Earnings Call Transcript
MANULIFE FINANCIAL CORP (MFC)
Earnings Call Transcript - MFC Q3 2020
Operator, Operator
Please stand by, your meeting is about to begin. Please be advised that this conference call is being recorded. Good morning, and welcome to the Manulife Financial Third Quarter 2020 Financial Results Conference Call. Your host for today will be Ms. Adrienne O'Neill. Please go ahead, Ms. O'Neill.
Adrienne O'Neill, Host
Thank you, and good morning. Welcome to Manulife's earnings conference call to discuss our third quarter 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. We will begin today's presentation with an overview of our third quarter and an update on our strategic priorities by Roy Gori, our President and Chief Executive Officer. Following Roy's remarks, we’ll end today’s presentation with Phil Witherington, our Chief Financial Officer, who will discuss the Company's financial and operating results. Following the prepared remarks, which were recorded earlier this week to ensure optimal sound quality, we will move 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 will do our best to respond to all questions. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 34 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?
Roy Gori, President and CEO
Thanks, Adrienne. Good morning, everyone, and thank you for joining us today. Turning to Slide 5. I'm very pleased with the third quarter financial results that we announced yesterday. I want to start with a few opening remarks about how the diversity of our business has been a crucial factor in delivering strong financial performance since the onset of the global pandemic. Despite operating in a challenging environment for most of the year, we've delivered over $4 billion of core earnings year-to-date and our net income is comparable at $4.1 billion. This is a testament to the diversity and resilience of our business model as well as to the importance of the investments that we've made in our digital transformation over the last few years. In Asia, we rank as the top three pan-Asian player. We have insurance operations in 11 markets with over 115,000 agents. We have more than 100 bank assurance partnerships, of which eight are exclusive and provide us with access to over 14 million customers. In Asia Other, which includes emerging markets, agent count is growing 30% in the last 12 months. And NBV is up 8% year-to-date. We are at scale in most markets where we have operations and the breadth and depth of our franchise in Asia has played an important role in delivering the strong performance that I referenced. In the U.S. we're a leader in innovative behavioral insurance products. And now John Hancock Vitality PLUS offering has continued to be a key sales differentiator for us. In addition, the U.S. is a solid contributor to core earnings, led by stable contributions from our in-force U.S. business. In Canada, we're number one in Group Benefits new business year-to-date, offering top-tier plans and support to more than 3 million Canadians and their families. Our Canadian business is a significant contributor to sales and NBV as well as to core earnings. And finally, in our global WAM business, we're a leading provider of investment administration solutions to retirement plans with nearly 8 million participants globally. In Hong Kong, the Manulife Mandatory Provident Fund is the largest MPF scheme sponsor with a market share of nearly 25% in terms of AUM. And we've been ranked number one in this market since the fourth quarter of 2016. In terms of sales, we also ranked number one in Canada retirement and number two and three in U.S. retirement small case and mid-case respectively. We view the diversity of our global WAM AUMA as a source of strength and a factor in reaching $715 billion at the end of the third quarter. Turning to Slide 6 and our financial highlights for the third quarter of 2020. We delivered core earnings of $1.5 billion and net income attributed to shareholders of $2.1 billion, which included a gain on a reinsurance transaction that improved the capital efficiency of our legacy business and a charge related to the annual actuarial review. Our APE sales were $1.4 billion, down a modest 2% from the prior year, which reflects the strength of our product shelf, the maturity of our digital capabilities and the tenacity and resourcefulness of our distribution channels. Our capital position remains strong with a LICAT ratio of 155%. Book value per share rose to $25.49, up 8% from the prior year. Turning to Slide 7. As I've said on various occasions in recent months, the focus on our five strategic priorities has not changed. Now I have the three macro demographic trends that underpin them, namely, one, the emergence and growth of the middle class in Asia; two, the impact of aging global demographics on the retirement gap and wealth transfer; and three, increasing trend toward digitization of the customer experience. While we've already achieved our portfolio optimization target, I'm very pleased to report that we released $485 million of incremental capital from our legacy businesses in the third quarter. This was largely as a result of executing a reinsurance agreement related to our U.S. Bank-Owned Life Insurance block. 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. Core expenses declined by 5% in the third quarter of 2020 versus the prior year quarter. And we achieved an expense efficiency ratio of 51.2%. A modest decrease of 0.2 percentage points from the prior year quarter. We continue to expect to achieve our target of $1 billion of expense efficiencies by the end of 2020, two years ahead of schedule. Our third priority is to accelerate growth in our highest potential businesses. We aspire to have these businesses generate two-thirds of total company core earnings by 2022. Our highest potential businesses accounted for 65% of total company core earnings year-to-date. 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 61% of total company core earnings, which is a five percentage point increase since 2019. In Asia, we sold our first policy in Myanmar, a digitally savvy market with one of the lowest insurance penetration rates in Asia. And we entered into a new partnership with Cong Dong Bau, a community with more than five million members across Vietnam that improves access to financial advice and solutions for expected and new mothers. In global WAM, Manulife Investment Management was included in the Principles for Responsible Investing Leaders Group 2020, as one of only 36 organizations globally recognized for being at the cutting edge of responsible investment and demonstrating a strategic commitment to climate change reporting. This highlights our commitment to being a leader in sustainable and responsible investing. 