Prepared remarks
Thank you for standing by. This is the conference operator. Welcome to the Manulife Financial Corporation Second Quarter 2026 Results Conference Call. The conference is being recorded. 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 second quarter 2026 financial and operating results. Our earnings materials, including the webcast slide for today's call, are available in the Investor Relations section of our website at manulife.com. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 32 for a note on the non-GAAP and other financial measures used in this presentation. Please note that certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from what is stated. Turning to Slide 4. We'll begin today's presentation with Phil Witherington, our President and Chief Executive Officer, who will provide a highlight of our second quarter 2026 results, a strategic update and an overview of our latest long-term care reinsurance transaction. 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, and thank you, everyone, for joining us today. Before we begin, I'd like to take a moment to recognize and welcome the newest members of our executive leadership team that we announced in May. Patrick Graham has assumed the role of President and CEO of Manulife Canada. Patrick previously led our Hong Kong and Macau business and brings deep expertise across both distribution and health that will help accelerate our Canada growth strategy. I'd also like to congratulate Jodie Wallis on her expanded mandate as Chief AI Officer, which now spans both AI and enterprise data. Jodie remains instrumental in driving responsible AI adoption at scale to support growth, improve efficiency and enhance customer experience, and her appointment to the executive leadership team further reflects the importance of this work across our enterprise. In addition, Stephanie Fadous and Shamus Weiland have taken on broader responsibilities. These important leadership changes further strengthen our team, both at the enterprise level and in our key markets, and I'm confident they position us to deliver on our strategic priorities and drive sustainable growth. I'll now provide an overview of our second quarter financial performance before turning to the stand-alone long-term care reinsurance transaction we just announced. Let's start on Slide 6. We delivered strong results this quarter, demonstrating disciplined execution and the benefits of our diversified portfolio. Our insurance businesses generated strong top line results with APE sales growth of 21% year-over-year, supported by double-digit growth across all segments. APE sales momentum remained strong in Asia, which was driven by broad-based contributions from key markets such as Hong Kong, Singapore and Japan and was supported by our high-quality agency force, which I will discuss further momentarily. Growth in overall sales drove a double-digit increase in value metrics, including year-over-year new business CSM growth of 16%. This contributed to CSM balance growth of 20%, positioning us well for future earnings generation. In Global WAM, record gross flows supported net inflows of $0.4 billion this quarter. Net inflows were driven by strength in our institutional business, including continued contributions from CQS and Comvest. In terms of profitability, core EPS grew 16%, reflecting 12% growth in core earnings and the benefits of continued share buybacks. This strong result was led by Asia, where core earnings grew 21% from the prior year to a record level as well as Global WAM, where core earnings increased 9% despite the impact of the transition to eMPF. While we saw some insurance experience headwinds in Canada and the U.S., the overall results reflect the strength and resilience of our diversified business. And we delivered a solid core ROE of 16.3%, up 130 basis points from the prior year quarter. Turning to our balance sheet. We maintained a strong capital position with a LICAT ratio of 136% and a leverage ratio well below our medium-term target, providing us with substantial financial flexibility and supporting continued return on capital to shareholders through dividends and share buybacks. Turning to Slide 7. We continue to make strong progress in the execution of our strategy, which is underpinned by our ambition to be the #1 choice for customers. Our distribution capabilities and product innovation remain important differentiators positioning us to meet evolving customer needs. In Asia, we achieved a 9% year-over-year increase in Million Dollar Round Table members, the highest increase among the top 10 multinational insurers, reflecting continued progress in scaling our high-quality agency force. In fact, APE sales per active agent increased over 30% year-over-year in the second quarter. This speaks to the effective execution of our agency strategy, including efforts to enhance the quality of our agency force through Manulife Business Academy training programs, AI-enabled capability building and broader adviser excellence initiatives. In addition, we expanded our global high net worth offerings with two innovative insurance solutions that address the evolving wealth protection and legacy planning landscape. This includes the introduction of an insurance savings solution that