Earnings Call Transcript - MFC Q1 2020

Operator, Operator

Good morning and welcome to the Manulife Financial First 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 first quarter 2020 results. For the first time in our company’s history, we are conducting this call virtually. Our earning release, financial statements and related MD&A, embedded value report, statistical information package and webcast slides for today’s call are available on the Investor Relations section of our website at manulife.com. We’ll begin today’s presentation with an overview of our first quarter and then 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. We will end today's presentation with Scott Hartz, our Chief Investment Officer, who will discuss the Company's general account invested asset portfolio and the effectiveness of our hedging programs. 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 44 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. The slide also indicates where to find more information on these topics and the factors that could cause actual results to differ materially from those 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

Thank you, Adrienne. Good morning everyone and thank you for joining us today. Turning to Slide 5, I'd like to start by acknowledging the significance of the situation that we find ourselves in as a global community. We also extend our deepest sympathy to those who have been directly impacted by COVID-19, and our immense gratitude to frontline healthcare and other essential workers for their crucial contributions. I believe it is a time when we have a responsibility to step up and protect the health and welfare of our employees, customers, and communities, and that's exactly what we're doing at Manulife. The health and safety of our employees is a top priority, as is our focus and commitment to supporting our customers around the world. We're very proud that enacting our business continuity plans enabled 95% of our global employees to work from home during the pandemic. As of today, approximately 90% of our employees are working from home, as many of our colleagues have returned to the office in China and Hong Kong. We have short salary continuance and flexible arrangements for employees who encountered COVID-19 related challenges with remote work. This is a challenging time for many people, and we're focused on ensuring that our customers are receiving the highest level of service and support possible. We remain open in every market where we have a presence and continue to offer all products and services. In order to make things easier and safer for the customers as well as for our employees, advisors, and agents, we responded to the crisis by leveraging technology to rapidly deploy various client solutions. In some instances, these were new tools that we already had in the pipeline, and in other cases, we moved fast to deploy existing technology to new markets. I will share some examples later in my presentation. In addition, we've dedicated $20 million in financial relief to customers who are experiencing hardship. These include extended premium grace periods on several insurance products across our segments, mortgage payment deferrals through Manulife Bank, and waiting to see 401k hardship deferrals in our global wealth and asset management business, and we're donating funds to causes supporting healthcare workers and hospitals providing COVID-19 care and to aid programs that provide food security to vulnerable populations in our communities. Before we move on, I'd like to acknowledge how incredibly proud I am of the Manulife team. There are countless examples of how our team members have risen to the challenge and gone above and beyond to be there for our customers when they needed us most. Many of them are on the call today, and thank you to each of you. Slide 6, we are very pleased with how smoothly our employees across all levels and functions were able to transition to working from home. This was possible because we've made key strategic investments in our network, equipment, and tools over the last few years, as we already had a mature work-from-home culture. For example, 99% of our North American employees have been working remotely since mid-March, resulting in VPN usage increasing to 2.5 times regular levels, and yet during peak periods, our average network utilization is less than 55% of that total capacity. We are keeping team members up-to-date by hosting enterprise-wide town halls, posting regular video updates from senior executives, and launching a speaker series to tackle various topics of interest including mental health. Finally, our online learning tools are well developed, and as a result, participation in training programs has continued at pre-crisis levels. In addition, we leverage this expertise to pivot to online learning for our agents and advisors around the globe. Turning to Slide 7, as I said earlier, we responded to the crisis by rapidly deploying new and existing technology. This included launching Chatbot technology to manage call center volumes, Docufy to enable contactless transactions and reinforcing our existing digital tools such as e-applications for life insurance in Canada and the U.S. And we've enabled non-face-to-face processes for sales in all markets in Asia. Prior to the crisis, we've been using this technology in China, and thanks to that experience, our capabilities were well developed. When the crisis hit and isolation measures were put in place around the world, we accelerated our plans to roll out this technology more broadly in the region. This enables our distribution partners and agents to engage with our customers according to their preferences. It also