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 remain focused on our digital transformation, and we've invested over $600 million in digital capability since 2018. In Asia, our relationship NPS score increased by 11 points this quarter compared with the third quarter of 2019. This reflects the quality of the digital solutions that we've rolled out and our commitment to continue to provide outstanding service to customers during the pandemic. Our final priority is building a high performing team. Our target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022. We recently completed our 2020 employee engagement survey and ranked in the highest percentile among global financial services and insurance peers, a top quartile position and a significant improvement compared to 2019. In addition, Manulife was recognized by Forbes on its 2020 World's Best Employers List, putting Manulife in the top 100 best employers globally and making us one of only three financial services companies globally to make the top 100. Turning to Slide 8. We embarked on a digital transformation journey several years ago and have invested over $600 million in digital capabilities since 2018. These metrics reflect the impact of those investments. The vast majority of our products are available to prospective customers through virtual face-to-face solutions. And given our success in this area, we expect these figures to remain fairly stable over time. Turning to Slide 9. We remain committed to proactive and continuous investment in digital capabilities to reorient the customer experience over the long-term. This quarter, Canadian Group Benefits launched Health by Design, a proactive approach using the latest science, technology and predictive analytics to help each member with a unique health journey. In the U.S. we added the Amazon Halo wellness band to devices supported by John Hancock Vitality program. In Mainland China, we introduced facial and video recognition and intelligent guide script into the sales process. And in our global WAM business, we launched several online tools and automation, supporting our advisor community. Overall, the acceleration and expansion of our digital tools have greatly enabled us to engage more effectively with our customers. Moving to Slide 10. To conclude, I'm pleased with our third quarter and year-to-date performance, and I'm confident that Manulife is well positioned for the future. We entered 2020 in a position of strength, thanks to actions taken over the past decade to derisk our business and reduce our company's sensitivity to market movements. Our financial performance has been solid, and we continue to execute against our strategy. We have the financial flexibility to navigate the downturn and to capitalize on opportunities as they emerge, both organic and inorganic. We will continue to take a disciplined approach to deploying capital, and we'll only do so if it's in the best interest of our shareholders. Finally, we remain committed to both our dividend and medium-term financial targets, given our consistent track record of execution and the fact that the demographics and economic fundamentals underpinning our strategy have not changed. Thank you. And I'll hand over to Phil Witherington, who will review the highlights of our financial results.
Philip Witherington, CFO
Thank you, Roy, and good morning, everyone. Turning to Slide 12 and our financial performance for the third quarter of 2020. We achieved solid core earnings of $1.5 billion in the quarter and core ROE was 11.4%. NBV declined by 14% and APE sales declined by 2% compared with the prior year quarter. We view this performance favorably in light of the current environment. Average AUMA in Global WAM increased by 8% compared with the prior year quarter, reflecting the favorable impact of markets and year-to-date net inflows of $6.1 billion. And we maintained substantial financial flexibility with a LICAT ratio of 155% and a leverage ratio of 26.7%. I will highlight the key drivers of our third quarter performance with reference to the next few slides. Turning to Slide 13, core earnings in the third quarter of 2020 were $1.5 billion, down 6% from the prior year quarter on a constant exchange rate basis. The decrease in core earnings was driven by the absence of core investment gains in the quarter, lower investment income in corporate and other, unfavorable policyholder experience in our Canadian insurance businesses and lower new business volumes in the U.S. and Asia. These items were partially offset by in-force business growth, a favorable product mix in Hong Kong and Asia Other, and higher average AUMA in Global WAM. We delivered net income attributed to shareholders of $2.1 billion in the third quarter. Of note, we recognized a gain of $147 million from investment-related experience, reflecting the favorable impact of fixed income reinvestment activities and higher-than-expected returns on ALDA, driven primarily by fair value gains on private equities, partially offset by modest credit losses and the estimated impact of the sale of NAL Resources Limited, which is expected to close on January 4, 2021. The gain of $228 million from the direct impact of interest rates was driven by non-parallel movement in swap spreads, U.S. risk-free rates, and modest gains on the sale of AFS bonds, partially offset by the impact of narrowing corporate spreads primarily in the U.S. The gain of $162 million from the direct impact of equity markets reflects the continued recovery of global equity markets in the third quarter of 2020. We completed our annual review of actuarial methods and assumptions, resulting in a charge to net income attributed to shareholders of $198 million, consistent with the estimate that we had provided in the second quarter. The largest component of the net charge related to a review of the lapse assumption for our universal life policies in Canada. This was largely offset by the favorable impacts of mortality and morbidity updates and various other updates. This year's review also included a comprehensive study of our Canadian variable annuity assumptions, as well as certain methodology refinements. Finally, the gain of $276 million from reinsurance transactions was primarily driven by the execution of an agreement to reinsure approximately $3.4 billion of policy liabilities related to our U.S. Legacy Bank-Owned Life Insurance business during the third quarter of 2020, which generated a gain of $262 million. Slide 14 shows our source of earnings analysis. Expected profit on in-force increased by 9% on a constant exchange rate basis, driven by growth in Asia and the U.S. The year-over-year growth rate was higher than we would typically expect as it benefited from market movements throughout the year, as well as from the impact of the annual actuarial review. We continue to view 6% as a reasonable annual growth rate for our expected profit on in-force. New business gains were higher than the prior year quarter, driven by favorable new business product mix in Hong Kong and Asia Other, partially offset by unfavorable new business product mix in Japan and lower international sales in the U.S., reflecting the adverse impact of COVID-19. Overall policyholder experience in the third quarter was unfavorable, driven by higher large-case claims in U.S. Life and lower lapses in North America, partially offset by the impact of higher claims