion per year. When I look at that period, 2015 to 2019, where the remittances were coming from, and of course, $2.5 billion over five years is $12.5 billion. Of that, $6.9 billion came from the U.S., $3.7 billion came from Canada, and Asia contributed $2 billion.

That gives me some confidence that we have a historic track record of remittance generation. I am also confident in the medium-term remittance power of our organization. Remittances are supported by strong earnings generation on a Canadian basis, but also on a local basis. While there may be variation in timing of remittances from quarter to quarter and year to year, we have sufficient flexibility within MLI to compensate for that. I think the outlook is favorable. I do not have particular concerns when it comes to remittance generation, Tom. Okay. The follow-up, we have seen lots of transactions with private equity firms or even reinsurers, just with respect to annuity blocks, albeit it is probably more related to fixed and equity indexed annuity blocks.

Maybe you can comment on some of the dialogues that you may have had with respect to reinsurers, what the outlook is for transactions in this environment. I'll leave it there. Maybe just put some color on that. Thanks. Yeah. Thanks, Tom. Let me start, and let me then hand over to Navid. Portfolio optimization has been a huge priority for us as we declared at our Investor Day. We did set a target of freeing up $5 billion worth of capital by 2022. We were really delighted that by the end of 2019, we were able to achieve that goal and actually further make progress in 2020. This has been a big priority for us, focusing on transacting. Obviously, they're only doing that when it's in the best interest of shareholders.

I think I'd say that in the current environment with the excess liquidity, we're certainly seeing a lot of interest. That will continue to be the case, I believe, in 2021 and beyond. Let me hand over to Navdeep, who will provide a little bit more color and context. Yeah. Thank you, Roy. We're still exploring reinsurance transactions. I think there's still some runway there for us. As Roy said, we'll transact in the best interest of shareholders. I think the bank-owned life insurance transaction from Q3 is a good example of this. There was a considerable reduction in interest rate risk as a result of that transaction. As we talked about, there is definitely a lot of activity in the market and a lot of capital chasing deals. We especially closely monitor the risk transfer market for variable annuities and long-term care insurance.

It is probably more robust for VA than it is for LTC. I mean, to reiterate, we are also heavily focused on organic work on all of our legacy blocks. This includes re-rates, buyout and transfer programs, claims management, and other enforced management initiatives. Really pleased with our success there. Again, regularly monitoring the market. Okay. Thank you. Thank you. The next question is from Manny Gromman with Scotia Bank. Please go ahead. Hi. Good morning. Just following up on the remittances discussion. If my memory is correct, the downstreaming was tied to rates. I am wondering, if you look out to 2021, is there any chance that the rate environment could reverse what we saw in 2020? Could you see that have a very positive impact on remittances in 2021? Thanks. Thanks, Manny. This is Phil.

You're right that the driver of the injections that I commented on in May into Asia was market conditions, in particular interest rates, reflecting the very sensitive local basis in Hong Kong, sensitive to interest rates. Also, one of the drivers there was equity markets as well. I think it's fair to say that as the macroeconomic environment improves, and if we do see a sustained improvement in interest rates, that does become a tailwind for remittances. I would expect to get some of that capital back. Thanks for that. On the subject of capital, you continue to show a build in your capital over the supervisory target. I think there's definitely some question marks about exactly what your deployable excess capital is out in the market. I'm just wondering if you could maybe help clarify how we should think about it.

A related point is just the centrality of buybacks in your capital plans for 2021. Yeah. Thanks. Let me start, and then I'll hand over to Phil. As you rightly point out, and as Phil commented in the opening remarks, we're in a very strong capital position. Like our ratio of 1.49 is where we ended the year. That basically translates into $29 billion worth of excess capital over our supervisory limit. This, as you know, has been a strong focus for our organization as we've been really driving that agenda of a strong capital position, which provides us significant financial flexibility. At the same time, over the last three years, we've reduced our leverage ratio. Our leverage ratio was north of 30%. Now we've seen that come down quite significantly. We really do feel good about the strong capital position that we're in.

In terms of deployment of capital, I think one of the things that I'd lead with is that our geographic footprint puts us in a bit of an enviable position that we don't need M&A to deliver on our medium-term goals of 10-12% core earnings per share growth. I think that really is a source of strength, which ultimately means that when we do deploy capital for any M&A, we will do that opportunistically. We'll do that when we've got a high degree of confidence that we can execute against that agenda. We'll be very, very disciplined on that front. Our priorities from a capital deployment perspective, as we've said in the past, is clearly organic growth, continuing our strong track record of dividend increases, and buybacks. Buybacks have been a key source of value enablement for us.

