Earnings Call Transcript - MFC Q1 2022

Operator, Operator

Good morning, and welcome to the Manulife Financial First Quarter 2022 Financial Results Conference Call. Your host for today will be Mr. Hung Ko. Please go ahead, Mr. Ko.

Hung Ko, Host

Thank you. Welcome to Manulife's earnings conference call to discuss our first-quarter 2022 financial and operating results. Our quarterly earnings material, including the webcast slides for today's call are available on the Investor Relations section of our website at manulife.com. Turning to Slide 4. We will begin today's presentation with an overview of our first-quarter highlights and an update on our strategic priorities by Roy Gori, our President and Chief Executive Officer. Following Roy's remarks, Phil Witherington, our Chief Financial Officer, will discuss the company's financial and operating results and provide an update on the key implications of IFRS 17 on Manulife's financial results and key performance indicators. After the prepared remarks, we will move on to the live question-and-answer portion of the call. We ask each participant to adhere to a limit of two questions including follow-ups. If you have additional questions, please re-queue and we will do our best to respond to everyone. Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 39, we note on the non-GAAP and other financial measures used 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, Hung. Thank you, everyone, for joining us today. Yesterday, we announced our first-quarter 2022 financial results. Our diversified footprint, operational resilience, and proven digital capabilities enabled us to deliver solid results in the first quarter, despite a challenging operating environment caused by the resurgence of COVID-19 and global market volatility. You'll see on Slide 6, we delivered solid core earnings of $1.6 billion, a modest 4% decrease from the prior year quarter as we continue to benefit from the diversity of our businesses. And we also reported net income of $3 billion, an increase of $2.2 billion over the prior year quarter, reflecting strong investment-related experience and a gain from the closing of the US variable annuity reinsurance transaction. We achieved new business value of $513 million. The resurgence of COVID-19 and tighter containment measures impacted many of our markets in Asia and lowered NBV. This was partially offset by double-digit growth in both Canada and the US, exemplifying the benefits of our business diversification. While the rapid and unprecedented resurgence of COVID-19 disrupted new business activities in multiple markets in Asia, our diversified digitally enabled and well-established distribution channels delivered double-digit growth in APE sales and NBV relative to the average levels during the first wave of the pandemic in the first and second quarters of 2020. And Global WAM had another quarter of strong net inflows, generating $6.9 billion with positive contributions across all geographies and business lines. Finally, we reported embedded value of $64.8 billion or $33.35 per share as of December 31, 2021, an increase of $3.7 billion or 7.3% from the prior year. We believe that embedded value is an important valuation metric. Additional information on our embedded value can be found in the appendix and our 2021 embedded value report. Turning to slide 7. We are laser-focused on delivering on our strategic priorities. Our highest potential businesses accounted for 53% of total company core earnings in the first quarter of 2022. In Asia, we successfully commenced offering insurance solutions to VietinBank’s 14 million customers as part of our exclusive 16-year bancassurance partnership in Vietnam. And in our Global WAM business, we announced the launch of the Real Asset Investment Strategy in Canada, which provides investors access to a mix of global private and public real asset investments, combining the benefits of broad private asset exposures with the liquidity benefits of allocating the public markets. We continue to execute on our ambition to be the most digital customer-centric global company in our industry. In Asia, more than 10% of APE sales resulted from leads generated using advanced analytics to identify additional needs from existing customers. We launched an enhanced Manulife Vitality mobile app experience in Canada for our individual insurance business, giving the app a new look and feel with easier navigation to further drive member engagement. In the US, we enhanced our e-app by implementing automated background checks, which reduced onboarding cycles from three weeks to five days, and reduced costs and call center volumes. In our Global WAM retirement business, we enabled registration directly through the mobile app in Canada, resulting in approximately 50,000 Canadian customers using our mobile application by the end of the quarter. We've made tremendous progress on our digital journey, as evidenced by the 20-point improvement in our Net Promoter Score from plus one in 2017 to plus 21 in 2021. In recent months, our service levels were impacted by temporary workforce capacity constraints. And at the end of the first quarter, the rolling four-quarter average NPS was tracking below our 2022 target of plus 31. We're taking actions to boost the average NPS in 2022. We are committed to continuing to execute on our strategy to attract, engage and retain customers by delivering an outstanding experience for every interaction. We remain on track to achieve our 2025 supplemental goal of plus 37. In line with our semiannual reporting of NPS, we will provide a more fulsome update with our second-quarter 2022 results. Turning to slide 8. We continue to drive progress on our expense efficiency, portfolio optimization, and high-performing team priorities during the quarter. We achieved an expense efficiency ratio of 50% despite a modest decrease in core earnings as we continue to proactively manage costs amidst the challenging environment. Of note, we closed the variable annuity reinsurance transaction in the US with a deal multiple of 11.8 times and released $2.4 billion of capital. And we've commenced share buybacks to deliver shareholder value and utilize the impact of the transaction on core EPS. Turning to slide 9. During the first quarter, we witnessed a rapid and unprecedented resurgence of COVID-19 in Asia. Despite daily new confirmed cases significantly exceeding prior waves for many of our markets. This resulted in tighter containment measures, notably in Hong Kong, Mainland China, and Vietnam. These containment measures have challenged the broader economy and the insurance industry as a whole. We are encouraged to see recent signs of stronger customer demand returning as case counts are declining. For example, in Hong Kong, we saw confirmed cases decrease from the peak of 77,000 daily to 300 daily as of May 1st, and containment measures have begun to relax in late April. Turning to slide 10. Despite the ongoing prevalence of COVID-19, we have demonstrated a strong track record in managing the challenges over the past two years. A clear example is our Hong Kong business, where we've gained market share and increased our ranking by one spot to number five in insurance and retained our number one market position in NPS in 2021. We have delivered 19 consecutive quarters of year-over-year growth in core earnings. We've also scaled and digitized our distribution force, growing agency headcount by 7% and increasing our EPOS active agent adoption to over 80%. Our NBV margin improved three percentage points this quarter compared to the prior year as we focused on increasing health and protection mix and scaling our MOVE platform to help more customers become healthier. Since the outbreak of COVID-19 in 2020, we've delivered resilient results due to the investments that we've made into our talent, digital, and distribution channels. As markets across Asia navigate the challenges of the pandemic, we continue to be well-positioned to serve our customers' needs. The strong demand that we've witnessed in North America and ongoing attractive megatrends in Asia give us optimism about the opportunity as those markets recover from the pandemic. Turning to slide 11. We delivered solid results in the first quarter of 2022, and I'm very proud of the performance of our business. During the quarter, despite a challenging operating environment caused by the resurgence of COVID-19 and global market volatility. We closed the transaction to reinsure over 75% of our US variable annuity business with a deal multiple of 11.8 times and released $2.4 billion of capital. We remain committed to generating shareholder value as we commenced share buybacks to neutralize the impact of the transaction on core EPS. Our solid foundation, global presence, diverse business, and continued strong execution uniquely position us to succeed and deliver on our growth targets. Thank you. And I'll hand over to Phil Witherington, who will review the highlights of our financial results and provide an update on IFRS 17.