terminations in long-term care, due to the impact of COVID-19. Of note, policyholder experience in the U.S. was flat compared with the prior year as unfavorable life experience, which included modest COVID-19-related claims losses was partially offset by favorable long-term care experience. Core earning on surplus declined compared with the prior year quarter, largely due to lower yields and a change in asset mix, partially offset by higher average asset levels. Turning to Slide 15, core earnings increased by 9% in our Global Wealth and Asset Management business, driven primarily by higher average AUMA partially offset by unfavorable impacts from changes in product mix and lower fee spread in the U.S. retirement business and lower tax benefits. Core earnings in Asia increased by 6%, driven by in-force business growth across Asia and favorable new business product mix in Hong Kong and Asia Other, partially offset by unfavorable new business product mix in Japan, and the non-recurrence of management actions in Asia Other in the third quarter of 2019. In the U.S., core earnings increased by 5%, primarily driven by higher in-force earnings and a focus on reduced spending in the current economic environment, partially offset by the non-recurrence of a favorable tax item in the third quarter of 2019. Core earnings in our Canadian business decreased by 12%, reflecting unfavorable policyholder experience in our insurance businesses and a number of smaller experience-related items. Core losses in our Corporate segment increased by $128 million compared with the prior year quarter, reflecting the absence of core investment gains in the third quarter of 2020 and lower investment income. We expect lower yields to persist as a headwind to the core percentile of the segment given the prevailing interest rate environment. Slide 16 shows our new business value generation and APE sales. In the third quarter of 2020, we delivered new business value of $460 million, down 14% from the prior year quarter. In Asia, new business value decreased 16% from the prior year quarter, primarily driven by lower APE sales in Hong Kong and a decline in interest rates in Hong Kong. In Canada, new business value increased 31% from the prior year quarter due to higher sales volumes in large-case group insurance. In the U.S., new business value decreased 38% from the prior year quarter, largely driven by lower international universal life sales due to COVID-19. In the third quarter of 2020, we delivered APE sales of $1.4 billion, down a modest 2% from the prior year quarter. In Asia, APE sales declined by 6% from the prior year quarter as growth in Japan and Asia Other was more than offset by lower sales in Hong Kong. In Canada, APE sales increased by 23% from the prior year quarter, primarily driven by higher large-case group insurance sales, partially offset by lower individual insurance sales due to the adverse impact of COVID-19. In the U.S., APE sales declined by 14% from the prior year quarter due to the adverse impacts of COVID-19 as lower international universal life, domestic protection universal life, and variable universal life sales were partially offset by higher domestic indexed universal life and term life sales. Turning to Slide 17, our Global Wealth and Asset Management business experienced net outflows of $2.2 billion in the third quarter compared with net outflows of $4.4 billion in the prior year quarter. The third quarter numbers include the redemption of $5 billion equity mandate by a UK-based Institutional Asset Management client. In Canada, net inflows were $1.2 billion compared with net outflows of $6.9 billion in the third quarter of 2019. The improvement was driven by the non-recurrence of $8.5 billion redemption in Institutional Asset Management in the prior year quarter and lower redemptions in retirement. In Asia, net inflows of $1.1 billion were lower than net inflows of $2.3 billion in the prior year quarter, driven by higher retail redemptions in mainland China, partially offset by higher gross flows. In the U.S., net outflows were $4.5 billion in the third quarter of 2020 compared with net inflows of $0.1 billion in the third quarter of 2019. This decrease was driven by the redemption of the equity mandate in Institutional Asset Management, which I referred to earlier, coupled with lower retirement plan sales and recurring deposits and higher member withdrawals. Our average AUMA increased by 8% compared with the prior year quarter driven by the favorable impact of markets and year-to-date net inflows of $6.1 billion. Our core EBITDA margin was 30.4%, up 170 basis points from the prior year quarter, reflecting our scale and commitment to expense efficiency. Turning to Slide 18, our LICAT ratio of 155% in the third quarter of 2020 represents $32 billion of capital above the supervisory target. This is in line with the prior quarter as the impact of net capital issuance and reinsurance of a block of U.S. Legacy business were offset by the overall movement in markets and the capital impact of investment activities. Our leverage ratio increased to 26.7%, slightly above our medium-term target of 25% as we have been proactively pre-financing debt, which is approaching maturity. In addition, the stronger Canadian dollar also contributed to the increase this year quarter. Turning to Slide 19 and core expenses. Our expense efficiency program is mature and a disciplined approach to expense management is deeply embedded in our culture at Manulife. We've taken action to contain core expenses since the onset of the COVID-19 pandemic and have reduced core general expenses by 5% compared with the prior year quarter and 3% on a year-to-date basis. As a result, our year-to-date expense efficiency ratio is 52.9%. Turning to Slide 20, which shows the performance of our ALDA portfolio by asset class over the 15-year period since Manulife’s acquisition of John Hancock. The average return of the overall portfolio during the period from 2005 to 2019 was 9.4%. It's worth noting that this was delivered with significantly lower volatility in comparison to public equities. With the exception of oil and gas and Timberland, the average return of each of the underlying asset classes has exceeded its current best estimate long-term return assumption over this period. Despite this, the overall ALDA portfolio return over this period has exceeded our current aggregate best estimate long-term return assumption. Slide 21 outlines our medium-term financial operating targets and recent performance. Core EPS growth and core ROE were below our targets, reflecting unprecedented levels of disruption as a result of COVID-19. Nonetheless, our performance during the first three quarters of 2020 demonstrates the resilience of Manulife’s business. While it's reasonable to expect COVID-19-related headwinds to persist for the foreseeable future, we believe a 10 to 12% core EPS growth rate remains appropriate for 2021 and beyond. 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. This concludes our prepared remarks. Operator, we will now open the call to questions.
