Prepared remarks
Thank you for standing by. This is the conference operator. Welcome to the Manulife Financial Corporation First Quarter 2026 Results Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. Should you need assistance during the conference call, you may reach an operator by pressing star then zero. I would now like to turn the conference over to Mr. Hung Ko, Global Head of Treasury and Investor Relations. Please go ahead.
Thank you. Welcome to Manulife's earnings conference call to discuss our first quarter 2026 financial and operating results. Our earnings materials, including webcast live for today's call, are available in the investor relations section of our website at manulife.com. Before we start, please refer to slide two for a caution on forward-looking statements and slide 33 for a note on non-GAAP and other financial measures used in this presentation. Please note that certain material factors and assumptions apply in making forward-looking statements. Actual results may differ materially from what is stated. Turning to slide four. We'll begin today's presentation with Phil Witherington, our President and Chief Executive Officer, who will provide a highlight of our first quarter 2026 results and a strategic update. Following Phil, Colin Simpson, our Chief Financial Officer, will discuss the company's financial and operating results in more detail. After their prepared remarks, we'll move to the live Q&A portion of the call. With that, I'd like to turn the call over to Phil.
Thanks, Hung, thank you everyone for joining us today. As I reflect on my first year as CEO, I'm proud of what we've accomplished as an organization. We've moved at pace to make significant progress against our refreshed enterprise strategy. As we look to the future, we're well-positioned to achieve our ambition to be the number one choice for customers. I'll begin with an overview of our first quarter financial performance starting on slide six. We delivered solid results in the first quarter, building on our strong 2025 momentum despite heightened macro uncertainty. Our insurance businesses generated strong top-line results, with each segment achieving double-digit growth in new business contractual service margin (CSM). This contributed to 18% growth in our CSM balance and further strengthened our future earnings potential. Asia had strong sales this quarter, with meaningful growth from key markets including Hong Kong, Japan, and Singapore. While Global Wealth and Asset Management (WAM) posted net outflows in the first quarter, we saw sequential improvement, including continued institutional inflows supported by the recently acquired Comvest business as well as CQS. Colin will take you through those details shortly. From a profitability standpoint, we delivered core EPS growth of 11%, in line with our medium-term target. This reflects strong growth in Asia, where core earnings increased 22% year-over-year, as well as the positive impact of share buybacks. We delivered this result despite the impact of the transition to eMPF, which moderated core earnings growth in Global WAM. It was also a challenging quarter for insurance experience in Canada. Nevertheless, we continue to make progress towards our 18%+ core ROE target by 2027 and delivered a solid core ROE of 16.5%, up 90 basis points from the prior year. Onto our balance sheet. Our LICAT ratio remains strong, and our leverage ratio is well below our target, providing us with ample financial flexibility. In addition, our adjusted book value per share increased 6%, even as we continued to return significant capital to shareholders through dividends and share buybacks. Moving on to slide seven, which shows the refreshed enterprise strategy introduced late last year. The organization remains highly energized about the strategy with a focus on execution to deliver high-quality, sustainable growth. Continuing our strong momentum from last year, we made meaningful progress executing the strategy again this quarter, which you can see on slide eight. A balanced and well-diversified portfolio underpins our ability to deliver earnings resilience and long-term value creation. This is why we continue to expand our global reach and capabilities, which have proven to be especially important during periods of uncertainty. We were recently named Asia's Best Insurance Provider for Wealth Management, reflecting our innovative product suite, value-added service, and trusted relationships with our distribution partners across our high-net-worth channels. In Global WAM, we completed the acquisition of Schroders Indonesia, strengthening our position as the largest asset manager in Indonesia. We entered into a strategic partnership with L&G, enabling us to leverage complementary strengths in global asset management and distribution and expand access to differentiated investment solutions across institutional, retirement, and retail channels. In the U.S., we further differentiated our Indexed and hybrid Indexed Universal Life offerings, positioning us well to meet evolving income protection and wealth accumulation needs. We also continued to expand our U.S. distribution footprint. Over the past year, our wholesaling team has grown by more than 50%. This expansion enables us to deepen advisor relationships, improve execution and coverage in key markets, and better support the launch of new products and initiatives. Becoming an AI-powered organization is a key area of focus. We're