Phil Witherington, Chief Financial Officer

Thanks, Roy. We're off to a solid start to the year despite a challenging operating environment. I'll now highlight the key drivers of our first-quarter results. Starting on slide 13. We generated solid core earnings of $1.6 billion in the first quarter of 2022, a modest 4% decrease from the prior year quarter. This year-over-year change was driven by a number of factors: lower new business gains in Asia, an unfavorable impact of markets on seed money investments and lower in-force earnings in US annuities due to the variable annuity reinsurance transaction that closed on February 1st. These items were partially offset by experienced gains, in-force business growth in Canada and Asia, higher fixed-income yields, and a lower cost of debt in corporate and other, as well as higher new business gains in Canada and the US. Of note, the unfavorable impact of markets on seed money investments was $63 million and consisted of approximately $37 million from equity funds and approximately $29 million from fixed income funds. The overall amount was larger than our disclosed sensitivity would imply, mainly reflecting the impact of material interest rate moves not contemplated in our sensitivity. Net income attributed to shareholders of $3 billion was up $2.2 billion from the prior year quarter, reflecting gains from the direct impact of markets, again related to the U.S. variable annuity reinsurance transaction and larger gains from investment-related experience. Of note, we recognized a gain of $658 million from investment-related experience, $100 million of which was included in core earnings as core investment gains, with the remaining $558 million reported outside of core earnings. We recognized other gains of $763 million, largely driven by a one-time after-tax gain of $842 million from the U.S. VA reinsurance transaction. The cumulative net gain from this transaction is $802 million, after including a one-time after-tax loss of $40 million recognized in the fourth quarter of 2021. The gain of $207 million from the direct impact of interest rates was due to the flattening of the yield curves and gains from widening corporate spreads, partially offset by realized losses on sales of AFS bonds. The impact of equity markets in the quarter was a loss of $110 million. Slide 14 shows the recent history of our investment-related experience. Over the past three years, including through the pandemic and related market volatility, we have continued to generate strong investment-related experience. While experience can vary period-to-period, since 2019, our investment-related experience gains have well exceeded $100 million, on average each quarter. The average quarterly gain of $212 million since the start of the pandemic in early 2020 is also comparable to the average of $192 million we reported during 2019. Overall gains from fixed income reinvestment have been strong and steady, and credit experience has been a reliable contributor. ALDA has also been a contributor over this period, although the experience varied significantly quarter-to-quarter due to its mark-to-market nature. Through the cycle, our ALDA portfolio has performed well and exceeded our long-term return assumption, as I noted in our fourth quarter 2021 results. Slide 15 shows our source of earnings analysis for the first quarter of 2022 compared to the prior year quarter. Expected profit on in-force increased 3%. Excluding the impact of the U.S. VA reinsurance transaction, the increase was a strong 7% from the prior year. New business gains decreased by 31% from the prior year period, primarily driven by lower Critical illness sales in Mainland China, lower sales in Hong Kong, and several markets in Asia Other due to the strong COVID-19 wave, as well as lower COLI product sales in Japan. Policyholder experience was a net favorable $50 million on a pre-tax basis, reflecting the diversified nature of our business. Favorable experience in U.S. long-term care more than offset losses in U.S. Life and Canada recorded a net favorable experience, while Asia was largely neutral. Slide 16 shows the recent history of our policyholder experience. As we mentioned previously, the pandemic and related macroeconomic environment impacted our policyholder experience differently across product lines and geographies. The diversity of our businesses and our use of reinsurance provided an offset. And on a cumulative basis since the start of the pandemic in early 2020, the net impact was close to neutral, in fact, slightly positive. Slide 17 shows our earnings by segment and return on equity. We delivered core earnings growth of 4% in our Global WAM business, reflecting growth in net fee income. Core earnings in Asia decreased by 5%, driven by lower new business volumes in Hong Kong and several markets in Asia Other, reflecting the adverse impact of COVID-19 containment measures, lower sales in Japan, and unfavorable product mix in Mainland China. Core earnings in Canada increased by 19%, reflecting higher in-force earnings, more favorable policyholder experience, and new business gains in the individual insurance business. Core earnings in the US decreased by 3%, largely due to the VA reinsurance transaction. Excluding the impact of the transaction on in-force earnings, core earnings would have increased 4% as compared to the prior year quarter. The core loss in Corporate and Other increased by $91 million, primarily driven by the unfavorable impact of markets on seed money investments, and we delivered a core ROE of 11.8%. Turning to slide 18, which shows our APE sales and new business value generation. In the first quarter, we generated APE sales of $1.6 billion, down 9% from the prior year as growth in North America was more than offset by a decline in Asia. In Asia, APE sales decreased 17% due to adverse impacts from COVID-19 in Hong Kong and several markets in Asia Other, as well as lower COLI product sales in Japan. We delivered new business value of $513 million, down 14% from the prior year quarter. In Asia, new business value decreased due to the factors I noted earlier and unfavorable product mix in Mainland China. This was offset by double-digit NBV