In fact, we returned $1.2 billion worth of capital to shareholders via buybacks. That is net of the drift. When the OSFI restrictions are released, that will be, again, another priority for us. I will sort of pause at that and see if Phil wanted to supplement with any thoughts. Yeah. I am happy to add a couple of points. Roy talked about capital deployment priorities given the financial flexibility. Dividend is very high on the list there. From 2017 through 2020, our dividend CAGR has been 11%. A year ago, on the call last year, we announced a 12% increase to the dividend. I think it is also worth recognizing that from an NCIB perspective, you specifically mentioned this, Manny. We had, through the program, and this is a net capital deployment, so net of the drift that we had in place, we deployed $1.2 billion of capital on the NCIB.

We were actually in the market buying back shares until the 13th of March when OSFI put in place the restrictions on dividend increases and NCIB programs. Ultimately, the dividend and the NCIB are decisions that the board, the Manulife Board, will make. I can assure you that it is something that is considered on a quarterly basis. We sit down with the board and discuss capital deployment and the level of the dividend. I think that quarterly routine that we are in puts us in a position to respond in a timely manner to changes in the external environment. Thank you. Thank you. The next question is from Paul Holden with CIBC. Please go ahead. Thank you. Good morning. First question is with respect to the outlook for individual insurance sales. I guess sort of across geographies, namely Hong Kong, Canada, and Asia.

The reason I ask is you've put a lot of effort and focus on improving digital sales channels as well as making it easier for people to buy insurance with a lack of medical exams. We continue to see life sales down year over year. Just wondering, what is the catalyst for sales broadly to go higher? Is it just as simple as the lifting of social distancing restrictions? Are there other catalysts that could take sales higher on a year-over-year basis? Yeah. Paul, thanks for the question. Roy here. Let me start, and then I'll hand over to Anil and Mike to provide a little bit more color and texture as it relates to our Asia business and our Canada business. I guess, as we said in the opening remarks, since the onset of the pandemic, our business has demonstrated, I think, really strong resilience.

The fact that our AP sales are only down 8%, given the headwinds that we saw in 2020, I think is quite remarkable. I think that's a function of three key things. The first was our global diversity. I think we really benefited in 2020 from the global diversity of our franchise. That's not just across the three broad geographies of Canada, the U.S., and Asia, but even within Asia, the geographic diversification that we have across the different markets there, which really meant that when we saw some markets entering more restrictive conditions and environments, we saw others that were loosening or relaxing. That diversity really was a source of strength and bode well for us. Quite frankly, I think it will continue to be the case in 2021 as we see still markets in varying degrees of lockdown and easing.

The second key factor for us on the sales front was the digital infrastructure. We've invested heavily in the last three years, in fact, more than $650 million in enhancing our digital infrastructure. It wasn't because we knew COVID was coming, but we knew that there was going to be a big shift and push towards engaging with consumers in a digital way. That is the reason why we made those investments. We saw our agenda of digitally engaging with customers accelerate significantly in 2020. Thankfully, that was a function of the tools that we had in place, which certainly supported that. I think that is going to continue to be the theme and the flavor for 2021. We will certainly want to capitalize on that momentum. We will want to make sure that we leverage that infrastructure that we have.

The final thing I'd say is that we're benefiting significantly from the strength of our sales channels. If I just sort of highlight Asia, and Anil will talk about this, we've been very focused on growing our agency force, but also making sure that we have the most professional agency force in Asia. In Asia, we grew our agency by 21% to 115,000. At the same time, we've also invested significantly in our banker distribution, where it's certainly one of the leaders in banker in Asia. That was started many, many years ago. With VietinBank transaction closing, we will have 10 exclusive bank partnerships, over 100 partners in general. The 10 exclusive gives us access to 30 million clients. I really feel that 2020 was a really important year for us.

It was a demonstration of the resilience of the business to demonstrate the results that we have. I feel that is going to continue in 2021. Let me hand over to Anil and then Mike to provide a little bit more color and texture on sales momentum. Thanks, Roy. As Roy rightly pointed out, I think the diversified nature of our geography, of our channel mix, of our product has led to the significant resiliency that we have been able to show during the crisis. I think the investments that we continue to make in expanding our footprint, both on the agency as well as our bancassurance channel, that allows us a great mix and diversification strength to our channel, was absolutely pivotal in kind of driving the kind of success that we saw in 2020.