accelerating progress through targeted strategic actions. This includes recent strategic partnerships such as our collaborations with Akka and Adaptive ML, which improve our ability to deploy AI at scale with speed and consistency. In parallel, we're focused on increasing our capacity and accelerating the pace of our technology initiatives. By further leveraging AI tools, our developers drove a 30% increase in productivity this quarter, enhancing their ability to support business growth and develop new capabilities. In Global WAM, we deployed an AI-powered sales platform in U.S. retail that has driven a 40% increase in meaningful advisor interactions and is supporting higher flows. We also continued to roll out AI tools across Asia to enhance agent and advisor productivity, including the launch of a new distributor AI tool in Vietnam and enhancements to our advisor AI tool in Japan. These initiatives support faster access to information, enhanced customer service, and enable further improvements to distributor productivity and wider customer reach. In the U.S., we expanded our Quick Quote support tool, automating nearly half of preliminary assessments and reducing average turnaround time from days to minutes. These examples illustrate how we're scaling digital and AI capabilities across the enterprise to deliver measurable improvements in efficiencies, customer experience, and value. Finally, we're committed to empowering health, wealth, and longevity for our customers across all stages of their lives, and we continue to deepen our leadership in this space. During the quarter, we announced a new partnership with Guardant Health, offering eligible customers in Asia access to the Shield Multi-Cancer Detection blood test. We're proud to be the first insurer in Asia to offer this test, expanding access to early cancer detection. In Canada, we've partnered with Osara Health to offer evidence-based cancer support programs to eligible group benefits customers, helping them navigate the daily challenges of living with cancer, obtaining treatment, and recovery. Overall, I'm pleased with the progress we're making. We're taking decisive action to strengthen our competitive differentiation, which is positioning us for long-term success and contributed to our solid operating results this quarter. Our financial and operating performance underscores the strength of our strategy, the discipline of our execution, and the quality of our global franchise. We remain steadfast in our commitment to delivering on our targets and driving sustainable growth, and we're confident in our ability to do so. With that, I'll hand it over to Colin to discuss our quarterly results in more detail. Colin.
Thanks, Phil. Good morning, everyone. This quarter marked another period of solid execution for Manulife through a volatile macro environment. Before opening the line to questions, I'll walk you through this quarter's results. Let's begin on slide 10 to discuss our top line. We delivered solid new business results in the first quarter with 16% growth in new business CSM underpinned by double-digit growth from each insurance segment. This was supported by strong APE sales growth in Asia and the U.S. Canada's APE sales declined as growth in individual insurance sales were more than offset by lower large case group insurance sales, which tend to be lumpy. In Global WAM, headwinds in active mutual funds in North America retail, and to a lesser extent, U.S. retirement, led to net outflows of $4.4 billion. Turning to slide 11. You'll note a few of the key drivers behind our earnings this quarter compared to the first quarter of 2025. Strong business growth in Asia and Canada, along with the net impact of last year's actuarial assumptions review, drove a higher net insurance service result. Overall insurance experience improved compared to the prior year, reflecting claims gains in U.S. life and LTC, as well as the non-recurrence of a P&C provision in the first quarter of 2025, partially offset by unfavorable experience in Canada Group Insurance. I will provide more color on our insurance experience in a few moments. Moving down the DOE table and onto our net investment result where we saw a decrease of 5% versus the prior year, primarily driven by lower investment spreads in the U.S. Our expected credit loss, or ECL, was a $39 million pre-tax charge, largely in line with the prior year and our medium-term guidance. Lastly, Global WAM generated modest pre-tax earnings growth. Turning to slide 12. Core EPS was up 11% year-over-year, reflecting strong growth in core earnings alongside the impact of continued share buybacks. Net income for the quarter came in at $1.1 billion, reflecting a charge from market experience driven primarily by public equity performance. It's worth highlighting that while we're only halfway through the second quarter, most equity markets have largely reversed their first quarter underperformance. We also saw a $242 million charge in our ALDA portfolio, primarily related to lower than expected returns across real estate, timber, and private equity investments. Moving on to results by segment, we'll start with Asia on slide 13. You'll notice that we've expanded our regional disclosures for certain sales and other metrics to now include mainland China and Singapore on a quarterly basis. This additional granularity gives you a sense of the diversity and scale of our Asia footprint. APE sales increased 11% from the