Operator, Operator
Thank you. We will now take questions from the telephone lines. The first question is from John Aiken from Barclays. Please go ahead.
John Aiken, Analyst
Good morning. In terms of the long-term care experience, the claims terminations, can you give us a sense as to what the split was between the terminations of those policies actively in claims and those that are not? And then as a follow-on, if we continue to see the case count since its increase in the U.S., should we expect to see the same trade-off in terms of the benefits versus the higher claims on life to basically offset like we saw in the third quarter?
Steven Finch, Actuary
Thanks, John. It's Steve Finch, I'll take that question. The gain that we saw in long-term care in the quarter was really primarily driven by deaths of those on claim. So claim terminations of those that are already receiving benefits, we didn't see a notable increase in deaths among our active lives. So that was the driver in the quarter. In terms of how it trends from here, it's really difficult to say. It depends on how the pandemic impacts different parts of the population, and we certainly saw early in the year and it was widely reported that nursing homes and care facilities were disproportionately impacted and we saw that come through our Q2 results. Hopefully, and it seems that that situation has improved and the claim terminations that we saw in Q3 were significantly lower than what we saw and reported on earlier in the year. So it's hard to predict how it's going to play out. We are going to continue to watch the data closely.
John Aiken, Analyst
I understood, thanks, Steve. And Phil, if I may, on expenses and the efficiency ratio, obviously, you feel very confident about hitting the billion dollar target for 2020. How can we think about expenses going forward in terms of ongoing reinvestment programs? What's going to fall to the bottom line? And what are your outlooks for ongoing spend in technology? Are we going to continue to see inflation on that in the same degree as we have over the last couple of years?
Philip Witherington, CFO
Thanks for the question, John, and good morning. Yes, on expense efficiency, you're right. We have made progress. It continues to be a core part of our strategy, a key priority in our strategy. We do expect this year to deliver the $1 billion target that we have laid out, but we are falling short at the moment of the overall cost efficiency ratio target. We said that we would get to 50% by 2022, that's still the plan. But there's clearly more work to do there as a consequence of the environment that we're in and the impact that that has on revenues. So it continues to be important. Now in terms of reinvestment and what the component that we would expect to fall to the bottom line, the results year-to-date clearly demonstrate that the cost program is having bottom line benefits and the same was true in the prior year with expenses falling by 5% in the quarter, 3% year-to-date that's clear, we are continuing to reinvest and one of the metrics that Roy gave in his remarks is that we have invested $600 million in digital initiatives and our intention is absolutely to continue to invest. But despite that reinvestment, we do remain committed to a 50% cost efficiency target by 2022.
John Aiken, Analyst
Thanks, Phil. I'll re-queue.
Philip Witherington, CFO
Thanks, John.
Operator, Operator
Thank you. The next question is from Humphrey Lee from Dowling & Partners. Please go ahead.
Humphrey Lee, Analyst
Good morning and thank you for taking my questions. Maybe a question for Steve, just wondering if you can go into some additional color in terms of the assumption review, specifically on the key changes to lapses and then also the one for morbidity and mortality?
Steven Finch, Actuary
Sure. Thanks, Humphrey. In terms of the lapse review, the charge that we took there is primarily from the review of our yearly renewable term and level cost of insurance products in Canada. The reserve strengthening was primarily driven by the experience that we're seeing emerge on our larger policies, so $1 million plus. We think one of the drivers of the experience that we're seeing is the persistent low interest rates that we've seen over the past many, many years. We've been tracking this block quite closely; the last detailed study that we did was in 2017. Since that time, as the block has matured, we've got a lot more data points at the later duration so after a policy has been in place and in-force for more than 15 years, the data points that we've got there have more than doubled, and we are seeing lower experience, lower lapses and that is what we've reflected in the experience. Just for context, so you get a sense of what the assumption is on these large policies, our ultimate lapse rate now after this change is 0.25% per year, so 0.25% of customers stopping paying premiums and lapsing each year. That's the best estimate and we add a margin of 20% on to that as well to get to the PfAD assumption. I feel good that we've reflected all this emerging experience. I think we're at the prudent end of practice in the industry. In terms of mortality, the changes that we saw there, we strengthened reserves in our U.S. life insurance business as emerging experience showed the need to increase the simple mortality rates at the older ages. We saw gains in Canada. We reviewed certain reinsurance agreements and have undertaken some recaptures which is a benefit. In Canada, we also did a review of mortality margins on our preferred business. We harmonized those assumptions with our U.S. business. In addition, in Japan, we have been observing gains in our retail business there, primarily related to hospitalization benefits and cancer benefits, which resulted in our release of reserves there.
Humphrey Lee, Analyst
So I guess when we think about how the basis change affecting the run rate earnings for the different segments? Like how should we think about that uplift?
Steven Finch, Actuary
Right, thanks, Humphrey. So we're seeing it come through in a few places and the uplift is on the order of $15 million per quarter. Some of that's coming through in terms of an increase in earnings in-force in the U.S. from the mortality basis change, also some of the true-ups in our models. We’re seeing a pickup in Asia offset by a decrease in Canada, and then we're also seeing it come through the policyholder experience line, but all in roughly $15 million a quarter.
Humphrey Lee, Analyst
That's helpful. Thanks.
Operator, Operator
Thank you. The next question is from Tom MacKinnon from BMO Capital Markets. Please go ahead.