growth in North America as we continue to see strong customer demand in our Canada and US insurance businesses. Turning to slide 19. Our Global WAM business continued to benefit from our geographic and line of business diversification, as evidenced by strong net inflows of $6.9 billion and gross flows of $38.5 billion in the first quarter. In Retail, net inflows were $4 billion compared with net inflows of $6.5 billion in the prior year quarter. The decrease was driven by lower gross flows, mainly in fixed-income products, and higher mutual fund redemptions in Canada. Institutional Asset Management net inflows were $0.9 billion compared with net outflows of $7.2 billion in the prior year quarter. The increase was driven by the non-recurrence of a $9.4 billion redemption by a large institutional client in the first quarter of 2021. In Retirement, net inflows were $2 billion compared with the $2.1 billion in the prior year quarter. Overall, Global WAM's average AUMA increased by 8% compared with the prior year quarter, driven by market performance over the past 12 months and continued net inflows. Net fee income yield decreased by 0.5 basis point to 42.9 basis points, primarily driven by a modest decline in fee spreads. And our core EBITDA margin increased by 20 basis points, driven by growth in net fee income, reflecting higher average AUMA. Turning to Slide 20. We continue to maintain a strong balance sheet and capital position. We have $25 billion of capital above the supervisory target, and our LICAT ratio of 140% is strong. The 2 percentage point decrease compared with the fourth quarter was mainly due to the impact of higher interest rates, partially offset by capital release from the US VA reinsurance transaction. Our financial leverage ratio increased by 0.6 percentage points from the prior quarter, driven by a net issuance of securities, the impacts of higher interest rates on AFS bonds, a stronger Canadian dollar, and share buybacks, partially offset by growth in retained earnings. We commenced share buybacks and purchased approximately 0.75% of our common shares in the first two months following the US VA reinsurance transaction, demonstrating our commitment to deliver shareholder value and neutralize the impact of the transaction on core EPS. Slide 21 shows the summary of our financial performance for the quarter. The mixed performance of our profitability and growth metrics reflects the impact of a challenging operating environment, with our global strength and diversity being a notable mitigant. Our balance sheet remains strong and provides us with financial flexibility to deliver on our strategic and capital deployment priorities. Slide 22 outlines our medium-term financial targets and recent performance. While some of these metrics are tracking below our targets this quarter, we're pleased with the performance and resilience of our business, given the temporary disruption caused by the resurgence of COVID-19 and global market volatility. We remain confident in our ability to continue to deliver on our targets over the medium-term. Turning to slide 23. I'm pleased to give an update on the key implications of IFRS 17 on Manulife's financial results and key performance indicators. Before I start, I want to remind you that the new accounting standard does not impact the fundamental economics of our business or our financial strength, claims-paying ability, or dividend capacity, though it will impact where, when, and how specific items are recognized in the financial statements. There are a few key items that I want to walk through with you. First, a contractual service margin or CSM for short, will be established on our in-force business at transition, representing unearned profits and will be treated as available capital under LICAT. Overall, we expect a decrease in equity of approximately 20%, mainly driven by the establishment of CSM at transition. Second, as we write profitable new insurance business, our CSM balance will grow. Since CSM will amortize into earnings in the future, a growing CSM will be an important component of future earnings growth. Third, recognition of new business gains and certain investment-related activities will be deferred under IFRS 17, and therefore, we expect a reduction in core earnings of approximately 10% upon adoption. Fourth, we expect IFRS 17 to improve the stability of our earnings relative to IFRS 4. Fifth, our capital position will remain strong in an IFRS 17 environment and we also expect our LICAT ratio to be more stable than is currently the case under Calm and IFRS 4. Finally, as a result of the adoption of the new standard, some of our medium-term financial and operating targets will be increased and we're confirming the remaining targets are unchanged by IFRS 17. Slide 24 highlights the expected changes to our medium-term financial and operating targets, where some will be increased upon transition to IFRS 17. Our core ROE target will be increased to 15% plus from the current 13% plus, driven by expected changes in core earnings and equity. And we do not expect material changes to our remittances or changes to our dividend per share or its trajectory. As a result, the target dividend payout ratio range will be updated to 35% to 45% from the current 30% to 40%. We are confirming our remaining medium-term financial and operating targets under IFRS 17. However, given that CSM represents unearned profit and available capital under LICAT, we intend to adjust our definition of financial leverage ratio to include the CSM in the denominator. And given the CSM is an intrinsic part of the value of the business and an objective metric that illustrates the growth and future earnings generation capability of our insurance businesses, on transition, we will be adding two new medium-term financial targets relating to the CSM: new business CSM growth of 15% per year and CSM balance growth of 8% to 10% per year. After this call, we will release a presentation and video, which will provide additional information on the impact of IFRS 17 adoption on our financial reporting and targets. These materials will be available on our Investor Relations website. This concludes our prepared remarks.