positions us well to capitalize on any changes in customer sentiment post COVID-19 and supports productivity and retention of that agency force. The ultimate test is whether these measures are working well through the NPS call, and we’re happy to report that we’ve actually experienced a slight improvement in our transactional NPS call since the onset of COVID-19, which we see as a big win, given our elevated core volumes and the pivot to working remotely. Turning to Slide 8, Manulife entered the quarter in a position of strength, thanks to the work we've done over the past decade to de-risk our business and reduce our company's sensitivity to market movements. In the first quarter of 2020, our market ratio improved to 155%, and our leverage ratio of 23% was considerably lower than it was two years ago and is now below our medium-term target. This combination results in more financial flexibility than we've had in recent years. We have a high-quality invested asset portfolio with 98% of fixed income assets rated investment grade. Scott will go into our general account portfolio and the effectiveness of our hedging progress in his presentation. We diligently worked towards becoming a digital customer leader, and as you heard before, this is serving us well in the current environment. Finally, expense efficiency has been one of our highest priorities, and we've made meaningful progress towards our 2022 target with the delivery of total expense savings of $700 million, and a strong culture of expense discipline is serving us well in this environment. As a result of these strengths, I'm confident that Manulife is well positioned to navigate this crisis and the associated economic downturn. Turning to Slide 9, yesterday we announced our first quarter financial results. As I mentioned, the coronavirus continues to disrupt the economy and capital markets worldwide. Our operating conditions during the first quarter were understandably affected. Despite these challenging conditions, we delivered solid results demonstrating the diversity and resilience of our businesses. We delivered net income attributed to shareholders of $1.3 billion and core earnings of $1 billion. The relatively small variance between these two figures amid challenging macroeconomic conditions is a testament to the performance of our equity market and interest rate hedging programs. Core ROE was resilient at 8.2%, and we achieved net inflows of $3.2 billion in Global WAM, with all business lines contributing positive net flows. Book value per share rose to $26.53, and we also reported embedded value of $58.1 while $29.79 per share as of December 31, 2019. It's worth noting that embedded value only reflects a portion of the value of our businesses, as it attributes no value to future new business and only tangible book value throughout growing wealth and asset management businesses as well as our P&C reinsurance operations in Manulife Bank. Turning to Slide 10, despite the challenging environment, I believe that we've accomplished a great deal in the first quarter. We successfully completed our 2022 portfolio optimization targets of $5 billion of capital in the fourth quarter of 2019, three years ahead of schedule. While we achieved our targets, we generated an additional $265 million of capital benefit in the first quarter of 2020 through a variety of initiatives. The initiatives announced to-date have resulted in cumulative capital benefits of $5.3 billion. We remain focused on aggressively managing costs to drive expense efficiency, which resulted in modest core expense growth of 2% in the first quarter of 2020, which is well below our historic average. Our three priorities are accelerating growth in our highest potential businesses, and we aspire to have these businesses generate two-thirds of total company core earnings by 2022. In Asia, we extended our exclusive strategic bank assurance arrangement with Bank Danamon Indonesia to 2036, and in Global WAM, we launched a large case U.S. retirement plan worth $2.6 billion with over a 100,000 participants. Our core priorities are our customers and how we're using technology to attract, engage, and retain customers by delivering an outstanding experience. As I previously mentioned during the first quarter of 2020, we've leveraged our digital platforms to better serve our customers during the COVID-19 pandemic. Our final priority is a high-performing team. Our target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022. In February, I was delighted to announce the appointment of Karen Leggett as Chief Marketing Officer. And in March, we were named one of Canada's best diversity employers for the third year in a row by Mediacorp. Moving to Slide 11. In conclusion, we have a fantastic diverse franchise and a winning team. We are in a position of strength and we remain focused on maintaining financial flexibility and operational resiliency. The long-term fundamentals and demographics underpinning our strategies remain unchanged. Trends such as these reinforce the importance of insurance, wealth management, and retirement products, which we believe will drive high demand for our products in the future, and even stronger customer preferences to interact with companies that have digital capabilities and streamlined processes. We are in an unprecedented macroeconomic environment and there are many possible scenarios on the length and nature of the impending recovery. The possible recovery remains to be seen, but I'm confident that we are in a position of strength. We remain committed to our dividend along with our medium-term financial targets. Thank you. And I'll hand over to Phil Witherington, who will review the highlights of our financial results. Phil?