uniquely combines the benefits of our participating life products with investment diversification through a Manulife CQS strategy, further differentiating our value proposition to high net worth individuals. In Global WAM, we expanded our ETF-based offerings for North American retail customers. And in the U.S., we enhanced our variable universal life offering, broadening the reach of our life insurance solutions while delivering greater protection, flexibility and long-term value. Being an AI-powered organization is a key priority within our refreshed strategy and our continued innovation and industry recognition reflect the meaningful progress that we're making across the enterprise. We are proud to be recognized by Evident as the #1 life insurer for AI maturity for the second consecutive year, ranking first in North America and top three overall among 30 major insurers across North America and Europe. We were also recognized for our AI-enabled underwriting capabilities in Canada and named the Model Insurer for Data, Analytics & AI by Celent. And in Global WAM, we launched new scalable Agentic AI solutions. The portfolio of solutions includes document intelligence readers and knowledge assistants, which are enhancing customer experience while driving greater operational efficiency. Finally, the rollout of our enterprise AI platform continues, providing our AI developers and data scientists with a scalable and secure foundation to design, build and govern AI responsibly. It allows us to reuse capabilities across businesses and markets, accelerating delivery and reducing duplication. This platform lays the foundation for accelerated development and AI value generation. Overall, these achievements and the recognition we've received underscore the meaningful progress that Jodie and the team have made embedding AI across our organization. Similarly, we're proud of our longevity leadership, where we're helping customers achieve better health and wealth outcomes across their lifespan while driving sustainable growth for our business. In collaboration with the MIT AgeLab, our U.S. insurance and retirement businesses launched a first-of-its-kind longevity preparedness tool, helping customers assess and improve their readiness for living longer, healthier and better lives. We also enhanced our health and wellness offerings for eligible Canada Group Retirement and private wealth customers through preferred rate access to select health and wellness solutions. And in Hong Kong, we're providing customers with greater health care options, quadrupling our medical specialist network to more than 900 providers through our strategic partnership with Bupa. Collectively, these achievements highlight the meaningful impact that we're making to empower customer health, wealth and longevity. Before I turn it over to Colin, I'd like to discuss the long-term care reinsurance agreement with Munich Re that we just announced, which is our third long-term care transaction within the past three years. A couple of elements of this transaction differentiate it from our prior deals. First, it is a full risk transfer of biometric risk on $3.2 billion of reserves at 80% quota share. And second, it is a stand-alone long-term care block. The pricing is similar to our previous transactions with a modest negative cede, further reinforcing the robustness of our reserves and assumptions. The transacted block is an older vintage but has richer benefits, including greater lifetime benefits and policyholder inflation protection compared with our retained book. Inclusive of prior transactions, we will have reduced LTC morbidity risk by 24%, significantly improving our overall risk profile. The impact to capital is expected to be largely neutral as the benefit from reducing morbidity risk required capital is offset by the release of the associated risk adjustment and the ceding commission. Unlike our previous deals, there is no capital benefit from the disposal of investments as no assets are being transferred. Foregone core earnings is relatively immaterial at CAD 30 million per annum in the first year, and that will reduce over time as the block runs off. More broadly, this transaction demonstrates how we're continuing to derisk our in-force portfolio through innovative actions. Looking ahead, we continue to focus on improving our long-term care portfolio through organic initiatives that will enhance risk-adjusted returns and drive shareholder value. For example, our long-term care transformation program is focused on helping customers remain healthier and more independent for longer and reducing fraud through enhanced claims management. The program is already generating strong results with current run rate LTC claim savings of over 6%, which also helped contribute to the attractiveness of the transacted block. In closing, I am pleased with our performance this quarter and delighted to have delivered a third long-term care in-force reinsurance transaction. We continue to execute on our strategy, innovate across our diversified business, drive sustainable growth and deliver insights and solutions to help our customers across their life spans and for generations to come. With that, I'll hand it over to Colin to discuss our quarterly results in more detail. Colin?