prior year, supported by double-digit growth in Hong Kong, Japan, and Singapore. After a softer fourth quarter in Hong Kong, focused execution from the team drove 18% year-on-year growth in APE sales, reflecting higher agency and bancassurance sales and resulting in record quarterly sales. Overall, new business margins modestly expanded, supported by a more favorable business mix. From a core earnings perspective, Asia delivered another quarter of impressive results. Core earnings increased 22% year-on-year, reflecting continued business growth and the net favorable impact of last year's basis change, partially offset by less favorable insurance experience. Now, moving on to Global WAM on slide 14. Despite generating record gross flows this quarter, net flows were challenged. In retail, we experienced higher active mutual fund outflows, primarily driven by higher redemptions through third-party intermediaries in North America, including a few large model redemptions in the U.S., while U.S. retirement outflows were primarily driven by higher plan redemptions. These were partially offset by strong institutional inflows, including contributions from Comvest and CQS. We also saw strength across Canada and Asia retirement, North American ETFs, and Canadian wealth, as well as Asia retail, highlighting the strength of our diversified platform. Our core EBITDA margin expanded 60 basis points from the prior year, supported by AUMA growth, the Comvest acquisition, and continued expense discipline, partially offset by the impact of the eMPF transition in Hong Kong and lower performance fees, which can be lumpy. These factors also contributed to modest core earnings growth of 2%. With a reduction in one-time eMPF related expenses incurred in the first quarter, along with more trading days, we expect the Q2 core earnings run rate to increase by approximately $25 million. If equity markets were to hold at current levels, they would provide a tailwind to the normalized amount. Next, turning to Canada on slide 15. This quarter, APE sales declined 15% year-over-year, reflecting lower group insurance sales. This partially offset by higher sales in individual insurance as we saw continued strong demand for our participating life products. Overall, we also saw a decline in new business value. New business CSM, however, increased 13%, reflecting the strong growth in individual insurance. Core earnings declined 6% year-over-year, primarily reflecting unfavorable insurance experience in group insurance compared with favorable experience in the prior year. This was driven by a combination of higher incidence and lower recoveries in our long-term disability business, along with higher expenses to support business growth and transformational investments. We expect recoveries and experience to normalize throughout the year. We continue to invest in our Canadian business to improve customer experience and help our customers return to work. The impact of this experience was partially offset by business growth, the net impact of last year's basis change, and a lower ECL provision charge. Lastly, let's discuss our U.S. segment's results on slide 16. APE sales grew 29% year-over-year, driven by continued strong demand for our insurance accumulation products and translating into robust growth in new business CSM. Core earnings decreased modestly, primarily reflecting lower investment spreads, though this was partially offset by favorable insurance experience. It's worth noting that this included claims gains in our U.S. life business, reinforcing our view that the unfavorable experience last year was a result of normal course variability rather than a sign of an underlying trend. Also of note, LTC insurance experience was positive across the P&L and CSM this quarter. Moving on to our book value on slide 17, you'll note we continued to grow our adjusted book value per share, which was up 6% from the prior year at $39.01, even as we returned $5.3 billion of capital to shareholders over the past year. As previously announced, our new buyback program began in late February, allowing us to repurchase up to 2.5% of common shares outstanding. Between dividends and share buybacks, we returned $1.2 billion of capital to shareholders during the quarter. Let's now turn to our balance sheet on slide 18. Our LICAT ratio remains strong at 136%, $25 billion above our supervisory target ratio, and our financial leverage ratio of 22.5% remain well below our medium-term target of 25%. In what remains a dynamic and volatile macroeconomic environment, our balance sheet has held up extremely well. These results highlight the strength and resilience of our capital position and provide us with confidence in our ability to navigate uncertainty while maintaining financial flexibility. Finally, turning to slide 19, you'll find an overview of our continued progress against our 2027 and medium-term targets. While we face some headwinds this quarter, overall, we are very pleased with our financial performance underpinned by the strength and resilience of our diversified business. Strong underlying business growth and disciplined execution keep us on track to deliver against our targets. This concludes our prepared remarks. Before we move to the Q&A session, I would like to remind each participant to adhere to a limit of two questions, including follow-ups, and to re-queue if they have additional questions. Operator, we will now open the call to questions.