Again, just to kind of illustrate that point by taking one market, and that is Hong Kong. You referred to that in your question. Challenges have not been new to Hong Kong. If you go back to quarter two of 2019, we were witnessing challenges due to the disruptions on account of protests right from there on. I think one of the things that we have been able to do well is show the execution rigor that has helped us win through some of the crises and the challenges that we have witnessed. In fact, in Hong Kong, year-to-date quarter three 2020, our market share actually grew by 50%.

This is on top of the fact that we have been enforcing a strong focus on inforce management, being very disciplined about expenses, very disciplined about our product pricing, and kind of responding pretty much instantly to some of the macro conditions, specifically the lower interest rate environment, so that we continue to protect value. Towards that, as you can tell, Hong Kong core earnings, both in quarter four as well as for the full year, registered a double-digit growth. On many counts, as I said, basis the investments that we made in our technology platform, in our distribution, in our people, we feel very confident to be able to seize the opportunity in Asia. Again, Roy mentioned in his opening remarks that we were able to gain market share in six of our geographies.

I think that was a great evidence as to how we've been able to outperform and outpace our key competitors. Yeah. It's Mike here. I'll just add a few comments. I won't hit on a lot of the similar themes that are impacting the Canadian business. I mean, at a high level, we do know that coming out of the SARS crisis, we did see an increase in interest in life insurance. I think that is one trend that we'll see around the globe, frankly, as we move forward. We've certainly seen it already. From a Canadian perspective, we certainly have also taken advantage of the pandemic to digitize a lot of our processes. I think that will help with the ability to process sales and make it easier for both customers and advisors going forward.

That's similar to some of the themes that Roy mentioned. I just remind you, in Canada, we actually have quite a diverse product shelf. We sell individual health and dental. That was actually up this year. Our affinity business was up. Our mortgage creditor business was up. We had a very strong first half in our sort of traditional individual life sales. That suffered when our pipeline really got depleted at the first part of the pandemic when there was a lockdown in terms of being able to get paramedical testing. We've seen that pipeline building back up. You would have seen in our results a nice increase from Q3, up about 17%. We do expect that business is going to come back as that pipeline builds up over the next couple of quarters. That's helpful. Thank you. Second question is also a big picture one.

Going back to the earlier discussion regarding transaction activity in the U.S., a lot of folks are also talking about the Prudential Jackson National pending transaction. Part of your answer has been talking about doing what's best for shareholders. I think it'd be helpful for everyone to understand, with a little bit more granularity, how you view that lens. How are you viewing this balancing act between engaging in transactions and what is best for shareholders? What are the key metrics or items that you're considering? Yeah. Thanks, Paul. Let me answer that. The short answer on the metrics is that we look at a wide variety of lenses or metrics and financials as well as non-financials to determine what's in the best interest of shareholders.

The key philosophy that we've employed, quite frankly, since we embarked on the new strategy was that we wouldn't take anything off the table. You've seen through the portfolio optimization focus and activity that we've achieved a lot of great results from that focus and attention. At the same time, what I will say is, we saw this in 2020, one of the core strengths of our franchise is our global diversity. The fact that we have business operations that are globally diverse across the US, Canada, and Asia really put us in a very strong position in 2020. Quite frankly, I expect that will continue to be the case in 2021 and beyond. We've said all along that we'd never rule out anything or any transaction.

What I would say specifically as it relates to the Prudential transaction, that's not a high priority for us. We really do believe that the global diversity of our business is our key strength. There is an incredible opportunity for us to unlock through the agenda that we're executing today, be it in organic transactions. As Navid mentioned earlier, the tremendous opportunity through organically managing our business for greater outcomes and results. Thank you. The next question is from Mario Mandanca with TD Securities. Please go ahead. Good morning. If we could go to the Asia business for a moment. Obviously, I'm sorry, not Asia, wealth management. Obviously, the last couple of quarters have been very good. The market's strong, and the margin continues to improve. What I observe, though, is that the expense level in the wealth business really hasn't changed in almost two years.

Obviously, the company is doing a good job of keeping a lid on expenses and benefiting from a better environment. Where I'm going with this is, is there any reason why would it be appropriate to suggest that NALEF does not need to make any big investments in the wealth business as you continue to grow assets? Or could we see sort of a step up in expenses once you cross over, say, the $800 billion line or $900 billion or trillion? Do you see in the horizon any real need to invest more aggressively in the wealth business to take it to the next level? Great. Thanks, Mario. This is Paul speaking. I'll just start by saying we actually did make quite a big investment in the global infrastructure through our Go program years ago, which moved all of our business on a global platform.