Operator, Operator

And the first question is from Meny Grauman at Scotiabank. Please go ahead.

Meny Grauman, Analyst

Good morning. You referenced unfavorable product mix in China. I'm just wondering if you could give us a little bit more detail on that, is that COVID related or is that something else?

Anil Wadhwani, CEO, Asia

Thanks, Meny. This is Anil Wadhwani. So if you recall, we had mentioned at our previous earnings call that we are seeing regulatory changes at an industry level that are impacting the critical illness proposition. And as a consequence of that, we saw a very different product mix year-on-year. We had an outstanding first quarter in 2021 in China. And on account of some of the adjustments that we have been making in response to the regulatory changes, the product mix was significantly different in quarter one of 2022, so that effectively kind of drove the difference. I do want to qualify that some of these changes, while they create a challenge for us in the short term, from a medium to long-term perspective, that is good for the sustainable growth of our insurance business in China.

Meny Grauman, Analyst

Thanks for that. Regarding COVID, Roy, you mentioned in your presentation that case counts are decreasing, particularly in Hong Kong. Do you have any insight on when these strict measures may be lifted? When can we expect a more open sales environment in Hong Kong and beyond?

Roy Gori, President and CEO

Yes. Thanks, Meny. Let me start, and I'll hand back to Anil to provide a little bit more color and flavor. The thing that I would say is that in Q1 of this year, we saw a really unprecedented resurgence of COVID in Hong Kong, but also in other markets in Asia. And really was dramatically anything we saw in prior waves. And the example that I gave earlier was that of Hong Kong, where we saw a COVID case count high of 77,000 on a given day in the quarter versus the previous high of about 150 cases per day. Now, the encouraging sign is that we're seeing COVID case counts reduced significantly, which is what we saw in North America, quite frankly, and in other parts of the world. In May, for example, in Hong Kong, the case count came down to about 300, and that is certainly a big positive. So in general, we see that the situation we saw in Q1 was more temporary in nature. The case counts are certainly improving, and the containment measures are being lifted. So it's temporary in nature. We are encouraged by the movement and the momentum since the end of the first quarter, but it's not necessarily true that we'll see an immediate bounce back in one quarter. But again, if I think about the medium-term outlook for Asia, we are just as excited today as we were last year and in prior years. The Asia opportunity is undeniable. It's incredibly significant. And quite frankly, we demonstrated the strength of our franchise through 2020 and '21, where we saw significant growth momentum, where we quite frankly gained market share versus many of our peers. But Anil, you may want to provide a little bit more flavor on what you're seeing on the ground.

Anil Wadhwani, CEO, Asia

Thanks, Roy. So Roy mentioned a couple of times that Hong Kong, obviously, was a key recipient of the unprecedented surge that we saw. And we also kind of saw some of the lingering impact of COVID in many of our Southeast Asian markets. Having said that, if you look at our earnings profile, Hong Kong did deliver a positive earnings growth despite the unprecedented challenges. So did Japan. We also saw positive earnings growth in Singapore, Philippines, and Indonesia. The market that was really challenged was China for reasons that I've mentioned earlier. If I look at the outlook, what we are seeing is that vaccination rates are improving. And that is leading to greater confidence regarding relaxation measures as well as a positive impact on customer sentiment. Having said this, I also want to point out to the fact that we have again seen some severe lockdowns in Shanghai on account of the surge that we've witnessed recently. So the point being that we will, in the short term, have to navigate these challenges, which, as Roy alluded to are temporary in nature. But again, medium-term, the secular trends in Asia are quite undeniable, and we are very uniquely positioned on account of market-leading positions in many of our geographies to be able to address this opportunity.

Meny Grauman, Analyst

Thank you.

Operator, Operator

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young, Analyst

Good morning. Just on IFRS 17, are we to assume that you're planning on putting the interest rate volatility through the AOCI? And if that's the case, is there any logistical issues we should be considering with the choice of that option?

Phil Witherington, Chief Financial Officer

Thanks, Doug, for the IFRS 17 question. This is Phil. We have decided to elect the OCI option in the standard. And let me provide a little bit of context for that. One of the key changes that comes with IFRS 17 is that the direct linkage that exists between the expected return on assets and the liability discount rate that goes away with IFRS 17, and that provides the potential for additional short-term variability arising from the impact of interest rates on both assets and liabilities. What the OCI option allows for and this is an option that the standard provides for is that movements arising from interest rates, both assets and liabilities are offset within OCI. And therefore, it provides us offsetting effect of short-term variability that does arise from those movements in rates. And it provides, therefore, for more stable net income. Now, we are a global company, and we do expect a number of our global peers to take the same approach in electing the OCI option. And from a – one of the things you referenced in your question is the logistical aspects. I don't see any particular challenges from a logistical perspective, given that there will be very transparent disclosure of the movements in assets and liabilities within OCI. And so I feel that this is certainly no less transparent, possibly even more transparent than adopting a fair value through P&L approach.

Doug Young, Analyst

Just a follow-up. I guess where I was going, I think if assets are under AOCI, you can correct me because I'm probably or I may be wrong, but you only recognize a return by selling an asset. Do I have that right? And is that the mechanics we have to think about instead of generating returns on an ongoing basis, you have to actually recognize that. Is there any issue with that?

Phil Witherington, Chief Financial Officer

Thanks for the follow-up, Doug. Let me clarify that. What we're talking about with the AOCI option is where we record the impact of movements in interest rates. So with this election, our fixed-income asset portfolio will be classified as fair value through OCI, which means movements in fair value of those assets will be recorded in OCI. But what stays in both core earnings and therefore, net income is the effective yield on those assets. And of course, we do buy to hold for the long term. So I think that's a sensible approach for our business. And to the extent that there are realizations of gains or losses over time, they would form a component of net income as they would for a smaller AFS portfolio in the current environment.