Thanks, Phil, and good morning, everyone. This quarter, we delivered strong results, underscoring our continued focus on high-quality growth and value creation. Before opening the line to questions, I'll walk you through our results. Let's begin on Slide 10 to discuss our top line. We delivered strong APE sales growth underpinned by double-digit increases across all insurance segments, including over 20% in both Canada and Asia. This momentum translated into double-digit growth in value metrics with new business CSM increasing 16% year-over-year. In Global WAM, net inflows of $0.4 billion reflected strength in our institutional business, partially offset by outflows in retirement and to a lesser extent, retail, which I will expand on shortly. Turning to Slide 11. I'll walk you through the key drivers of our earnings this quarter compared with the second quarter of 2025. Our higher net insurance service result was driven by continued growth in Asia as well as the net positive impact of last year's actuarial assumption review. This was partially offset by insurance experience, including unfavorable experience in Canada compared to net favorable experience in the prior year, partially mitigated by much improved but still negative claims experience in U.S. Life. I will provide more detail on the insurance experience in Canada and the U.S. momentarily. Moving down the DOE table, our core net investment result increased 10%, primarily driven by a lower charge in the expected credit loss provision, or ECL, partially offset by lower investment spreads in the U.S. Lastly, Global WAM generated 10% growth in pretax earnings. On to Slide 12. And as Phil mentioned at the top of the call, core EPS increased 16% year-over-year, driven by strong core earnings growth and ongoing share buybacks. This quarter, we generated net income of $2.1 billion, exceeding core earnings as higher-than-expected returns on public equities more than offset lower-than-expected returns on ALDA. As we've seen across the industry, market conditions continue to weigh on valuations and returns in certain alternative asset classes. Moving on to the results by segment. We'll start with Asia on Slide 13. APE sales increased 21% from the prior year, driven by double-digit growth in Hong Kong, Singapore and Japan, partially offset by lower sales in Mainland China and other markets. The strong sales reflects double-digit growth across agency, banker and other third-party sales, demonstrating the strength of our diversified multichannel distribution network. It also drove strength in our value metrics, though this was partially offset by changes in business mix. In Hong Kong, APE sales growth of 37% year-on-year reflected higher sales of savings products across all channels. This performance reflects the breadth of our franchise with our domestic customer base driving the majority of sales this quarter and remaining a core strength of our business. With regards to core earnings, Asia delivered another quarter of strong results. Year-over-year, core earnings increased 21%, driven by 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. We were encouraged to see a return to net inflows this quarter, driven by strength in our institutional business, including continued contributions from CQS and Comvest and supported by another quarter of record gross flows. This positive result was partially offset by outflows in North American Retirement and retail, though we did see continued momentum across Canada Wealth and Asia more broadly. In the retirement channel, outflows reflected higher plan sponsor redemptions and increased net member withdrawals due to higher account balances from market appreciation. Retail outflows were primarily driven by active mutual fund redemptions through third-party intermediaries in Canada, although trends improved on a sequential basis. Even as we continue to navigate pressures in certain areas of the business, this quarter's positive net flow result reflects the strength and resilience of our diversified platform. We generated solid core earnings growth of 9% from the prior year, driven by higher average AUMA and contributions from the Comvest acquisition, partially offset by the impact of the eMPF transition in Hong Kong and higher expenses due to business growth. These factors also supported our core EBITDA margin reaching 31.2%, expanding 110 basis points from the prior year. Next, turning to Canada on Slide 15. This quarter, APE sales increased 23% year-over-year, reflecting growth across all lines of business, led by higher large case sales within group insurance and continued strong participating life sales within our individual business. This, along with increased margins in individual insurance and annuities, drove strong growth of 29% in new business CSM, while new business value was largely flat due to lower margins and product mix changes in group benefits. Core earnings declined 10% year-over-year, mainly due to unfavorable claims and expense experience within group insurance as well as normal claims variability in individual insurance. Relative to the first quarter of 2026, overall insurance experience improved modestly, reflecting the impact of the actions we are taking in group benefits, though this was partially offset by the unfavorable claims experience in individual insurance. We now expect overall Canada insurance experience to trend neutral by the end of the year as our group benefit case managers help members return to work, although elevated expenses from our transformational investments should persist to the end of the year. Lastly, let's discuss our U.S. segment's results on Slide 16. APE sales grew 12% year-over-year, supported by product enhancements and distribution expansion initiatives, while growth in our value metrics was impacted by product mix. Core earnings rebounded year-over-year, reflecting improved claims experience in both life and LTC as well as a lower ECL provision charge, partially offset by lower investment spreads. While life claims experience was unfavorable this quarter, it improved meaningfully from the prior year. We view the result as being within the normal range of variability and when considered alongside the gain in the first quarter of 2026 is close to neutral on a year-to-date basis. LTC experience was once again favorable across both the P&L and CSM. Turning to Slide 17. Our adjusted book value per share continued to grow, increasing 15% year-over-year to $41.12. We achieved this growth while returning $5.3 billion of capital to shareholders over the past 12 months. For the stand-alone quarter, we returned $1.4 billion to shareholders through a combination of dividends and share buybacks underpinned by our continued strong cash generation. Let's now turn to our balance sheet on Slide 18. Our capital position remains strong with a LICAT ratio of 136%, representing $26 billion in excess of our supervisory target ratio. Our financial leverage ratio of 22.2% remains well below our medium-term target of 25%. Together, these metrics highlight the robustness of our balance sheet and the strength of our capital position, providing significant financial flexibility and positioning us well for the future. To close, Slide 19 highlights our progress against our 2027 and medium-term targets. We're pleased with the progress we have made towards our financial targets, underpinned by strong results from two of our high-growth businesses, Asia and Global WAM. While there is more to do to achieve our core ROE target, this quarter saw a 130 basis point increase compared to the prior year quarter. We remain committed to delivering against our targets, while at the same time, further improving our risk profile as evidenced by the stand-alone LTC reinsurance transaction, another milestone for Manulife. 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 requeue if they have additional questions. Operator, we will now open the call to questions.