We are really seeing the benefits of that as we scale, which you are starting to see in our results. We have also, as we brought the organization together a couple of years ago, really found opportunities for efficiency to run the business better, to get better collaboration. We have had a lot of those early wins, I would say, showing up in the results. We still think there is tremendous opportunity in the business to drive out efficiencies as we look at our global scale and make sure we leverage that for our local businesses. I mean, one of the things we do try and watch is just our expense growth relative to revenue growth. I think I have said this historically, try and live within half of our revenue growth with expenses to make sure we can manage fee compression, continue to expand the margin, etc.

We do today, in our expense line, already significantly invest in the business every year. It is really a question of priorities. For us, we would expect that we will see growth in expenses as the business grows. We will not be able to keep it flat forever. We do expect we are going to be able to do that in the context of the revenue growth and continue to move the other metrics forward. Yeah. Mario, if I could have just said, I think you have touched on perhaps one of the biggest opportunities that we see in our global wealth and asset management business. That is that we have got an infrastructure and a foundation that can support a business that is much larger without having to make significant investments beyond the ones that we have already made.

We feel that this is a key driver of not just improving our margin, but improving our profitability trajectory for our global wealth and asset management business going forward. Paul highlighted some of the system investments that we've made. We've also been investing significantly on the digitization front as well in terms of the way we interact with customers. This is one of the reasons that we're most excited about the prospects that we see and have in the wealth and asset management business as we continue to grow and build out our global footprint there. Okay. If we could now go back, Roy, to your answer to Paul's question. Paul was asking about the sort of lens or the goalposts you look at in assessing a transaction that would free up capital.

Now, without providing any numbers, because I know you can't negotiate a sale or a reinsurance transaction on a call like this. Would I be correct in saying that on the one hand, the company has to look at what kind of earnings would be given up and what sort of book value charge might arise? That would be one part of the scale. On the other side, what kind of capital relief would be achieved and what that capital could be put to use? Is that, in a very simplistic way, the decision and the balancing act that the company faces when making decisions like this? Yeah. Thanks, Mario. It's somewhat simplistic the way you've mapped it out. I think you've just touched on some of the different components as it relates to making an assessment of whether we'd transact or not.

The two aspects that you've highlighted are certainly front and center for us as we look at whether we would transact or not. Again, the lens for us is best interest of the shareholder. That will include the value that is placed by the street in relation to each of our businesses and the capital that is being consumed by them. Certainly not a single-dimensional decision point. You've touched on at least two of the key aspects that we always consider when we decide on whether to transact or not. There are a few others. You're broadly right. Thank you. Thank you. The next question is from John Aiken with Barclays. Please go ahead. Good morning. With my line of questioning, I don't want to downplay the success you've had on the expense efficiency and the reduction of expenses.

When I take a look at what happened in 2020, you did have expense reductions in all of the operating segments. We actually have seen inflation in corporate and other. I was wondering if you could talk about what's driving this. Is this the cost of digital initiatives being absorbed by corporate? Or is there just some change in terms of how the cost allocations have been made? Thanks, John. That's a good question and a good observation from our results. What you're seeing in corporate and other on the expense line is an increase in expenses in the order of $50 million. What's driving that is a one-time charge relating to the write-down of some IT assets on the balance sheet. Really, it's nothing to be alarmed about in the context of everything that's going on in the backdrop of the pandemic.

We are looking very hard at our digital strategy and pivoting projects in certain ways as we prioritize certain digital investments in this environment. We have looked hard at everything that we have capitalized on the balance sheet and written certain items down. That is a one-time exercise, so not something that you should project forward. I think just touching on the question of corporate and other, one point that I do want to be transparent about is, and I referenced this in my remarks, that we are in a lower interest rate environment. That does impact the yield that we can generate on the surplus asset portfolio. If we compare Q4 2020 with Q4 2019, the headwind there is in the order of $50 million. Thanks, John.

When we take a look at the write-down of these IT assets, when you talk about this being one time, this is then still included in your definition of what your core earnings are? Correct. Yes. Yeah. We're very disciplined about what we include in core earnings. I'll be transparent. What we decided to do in this case is report them in aggregate in corporate and other so that we don't distort the underlying operating results of our businesses. But absolutely, it's part of core. Understood. Thanks. I'll read to you. Thank you. The next question is from Doug Young with Desjardins Capital Markets. Please go ahead. Hi. Good morning. I think it was Phil. And I think it's in the report as well. But your AltA experience, you mentioned that real estate returns fell short of expectations.