Doug Young, Analyst

Okay. And I'll probably have a follow-up on a few things there. But the second question and I guess, for you as well, Phil, can you update us on what you consider to be excess capital? And by that, meaning what you would be willing to use for a transaction or what you think is available to be used for stock buybacks?

Phil Witherington, Chief Financial Officer

Yes. Thanks for the question on capital, Doug. When I think about capital, I think there's always an element of judgment in determining what is excess and what is not. The benchmark that we use is we look at our internal operating range, which is derived from a series of stress scenarios. And above that operating range, we determine is capital that is available for use, depending upon judgments that management will make over a period of time, taking into account factors such as the external environment, and I don't, in any way, apologize for the fact that we do take the approach of managing the balance sheet conservatively. When I look at the amount of capital that we have in excess of the upper end of our operating range, we said about a year ago that we hold $10 billion above the upper end of that range, and it's still above $10 billion today. So there is financial flexibility for us to deploy capital. We have been deploying capital in partly of the completion of the U.S. variable annuity transaction. As I said in my remarks, during the quarter, we repurchased approximately 0.75% of our issued shares, which is a deployment of capital in the order of $280 million from memory, but I think that represents a really strong start to the NCIB. And, of course, remind you as well, we increased the dividend by 18% in the fourth quarter.

Roy Gori, President and CEO

Doug, I might just add to Phil's comments. Sorry, Doug, I was just going to add that focusing on our financial strength, financial flexibility, and our capital strength has been a really significant priority for us over the last four or five years. We articulated at our Investor Day in 2018, portfolio optimization being a significant strategic priority for our franchise. We set a goal of bringing up $5 billion worth of capital over five years. We achieved that goal three years ahead of schedule. In fact, we've exceeded $6 billion. At the same time, our leverage has come down from circa 30% at that time to about 25%, 26%. So being in a strong financial position, obviously, was a very important part of navigating the pandemic when we entered the pandemic. There was a lot of uncertainty, and having that financial strength was a source of value, and we feel really good about the fact that we have $10 billion in excess of our upper operating range, which provides us the flexibility to do buybacks or inorganic transactions, but also gives us the comfort in navigating challenging environments. What that context might be helpful as well.

Phil Witherington, Chief Financial Officer

And Doug, this is Phil again. I should be careful at my age about recalling numbers from memory; I said $280 million of capital through the NCIB in the quarter. It was $380 million of capital deployed.

Doug Young, Analyst

Okay. Thank you.

Operator, Operator

The next question is from Tom MacKinnon from BMO Capital Markets. Please go ahead.

Tom MacKinnon, Analyst

Yes, good morning. Thanks for taking my question. Just with respect to the impact of new business, particularly in Asia. If I look at sales, they were actually up quarter-over-quarter nicely, but impact of new business was down. And if I look at the impact of new business was like down 30% quarter-over-quarter. And if I look year-over-year, the sales in Asia may have been down 18%, but the impact of new business was down 50%. So obviously, this kind of shows up in the NBV margin. But maybe you can tell us if what we saw in the first quarter was just strictly an anomaly? Is it a change in mix? How should we be looking at this going forward just in light of continued lockdowns? Is the mix of business that you're selling now kind of indicative of the mix of business you're going to continue to sell? And then I have a follow-up. Thanks.

Anil Wadhwani, CEO, Asia

Thanks, Tom. So there were three factors that impacted new business gain, as you rightly pointed out. So one, as we mentioned earlier, the COVID impact in Hong Kong was quite significant, and that had an impact on volumes as well as new business gain in Hong Kong. I do want to underscore the point that on account of the strong in-force management, Hong Kong was able to deliver a 1% earnings growth despite some unprecedented challenges. The second factor was Japan. So, Japan, as we have relayed on previous earnings calls as well, we have been focusing on a much more diversified set of product mix as opposed to focusing primarily on COLI. That, in combination with the focus we have employed on a force as well as expense efficiency actually has resulted in Japan growing its core earnings throughout 2021, and also in the first quarter of 2022. Lastly, but certainly not least, which is what I alluded to earlier was China. China had a couple of factors there, Tom. One, China had a resounding quarter one in 2021 on account of some of the regulatory changes that have impacted the product mix at an industry level. We have seen a very different product mix in quarter one of 2022, so that obviously had a knock-on impact on volumes, but certainly had a knock-on impact on new business gain as well. The second is that quarter one has an element of seasonality, where China has an oversized contribution on account of the door opening in quarter one. So that, as we get into quarter two and beyond, will start to normalize where the contribution of China is going to be much lower in terms of sales as compared to what we witnessed in quarter one. So those were the factors that, in effect, led to the decline of new business gain versus the decline in sales.

Roy Gori, President and CEO

Tom, I just want to reinforce one point that Anil made earlier, and that is that Q1 of 2021 was a very strong quarter for us for Asia, in particular. New business value in that quarter was up 39% on the prior year, and earnings were up 21%. So, the benchmark of last year is a very high benchmark. Now, that's not to discount the challenges, but it is a high benchmark from a parity perspective. The other thing that I'd sort of leave in your mind is that our international business currently gets reported under the US segment. Asia figures significantly in the international segment. And in Q1 of this year, new business value growth of international was 25%, which we see as, again, another encouraging sign as to the outlook for the coming quarters.

Tom MacKinnon, Analyst

Okay. So, I guess, it kind of sounds if China becomes a little less of a contributor to this and Hong Kong comes more, then we would probably see the new business gains as a percentage of insurance sales go up in the future. Is that a safe way of trying to characterize it?