Questions and answers
Our first question comes from John Aiken with Jefferies.
I know it's early days, but I was wondering if you could give us your thoughts on the Chinese government's tax on offshore insurance policies, how that may affect your business in the region?
Thanks, John. It's Steve Finch here. I'll take that question. I'll start with taking a step back to frame the size of the business with respect to MCV business. Manulife has a diversified business in Hong Kong. Our core strength is our domestic franchise, which represents about 75% of sales year-to-date. So MCV is an important part of the business at 25%. It can vary from period to period. As you note, it's early to comment on the implications of some of the recent news. The point that you raised about tax treatment of offshore trusts: there's been press even more recently on enforcement of existing rules, which I think is really important. There haven't been updated tax laws, but there is focus on potential enforcement of existing rules. That's pretty common to see as markets develop. My expectation is that as guidance gets more clear, it could actually provide more clarity, remove ambiguity and actually help support the development of this business over time. And I want to make a key point. We expect that the structural trend of Mainland Chinese customers accessing Hong Kong for products and services to continue. There's a lot of reasons why that's being done: currency diversification, access to different underlying investments that they can get onshore, the benefits and services that they can access in Hong Kong. In my time in the role, I haven't heard tax benefits as the primary reason that's driving this business.
Yes. Thanks, Steve. Just to paraphrase to make sure I got this straight. So basically, you're expecting some changes, but this is not destroying the outlook for the business?
Yes, absolutely not destroying the outlook. I have confidence as we look to the future this part of the business is going to continue to be a strength of Hong Kong. Could there be short-term implications? Really too early to say. We'll have to track it closely and see how this evolves over time.
Our next question comes from Tom Gallagher with Evercore ISI.
Steve, one quick follow-up: you said 25% are MCV sales within Hong Kong, and Hong Kong is about 40% of Asia. If sales on that part of the business went to zero, that would be a 10% hit to total Asia, but it sounds like you don't expect it to go to zero. There might be a hit, but you'd probably be able to restructure or transition it somehow. Is that a fair way to frame it?
Yes, and I'll expand a bit. I do not expect these sales to go to zero, not even in the short term at all. And as we look out into the future, I continue to have confidence that this is going to be an important part of the Hong Kong insurance business and for Manulife. Any short-term impacts will be manageable, won't impact core earnings over the immediate future. So continue to have confidence in this business going forward.
Okay. And for my follow-up, just on the long-term care deal, I heard the 5% negative cede on IFRS. What was it on U.S. statutory, the negative cede? And can you also just give a little color for retaining the asset risk? What was behind that? Would it have been too punitive had you transferred the asset risk? Or were there other reasons you maintained the asset risk?
Thanks, Thomas. It's Stephanie here. So on an NAIC basis, the ceding commission would have been around 6% to 7%. Our IFRS reserves in this block are higher than the statutory reserve. In terms of color on the transaction, we're quite pleased to have transacted in this new innovative structure, where we basically cede the biometric risk or exchange variable cash flows for fixed cash flows, but we retain the asset management. What that does is retain the earnings potential and the assets supporting the portfolio as well as the capital generation on the assets as the block matures over time.
Our next question comes from Gabriel Dechaine with National Bank.
Just another question on the Asia sales outlook, the Hong Kong sales outlook more specifically because the Chinese regulators don't look to be just going after or forcing existing rules on MCV sales. It looks like they're broadening their search for unpaid taxes essentially on gains on offshore investments. I'm wondering if there's any implications at all? Maybe there's not because the structure of the products are entirely different and unaffected. But your offshore high net worth business, which is also managed out of Hong Kong, I believe, I appreciate it's not entirely sold to wealthy Chinese individuals, but there may be some implications there, if you care to comment?