Phil Witherington, CFO

Thank you, Roy, and good morning everyone. Turning to Slide 13 and our financial performance for the first quarter of 2020, as Roy mentioned, considering the challenging conditions, we delivered solid results. I will highlight the key drivers of our first quarter performance with reference to the next few slides. Turning to Slide 14, core earnings in the first quarter of 2020 were $1 billion, down 34% from the prior quarter on a constant exchange rate basis. The decrease in core earnings was driven by the unfavorable impact of markets on seed money investments, the absence of core investment gains, revenue business volumes in Japan compared with a very strong quarter for Japan COLI in the prior years, and unfavorable policyholder experience in North America, including elevated travel insurance claims related to COVID-19. These items were partially offset by the impact of in-force growth in Asia and higher fee income from higher average assets levels in our global wealth and asset management businesses. We are pleased with the resilient performance of our businesses during these challenging times, and believe that Manulife is well positioned to continue to succeed through this period of uncertainty and the subsequent recovery. We delivered net income attributed to shareholders of $1.3 billion in the first quarter. Of note, we recognized losses of $608 million from investment-related experience, driven by lower than expected returns on investments, primarily due to the impact of sharp declines in oil prices. The feasible impact of fixed income reinvestment activities, as we took advantage of wider corporate spreads, served as a partial offset. We recognized a gain of $2.1 billion from the direct impact of interest rates, primarily driven by wider corporate spreads and realized gains on the sale of AFS bonds, partially offset by the impact of lower risk-free rates. The charge of $1.3 billion from the direct impact of equity markets reflects significant declines in global equities during a volatile quarter. We also reported a $72 million gain related to a tax benefit from the U.S. CARES Act as a result of carrying back net operating losses to prior years. Slide 15 shows our source of earnings and analysis. Expected profits on in-force increased a modest 3% on a constant exchange rate basis, driven by growth in Asia. New business gains were lower than the prior year quarter due to lower sales volumes in Japan. As a reminder, the first quarter of 2019 was an exceptional quarter for Japan COLI sales. Overall, policyholder experience in the first quarter was unfavorable, primarily due to higher travel claims in Canada related to COVID-19 travel interruption and cancellation, and higher claims in our U.S. life insurance business. LTC policyholder experience was neutral in the first quarter of 2020. Turning to Slide 16, we delivered core earnings growth of 6% in our global wealth investment management business driven by higher average asset levels. Core earnings in Asia decreased by 7%, driven by low new business volumes in Japan. You may recall within the first quarter of 2019, we experienced a significant increase in COLI sales in Japan due to anticipated unfavorable tax changes. In contrast, our businesses in Hong Kong and other Asian markets posted double-digit core earnings growth, which served as a partial offset. In the U.S., core earnings decreased by 13%, driven by unfavorable life insurance policyholder experience. Core earnings in our Canadian business decreased by 16%, primarily due to unfavorable travel claims experience related to COVID-19. We delivered core ROE of 8.2% in the first quarter of 2020 against the backdrop of challenging market conditions. Slide 17 shows our new business value generation and APE sales. In the first quarter of 2020, we delivered new business value of $469 million, down 11% from the prior year quarter. In Asia, new business value decreased by 14% compared with the first quarter of 2019, as growth in Hong Kong and Asia was more than offset by a decline in Japan. In Canada, new business value increased by 24% from the prior year, driven by higher sales across all business lines. In the U.S., new business values decreased 23%, primarily due to the impact of lower sales volumes and less favorable business mix. In the first quarter of 2020, we delivered APE sales of $1.6 billion, down 9% from the prior year quarter. The decline in APE sales growth was driven by the impact of tax changes on coding product sales in Japan, which offset growth in Hong Kong and Asia. In Canada, APE grew 44% compared with the first quarter of 2019, driven by large case group insurance sales and continued growth of our individual insurance business. In the U.S., APE sales were largely in line with the prior year quarter, as lower domestic universal life sales following regulatory changes in the fourth quarter of 2019 were more than offset by strong term and international sales. Turning to Slide 18, our global wealth and asset management business generated net inflows of $3.2 billion in the first quarter compared with net outflows of $1.3 billion in the prior year, with positive contributions from all business lines despite higher retail redemptions in the U.S. and Canada and mid-equity market declines in March. In the U.S., net outflows of $0.2 billion in the first quarter of 2020 improved compared to $4 billion of net outflows in the first quarter of 2019. This improvement was driven by higher retail gross flows primarily from strong institutional model allocations and intermediary sales, as well as the sale of a large case retirement plan. In Canada, net inflows of $2.8 billion improved compared to net inflows of $2.1 billion in the first quarter of 2019. The improvement was driven by higher gross flows into institutional asset management equity mandates. In Asia, net inflows of $0.6 billion were in line with the prior year quarter, as high net inflows in retirement were offset by higher institutional redemptions. Our core EBITDA margins remained solid at 27.3% in line with the prior quarter and up 30 basis points from the prior year quarter. Our average AUM remained stable compared with the prior year quarter as the unfavorable impact of markets was offset by net inflows. Turning to Slide 19, we have entered this downturn with a strong balance sheet and regulatory capital position. Our financial position has strengthened further in the first quarter of 2020. We have $31 billion of capital above the supervisory target, and our LICAT ratio improved to 165%. The 15 percentage point increase compared to the prior quarter was driven by the positive impact of widening corporate spreads and lower risk-free rates, partially offset by the impact of low public equity and overvaluations. Our leverage ratio declined to 23%, 2 percentage points below medium-term targets of 25%. The decrease in the leverage ratio was driven by the impact of lower interest rates, which increased the value of AFS debt securities. The $500 million subordinated debt redemption occurred in January 2020, along with the favorable impact of a weaker Canadian dollar and growth in retained earnings. These factors were partially offset by share buybacks. Given the high levels of market volatility and overall uncertainty, we believe this is prudent to maintain strong levels of capital and liquidity, and to adopt a longer time horizon than in normal conditions to address future financing needs. Our relatively low leverage ratio allows for this cautious approach to pre-financing. Turning to Slide 20, we continue to maintain strong liquidity at both consolidated and legal entity levels, and we are confident in our ability to meet all our payments and obligations. Approximately one quarter of the assets in our general account portfolio are liquid government bonds and cash. I would also like to reiterate our capital allocation priorities, which remain unchanged. Organic investments in our highest priority businesses remain our top priority, followed by sustainable dividend increases, opportunistic share buybacks, and then M&A. It's worth noting that it is not unreasonable to expect that subsidiary remittances would be lower in this interest rate environment. However, we do not expect this to be a constraint on our capital priorities. As an example of our appetite to deploy capital, within the last few weeks, we have extended our exclusive bank assurance agreement with Bank Danamon Indonesia until 2036. Slide 21 outlines our medium-term financial operation targets and our recent performance. Core EPS growth, core ROE, and expense efficiency were below our targets, primarily driven by the challenging macroeconomic environment in the first quarter of 2020. And like most other companies, we expect the second quarter of 2020 to be a challenging one, given the isolation measures that have been in place around the world. In light of the current environment, we would not expect to achieve our medium-term core EPS growth targets of 10% to 12% this year. We are in a strong position, and we remain committed to our dividend along with our medium-term financial targets. I would now like to turn the call over to Scott Hartz, who will discuss the general accounts investment portfolio. Scott?