Thomas MacKinnon, Analyst
Yes. Thanks. Good morning. I guess start with Phil, just really on the earnings on surplus and the impact on new business. You mentioned lower yields and asset mix changes impacting this quarter and lower investment environment, certainly a headwind going forward. Just trying to gauge as to how we should be thinking about earnings on surplus, just given where we are at the third quarter level. And as well as the impact of new business certainly better in Asia, helped by better sales and more profitable sales mix. Is this kind of more indicative of what we should probably expect going forward in terms of impact in new business in Asia as well? And I have a follow-up. Thanks.
Philip Witherington, CFO
Great. Thanks Tom for the question. This is Phil. I'll cover the earnings on surplus points and then maybe hand over to Anil to cover the Asia new business question, and then we'll take your follow-up. So earnings on surplus, as you probably know, variability in earnings on surplus is one of the key drivers of between quarters in the corporate and other earnings variability. In the third quarter, earnings on surplus pretax was $126 million; that’s in the order of $50 million to $60 million lower than the third quarter of 2019. As I said in the prepared remarks, and as you've called out, key drivers there were lower yields, which really reflects the lower interest rates environment that we're in, as well as asset mix changes. There was a tactical change in asset mix in our surplus portfolio during 2020. We reduced the components of the portfolio that is invested in public equities, switching those into fixed income just in view of the environment that we're in. We're not completely out of equities, but we’re at approximately half the exposure there to equities. There was a slight offset from that from higher average asset levels. I think it's also worth noting the quarter-on-quarter movement in earnings on surplus. In the second quarter, as we called out, there was a gain from the impact of seed capital. So that was a bit of a bounce back in seed capital valuations in the order of $150 million. The third quarter also saw favorable seed capital returns, but at about half that level, around $70 million to $75 million. So that really explains the quarter-on-quarter movement. I think I'll hand over to Anil to talk about the Asia new business question.
Anil Wadhwani, Asia CEO
Thanks, Phil and thanks, Tom for the question. If you look at the new business gains for Asia, and let me start with planning a little bit of color quarter-on-quarter. Our sales were up by 31%, though our new business gain was up by 66%. As you rightly pointed out, it was an account of better product mix, largely predicated on the back of the increase that we saw in health and protection. In fact, our health and protection sales jumped by 27% quarter-on-quarter. In addition to that, we were very disciplined on our expenses, as Phil alluded to in his opening comments. From a year-on-year perspective again, while our sales were down 6%, our new business gain was up 24%. A couple of reasons for that. Firstly, again, improved product mix, so the shift to health and protection as that continues to be a top-of-mind topic for our customers on the back of the outbreak. In Hong Kong, for example, we repriced and launched our critical illness product as well as a new bar savings product, both with improved margins. We continued to be very disciplined on expenses and our expenses – despite Asia being a growth engine, declined year-on-year by 5%. We saw expense reductions in Japan, in Hong Kong and continue to be very prudent about that as I mentioned earlier. And last but not the least, if you look at it from a year-on-year perspective of being had lower VHIS sales in quarter three of 2020 as compared to quarter three of 2019. As you would have noted that VHIS while has a healthy new business value margin from an earnings perspective, it does kind of create new business strain. That strain was significantly lower for us in quarter three of 2020. So a combination of factors around improved product mix, better expense discipline, and the VHIS has resulted into the new business gain – increase that you see in quarter three of 2020.
Paul Lorentz, WAM CEO
Yes. Tom, I might just also just supplement to Anil’s comments. I know it was just not a phenomenal job with growing our agency force in Asia as well. In fact, we've grown our agency by 27% on last year, which has been a huge source of strength for us. The focus for us in agency is on a premier agency where we really look for higher productivity than what most would see in the marketplace. So that's been another tremendous driver of growth for us, as has been our strong bank insurance agreements. Again, Anil’s been really driving with great emphasis, and they certainly have helped us with the momentum that we've had in sales in Asia as well.
Thomas MacKinnon, Analyst
Okay. Thanks. And then the follow-up has to do with Canadian individual insurance sales, which are down, I think, in the year and maybe 23% year-over-year. I think you've mentioned you're still getting quite a few – being able to send in apps electronically, but is it just the fact that she can't have sort of paramedic visits? What's slowing down the sales? Is it strictly COVID, which we anticipate sales pick up to post-COVID as a result of that, which would be driving those insurance sales down year-over-year in Canada? Thanks.
Michael Doughty, Canada CEO
Thanks Tom. It's Mike Doughty. And I'll take that question. Yes, you saw in our – overall, in our Canadian segment because we have a diversified business, we actually had a pretty strong quarter in total sales, but definitely you're seeing the impact of COVID on our individual insurance line. You'll remember we entered the year in a very strong position. And really what you're seeing now is kind of the delayed effect of the early lockdown, where the paramedics were closed. So at the higher face amounts, it was very difficult to get new business written and into the pipeline. We have seen an improvement throughout the quarter. So activities are certainly coming back and we're optimistic that that's going to continue, of course, absent more severe shutdowns. The one exception I would reference, of course, we do write travel insurance and that will certainly be depressed until borders reopen and people are traveling again.
Thomas MacKinnon, Analyst
Are you looking at any kind of simplified underwriting product where you wouldn't need any kind of paramedic visit or is what would be the appetite for that just that you see in the market or you see with brokers?
Michael Doughty, Canada CEO
Yes. We've actually – very early on in the pandemic, we actually worked with our reinsurance partners and were very quick to actually expand the agent amount limits so that we can process quite a bit of business under $2 million at the sort of younger ages without needing medical evidence. So that has been very popular. The other thing that we did, we've had an electronic application for some time and have really been promoting that. 83% of our insurance business was processed through that electronic application in the third quarter. So we do think our products are available, virtually all of them virtually now. So that's not an issue for us.