Maybe Scott can touch on, was this related to the Office Real Estate book? I think that's something that you mentioned you have some concerns with on a go-forward basis. Just trying to get a bit of an update on that. Sure. Thanks, Doug. It is Scott. Yeah, we didn't have a loss in that portfolio. As you know, if we don't achieve our assumed returns and they fall below that, a loss does show up through our income statement. That's what happened in the fourth quarter and for the full year. In fact, our real estate returns were about 0.5% in the fourth quarter. Still positive, but below the assumed return. You're also correct. Office is the biggest driver. Office is two-thirds of our portfolio.

We are just not seeing sort of the appraisal gains that we have historically seen and would need to see to get to those assumed returns. The income returns are still where they were. It is something that we are watching going forward. I think it is still to be determined how this will play out. I would say a protection on that part of the portfolio is that 25% of our real estate portfolio is in Asia. We are not seeing the same dynamics of the work-from-home in Asia, so less concerned there. In North America, I mean, it is still the playout. There are folks that believe that there will be more spacing, which will create more demand. We just have to see once we can all get back to the office where the demand will settle out.

We do have a little over a six-year average remaining lease term and 92% occupancy in the portfolio. Those should help us weather sort of the short term here. Yeah, basically, we're not seeing the appraisal gains we need. On the office portfolio, even slight appraisal losses give us that half a percent total return in the fourth quarter. Just can you remind us how much of your office portfolio Manulife Financial actually occupies? Yeah. Of the about two-thirds of the portfolio that is in office, just under 50% is non-occupied. I should add that the rest of the portfolio is largely industrial warehouses and multifamily, where we have much less concern. There's only about 3% in retail, which would obviously be a much bigger concern if we had significant retail holders. Okay.

Just second, Steve, I think there was negative lapse experience again in the US that offset some of the gains in long-term care insurance. Am I right? Can you quantify? Can you talk a bit about what you're seeing? I think you took a reserve charge for lapse last year. Sorry, last Q3. I think in Q3, you had some negative lapse experience. Just hoping to get an update on that front. Sure, Doug. Yeah. One of the things that we're seeing in the US, in the context of we've seen diversification in terms of business results, some of the sort of more second-order impacts of the pandemic, we've seen in our medical and health businesses, we've seen people not going to receive care. We've seen gains there.

In the US life business, what we've seen is that in our protection-oriented products, customers are hanging on to their they value the coverage that they've got. They're hanging on to it longer than what we saw pre-pandemic. We've seen that our lapse rates on that business is 20-25% lower than pre-pandemic trends. That's roughly a $25 million impact in the quarter from what we saw. We do anticipate that these trends will revert back towards pre-pandemic levels over time. We'll watch those trends very closely. You're pointing out one of the things that we're seeing is what we consider short-term aberrations as a result of the pandemic. Okay. I'll leave it there. Thank you very much. Thank you. The next question is from Darko Mihalic with RBC Capital Markets. Please go ahead. Hi. Thank you. I have two questions.

The first one, I think, is for Phil. And maybe Steve, not sure. It should be relatively straightforward. I think, Phil, in your prepared remarks, you mentioned 6% EPIF growth is still reasonable. I did see a fall in Canada. I wonder if you could talk let me quarter over quarter. I wonder if you could talk a little bit about EPIF growth by segment, really Asia, Canada, and US. Any kind of help there would be much appreciated. Sure. I can take that, Darko. Thanks. Phil commented in his remarks that we expect roughly 6% growth in earnings on inforce on an annual basis. We expect higher growth, close 8-9% in Asia. Then lower expected growth in Canada and the US as we've got a higher proportion of legacy business.

What we saw in the quarter, specifically in Canada, you mentioned quarter over quarter, we do see some seasonality. We see stronger expected profit in our group business in Q3. The drop from Q3 was really seasonality. The other thing that it's not a big driver of the trends. As you talk about by segment, in the basis change last year, as we pushed through all the changes mechanically, we saw a modest increase in our earnings on inforce in Asia and the US and a modest decline in Canada. Total company was not a material change. Those are some of the drivers and expectations that we're seeing on earnings on inforce. Okay. Thank you for that. My second question relates to portfolio optimization. It was good to hear Naveed talk about transactions and organic opportunities.

When I sit back now and I think about other things apart from lowering long-term care exposure or variable annuities, one thing that pops out in this kind of market environment is perhaps, is it time to revisit AltA? I'm sitting here reading about Wall Street Bets. I've got cryptocurrencies going crazy. I've got equity markets going nuts. Your AltA portfolio is down. I acknowledge it's at 9.5% now. I think 2019, 2018 was around 10%. Is it possible that we could perhaps free up capital and reduce AltA? Is that something that you would be considering going forward, given I think you mentioned excess liquidity in the marketplace? Whatever it is, is there a chance here that Manulife might consider once again reducing AltA as a proportion of investments? If not, why not? Yeah. Doctor, let me start.