Scott Hartz, Chief Investment Officer

Thank you, Phil, and good morning everyone. I'm pleased to provide you with a more in-depth update on the direct impact of equity markets and interest rates and our results in our investment-related experience. I will also provide some additional color on the strength of our investment portfolio. Please turn to Slide 23. As you might recall, our dynamic program hedges variable annuity risks on a best estimate economic basis, and our macro program hedges the remaining equity market risks not covered by the dynamic program. Our BA hedging program was severely tested this quarter, given the significant volatility we saw in interest rates and equities. The program performed quite well, offsetting 93% of the increase in liability. The slippage was roughly half due to the trading needed to rebalance the hedge and half due to the underlying funds underperforming our hedging benchmarks. This fund underperformance typically reverses when markets normalize. Our interest rate hedging program uses a combination of long bonds in the cash market, forward starting interest rate swaps, treasury forwards, and treasury futures. We also use interest rate futures to hedge minimum interest rate guarantees in our liabilities. Our sensitivities to interest rates and equity markets have been significantly reduced since the 2008 global financial crisis. Starting from 2013, when we achieved our hedging targets, you can see the impact from interest rates and equity markets have largely offset each other and over time have had an immaterial impact on net income. During the first quarter of 2020, we saw the U.S. 30-year risk-free rate drop over 100 basis points. The S&P 500 dropped 20%, the VIX increased to 80%, and corporate spreads widened by roughly 150 basis points. In these volatile market conditions, we recognized a $792 million gain as losses related to the direct impact of equity markets and falling risk-free rates were more than offset by widening corporate spreads. So, while we are certainly in a period of extreme market stress, our hedging programs have been effective at mitigating net income variability, and we remain within our equity and interest rate risk limits. Next Slide 24 shows a recent history of our investment-related experience, and as a reminder, investment-related experience is derived from three sources. One, fixed income reinvestment, which compares our purchase and sale activity to our reserve assumptions; two, credit experience, which compares the impact of downgrades and defaults to that assumed in our reserves; and three, all other, which compares how the total return on all of our investments performed relative to our reserve assumptions. As a reminder, all short for alternative long-duration assets is our term for private non-fixed income assets ranked largely in real assets. Over the past three years, investment-related experience has been significantly in excess of the $400 million we can include in our core earnings. Gains from fixed income reinvestment have been strong and steady over this period, and were a significant contributor this quarter because we took advantage of the very wide spread environment to redeploy government bonds into high-quality spread product. Credit results have also been a reliable contributor up to the current quarter. In recessionary periods, we do expect credit results to be worse than our through-cycle reserve assumptions. Although it was a significant drag this quarter, particularly due to the markdown of our oil and gas portfolio given the significant decline in energy prices. We do expect variability in our total portfolio quarter to quarter due to its mark-to-market nature, but we also expect significant recoveries when market conditions improve. Through the cycle, our total portfolio has largely performed as expected. Now, turning to Slide 25, our invested assets are diverse and have high quality. Over 98% of our fixed-income assets are investment grade. We hold a diverse mix with a focus on defensive asset classes and we'll expand on this later in my presentation. We provide alternative assets to generate enhanced yield. This has removed the need for us to chase yield through riskier fixed-income assets. For example, our exposure to below investment grade is limited to only 2% of our portfolio, and we do not have any exposure to collateralized loan obligations. Finally, a key component of our risk management framework is our credit team. As a company, we take credit risk very seriously and manage it within a highly experienced team, which has been through many credit cycles. Our approach to credit risk has served us well in downturns, including the 2008 global financial crisis. Turning to Slide 26, you'll see it illustrates how strong our long-term credit performance has been. Our portfolio losses have consistently stayed below benchmark levels since the financial crisis, based on our portfolio as of March 31, 2020. The long-term expected level, based on Moody's default studies applied to our aggregate credit exposure, is approximately $108 million pretax per quarter. Further, relative to our internal credit loss assumptions, we have generated positive credit experience each calendar year since 2010. The chart on the slide represents actual impairments while the accounting credit results also include increased credit reserves for downgrades. These reserves will ultimately be released into income. This chart reflects the ultimate impact of credit sentiment income. While we have certainly been pleased with this performance, we would