Operator, Operator
Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Hi, good morning. Thanks for the additional information on the ALDA portfolio returns. But it's something that investors highlighted one of the main concerns that they have returns in that portfolio and potential charge if you have to lower them. I'm just wondering if there's anything else that you can provide on the disclosure side, and not for this call really, but similar to what you've done for long-term care. Give more granularity on the best estimate versus PfAD, some sensitivities to changes that might arise? And basically, stuff that would downplay or at least from your perspective downplay the risk of a possible charge, I'm wondering if that's something that you guys would be considering presenting. And actually, if there's anything you'd say about the CRE and from the GAAP performance this quarter, that'd be great too.
Roy Gori, President and CEO
Okay. Thanks for the question, Gabriel. So on your point on disclosure, that's something we can take away and think about. It’s certainly a good suggestion and we're very open to providing transparent disclosures. Scott, I don't know if there's anything else you wanted to add with respect to ALDA returns and the disposal of NAL.
Scott Hartz, Investment Officer
Sure. And let me back up a little bit here. Thanks Gabriel for bringing this up. Our assumed returns, our long-term returns of 50-plus years experienced in any given quarter or any given year, doesn't really influence us that much. With that said, we do look at those returns each year to make sure we continue to be comfortable with them. That starts with looking at history, and hence Phil showed the longer-term history we have here, where we have actually achieved the current assumptions over 15 years. But as everyone knows, past performances is no guarantee of future performance. We do look at what drove those returns and whether we think conditions have changed. There certainly were some tailwinds over that period, but there also have been some headwinds. And I'll just point a few of them out. First, we did see interest rates drop and hence discount rates drops over this period, which was a tailwind. But on the other hand, this is largely a real asset portfolio. It's got infrastructure, real estate, timber, agriculture, oil and gas, and inflation is a big component of the returns there. Inflation has come down, and inflation expectations have come down even more, and that's been a bit of a headwind for the portfolio. If you look at that time period, it's been – especially the last 10 years are really good one for equities, a bit of a bull market. But reaching back to 15 years does take us through the global financial crisis when equities performed poorly and real estate certainly performed poorly. As you saw in Phil's exhibit, U.S. equities were at about a 9% return, Canadian equities about 7% return, which is pretty consistent or even maybe a little below the really long-term returns in those markets. We don't feel like it was an unusual period from that perspective. I just would point to oil and gas, which certainly has been a headwind for us over those past 15 years, returning less than 5% and even worse in more recent times. We did sell NAL, with it closing in January this past quarter, and with that our oil and gas exposure falls to below 5% of the overall ALDA exposure. That's down from nearly 10% at certain points. So we do feel like a lot of that headwind is behind us now. And when you put all that together, we do get comfortable with our current assumptions. Your other question was – sorry, just to follow-up on real estate and looking forward on real estate. I'm concerned about. Retail obviously would be a big concern; we have very little there, only 3% of the portfolio. Industrial and multifamily, I feel actually very good about, particularly industrial, but office is the biggest question mark and that is the biggest part of our portfolio with little over two-thirds in office. Although we occupy a lot of that space so looking at just what we call investment office properties, that's a little less than half the portfolio. That's where I am most focused while listening to a lot of folks regarding its future. I have been very concerned that the longer we continue to work from home, the less amount of people will return. But if we can get back sooner, that will limit the scheme of things overall impact. We had modest losses on our real estate portfolio this quarter, so a modest loss means just we underperformed the assumption; it was still a slightly positive return and we'll be watching it closely. That is probably my biggest concern in that portfolio. I think private equity, on the other hand, is a bit of a tailwind as I think you know those returns are a bit lagged, and the third quarter was a good quarter for public equity. I think all will provide us pretty good returns, absent markets changing radically over the next couple of quarters in private equity. So I think those two largely balance each other out at this point.
Gabriel Dechaine, Analyst
Okay. Thanks.
Steven Finch, Actuary
I just wanted to briefly add my comments in terms of my review of the assumptions. Scott and I and his team worked very closely together. I continue to be confident in our ALDA assumptions over the long-term. The key things there that Scott pointed out that I'll reemphasize is, it is a very long-term assumption. We have a really strong team and demonstrated track record for delivering the returns that on a risk-adjusted basis are as you saw in what Phil presented earlier. The other thing, Gabe, just to remind you of is we put significant margins on all the ALDA assumptions. We put margins on growth, income, and we're required to shock the portfolio at the time that’s least favorable. So our all-in average padded assumption is a 6.1% annual return. Thanks.
Gabriel Dechaine, Analyst
I had a second question, but I'll graciously leave time for my fellow analysts.
Operator, Operator
Thank you. Your next question is from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi, good morning. Question about the annual assumption review, and I'm wondering if COVID considerations played any role in that review. Did that factor in at all to what you did this quarter?
Steven Finch, Actuary
Thanks, Meny. It's Steve. The short answer is no. We're still tracking these trends that we're seeing from COVID and we're not taking the view at this point of updating long-term assumptions, and that is consistent with what I've seen for peers across the globe in the industry. I've seen surveys from some of the audit firms and consistently people are saying, we need to see how all this experience develops. We'll form views and we'll factor in the future, but not part of this year's study.
Meny Grauman, Analyst
So that was the second part of my question, whether you would ever consider being proactive given the nature of the shock. I know one of your peers has talked about that. I'm just wondering, under what circumstances would it make sense to be proactive or how much time do you need to see things develop before you would feel comfortable doing something on this particular issue?