Questions and answers
We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speaker phone, please pick up your handset before pressing any keys. We will pause for a moment as callers join the queue. The first question today comes from John Aiken with Jefferies. Please go ahead.
Good morning. Wanted to drill down on the performance in Asia, if I may. I actually want to look at Japan in particular. We've seen several quarters of improving core earnings growth. Wanted to discuss what the outlook is for the region, what you're doing in terms of product development and how sustainable are these earnings levels or even the growth trajectory.
Thanks, John, for the question. It's Steve here. As Phil and Colin noted, we were really pleased with the overall Asia results with the strong growth in our new business metrics. Japan was a key part of that. We're pleased with the new business performance, the APE sales growth, and the value metrics all grew very strongly. What we're seeing there is a combination of a couple of things. First is a continuation of the momentum that we had in 2025. We've been really focused on broadening our product propositions and our portfolio to cover a wider range of customer needs across distribution channels. Then we also note that in Japan there can be some quarter-to-quarter variability, somewhat due to market conditions. We saw a bit of that this quarter, but the fundamentals, the sustainable part, the business performance, that part is sustainable. We've introduced some new whole life products and ILP products, all of which have hit the mark in terms of customer needs. Our outlook there is quite positive. What we're seeing is that the environment is supportive of insurance, building on customers' needs to build retirement savings. The interest rate environment has helped the attractiveness of insurance products. We're quite optimistic as we look out, particularly with the products having hit the mark.
Thanks for the color, Steve. I'll re-queue.
The next question comes from Gabriel Dechaine with National Bank. Please go ahead.
First, question is on the experience in group. Can you break that down between expense and the disability and why this quarter might be just a bit of a blip as opposed to something we have to worry about for a few more quarters? I looked at last year, it's not like group had a big sales surge, and 2024 was pretty high. I don't know if there's any connection there. Sometimes you have big sales and the pricing with it needs to be adjusted.
Hi, Gabriel. Naveed here. Thanks for the question. You highlighted that we did have unfavorable insurance experience in Canada, specifically in our long-term disability business. What we saw there was modestly higher incidence and lower recoveries. It's worth noting though that we're seeing overall less favorable experience in this business across the industry in the first quarter. We did also see experience losses on our travel insurance business due to recent global disruptions, which we do not expect to persist going forward. Finally, group insurance had higher expenses in the quarter to support recent growth and transformational investment to elevate the customer experience. On the long-term disability, we are taking targeted actions on the business to address the lower recoveries that I previously mentioned. In 2025, we started to hire extra case managers as our disability caseloads had exceeded our target levels due to business growth. If you sell the business, you mentioned the really strong sales year in 2024, it did take some time for those disability cases to come in. We did need to ramp up our case managers to deal with the growth. It does take some time to onboard and train the new case managers. We did see higher expenses and lower recoveries contributing to deterioration in experience. Now going forward, we do expect Canada segment total insurance experience to improve and trend to more normal levels by the end of the year.
Okay.
Gabriel, this is Phil. Just to add, you did ask about sales momentum, and I think the word that Colin used in his remarks was that group business can be lumpy. That's absolutely right. If you look at the next level of detail below sales, in Canada, the individual insurance sales are actually very strong, and that's the driver of the 13% growth in new business CSM in Canada. I would expect that group sales continue to be lumpy. A better metric actually for group business is to look at persistency. Our persistency remains strong.