I will hand over to Scott. As you know, we did take some actions to reduce our older return assumptions. I will remind everyone that the all-in padded assumption for us is 6.1% annual return. We would not rule anything out. One thing that we will say is that AltA is an incredibly valuable asset class for us. That is, I think, certainly the case, even maybe more so now in an environment of lower interest rates. Having a diversified investment portfolio and having the experience and knowledge of alternatives, I think, has been a huge source of strength for us over several decades. I think, actually, that will come to the fore even more so in the decade ahead with a lower interest rate environment. For us, diversification is really critical.

Having assets that can back our long-term liabilities and deliver through the cycle is certainly a huge priority for us. Let me hand over to Scott to provide some further commentary. Yeah. Thanks, Roy. That's really well said. I mean, it's really the right way to invest for long-term liabilities, speaking as an investment person. You'll see that at the pension funds that we have very long liabilities that don't have liquidity issues. Backing them with AltA makes a lot more sense. As Roy points out, in the current environment where fixed income is returning that much lower, it makes that much more sense. We're starting to see peers talk about doing more of it. Unfortunately, it comes with accounting noise, as we saw this year. We saw it in the financial crisis. We saw it this time.

Periodically, we're going to have some bad quarters when markets are upset. Relative to a fixed income strategy, the long-term earnings are much higher. To your remarks on GameStop and Bitcoin, there are definitely bubbles out there. We're not seeing bubbles in our AltA portfolio. It's not like we feel like this is a good time to be liquidating the AltA portfolio. We think they're still relatively reasonably valued and expect we'll be able to achieve our expected returns going forward. I guess where I was going with that is if we did see bubbles in the AltA portfolio, would you consider redo? I mean, when I think of the pushback I get on Manulife is long-term care, variable annuities, and AltA. The question is, we are seeing bubbles. If we start to see stuff in AltA, wouldn't this be an opportunity to reduce?

I guess the answer sounds like almost flat out no. Is that the way I would interpret your answer? No. The way I would put it more is we value diversification significantly. We are in six different AltA categories. We are always looking at new opportunities. If we were to see bubbles in one particular category, we would de-emphasize it. We would look to sell down. It is not the most liquid portfolio, so it takes time to do that. We are always evaluating the value in each of the categories. As you saw, we sold NAL. That was for other reasons, not because it was in a bubble. We are constantly looking at the portfolio and determining where the best value is and focusing on that. Thank you. Thank you. The next question is from David Modomattin with Evercore ISI. Please go ahead. Hi. Thanks.

Good morning. Thanks for fitting me in here. Just a question for Phil and Naveed. I was just wanting, excuse me, I was just wondering if you can just update us on the amount of, excuse me, the amount of capital and earnings you still have tied up in legacy businesses that can be unlocked. You guys have obviously made good progress. I think you said in 2018, it was around $23 billion of capital and I think $2 billion of earnings. Just wondering where that stands today. I can take that question. Yeah. This is Naveed here. David, thanks for the question. As you can see, we've taken considerable action on the capital front on the legacy side. I don't have the exact number. The total capital allocated to the legacy business is a bit lower than what we showed in 2018.

The earnings, despite the give-up on some of the transactions, is sort of in line with where it was in 2018. That gives you some reasonable guidance. Just to add to that, when we regroup for the Investor Day later in the year, I think that's a good time for us to provide a more holistic update on execution of each of our strategies, including portfolio optimization. Okay. Great. I guess just another question for Phil, just circling back on the 6% growth and expected profit on inforce. I guess I'm kind of scratching my head because that's the largest component of core earnings. It's 70%-75% of core earnings if I assume that you guys have $400 million of investment gains.

I'm just trying to bridge between 6% and you guys getting to the 10-12% medium-term EPS growth target. I guess I'm just wondering how to bridge that 6% growth on 75% of your core earnings and how you guys plan to get to that 10-12% EPS growth target if that's the case. Yeah. Thanks, David. It's a good question to ask. We are committed to the 10-12% target. With EPIF growing consistently with our expectations, we would expect 6% over the medium term. The components that will be accretive to that, we've got the impact of new business in our insurance businesses around the world, in particular in Asia, where we're seeing substantial growth as well as the opportunity to generate value through the impact of scale.