Steven Finch, Actuary
Yes. It's a good question. I think that's what people are thinking about in the industry. I just remind you that we have a diversified book of business. So we've seen gains in some product lines. We've seen some modest life claims from COVID; it can impact policyholder experience. We've got a diversified look. So I'd be cautious that we don't look at any one assumption. We need to look at it holistically in terms of how it's impacting us, and that'll be part of all the data that we look at going forward.
David Motemaden, Analyst
Hi, good morning. I had a question for Naveed and Phil maybe. I guess just wanted an updated view on the variable annuity book and particularly in the U.S., and just your view on risk transfer opportunities there. We saw a large transaction recently and a stock there that was involved meaningfully rerated after that. So wondering what your current view is on potential risk transfer opportunities on the U.S. book on the variable annuity side?
Naveed Irshad, VP, Variable Annuities
Hi, David. It's Naveed here. So that transaction was certainly interesting. It's one that we’re reviewing closely and seeing if there's any applicability for us. We know that it was a significant process that took over a year to complete. We also know that there are potential buyers of VA blocks who recognize that the market may not be appreciating the value within. So we do regularly explore inorganic options and we’ll transact if it's in the best interest of our shareholders. That said, our VA business continues to perform really well, generating earnings and cash. We're well hedged. The hedging program is holding up well through periods of high volatility. Historically, we've seen 95% hedge effectiveness. So it's working well. We're also pleased with the success we're having with organic initiatives, like the buyback program and have plans to continue our organic work. I'd say it's looking at both options, but again, we're happy with the performance of the business.
David Motemaden, Analyst
Got it. And if I could just follow-up. You guys obviously give capital and reserves backing the entire VA book. Is it safe to assume that the majority of that is backing the U.S. book given that's where the majority of the – I guess the net amount at risk is?
Steven Finch, Actuary
It's Steve. I can comment on that. I don't have the split in front of me, David. But the largest part of the block and relatively higher risk benefits are in the U.S. So it would certainly be more than half. The majority would be in the U.S., but we can circle back if we're willing to provide that information.
Operator, Operator
Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.
Doug Young, Analyst
Good morning. Steve, you're a popular person today, so I'm going to stick with you. You took a sizable hit in the actuarial assumption review related to lapse, so you did have some negative lapse experience in Canada again this quarter. I was hoping you could unpack that and maybe give a sense of what you're seeing. And you also had some negative lapse experience, it sounds like, in the U.S. this fall. I was hoping you could elaborate on that.
Steven Finch, Actuary
Thanks, Doug. Yes. So they're not directly connected. Really, I mean, the lapse review in Canada, as I talked about earlier, is reviewing the emerging experience. In terms of the quarter, what we're seeing – what we believe we're seeing, just like in Q2, we saw – people going to the dentist and not going for routine care that drove gains. We're seeing higher claims terminations in long-term care. What we're seeing across North America, across our protection products is lower lapse rates than a trend. So we're seeing people hanging on to their coverage in a situation where there's a global pandemic. Mike referred to some studies that are showing that consumers are valuing their life insurance more in this environment. So we think it's – just like we saw in the global financial crisis where you can see off-trend experience in terms of what customers might be doing. We think we're seeing some trends here on the North American lapse where people are holding onto their coverage.
Doug Young, Analyst
I mean, is there a risk that you didn't take the lapse assumption down enough? Is that what the experience is telling us? Or is this just something that you think it's more of an unusual event right now given COVID and that it will go back to more what you've assumed in your assumption?
Steven Finch, Actuary
We think it's an unusual trend. We took those level COI lapse rates, as I mentioned at the ultimate and the larger policies down to 0.25% to 0.2% on a padded basis. So they're pretty low. We think this is unusual trends that are likely to revert over time.
Operator, Operator
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Paul Holden, Analyst
Hi. Thanks. Good morning. First question is related to the Asia business and specifically Hong Kong. If I look at the reported COVID cases post-quarter, they've trended down significantly. So wondering if you're seeing a correlation between that decrease in COVID cases and improvement in sales.
Anil Wadhwani, Asia CEO
Thanks for the question, Paul. This is Anil. Hong Kong has been exceedingly resilient, not only due to the current challenges of 2020 but even in the light of the current challenges that we saw in 2019. If you look at our Hong Kong business, we were able to deliver a core earnings growth of 15% year-on-year. Importantly, we saw a strong traction quarter-on-quarter, so our new business value and our new business volume both were up by 8%. We are focusing on the fundamentals of the business and to that end we have a very strong agency in Hong Kong, which now stands at north of 10,000. We've grown that at 7% year-on-year via strong broker and bank partnerships. We are investing significantly in virtual face-to-face capabilities, which in the case of the pandemic served as a great tool, but absent of the pandemic, is a great productivity tool for our agents and our customers to utilize. We have also observed strong demand for health and protection products, allowing us to launch new offerings like critical illness. We feel confident about Hong Kong with our diversified businesses as well as a strong agency force. As Roy mentioned, we are number one and we continue to solidify our market position on the MPF business as well.
Philip Witherington, CFO
Paul, if I could also chime in just beyond Anil’s comments, specifically as it relates to Hong Kong and Asia. The global diversity of our business across all of our geographies and business lines has been a key source of strength for us in navigating this COVID environment. The fact that we had some markets in lockdown while others have emerged out of a more stringent lockdown, that's been a real source of strength for us. Our APE sales in the quarter were only 2% down on the prior year. I’d highlight that our Canadian division had a strong quarter with sales up 23%, Group Benefits was a key driver that helped us there. Our U.S. domestic business again, was a source of strength. Our WAM business saw gross flows grow 20% year-to-date over the prior year. The global diversity of our business has helped us navigate the difficulties and challenges of COVID.