And Gabe, it's Steve. Can I clarify when you say the offshore high net worth, are you referring to our Bermuda international high net worth? My earlier comments about Hong Kong encompass all the Hong Kong business, so whether it's high net worth, whatever channel it's coming through.
The sales and earnings in your Asia segment, I think there's an other category that includes the smaller other Asia businesses plus the offshore high net worth business?
Yes. The international high net worth that we disclosed is our Bermuda business. The Bermuda business, high net worth, yes, there are some China national sales that go through that business. Last year, our APE was a little bit over $150 million. The China portion of that is a little bit under 10%.
Okay. Right. Great. I'm wondering: so this LTC deal, which I think is positive news, just to understand, there's no planned reduction to the assets, notably the ALDA portfolio that partially backed these LTC blocks. I'd like to pivot to the future outlook. You talked about putting more emphasis on organic management strategies for that block of business. Is that a deliberate risk management strategy because you benefit from higher mortality rates in that business, whereas your U.S. Life block is still generating some mortality losses, so they offset each other?
Gabe, it's Trevor. Thanks for the question. I'll start and then turn it over to Phil. In terms of the asset strategy for the assets backing the reserves involved in this block, we do manage them within our broader ALM framework, and we don't have any current plans to change the investment strategy.
Great. Thank you, Trevor, and thanks, Gabe, for the question. So when we look to the future on long-term care, our primary basis for management of the portfolio going forward will be the organic management actions that we're taking. There are various things that we're doing, and I talked earlier in my remarks about the LTC customer care program. That has delivered a 6% reduction in claims through various initiatives, including reduction in fraud, waste and abuse. And you'll have heard over the years the progress that we've made on premium re-rates that has proved to be a highly effective mechanism to mitigate variability in claims experience over time. When I reflect on what the best thing to do for Manulife shareholders is, now that we've demonstrated our ability to transact across various structures, an older block, a younger block and over the past 24 hours, a biometric risk transfer, I think the logical thing to do is to make that pivot to organic management while retaining the strategic flexibility to transact if that makes most sense at a particular point in time. One supplement, and that is relating to how we preserve the benefits for Manulife and Manulife shareholders. By pursuing the third transaction on a biometric risk-only basis, we preserve the benefits of managing the asset portfolio for Manulife shareholders. And that's important when you reflect on our strategy. One thing we said in our strategy that we released in November last year is that sustaining the scale of our U.S. business is important. This structure where we retain management of the asset portfolio, along with yield opportunity and ongoing capital generation as the block matures, helps fulfill that objective of sustaining earnings and balance sheet scale of our U.S. segment.
Our next question comes from Paul Holden with CIBC.
So continuing with the long-term care reinsurance deal. I think you hit on an important point, the capital generation associated with that business. It may have been some time since you gave an update on the capital generation. Maybe some thoughts there to help us think through it as it pertains to this block, but more importantly, as it pertains to the retained block as well. When do IFRS reserves start coming down? When does statutory reserves start coming down? And when does the capital start flowing back to shareholders?
Thanks, Paul. I think Stephanie is best placed to answer that one.
Thank you, Paul, for the question. On the remaining block, which is slightly younger but still has a number of years of experience, we expect the block to be relatively stable and start declining in the next five to ten years. I would expect the capital, both IFRS and statutory, to start releasing and generating capital at the same time.
Okay. And given the reinsured block is a few years older than the remaining block, is that an easy assumption to make?
The reinsured block for this transaction was a more mature block of business with richer benefits. As the block matures, we'll have the capital generation on the assets that we've retained, and that will be a little quicker than the remaining block.
Okay. Next question changes the topic to the Canadian insurance business. Very strong individual insurance sales for the second consecutive quarter. Maybe talk about the success you're having in those sales, what kind of products are coming from distribution channels and the sustainability of that growth rate?
Paul, it's Patrick here. Thanks for the question. First, let me say how excited I am to be here and working with the Canadian team to drive our shared ambition of being the undisputed leader in insurance in the market. Your question speaks nicely to that shared vision and ambition. As you referenced, we've done very well in individual insurance sales, achieving #1 market share in Q1, largely driven off the back of our successful participating product and being #1 in the high net worth space. We view this as something that's sustainable. We've got a lot of competitive differentiators in the business. Going forward, we see opportunities in underserved segments in the market, so we can continue that track record of growth and success. Thank you.