Okay, great. Now turning to the investments, everyone is focused on private credit exposure, and your disclosures help. I want to ask about the impact of the oil price shock on your Asia footprint. There are different countries positioned differently with regards to how it's impacting them, level of reserves they have, for instance. Could you talk about any impact on consumption or sales that is noteworthy? More importantly, the credit exposure, whether it's in the public or government portfolio or maybe the corporate portfolio, if you're starting to see any signs of stress tied to this issue.
Okay, great, Gabriel. This is Phil. Let me start. There's quite a lot in there. I'll hand over to Steve on Asia and Trevor on private credit. Just in relation to where you started on the impact of the oil price shock and potential impacts on our business, I'll start in the Middle East and highlight that we don't have much direct exposure to the Middle East. To the extent that we do have direct exposure, it's very modest. We have seen in the quarter some disruption to our international high-net-worth business from Middle East customers. However, that's not particularly visible because it's been more than offset by very favorable momentum in some key hubs in Asia; Hong Kong and Singapore, for example, in the high-net-worth segment, have done very well. In terms of the broader impact on Asia, there's nothing currently visible in terms of declines in consumer sentiment. I'll hand over to Steve at this point to elaborate further.
Thanks, Gabe. Phil covered it quite well. At this point, you can see from the strength of the Q1 results that we don't see a material impact. We're watching closely for how this plays out over time. Some markets in Southeast Asia are more exposed to oil supply. We haven't seen material effects yet, and our capital positions are resilient and strong, so we feel quite good overall. I'll pass it to Trevor on the investment specifics.
Thanks, Steve. And thanks, Gabe, for the question. Two elements here. First, regarding private credit, most of that exposure is really in the U.S. There's very limited exposure to either the Middle East or Asia or, in fact, oil. Low concern there. With respect to the plain vanilla investment portfolio in Asia, it's probably mid-90s investment grade. It's largely government and quasi-government exposures, and even the below-investment-grade exposure in Asia tends to be sovereigns and quasi-sovereigns in places like Vietnam to match local liabilities. We're not seeing anything at this point. The quality of the portfolio is quite strong; no particular concerns.
All right. Thank you.
The next question comes from Thomas Gallagher with Evercore ISI. Please go ahead.
Morning. First question, just to follow up on Asia. Would you say Q1 earnings are a good baseline to build off of or anything unusual there? Investment spreads look pretty good and expenses low. Just want to see if you would adjust that at all when you think about the roll forward into Q2.
Thanks, Tom. It's Steve here. The short answer is Q1 is a good baseline to look at for future growth, subject to normal variability, but Q1 is a good base.
Okay. Thanks, Steve. The follow-up is there's been some recent M&A activity in the U.S., and I'm curious how you're thinking about your position and footprint in that market and whether you think M&A in that region may make sense for Manulife.
Well, Tom, this is Phil. I think it's best for me to take that one. We recently released our refreshed strategy at the end of last year. Our focus right now is on executing that strategy. It's very much an organic focus plus execution of the transactions that we have already done. We have done a sequence of M&A transactions in recent months and quarters over the last couple of years, CQS, Comvest, as well as Schroders in Indonesia. I do acknowledge we are in a strong capital position. Through our refreshed strategy, we expressed appetite to invest not only in Asia and GWAM, but also in our insurance markets in the U.S. and Canada. We have a strong capital position. The bar is high when it comes to inorganic deployment. I don't rule inorganic deployment out, but the bar is high, and our primary focus is organic execution.
Thanks, Phil.
The next question comes from Tom MacKinnon with BMO. Please go ahead.
Yeah, thanks. Good morning. Question about the U.S., where sales continue to be strong. Maybe you can provide a little bit as to what's happening there. Is it just expanded distribution? Is the product working? Is it piggybacking on Vitality brand strength? Maybe a little about the type of products that are driving that growth. They appear to be more CSM-type products, which indicates better earnings visibility going forward, but maybe you can dig deeper into those exceptional sales growth in the U.S.