In addition to new business, we've got wealth and asset management, which we anticipate being accretive to our overall level of earnings growth. We have expenses, expense efficiency. As you've seen over the past three years, expense efficiency is something that is accretive to the bottom line. Just to highlight as well, when we talk about 10-12%, that is growth in core earnings per share. To the extent that we are permitted to do so and that it's appropriate given the external environment, we would also consider buying back shares in order to increase the per-share component or make a per-share contribution to that 10-12% growth rate. Got it. Thank you. Thank you. The next question is from Humphrey Lee with Dowling & Partners. Please go ahead. Good morning. Thank you for taking my questions.

Just to stay on the topic of EPS growth, I know the medium-term target of 10-12%. Looking for 2021 kind of versus 2020, Phil, it looks like you are kind of positioned to see a little bit stronger growth given hopefully a positive inclusion of core investment gains and then some of the COVID-related headwinds would abate. Any reason why 2021 would not be higher than the longer-term target? Yeah. Thanks, Humphrey. Let me start. Then I'll hand over to Phil, who could supplement. Again, we obviously spent a lot of time thinking about 2021. The first thing I'd say is that there is obviously a lot to be optimistic about when we think about the year ahead. There is still a lot of uncertainty.

I think we're going to see a tale of certainly two halves and maybe even more challenging in the second half than what many are expecting. I think that uncertainty is really going to come from a couple of things. The first is the vaccine deployment and the speed of the vaccine deployment. That's a key critical enabler for lockdown restrictions being eased. I think the other big factor, and everyone is across this, is really a big question mark around the effectiveness of the vaccine against the various mutations. The first thing I'd say is that there is certainly a lot to be optimistic about. There is still a lot of uncertainty as to how 2021 will unfold. That level of caution is something that we're absolutely focused on. Having said that, we are feeling incredibly optimistic about our future.

I highlighted a few things earlier. I will reinforce them. The first is around the fact that we have a very globally diverse franchise. We have demonstrated in 2020 the resilience of our business to offset and overcome headwinds. The second was around our efforts to digitize. I think that, again, will be a critical enabler for us in 2021. The third, and Mike highlighted this, we are seeing the increase in value and importance being placed on insurance protection and wealth. Obviously, those are our businesses. That, I think, is going to be an incredible driver for us. The last thing I would say is that we do have, quite frankly, one of the core competencies of our franchise, an incredibly strong presence in many of the fastest-growing economies of the world, which have, by the way, the lowest insurance and wealth penetration.

Asia, we've described as our jewel in the crown, has become a really big part of our franchise. When you think about Asia geography, and there I'm grouping both insurance and wealth, and when you normalize for core investment gains, in 2016, Asia represented about 35% of our earnings. In 2020, they represented 41%. Our expectation is that by 2025, Asia geography, again, insurance and wealth, will represent 50% of our franchise. It is something that we're incredibly optimistic about. At the same time, there is a degree of uncertainty that makes us somewhat cautious around putting down a firm commitment on how earnings per share will unfold. We think of that more through the medium term and through the cycle. Let me hand to Phil and see whether he has any other supplements to add. I think you've covered it really well there, Roy.

I just reinforce, I think there is a lot to be optimistic about. We've seen a lot of challenges over the course of the last 12 months. Since the last time we spoke, the fact that there is now a number of vaccines having been developed and put to market and being rapidly manufactured and deployed, I think that's just one example of the many things there are to be optimistic about. Given the overall backdrop of uncertainty, I think it is hard to call a central scenario for the next 12 months, which is absolutely why we're looking at it from a medium-term perspective. Got it. I appreciate that, Cutler.

Looking at kind of the growth aspiration for Asia, and then especially thinking about how Asia has grown over the past few years, given the opening of the regulations in China for foreign-owned insurers, do you have any appetite to take on a higher stake in your China JV or even take a full ownership? If you were to do so, how much kind of core earnings contribution from Asia would go up? Thanks for the question, Humphrey. I guess the short answer is yes, we would. We have two joint ventures in China. Let me kind of start with talking about our joint venture on the insurance side with Sinochem, and I'll then ask Paul to chime in on the data side. As you know, on the insurance side, we have a joint venture with Sinochem where we have management control.

They have been an excellent partner and really a big contributor to the success and the trajectory that we've kind of set for ourselves in China. As you know, in China, we have extensive access in terms of distribution. We have now, with the approval of the recent Shaanxi branch, 52 cities and across 15 provinces in terms of access. Clearly, we would be keen to increase our shareholding, Humphrey. As I said, we have to necessarily kind of align our objectives with our shareholder. Just before I hand it over to Paul, in terms of Asia other, again, Asia other is the fastest-growing part of our business. Again, no surprises there, right? You mentioned the fact that, and Roy alluded to that as well, we have markets like China, Singapore, Vietnam, where we have a market leadership position, Indonesia.