Anil Wadhwani, CEO, Asia

That's correct, Tom. And you would see that even in some of the past years with China. I do want to qualify that kind of combined with some of the product mix shifts that have happened. So you need to take both those factors into account.

Tom MacKinnon, Analyst

Okay. Thanks. And then the second question is just with respect to long-term care experience. I think it continues to be favorable. I think when it was favorable through COVID. I got the impression that you weren't necessarily changing your reserving outlook. In fact, I think we're adding some of that excess into reserves, thinking things were going to mean revert. Any update on the thinking there? Thanks.

Steve Finch, Chief Actuary

Thanks, Tom, it's Steve here. As Phil mentioned, we've continued to see strong diversification between mortality and longevity, especially in the US. This quarter, we observed ongoing offsets. Gains in long-term care, mainly due to increased mortality, were only partially countered by elevated mortality in the US Life business. Regarding the reserves you asked about, when the pandemic began, we noticed a reluctance to seek care. Incidence rates dropped, and some individuals receiving care ceased to do so. We established reserves for this situation because we believe that people will seek care when it is considered safe. We are maintaining a substantial IBNR reserve of about US$130 million for this scenario. Our perspective hasn't changed; we expect people to eventually seek care, and we are adequately prepared for that.

Tom MacKinnon, Analyst

Can you comment on the impact of inflation in relation to long-term care and the nature of your product? While it's true that everyone is receiving good rate increases regarding long-term care, what are your thoughts on this? Thank you.

Steve Finch, Chief Actuary

Yeah. Sure, Tom. And I’d start by saying overall, in terms of inflation, Manulife is well positioned in the event that there continues to be higher inflation. We've got some pluses and some minuses. On the liability side, you mentioned long-term care where there are cost of care increases that will come through in terms of higher claims costs. But there are mitigants that we see in that line of business. For instance, during the pandemic, we've seen, and actually leading up to the pandemic as well, there has been a trend towards home care away from particularly nursing home care, and home care is materially less expensive than nursing home care. So we've seen some offsetting trends in the business that we will continue to watch out for. As you note, the successful rerate program. If there were higher inflation, the premium increases that we would seek would take that into account as well. So there are mitigants. The last thing I'd point out is on the asset side. In the period in the situation of higher inflation, our ALDA portfolio, a significant part of the portfolio, close to 75%, is in real assets. We would expect higher nominal yields in an inflationary environment over the medium term. So conclude with, we're well positioned as a company overall in an inflationary environment.

Tom MacKinnon, Analyst

Okay. Thanks for that.

Operator, Operator

Thank you. The next question is from David Motemaden from Evercore ISI. Please go ahead.

David Motemaden, Analyst

Hi, thanks. Good morning. I have a follow-up question about Hong Kong. Roy, you mentioned some promising signs of consumer demand returning. I noticed that some restrictions were relaxed last week. Aside from the decrease in case counts, can you provide more details on the metrics you have that indicate consumer demand is on the rise?

Roy Gori, President and CEO

Thank you, David. I'll start and then pass it over to Anil, who has more insights about the situation. At a high level, one major trend we're observing globally is that the pandemic is making consumers more aware of the significance of insurance. People are reassessing their coverage and considering whether they need to enhance it. This awareness is a key factor in the 30% increase in our new business value in Canada and a 56% rise in the US this quarter. The pandemic is emphasizing the need for our products, driving demand. We are facing some temporary challenges due to high COVID case counts and containment measures, which can affect customer sentiment and their willingness to purchase. However, we view this as a temporary issue. Demand remains strong overall, and we’re seeing the population return to more typical ways of handling the crisis, not just in North America but also in Asia. In Hong Kong, for instance, we are witnessing this shift, but Anil can provide more details on that.

Anil Wadhwani, CEO, Asia

Thanks, Roy, and thanks, David. So in Hong Kong, what we are witnessing is, obviously, the relaxation measures on account of the higher vaccination rates that you alluded to, which is giving more opportunities for our distributor partners to connect with customers. And as you can imagine, once these relaxation measures come into force, there's obviously a knock-on impact on customer sentiment as well. So that should all go well. Now you're right that this is more a recent phenomenon. It only happened on April 2021. So we are obviously kind of watching that closely. But a combination of factors and just witnessing the activity on the ground gives us to believe that there will be more opportunities for customer and distributor interaction. I also want to point out a couple of other factors. We had a very strong quarter and Paul could probably add some comments on MPF as well. We saw record flows on our retirement business, as well as continue to consolidate our market position on the MPS side. We continue to grow our agent headcount, as you would have noticed. Our agent headcount in Hong Kong was up 7%. And again, we have a quality franchise on the ground and have been investing in improving our digital capabilities, expanding our distribution, obviously investing in our talent. That has resulted in the resiliency that Hong Kong has delivered with 19 consecutive quarters, including of quarter one, 2022, of year-on-year earnings growth. So we feel pretty optimistic as we kind of go along. As I said, the relaxation measures is a positive indication in that direction. Paul, any comments that you would like to have?

Paul Lorentz, President, US Division

No, I think you covered it, Anil. We've just seen continued growth in the Hong Kong retirement business, and particularly in a year with difficult markets, best quarter ever in terms of flows. So I think it just speaks to consumer sentiment and the importance of what we're offering.

Anil Wadhwani, CEO, Asia

Yes. I just wanted to add one more point, David, is that we are also kind of seeing some great demand for our critical illness and medical products. That should not surprise us given what we have witnessed on account of COVID, that has cemented the need for health and protection in the minds of our clients.