Thanks, Tom. It's Brooks. Q1 represented the seventh quarter in a row of really strong new business growth, including the underlying value metrics. We're quite pleased with that, and it's a combination of many factors. Phil mentioned in his remarks that we substantially increased the size of our wholesaling force over 50% up from a year ago, but more than double from 18 months ago. Substantial investments there that are paying off. We have a highly differentiated story. Hot topics these days include longevity and wellness, and we continue to be the only U.S. life insurer offering life insurance with those embedded features and benefits. Very strong appeal. We've introduced new solutions recently, including Vitality Pro, which is a companion app to our customer-facing Vitality app. Vitality Pro is for advisors and intended to drive engagement, driving engagement with advisors and ultimately loyalty. Many more initiatives are planned. We feel good about the recent growth and the value it's creating, and we're quite optimistic about the future as well.
As a follow-up, are these largely more adjustable type products, i.e., the level of guarantees on these things would be lower than what's in your legacy book?
Great point, Tom. We were really the first U.S. insurer to move away from long-duration guarantees meaningfully starting in 2010. We have substantially migrated away from them. In the past 15 years, our block is virtually entirely adjustable.
Okay. Thanks so much for that.
Tom, this is Phil. To connect Brooks' comments to how we expect earnings in the U.S. to emerge in the future: Given this shift from guaranteed products to adjustable products, you would expect the net investment income in our core earnings to decline over time. The core insurance component of earnings driven by CSM generation amortizing through earnings would increase. We should expect that change in dynamics in U.S. earnings. Overall U.S. earnings, a good baseline or benchmark is in the Q4, Q1 range you've seen, $230 million to $240 million.
A bit of a shift in geography, but probably to higher quality items in your DOE. Okay. Thanks, Phil.
The next question comes from Paul Holden with CIBC. Please go ahead.
Thank you. Good morning. First, on the GWAM earnings. Down slightly year-over-year and obviously a few moving parts there. Hoping you can parse it out for us to get a better sense of how we should be modeling growth going forward. Maybe provide any further breakdown on the eMPF impact, the recent Comvest acquisition, etc. Anything to help model what kind of growth rate to use going forward.
Great. Thanks, Paul. I'll take the question. In terms of run rate earnings this quarter, as Colin mentioned, they were lower than our expected run rate for the quarter. We did have some one-time items. To clarify, the impact of eMPF is reflected in the quarter and is consistent with our guidance of $25 million. That was about CAD 33 million in the quarter. There were also one-time costs as we transitioned and moved in Q4 to the new platform, including system decommissioning and other items. When you adjust for those, and if you're looking at outlook for Q2, there were two fewer calendar days in Q1 as well. In terms of run rate for Q2, if you adjust for those items and calendar days, and if markets hold, you should expect a run rate approaching the $500 million mark.
That is helpful. Thank you. Similar question on net investment earnings, which declined about 10% year-over-year. You're growing underlying assets and there are a number of moving pieces. Can you parse that out and help understand what that should look like for the remainder of the year?
Hi, Paul. Thanks for the question. Yes, in terms of expected investment spread, it was down, largely driven by ALDA sales for the reinsurance that we executed at the beginning of last year, as well as some normal course ALDA portfolio management trades in the U.S. I would expect variability from quarter to quarter in this line given differences in timing of asset maturities and other changes between assets and liabilities on the balance sheet. We did see some spread compression in the quarter as well. As Phil mentioned, we expect a slow shift in earnings from this line towards the insurance service result over time. You should expect to see that in coming quarters as well. In terms of modeling, Q1 is probably a reasonable base to use.
Okay, thank you.
The next question comes from Alex Scott with Barclays. Please go ahead.
Hi, good morning. First, can you provide a high-level update on how you're viewing remittances for this year? I know you have a longer-term plan, but any commentary and broader thoughts on the balance between growth and remittance would be helpful.
Hey, Alex. Remittances: we introduced a $22 billion cumulative remittance target at our Investor Day. That implies a $5.5 billion run rate going forward for those years. We've exceeded that each year and continue to look favorably on remittances. Reasons include the shift in our product mix to capital-generative products with low new business strain, and the underlying capital strength of each of our subsidiaries. A couple of capital regime changes, Hong Kong and work through Japan, have actually worked in our favor because they bring local capital regimes closer to our consolidated capital basis. Everything points to a good outlook for capital generation. We said before you should expect 60%–70% of our earnings to convert into remittances, and we stand by that. That gives us a buffer compared to the 35%–45% dividend payout. Everything's looking very good for remittances.