remind everyone that credit is inherently cyclical. We will expect some adverse impacts in the current market environment, but that is the nature of the cycle and therefore credit losses are likely to be elevated throughout the recession. At the same time, we are taking advantage of the market conditions and investing in very high-quality issuers at spreads not seen since the GFC. This should provide an offset to our temporarily unfavorable credit experience. Now, turning to Slide 27, we show our investment-grade fixed income rating distribution relative to the U.S. industry benchmark. As I mentioned earlier, 98% of our fixed income portfolio is investment-grade with 75% rated A and above. Relative to the industry benchmark represented by Barclays U.S. Corporate Index, our portfolio has a significantly higher weight in bonds rated A and above. While the BBB component of the corporate bond universe has increased in recent years, our holding has been stable and is well below the market weight. In addition, within our BBB portfolio, only 17% is rated BBB minus, which is the weakest category. Our below investment-grade holdings, which I previously mentioned, are only 2% of our fixed income portfolio and are well diversified by industry sector and proportionately lower than our holdings at the time of the global financial crisis. Turning to Page 28, we show our fixed-income portfolio by sector. Our portfolio is quite diverse and built to endure significant economic stress. The portfolio is weighted most heavily in government and utility sectors, both of which are more defensive in nature. Our energy holdings, which constitute 8% of our portfolio, are currently under higher pressure given the significant demand destruction we are witnessing, and I will cover the details of that portfolio in a few slides. I'd also point out that we have a modest 3% weight in the more exposed consumer cyclical sector. On Slide 29, which shows the composition of our total portfolio. We continue to believe our assets represent an integral and complementary component of our investment mix backing long-term liabilities. In combination with fixed income assets, which back the first 20 to 30 years of liability cash flows, we believe alternative assets have the potential to increase expected returns while managing the level of risk. We have strong in-house capabilities and experienced investment professionals in each of our alternative asset classes. As you may recall, we recently sold over $5 billion in alternative assets supporting our North American legacy businesses, which allowed us to release over $2.2 billion in capital. This helps us reduce our exposure in guarantee checks. Currently, more than one third of our alternative assets is supporting participating businesses. We assess our actuarial assumptions every year, but we have no reason to believe our long-term return assumptions are unreasonable over the long-term period. Slide 30 summarizes our fixed-income energy exposure, which is topical considering current depressed oil prices. Here you can see the sub-sector diversification. More than one-third of our portfolio is in midstream, such as pipelines, which largely transport natural gas and liquids and are less susceptible to changes in commodity prices. This portfolio is high quality with 94% rated investment grade. Should our exposure to high-yield issuers does not expect widespread defaults, although given the significant pressure on oil prices, we would expect downgrades. Slide 31 summarizes our energy exposure through ALDA. As noted earlier, our ALDA oil and gas portfolio generated experienced losses this quarter. Our private equity, oil and gas holdings are in the U.S. and are valued based on the forward strip. When prices fall, we might typically see a delay in the loss recognition as we are dependent on valuations from our fund managers. In this case, given the drastic price swing, we did not wait for our fund valuations and estimated some of the loss that would normally have been recognized in Q2. Our conventional Canadian oil and gas properties are managed by our subsidiary, NAL Resources. These assets are valued by an independent appraiser, whose forward price typically moves less than the forward market curve, but this quarter has moved more than the market, which exacerbated the loss. While the losses were material this quarter, they were largely mark-to-market fair value adjustments, and the ultimate loss will depend on realized prices well into the future. While in the short term, prices will likely stay depressed, we would expect a significant recovery when demand is restored, as shut down production will be difficult to restart. Both our Canadian and U.S. holdings are largely unlevered, so they should be able to manage the short-term stress the industry is experiencing. Moving onto Slide 32, in summary, I want to reiterate that our invested assets portfolio is high quality and diverse. It is designed to endure significant economic stress. We have a very strong history of favorable credit experience, which is a testament to our credit teams and underwriting processes. Our oil and gas prices are stressed, but we continue to believe these are high-quality assets and our holdings will rebound in the medium term when markets improve. Finally, risk premiums have increased significantly, and we have taken advantage of these as we continue to be cash flow positive in this environment and are putting that to work in attractive investments. This concludes our prepared remarks. Operator, we will now open the call for questions.