Our next question comes from Tom MacKinnon with BMO Capital.
Steve, maybe you can talk a little bit about the trend in terms of what you've been seeing in Hong Kong sales; certainly did better than anticipated in the second quarter. There was news around MCV in late May, early June in terms of offshore accounts. Maybe you can comment as to what you've been seeing with respect to trends in the MCV sales just in the last couple of months, if possible? I have a follow-up.
Thanks, Tom, for the question. In terms of the sales performance in Hong Kong, we were pleased with the results this quarter. As was commented on earlier, we saw growth in APE of 37% and growth in NBV of 12%. It was quite broad-based. We've got a diversified distribution platform in Hong Kong, with success in agency and bancassurance that more than offset lower sales year-over-year in the MCV space. Regarding regulatory announcements coming out of China, those have been primarily focused on offshore investments or outbound investments. There's no direct impact on the MCV business. It's possible there could be some second-order impacts, which we're watching closely. But there were changes in regulations last year and early this year, and that's having some impact on the MCV business. As you noted, it was a strong result, and we have confidence in that business. One interesting fact was that Hong Kong recently took over as the #1 source of offshore wealth flows overtaking Switzerland. So it is a global and regional finance hub that continues to be really important.
And then the follow-up is with respect to Canadian LTD. I think you've mentioned you had poor experience in the first quarter continued into the second quarter. You talk about the overall trend to be neutral by the end of the year. What gives you confidence — predicting claims is always tough. What gives you confidence that this is going to trend to neutral by the end of the year? Maybe you can elaborate on some of the actions you're taking and maybe some repricing initiatives you're doing with respect to some of these cases where the experience hasn't been as good.
Thanks, Tom. Patrick here again. Like the industry, we are seeing unfavorable morbidity experience, largely driven by disability claims. Roughly one-third of new claims are coming from mental health, which can materially extend claims duration and are stickier. As a business, we're making targeted investments in a number of areas to improve health outcomes for our customers. That includes earlier intervention, enhanced treatment access and specialized case management teams designed to improve health outcomes for customers, manage duration and ultimately mitigate the growing impact of that on our experience over time. We have seen modest improvements in Q2 versus Q1. Whilst we see emerging industry trends with recoveries, we are confident that the overall insurance experience for the segment will trend towards neutral by year-end.
Tom, you also touched on our ability to reprice. To confirm, this is annually repriceable business. If we do see sustained adverse experience, we have the ability and intent to reprice.
Our next question comes from Mario Mendonca with TD Securities.
I have a quick follow-up on Hong Kong sales. Was there any level of front-ending of sales this quarter in Hong Kong, not necessarily because of the tax change because I don't think there's any way to escape the taxes. But in terms of front-ending sales in anticipation of regulatory change, did you see any of that in the quarter, Steve?
Thanks, Mario. The driver of the sales in Hong Kong this quarter, and Colin referenced mix, was that we routinely have customer offerings and campaigns. In the quarter, we had campaigns that really hit the mark with customers, and that was driving the sales results. It was very attractive for customers. That's why you see the APE growth higher than the NBV growth. So it was somewhat lower margin, but it really resonated. I didn't see any impact of accelerated sales from regulatory changes.
If we could go to the reinsurance transaction. Phil, I understand your comments about retaining the scale of the U.S. business to absorb the expense load. The trade-off is that you're not getting the release of capital that you did on the previous transactions. When I look at the pace of share repurchases over the past few years, the material improvement in ROE coincided with large reinsurance transactions that allowed for buybacks. If this is the new state of affairs where reinsurance transactions do not result in a release of capital, is it appropriate to suggest that the pace of buybacks can't return to where it was in the past? As a consequence, achieving the 18% ROE becomes more difficult. Is that appropriate?