Great. Second question on the GWAM net flows. Any commentary on the outlook thinking through the different moving pieces? You mentioned AI implementation benefiting retail wealth management interactions. Is there evidence that will convert to flows as well?
Alex, I'll take that. In terms of flows, we're pleased with momentum this quarter. Gross flows were $56 billion, a new record, up 13% versus the prior quarter and 15% year-over-year. We had a record quarter for ETFs across our retail business in North America. Momentum from a top-line perspective is strong. Softness came on the redemption side in a couple specific areas. First, general industry pressure on active management in North America. We had two model redemptions late in the quarter where partners were reallocating asset mix; that accounted for $3.4 billion of the $4.4 billion of outflows. Second, U.S. retirement was impacted primarily by higher withdrawals, driven by market appreciation increasing dollar amounts of withdrawals at the participant level. That creates a headwind on flows but a tailwind to fee revenue on the asset base. The rest of the business was broad-based: institutional inflows, positive contributions from CQS and Comvest, positive flows in Asia retail and retirement, North America ETFs, and Canadian wealth. Outlook: cautiously optimistic on flows given strong top-line, but we expect some of these pressures to persist with market uncertainty. We're confident we can get back to positive net flows over the long term as market clarity improves. On AI, we've been investing across our distribution platforms and are seeing benefits. One strategic lever is making our wholesaling team more productive and expanding the team. We're seeing productivity gains from AI and expect that to come through to top-line results as we expand the teams globally.
Got it. Thank you.
The next question comes from Darko MiCliff with RBC Capital Markets. Please go ahead.
Hi. I want to revisit the U.S. business. Phil, you mentioned investment earnings should be lower as a result of the changed product mix. Colin's remarks said spreads were lower. Is it really spreads? As you continue to alter the investment portfolio, will expected investment returns be even lower than the current run rate going forward? Can you provide more color on the two forces impacting that and give a sense of the run rate going forward?
Hey, Darko, it's Phil. It's a technical question. There are various factors. One is the commercial factor: our new business mix in the U.S. is focused on adjustable products, such as universal life type products. That gives rise to future earnings that don't come through the net investment result line but through the core insurance result line. Another factor is that in recent years we've transacted on significant reinsurance transactions related to components of our business; those transactions have resulted in a lower net investment result in our drivers of earnings analysis. Relatedly, as we have reduced our legacy portfolio through reinsurance and organic runoff, we are reducing holdings of older fixed-income assets within the guaranteed segment. All those factors are at play. Trevor, anything to add?
Not really, Phil. I think you've covered it. We've been selling down older corporate bonds, which is a driver of lower expected investment spreads going forward. I think lower spreads are a slow headwind. Older portfolio impacts are quicker to manifest. As Phil said, there's a geographic and product mix shift, moving earnings from expected investment spread into CSM amortization over time.
Is Q1 a good run rate to use in the model from here?
Yes. Yes, this is a good run rate.
Okay. Thank you.
The next question comes from Mike Rizvanovic with Scotiabank. Please go ahead.
Good morning. Quick one for Colin. Can you provide more color on the ALDA — what drove the negative experience in the quarter? More broadly, should investors be concerned about changing that run rate assumption, which would impact your core EPS as presented today? Is the 9%–9.5% assumption being thought about for potential change?
Hey, Mike. I'll hand over to Trevor because there's quite a lot going on in the ALDA portfolio.
Thanks, Colin. Thanks, Mike, for the question. In terms of ALDA performance this quarter, it was similar to Q4. We were adversely impacted by a fire on one of our large Australian timber assets, which generated a one-off charge of about CAD 50 million for the quarter. If you adjust for that, the quarter was actually better with most of the portfolio showing continued improvement: infrastructure was strong while real estate was largely flat. Regarding assumptions, these are long-term assumptions and forward-looking. We look at our own and benchmark experience and market expectations and current transactions we're underwriting, generally with return expectations well above our long-term assumptions. We'll review this again through the year. Given changes in asset mix over the last few years, including sales of underperforming office real estate, we feel the assumptions are appropriate for long-term forward-looking ALDA assumptions.