Operator, Operator

Thank you. The first question is from Tom MacKinnon from BMO Capital. Please go ahead. Your line is open.

Tom MacKinnon, Analyst

Yes. I got cut off a little bit on the call, but I'm not sure if he talked at all about any kind of outlook in terms of sales in April. If you can take us through that by division, that would be helpful? And then I have one follow-up.

Roy Gori, President and CEO

Yes, let me tackle that, Tom. Firstly good morning and great to see you, at least remotely. Yes, obviously, sales is going to be one area that impacts our business, and we're expecting to see a lot of volatility as quite frankly, different geographies adjust to the impacts of isolation and social distancing. I'm quite pleased actually with our first quarter results on new business value, which is still highlighted in our prepared remarks were $469 million. Actually, when you adjust for Japan or when you look at it on an x Japan basis we’re up 12%. For April, the first month of the quarter, we're looking at across all geographies, a net 10% off the same quarter of last year. But again, this is obviously going to be an area of significant movement. So it paints a broad trend from that to conclude on how the quarter is going to end or how we're going to look to the rest of the year. So that's something we're watching very closely, but pleased with the resiliency of our franchise. And quite frankly, our organization has adapted to the challenging circumstances by using new technologies to interact with customers and to continue our sales momentum as we still did in Q1. April results are encouraging, but still much more work for us to do on that front.

Tom MacKinnon, Analyst

Is there any way you can elaborate at all as to what you're seeing in the U.S. or Canada or in Asia with respect to that overall net 10%?

Roy Gori, President and CEO

Yes, so the movement obviously varies by geography. And even within Asia, it varies significantly by market places. We've seen different markets come back at different places; in China, for example, we're now seeing, in our own operation, 80% of our people back in the office environment. But, let me pause and ask, Mike, Marianne, and Anil to please provide some extra color on each of those geographies. Mike, do you want to start off with Canada and then we'll go to U.S. and Anil?

Mike Doughty, Executive

Sure. Thanks, Tom. This is Mike. In Canada, as Roy mentioned in April, we haven't seen any significant changes, and we are coming out with very strong momentum. We're closely monitoring certain areas. We've put considerable effort into digitizing our sales process over the years, which has led to increased usage of our tools. We have also been expanding these efforts over the last six weeks. Electronic applications, contract delivery and receipt, and electronic signatures have all increased. None of this is hindering our ability to continue processing business. However, we are experiencing a notable slowdown due to social distancing measures affecting paramedical visits to homes for evidence collection. Larger segments of the market are seeing a greater slowdown compared to smaller ones. Lastly, regarding our group benefits business, we are continuing to see sales. We have transitioned to virtual presentations, but there is a slowdown in small business quotes as owners are mainly focused on managing their operations. I'll stop there and pass it to Marianne.

Marianne Harrison, Executive

So, hi, Thomas, it's Marianne. In the U.S. very similar story to what Mike just said. You know, in terms of the capabilities that we have been building over the last couple of years, getting e-applications, e-signatures, e-delivery. It's been relatively smooth because we had those tools in place, even though there historically hadn't been a lot of take-up on it, there's certainly is now. Our April month was actually a pretty good month and we are seeing business holding, but we are seeing a change in mix as you might expect, less of the permanent, more of the term. Just because of what Mike was talking about in terms of being able to do the paramed exams, we can't do that. And so, we have changed some of our underwriting standards as well. Things like 80 and above, we're not currently writing and looking at some of the substandard pretty closely just because of the fact that we can't get the premeds done, so that's basically where we are in the U.S. Over to you, Anil.