Mario, let me take that, and Colin can supplement. The way we've structured this transaction partly reflects our intent to transact in different structures—an older structure, a younger block of business and now biometric risk only—allowing us to preserve and retain benefits for Manulife shareholders. There is a cost to transacting, evident in the 5% negative cede, similar economics to the first two transactions. But through the biometric-only approach, we retain the assets and therefore continued earnings and capital generation from that portfolio as it runs off. Beyond preserving earnings, it allows us to sustain our scale, which you pointed out, while preserving profitability for Manulife. It comes with a limited, immaterial impact to earnings. From our first two transactions, there was forfeited earnings that on an EPS basis we made up through share purchases, and there was substantial net income noise through realization of gains from OCI to net income as changes were made to the asset portfolio. When I think about the go-forward approach, it's actually preserving the earnings rather than having to make up the earnings by way of share buybacks. Regarding buybacks, they remain an important lever to get to 18% plus ROE. We have a 2.5% share buyback program in place. Our capital generation remains strong and we have a 2027 remittances target; we're well on track to achieve that target which supports the buybacks. In the second quarter, the pace of buybacks was consistent with full delivery of the 2.5% program. I feel confident we're doing the right thing on LTC, generating capital to support buybacks, and the overall position of the company remains strong from a capital and leverage perspective.
Mario, buybacks are an important lever to get us to 18%, but we're not anticipating an outsized buyback to get across the finish line. What you see this year, 2.5%, is without any boosting from reinsurance transactions, and we wouldn't want to guide you to anything materially higher or lower than that to get to the 18% core ROE.
The bottom line, Colin and Phil, this pace of buybacks is consistent with achieving the 18% ROE. You don't need to do anything special to get to the 18%. Is that your outlook?
That's a fair summary, Mario, confirmed.
Our next question comes from Doug Young with Desjardins Capital Markets.
I apologize, just something more on the long-term care insurance deal. Looking at the ceding commission — I know it's the same as past deals — what's driving the ceding commission this time? Last time it was the difference in return assumptions. In terms of structure with the ceding, how is it going to flow through? I think it's about $160 million. Is that accounted for as a negative in the CSM that just unwinds over time? I'm trying to get a little understanding of the mechanics.
Thank you, Doug. The ceding commission is really due to a difference in expectation of returns as opposed to a different view of reserve or assumptions, similar to what we mentioned on the prior deal. The 5% ceding commission will flow through CSM over time via CSM amortization.
This is Phil. Stephanie's explanation demonstrates that it's a really clean transaction in terms of accounting and mechanics. There's a modest impact on CSM, which flows through to earnings over time, but there is no noise in either core earnings or net income from the biometric risk transfer. It's something that reduces our risk without the cosmetic accounting implications we've seen on some other transactions.
Then Phil or Colin, it would be helpful to put into context how much of Manulife's core earnings are now from legacy businesses and how much common equity backs these legacy businesses. You gave an initial starting point in the past, and I think it tells an interesting story. Do you have the numbers?
Doug, drawing from prior targets, we had an objective to reduce legacy earnings below 15% of earnings, with a stretch ambition to get below 10%. We achieved that a couple of years back. It's comfortably less than 10% of our earnings coming from LTC and VA, and this transaction further reduces that. It's not something we track on a monthly basis, but it's well below what we set out to achieve.
How about common equity backing? I know you said LTC and VA are less than 10% of earnings; how much common equity is backing legacy businesses? It started at about 50%, but I don't have the update.
That's not something I have to hand, and it's not something we track month in, month out. Our priority metric was the percentage of earnings, and that's been exceeded. It's not something I'm overly concerned about right now.
Our next question comes from Darko Mihelic with RBC Capital.
Steve, maybe you can speak to the other area of Asia where sales and earnings don't look so great. What's going on and should we think about this trending the same way for the foreseeable future?
Thanks, Darko. In the 'other' category, the primary driver of weaker sales results is our international high net worth business, the Bermuda business reported in that segment. There have been headwinds this year from the Middle East conflicts; Middle East business was a significant component of that. However, our high net worth business booked across the region in Hong Kong and Singapore are primary hubs, and we've seen high net worth business overall increase materially this year. The business isn't flowing right now to Bermuda; it's flowing to Hong Kong and Singapore. That's reflected in the results. It's unclear how long it will take for the situation to unwind, but we are launching new products and focusing on where the flows have gone to ensure Bermuda remains an attractive offering.
Then a question on the Mandatory Provident Fund. We've heard sources saying fees are being reviewed by year-end. Is there any visibility on this and where it's headed for the fees from the funds that are managed?