Just a quick follow-up. It sounds like you can shift the portfolio into assets that generate higher returns over time. Do you still have more work to do there, or are you in later innings?
It's normal course portfolio management. We're making ongoing changes, selling assets we think are at a good time to sell and buying assets we think are relatively cheap. That's how we've managed the portfolio for the last 20 years, and we expect to transition into assets and asset classes that will meet those long-term assumptions.
Great. Thanks for the color.
The next question comes from Tom MacKinnon with BMO. Please go ahead.
Thanks. With respect to the reported results, the impact from public equity markets seemed more severe than expected sensitivities. We have equity markets, particularly in the U.S., heavily weighted to the Mag 7. Is that why the impact was more pronounced in the first quarter, or any color with respect to that?
Tom, thanks. In terms of market impact relative to sensitivity, there was a larger-than-expected non-core charge given weak performance in some equity markets. It was focused on the U.S. It was worse than the sensitivities, but it was largely driven by more active fund underperformance relative to local indices in what was a noisy quarter. It wasn't specific to the Mag 7.
Do you think the reported number that impacts book value should be viewed differently? The adjusted book value per share was actually better than people expected. Does that indicate reasonably good quality?
Tom, it's Colin. Great question. Should you stop at core earnings or go to net income or book value or adjusted book value, which was up 6% and 8% excluding FX? I believe book value and book value growth encompass everything you're exposed to as a shareholder or analyst. Book value growth is very important to us. It's adjusted for buybacks on a per-share basis. We saw modest book value growth this quarter, in part because of equity and ALDA underperformance. If markets stay where they are, much of that should reverse and then some. Continued book value growth is a reasonable outcome.
Thanks.
The next question comes from Mario Mendonca with TD Securities. Please go ahead.
Good morning. Can we go back to the GWAM business for a moment? It's a business where I've become accustomed to solid positive operating leverage and margin expansion. I appreciate the eMPF transition. As you look forward a year from now, would you expect revenue margin and EBITDA margin to be higher? Would you expect positive operating leverage? Once through this period, is it a few more quarters or years of transition? How would you characterize that?
Hey Mario. Short answer: you should expect margin expansion going forward, subject to normal markets and growth. We try to manage expense growth to 50% of revenue, and we still think we can do that with investments in GenAI and efficiency. The transition to eMPF is behind us. We had some one-time costs in Q1 that will not recur in Q2. From this point forward, we provided a new run rate. You should expect margin improvement over time.
Do you have an outlook for the EBITDA margin over the next 12 or 24 months?
We have the Investor Day target for next year of 30% EBITDA margin. We feel good that we're on track to achieve that target. Looking at Q1 2026 and forward with market growth and our ability to manage expenses, we feel optimistic about achieving that next year.
That brings me to Investor Day targets. Does the 18% ROE in 2027 still feel achievable? If so, how do you bridge the gap from 16.5% today to 18% in 2027?
Let me start, Mario. The 16.5% is impacted by some seasonal factors in Q1. Group benefits exhibits seasonality in Q1 as people submit claims at different times. P&C earnings have historically emerged more in the second half. If you look at last year's ROE numbers, the second half ROE numbers were 18.1% and 17.1%, much closer to our target. While 16.5% seems like a leap to 18%, it is 90 basis points higher than Q1 last year. We are making progress and have plans to get to 18%. It requires strong execution, and that's a big focus across the organization.
Mario, this is Phil. We stand by the 18%+ Investor Day target by the end of 2027. I expect to see improvements from where we are now, 16.5%. It's an improvement year-over-year, and I expect to see further improvements through 2026.
Thank you.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Hung Ko for any closing remarks.
Thank you, operator. We'll be available after the call if there are any follow-up questions. Have a good day, everyone.
This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.