David Motemaden, Analyst

Got it. And as a follow-up, thanks for that information; it was very helpful. Regarding the impact of new business in Asia and its progression moving forward, could you share your thoughts on this? It would assist us in assessing the earnings potential of the company or the Asian segment specifically in the future.

Anil Wadhwani, CEO, Asia

Yes. Again, as I said, David, earlier that the fundamentals of our business haven't changed. I think what has really been the constraining factor is that once the containment measures come into force, firstly, obviously, it has an impact on customer sentiment, as you would imagine, but also it restricts the movement both of our customers and distributor partners. So that's really been the constraining factor. The fundamentals of our business and the way we are positioned, the quality of our franchise on the ground are only getting better. That's been illustrated as I said, by the market share gains that we've now got for consecutive years in Hong Kong, as well as more broadly across Asia. So that is really the limiting factor for us that we will have to navigate in the short term. It's really hard for us to predict that, as you can imagine. But as I said, we feel, given our track record of execution and the quality franchise that we have that we are in a very good position to be able to address the customer demand.

Phil Witherington, Chief Financial Officer

And this is Phil, David, if I could just add one thing. I'd just add one thing to that, David. We haven't in the past provided guidance, medium-term guidance, specifically on new business. With the transition to IFRS 17, one of the things you may have noticed is that we've added guidance with respect to the generation of new business CSM that we expect to grow over the medium term at 15%. So we hope that, that's something that you and the rest of the analyst community will find helpful in terms of providing guidance on where we expect new business to be in the future.

David Motemaden, Analyst

Yes. No, that is helpful sort of like a value of in-force or is how I've been thinking about the CSM. And then maybe if I can just sneak one more in for Phil. I know you guys, when interest rates were going down, you put some capital into Hong Kong or to help support the Hong Kong business. Obviously, rates have moved up pretty significantly. Any plans to remit that out, the capital that you put in?

Phil Witherington, Chief Financial Officer

Thanks, David, for the question. We are expecting remittances from Hong Kong in this calendar year. You may recall, I think I provided an update last quarter and said remittances in 2021 from Asia were in the order of $900 million. A good chunk of that was capital from Hong Kong as well. So when I look at the outlook for remittances for the remainder of this year, I do see it as being a strong remittance year. I think that does reflect the favorable interest rates environment.

Operator, Operator

Thank you. The next question is from Paul Holden from CIBC. Please, go ahead.

Paul Holden, Analyst

Thank you. Good morning. First, I appreciate the additional information on IFRS 17, which is very helpful, and I think sharing those numbers now is timely. My question is about the impact of interest rates on the estimated book value, specifically the 20% impact you mentioned. You've discussed some of the mechanics involved, but I am trying to understand the overall effect we might expect from changes in bond yields leading up to the implementation of IFRS 17.

Phil Witherington, Chief Financial Officer

Thanks, Paul, for the question. This is Phil. I'll make a start, and Steve Finch may want to add as well, given the nature of the question. One thing we expect as we transition to an IFRS 17 environment is that our net income as well as our capital position, our LICAT ratio will be more stable. We're seeing, from all of the work we've done so far, less sensitivity to changes in interest rates on a net income basis and LICAT capital ratio basis than we see in the current environment. We do certainly consider that element as well as many other elements of IFRS 17 as a significant positive. And it's not only the impact of interest rates that is creating a stabilizing force under IFRS 17 as well. There are other factors such as the new business accounting, the investment accounting, whereby we don't capitalize future investment returns upfront. I think there are also factors that provide for greater stability of both core earnings and net income into the future.

Steve Finch, Chief Actuary

Yes. Thanks, Phil. Phil was commenting on what we see as a positive in terms of reduced sensitivity on our LICAT ratio from interest rates under IFRS 17, as well as our book value. But also to your question, we will establish an opening balance sheet at the start of 2022. So we're already past that point, obviously, so we know what interest rates are. So we're factoring that in when we're talking about the impact to book value or equity that Phil covered. Thank you.

Paul Holden, Analyst

I would like to follow up on that. I understand that you have marked the book value impact based on current rates. I'm interested in how sensitive that estimate is to possible changes in rates going forward, considering how much the bond market fluctuates daily. While you don't need to provide specific numbers, any indication of the potential magnitude would be appreciated.

Steve Finch, Chief Actuary

Sure. I'll start. As you look at our LICAT ratio, the example we provided last quarter was a 50 basis point increase in interest rates would result in a LICAT ratio declining by 3 points. We expect that to reduce materially under IFRS 17. So that's the point about the reduced sensitivity of the IFRS 17 regime with respect to interest rates.

Paul Holden, Analyst

Okay. And is there any reach where I can use on that sensitivity to how book value is impacted?

Phil Witherington, Chief Financial Officer

I would say it's directionally the same, Phil; I'm not sure if you have any additional comments on that.

Scott Hartz, Chief Investment Officer

Sure. Hey Paul, it's Scott. Thank you for the question. The gains we saw on all the portfolio in the first quarter were $283 million. It was pretty broad-based, I would say, the biggest drivers were our private equity and real estate, but really five of the six, all the categories had returns above their long-term expectations. Obviously, we've seen public markets drop a bit in the first quarter and more so far in the second quarter. That ultimately, if it continues, will weigh on private equity, which is the most correlated to that. But, if you look at the first quarter, public markets in the US were down about 5% and the read we're getting on private equity has been up like 2% to 3%. While there is some correlation, they certainly don't move in lockstep. But if public markets drop enough, it will definitely impact private equity valuations. For our portfolio, just remind you that we tend to get the data about a quarter in arrears for most of the private equity portfolio. For the first quarter, it's even worse than that. We don't get the year-end statements for a lot of the funds to get in. So we're, in many cases, lag two quarters. So the fourth quarter was a very good quarter for private equity. That will provide a bit of a tailwind for the rest of the year, which will mitigate a little bit of the headwind we will likely see if public equity markets continue to go down or stay down as much as they have been in the second quarter. But beyond that, private equity represents about 25% of all the portfolio. The other 75% is referenced earlier by Steve is in real assets. The what's driving down the public equity markets is concerns about higher inflation, higher interest rates, and higher inflation will definitely be a positive for three quarters of the portfolio. So we're feeling pretty good about expectations for returns on the overall ALDA portfolio for the balance of the year.