Yes. Thanks, Darko. It's Paul here. In terms of fees, this isn't a one-time exercise. It's something that we submit regularly throughout the years, and it's part of our regular fee compression budget that we build into all our businesses. We do expect fees to come down over time. So part of that process is we build that into our planning, we make proposals to the regulator and we try to balance that with competitiveness to make sure we're competitive where we need to be. This is business as usual for us.
Okay. So it's not overly material in any respect. Is that the way I should think about that?
That's how you should think about it.
Our next question comes from Mike Rizvanovic with Scotiabank.
Just a high-level question for Colin or maybe for Phil. Wanted to touch on expense efficiency ratio. I know your medium-term target is below 45%, it has oscillated the last few years. You're spending on new digital capabilities. Any updated thoughts on how you'd like to see this number move? Is it reasonable to think there are levers to improve this number by two to three percentage points sustainably over the next two to three years?
Mike, thanks for pointing out the expense efficiency ratio. We're pleased; 44.5% is our medium-term target. What's important is that we continue to invest in the business. If I look at each of the business lines, you'll see reasonable increases. For instance, GWAM has Comvest that added $25 million to expenses. Asia is growing so expenses went up 10%. In Canada, we're modernizing customer experience, so we saw a 10% increase there. At the center, we spent more on AI. So you'll see a little bump up. We've always said the #1 use for our capital is organic investments, and this is testament to that. In terms of seeing expense efficiency go forward, maybe one or two percentage points improvement is possible. AI initiatives are key to achieving that, both through growing earnings and being more efficient. There's lots more to see and work on. Expense management is core to Manulife's DNA and should continue to be a good story for years to come.
Across segments, is it fair to say higher expense segments like GWAM are where you have more torque to improve the ratio?
Yes, absolutely. GWAM has about a 60% efficiency ratio. As the business mix changes, that could impact the overall number. I would also point you to Asia: what's interesting is Asia is growing fast and it has the lowest expense ratio.
Our next question is a follow-up from Gabriel Dechaine with National Bank.
Just a follow-up on the group insurance LTD issues in Canada. Can you talk about some of the drivers there? Last week a peer mentioned economic factors influencing both the volume of LTD claims and duration. Is that something you're seeing as well?
Gabriel, yes. You're spot on. It's a globally recognized phenomenon that in down cycles, particularly where there's increased unemployment, there are rises in certain types of disability claims. What we're seeing and hearing from the market is unfavorable morbidity experience driven by disability claims. About one-third of those new claims are from mental health, which tend to be longer duration and stickier. The programs I referenced earlier—in terms of investments to get those customers back to work, get them healthy again and improve outcomes—are important. From a recoveries perspective, like the industry, we're seeing some pressure, but we think we're taking the right targeted actions to achieve the right outcome.
So your outlook for improved claims performance leans more on claims management and recoveries than on an anticipation of a stronger economy reversing those trends. Looking forward to 2027, many companies will be repricing group in Canada. Is there any concern that some customers might dial back coverage rather than accept price hikes?
On the first part, 100% we control our own destiny. We're making the right investments and will execute on them, which will help the trend and our customers. As Phil mentioned earlier, our schemes are able to be repriced annually. We'll take balanced adjustments and manage both margin and growth.
Our next question is a follow-up from Mario Mendonca.
One thing I noticed post-IFRS 17 is many insurers cleaned up corporate segments and nondirectly attributable expenses. More recently, corporate segment losses have increased again. Can you talk about what's changing and why losses in your corporate segment are starting to increase again?
Mario, the corporate result has gone backward from last year; it's $45 million more adverse. It's explainable. In our case, it's the presence of our retro P&C business; the cycle is softening. About one third of that $45 million year-on-year change is coming from our P&C retro business. The other two thirds reflect higher central project spending, mostly AI. We're holding on to expenses at the center, pushing up costs. There are also other factors like an accrual for withholding tax because we expect higher dividends from some of our entities that incur higher withholding tax. We've said we expect the corporate result to be between $300 million and $400 million adverse; we think we'll be towards the top end of that $400 million range, but within the range. We need to finalize the full financial plan before reconfirming 2027 in light of some central expenses, but that's a good place to start modeling from.
So $300 million to $400 million loss annually is the outlook, with the high end being more appropriate?
Yes. We were towards the bottom end of last year; this year we'll be towards the top end. We'll go through the full financial plan, but that's a good starting assumption.
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 today's call to a close. You may disconnect your lines. Thank you for participating, and have a pleasant day.