Anil Wadhwani, Executive

Thanks, Marianne. Thanks for the question, Tom. So, in Asia, different markets are witnessing the outbreaks since the third week of January. It first emerged in China, quickly followed by Hong Kong, and Hong Kong and China started to improve. The outbreak then spread to Japan and South Asian markets, which are now experiencing pretty severe levels of lockdowns and isolation measures. What we're witnessing in China is almost 90% of our folks are back to work, and in Hong Kong it's now north of 70%, so that is kind of positive. And I think it's only going to get better as the quarter progresses; however, customer activity is still not at normal levels, and that's on account of the economic uncertainty that is upon us. What I think is again in line with what Mike and Marianne say. The investments that we made in our business are really paying off. So for example, in Asia, we now have non-face-to-face enabled in all our markets and we're looking to constantly improve our processes. And thereby really kind of enabling our distribution partners to engage with our customers, even if there are going to be extended periods of lockdown. We have introduced that in our agency force and are now extending progressively to our bank partners. So, I think it's kind of a mixed bag for us. As I said, China and Hong Kong are getting better, and in fact in April, we saw China and markets like Vietnam getting very close to levels experienced in April of last year. But again in other markets, on account of lockdown, they are much more severely impacted. And we believe that while the measures will ease, the lockdown will be in some form or shape as we go through the quarter.

Tom MacKinnon, Analyst

Paul, it might be valuable for you also to give a bit of a flavor for our progress in GAM or what you're seeing from GAM perspective as well?

Paul Lorentz, Executive

Yes. Thanks, Roy. And Tom, it's Paul here. Just I'll just add to some of the sentiments offered by Anil, Mike, and Marianne. We're seeing similar trends that relate to non-face-to-face sales opportunities and particularly the impact on the small business owner on our retirement business. So that is something we're expecting. And I guess the other one that's somewhat unique to us in Asia, amid some of the market volatility, we have seen a shift into more cash in bank deposits in Asia, which does have an impact. But having said that, we are confident in our ability to generate net flows or positive net flows over the long-term. And I think some encouraging signs from my perspective are that, you know, in Asia, we were able to lower our positive net flows this quarter despite COVID-19 impacting Asia earlier than some of the other regions. We also entered the year with a stronger pipeline on the institutional side than we started last year. So that set us up well for this year. And then thirdly, we've been very proactive with customers and advisors in terms of engaging with them during this period of time, whether it's support leadership, et cetera. And it's been very appreciated by them. And I think it sets us up well as we navigate this crisis and come out of it to just really be true partners for both our customers and our advisors moving forward.

Tom MacKinnon, Analyst

Yes, thanks. This is a follow-up question. What are you observing regarding your property catastrophe retrocession covers? Are there any provisions we should anticipate, and is there any claims activity? How should we approach that aspect of the business?

Phil Witherington, CFO

So, Tom, this is Phil. I think that was best handled by me. We're not seeing any interruption as a consequence of COVID-19 in our P&C revisionists, reinsure, our insurance clients who offer property damage protection arising from natural perils such as earthquakes and hurricanes. And while there may be business interruption claims associated with property damage claims arising from those natural perils, in the case of a pandemic, that's not something that would fall within the scope of that coverage.

Steve Theriault, Analyst

Thanks very much. Maybe I'll go with a question going to the ALDA oil and gas exposures. So, Scott, I think what you're saying is that we should think of the hit this quarter as more of a mark-to-market than what we've seen in the past, trying to more fully reserve for the impairment that we've seen. So is that right? And is it correct that it's sort of $700 million to $800 million range this quarter? And what would it take to see more losses from your, I guess, how comfortable are you in the initial assessment?

Scott Hartz, Chief Investment Officer

Yes, David. It's Scott. Thanks for the question. You take it about right, our losses were about $750 million this quarter, and that was a mark-to-market. Some of that loss will undoubtedly stick, as some of our properties are currently drilling and producing oil and selling oil, and they're selling it at lower prices than we would have expected. But it is a mark-to-market based on 10 plus years of expected cash flow and marking it all sort of current market levels. And we did, as you pointed out, and I pointed out in my prepared remarks, try to fairly fully take that through on our NAL subsidiary, we have an outside appraiser, and that is the way it works. It's taken mark to market in the current quarter, for a bigger U.S. private equity portfolio, we are reliant on the private equity firms who manage a lot of those assets to give us marks, and typically we don't get those in time and things tend to be lagged a quarter or sometimes even two. But given the precipitous drop in prices, we tried to estimate best that based on prior experience. The last time we had a major drop in prices, we tried to estimate where those marks would come out and put through an estimate, doesn’t mean that there will be future losses as we get those marks in. And I would say the last time, we did see losses continue to dribble in a bit after the first big markdown, but we have accelerated those, and we feel like we've gotten a lot of it behind us.