Paul Holden, Analyst

That’s great. Thank you.

Operator, Operator

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine, Analyst

Good morning. You might want to consider limiting questions here because we've been going over an hour on each call for the past two years. Anyway, regarding buybacks, the market is quite volatile, and I noticed that your April filings did not show any significant stock repurchases. I’m curious about your perspective on buybacks in the current environment.

Phil Witherington, Chief Financial Officer

Gabriel, it's Phil. When we announced the US VA transaction, we made it clear that we intended to repurchase 3% of our stock to offset the impact of the transaction. That goal remains unchanged. We have made a solid start with the 1% of shares bought back in the first couple of months of the program. I cannot predict how buybacks will progress in the future, but we have more to accomplish to reach that 3%. We are committed to achieving at least that by the end of the year, so that as we move into 2023, the effect of the lost earnings from the transaction will not negatively impact our EPS for that year and beyond.

Gabriel Dechaine, Analyst

Perfect. Thanks.

Operator, Operator

Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

Darko Mihelic, Analyst

Hi, thank you. Good morning. I will try to make it brief as well. First question relates to inflation, but on a different level. We are seeing some Canadian banks suggest that they're going to pay their employees more. A lot of your business is in Canada and the US with a lot of inflation. So Phil, how does this impact your expense efficiency? And then secondarily, how have we thought about your expense program under IFRS 17?

Hung Ko, Host

Apology, I think we have lost connection with Phil. I think we will come back to that question, Darko. Apologies, maybe another one that we can ask that have and other speakers respond to that first.

Darko Mihelic, Analyst

Sure. I have a question for Neil as well, on Asia. I specifically wanted to get back to the question that Tom had asked about the VNB margin. One of your main competitors in Asia suggested that outside of China and Hong Kong, their VNB is actually higher than pre-pandemic levels. I didn't sense that that was the case for you guys. You guys only really highlighted in Hong Kong. So can you talk to maybe some of the other places like Indonesia, Malaysia, Vietnam, you name it, are you, in fact, losing share out there? And why would you not be in a position to have higher VNB versus pre-pandemic levels?

Anil Wadhwani, CEO, Asia

Thanks for the question. Our business, in fact, through the pandemic has been quite resilient. And I did mention in the first trial that in many of our key geographies, we've actually gained market share despite the onset of the pandemic. That's something on account of a few factors. We've expanded our distribution, our digital capabilities, that have followed through with a strong execution culture. So we have kind of seen market share gains in Asia. In quarter one, 2022 we obviously had an unprecedented impact of the resurgence. And I would reckon, if you look at our results in Hong Kong or otherwise, the results continue to be quite resilient, despite the leasing impact that we saw in Southeast Asia. To my mind, we've already kind of seen that subside. With vaccination rates going up and the containment measures coming down, we believe that we are very well positioned to be able to address that. You mentioned Vietnam, I do want to kind of emphasize that in quarter one, we were able to retain our market-leading position in Vietnam. We have almost 60,000 agents, three bank partners. We are very well positioned to be able to address these opportunities. You will probably see some quarter-on-quarter variation on account of volume and product mix. But again, given the quality of our franchise and our market-leading position, we feel very confident to be able to address the Asia opportunity.

Darko Mihelic, Analyst

Great. Thank you, Anil. Maybe just sticking with you, I'm not sure if Phil is back. When you guys mentioned IFRS 17, and you say core earnings are expected to decline by 10%. My suspicion is on a segmented basis that Asia would drop more. Can you give us any insight?

Anil Wadhwani, CEO, Asia

Yeah. I think Phil probably would be the best to respond to that. But the only thing I would kind of leave with you is that the fundamentals of our business and the way we conduct our business doesn't change, because of an accounting methodology change. We believe that yes, while the new business gains will now be recognized as part of the CSM, the drivers as well as the growth opportunity in Asia, as well as a strategy remain pretty intact. But I'll turn it to maybe Steve or maybe to Phil if they have any additional commentary on IFRS 17.

Steve Finch, Chief Actuary

Thank you. And I think we have Phil back on, so I will pass it to Phil.

Phil Witherington, Chief Financial Officer

I'm back on. I apologize for the technical difficulty we had there, but we're back. I'll finish off on the new business question. As you know, Darko, Asia is one of our key growth opportunities and therefore, is a key driver of the new business value generated in the group. For that reason, of course, when we transition to IFRS 17, we would expect a notable impact of the reclassification of new business or the deferral of new business gains, as CSM to be visible, and the transition impact for our Asia segment. We're not providing segmental level guidance at this point; that will come in as we approach in the months approaching transition. However, what I do want to add is that an important strategic target that we laid out at Investor Day is that we see our Asia business will represent 50% of our core earnings. And that's our Asia segment and our Global WAM Asia business, 50% of our core earnings by 2025. IFRS 17 doesn't change our strategic target there. So I think that helps put into context the extent of the impact that the IFRS 17 transition might have.

Operator, Operator

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Ko.

Hung Ko, Host

Thank you, operator. We will be available after the call if there are any follow-up questions. Have a good day, everybody.

Operator, Operator

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.