Paul Holden, Analyst
Okay, got it. My second question is related to WAM. And as you already pointed out, you have a diversified global model across a number of different product categories as well. But if I look at results, it seems like the U.S. in terms of flow perspective has been softer than some of the other geographies. So wondering if there's particular drivers behind that, and if there is a strategy in place to help prop up those net flows in the U.S. market specifically?
Paul Lorentz, WAM CEO
Thanks, Paul. It's Paul Lorentz. As you mentioned, the flows have been impacted in the U.S. primarily because of the impacts of COVID on the retirement business, affecting small business owners, leading to more withdrawals, along with lower retirement plan sales and recurring deposits. Although in aggregate, excluding large-case redemptions, the U.S. would have shown positive net flows this quarter, with our retail business being positive in the third quarter for the first time this year. So we have seen gross flows increase across the globe, and we believe our diversified businesses will continue to help us out over time.
Paul Holden, Analyst
That's great. Thank you. That's all for me.
Operator, Operator
Thank you. The next question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.
Nigel D'Souza, Analyst
Thank you. Good morning. I had a question for you on interest rates sensitivity. With rates declining in the past, LICAT has benefited from fair value gains related to AFS bonds held in surplus. I'm wondering if that trend reverses, and we see rates rise due to a successful vaccine or quick return to normalcy and higher inflation expectations. Would you look to crystallize the gains in AFS bonds to reduce the drag to LICAT in a rising rate environment? Is that the right way to think about it? I think, could you also touch on outside of AFS bonds, how you expect LICAT to be impacted if rates do continue to rise over the next few years?
Philip Witherington, CFO
Nigel. This is Phil. Just to clarify, on a LICAT basis, the value of the AFS bonds is fair value as carried in the balance sheet. Whether it's an unrealized gain or a realized gain, the impact is neutral. That's a notable difference to the old capital regime, the MCCSR regime, where the gains only qualified as capital upon realization. That would be neutral. When we look at interest rates rising, it will affect LICAT and with our ratio at 155%, that's certainly higher than what we would expect to be reporting in normal times.
Steven Finch, Actuary
I wanted to briefly add to Phil's point. We've stressed the balance sheet under a variety of scenarios, including scenarios with higher inflation and rates. The capital position remains strong. If interest rates rose, it would be generally good for Manulife, good for the industry. Overall, it's beneficial for products and the underlying economics.
Scott Chan, Analyst
Good morning. I just wanted to go back to ALDA and again, appreciate the performance update over the past 15 years averaging 9.4%. But during that time period, the risk-free rates have gone down about 500 basis points. So how can you expect those returns to continue to that similar level in terms of your best estimate? And I guess put it another way, it seems like your equity risk premium or ALDA equity risk premiums have increased.
Scott Hartz, Investment Officer
Yes, thank you for the question, Scott. So as I mentioned before, the declining rates are generally a positive as your discount rates come down. Inflation has come down as well, affecting the return features. Our ALDA strategy is suitable for long-tailed liabilities, particularly in a low rate environment. It has been proven effective, and over the years, we have consistently achieved good returns.
Paul Lorentz, WAM CEO
Speaking to EBITDA margins, we have driven significant improvement in the EBITDA margin, and we do see it as a sustainable level, although there will be fluctuations quarter-to-quarter. We continue to see growth across all areas of the business segments, despite some shifts and market impacts. Our recovery within Asian markets shows how the architectural changes have driven this strategy forward.
Mario Mendonca, Analyst
Good morning. I will try to keep this quick. Going back to Asia and the new business gains, that number does bounce around a fair bit. And I understand the comments you've made around mix of business and the VHIS being a lot lower. What would be helpful to understand then is, if I look at the three main geographies, Hong Kong, Japan, and Asia, could you talk about – and this is not new business value, but new business gains. As a general rule, would it be fair to say that Hong Kong generates lower new business gains and the other two generate higher new business gains? I'm asking it this way because I'm trying to think how might I look at this on a go-forward basis, the new business gains in Asia?
Anil Wadhwani, Asia CEO
Yes, Mario. Thanks for the question. A good indication of that would also be the contribution that each geography makes to our core earnings. Hong Kong is a significant contributor, and we have seen other markets like Vietnam and China growing at a fair clip. This is where the diversified nature of our markets in Asia has become critical. Despite challenges in 2020, we've seen various markets step up significantly to contribute to the core earnings story.
Mario Mendonca, Analyst
So just to put a final plan on this then, if Hong Kong is the biggest contributor to the new business gains in Asia and sales were down 30% year-over-year, you still had sharply higher new business gains in Asia total. So is it just specifically the mix of business within Hong Kong that will have the greatest effect on this number?
Anil Wadhwani, Asia CEO
Right. There were two factors. The product mix and the fact that, in quarter three of 2019, was the strongest for our VHIS product. VHIS has a very healthy new business value but leads to new business strain. We’re seeing a lower new business strain in quarter three of 2020, which positively impacted overall new business gains.
Philip Witherington, CFO
We are experiencing strong expense management across the board, contributing significantly to our core earnings this quarter. Our operational efficiency programs are enabling positive outcomes despite the challenges of 2020.
Operator, Operator
Thank you. There are no further questions at this time. I'd like to turn the meeting back over to Ms. O'Neill.
Adrienne O'Neill, Host
Thank you, operator. We will be available after the call if there are any follow-up questions. Have a great morning.
Operator, Operator
Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.