They are all growing at a fair clip and have huge runway for us given the under-penetration on insurance. Towards that, we have been doubling down in terms of increasing our distribution. In fact, our agency growth in Asia other is even faster than what you kind of see at an overall Asia level. Again, no surprises there. Importantly, we are also experiencing a 17% growth in active agent count. A lot of our bank partnerships, including the one that we signed recently, VietinBank, is in Asia other. The early renewal of Danamon, again, a key force for us to kind of grow our business in Indonesia. There is a lot going on for us in Asia other. As you can tell, in quarter four, Asia other contributed to in excess of 35% of our core earnings.

It is likely to be an even bigger growth engine for us as we look into the future. I am now going to hand it over to Paul for his comments on data. Yeah. Thanks, Anil. Very similar themes to what Anil just shared in that China from a wealth and asset management perspective is a very important market for us. We do operate with our own wholly owned foreign entity there, our Wufi, that does allow us to bring in some international capabilities as well as private market capabilities. Our partnership with Emtata is also a really important pillar for our growth there in terms of the ability to bring domestic equity and fixed income capabilities to both local investors and foreign investors. We have had a great partnership.

We're very committed to that market and really look forward to continuing to grow China by leveraging that relationship and all the other aspects we have in the region. This is Philip. I could just add, when we look at our businesses in China, I think the future is more relevant than the current state. You asked a question about earnings there, Humphrey. In the ballpark of $140 million came from China in 2020, the full year 2020 earnings. I think it's not really about the $140 million. It's about what that could grow to in the years to come. Appreciate that. Thank you. Thank you. The next question is from Nigel D'Souza with Veritas Investments. Please go ahead. Thank you. Good morning. I wanted to touch on core investment gains.

When I look at the last challenging year you had for core investment gains in 2015, those gains did not fully recover or get recaptured until 2017. I wanted to get a sense of your expectations for 2021. Do you expect to fully recapture the $100 million in per quarter core investment gains? Yeah. Thanks, Nigel. It's Scott. Thanks for the question. Our core investment gains is an assumption over the cycle. It is really difficult to predict in any given year. As Roy highlighted, 2021 is still going to be a very uncertain year. The trajectory looks good at this point. Who knows? There is lots of risk out there. We are going to have periods where we will underperform, largely driven by AltA, which is marked to market, as you know.

As we look at last year, we saw underperformance in the first two quarters. I feel like we got a lot of that behind us. In the third quarter and fourth quarter, we achieved and overachieved our $100 million per quarter run rate. My best estimate at this point is that we will. There continues to remain a lot of uncertainty. It is really a number we expect to achieve through the cycle, not necessarily in any given quarter or any given year. Nigel, this is Philip. I could just add, the methodology that we apply does reset at the beginning of the calendar year. The reason in Q3 and Q4 we did not recognize the investment gains through core earnings is because we were behind from Q1 and Q2.

As we're now in a new calendar year, if we generate favorable investment experience, up to $100 million would flow through core earnings per quarter. Thanks. That's helpful. The second question I had, if I could touch on earnings on surplus funds. I wanted to get your sense on what the pathway is to getting that number back to 2019 levels. In other words, is the only way you get there through higher yields? Or can you get there through changes in asset mix or asset levels? Thanks, Nigel. Let me make a start. Scott may wish to comment on this as well. I touched on it earlier. There is a headwind that exists when it comes to earnings on surplus. That is that interest rates have fallen. We do take a conservative view, quite rightly, on how the surplus investment portfolio is managed.

A large proportion of it is held in US Treasuries, which is part of our overall interest rate risk management strategy. That does give rise to a very real headwind in the order of $50 million a quarter if we compare Q4 2020 compared to the fourth quarter of 2019. There is not really a way of getting that back without interest rates coming back and the impact of that flowing through to yields over time. I think that is one of the headwinds that we need to accept. We do not really have an awful lot of appetite for materially increasing the risk of the investments in our surplus portfolio. The reason they are there is to provide stability and resilience in times of uncertainty. That is exactly what we saw happen in 2020. Scott, I do not know whether you have anything to add. I really do not.

That was a very good and complete answer. Obviously, what will turn it around is if we get higher yields, and that will grow the earnings on surplus. Absent that, we do hold those long liquid government bonds as a hedge against market risk, and we'll continue to do that. Thanks. That's very helpful. Appreciate the color. Thank you. There are no further questions registered at this time. I will turn the meeting back over to Ms. O'Neill. Thank you, operator. We'll be available after the call if there are any follow-ups. Have a nice morning, everyone. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.