Steve Theriault, Analyst

I guess from here, on the way back or things deteriorate further, do you stick with that mark-to-market approach? Or was it sort of a mark-to-market approach on a one-time basis? And then it's more of a bit more of a smooth progression from here?

Scott Hartz, Chief Investment Officer

Well, it really is marked to market, and it's just a question of when do we get the mark. And so, again, for NAL, we get the mark at quarter-end, a real-time mark, it's just we're delayed on the private equity portfolio. And so for small movements, we're not going to try to estimate what that is. But when we see a big movement like that, we do try to estimate it. And I would, again end with some of this undoubtedly will be real losses given the cash flows in the short term. But we would expect your prices to recover. We’re going to see shut-in production, which we really did not see the last time we had prices go down, and it becomes hard to restart. We’ll need to see much higher prices to try to restart. And in a lot of cases, restarts are difficult to do and don't produce the same level. So, if prices get up, prices need to be north of $50 to encourage a significant shale drilling or taking off the shutdowns, and at those kinds of price levels, we would expect significant recovery in our portfolio.

Steve Theriault, Analyst

Okay. And then I will ask a related question on the fixed-income energy exposure. Scott, can you give a bit more detail on say the E&P and oil field services exposure? What kind of risk do you think is there and can you give us a little more color?

Scott Hartz, Chief Investment Officer

Sure. I'm glad to provide that information. Page 30 of the slide deck illustrates that breakdown. You’ve pointed out the two sectors that are most concerning for us, while midstream is much less of a worry. The quality distribution in midstream is predominantly investment grade, with a good amount in BBB, most of which is in that area. The major companies are high quality, and we anticipate they will remain solid; for oilfield services, however, we are a bit more concerned. They generate a significant portion of their revenue from drilling activities, which are expected to come to a halt. Nevertheless, our portfolio tends to be of higher quality, leaning more towards the single A range, primarily within the top three service providers. We might see some downgrades there, but we expect those to remain in the investment grade category. Offshore drilling, a subset of this, is a very small part of our portfolio and is below investment grade. If we encounter impairments, that’s where they would likely occur, but it represents a minor portion. In exploration and production, which is a larger segment of our portfolio, there is quite a mix. We hold several billion in national oil companies like CNOC in China and the National Oil Company of Korea, which are strongly supported by their sovereigns, so we have no concerns there. However, we do have a substantial number of independent producers leaning towards the BBB range, and we anticipate some downgrades to below investment grade. They started as investment grade and are strong, and while we don’t foresee impairments there, downgrades are expected.

Operator, Operator

Thank you. The next question comes from Humphrey Lee from Dowling & Partners. Please go ahead; your line is open.

Humphrey Lee, Analyst

Good morning and thank you for taking my questions. In terms of claims exposure to COVID-19, give us any sense in terms of the net mortality sensitivity to the number of deaths that you can share, either based on the number of deaths in the U.S. or the number of deaths in Canada?

Steve Finch, Executive

Hi, Humphrey, it's Steve Finch. I'll take that question. And yes, we've done fairly extensive stress testing on our portfolio and your question with respect to businesses that have either mortality or longevity exposure. So, Manulife overall we've got a diversified mix of business, and in a pandemic like this, we would expect charges in some lines of business with offsets and other lines. So, charges in our life insurance business, but offsets in businesses with longevity exposure such as annuity and long-term care. In a scenario where there were 100,000 U.S. deaths, we would expect a charge of approximately 30 million Canadian post-tax. With the caveat that we do insure large policies particularly in the U.S., so there could be lots of variability, but roughly 30 million post-tax for 100,000 U.S. deaths. We'll see other impacts as well from claims. Notably the travel claims that we booked in Q1, and we're also closely watching our group businesses in Canada for the effects that the impact of the economy could have on claims there, but we're not observing any material trends at this point.

Humphrey Lee, Analyst

So for that 30 million, is it just for the U.S. or is that contemplating for Canada as well?

Steve Finch, Executive

That's total company.

Gabriel Dechaine, Analyst

Good morning. A couple of questions one on ALDA and one on Manulife Bank. On the well, I guess the investment experience at Slide 24, and Scott, you said there's no reason to believe your ALDA return assumptions are unreasonable or something does not expense. And I understand that it's a long-term return assumption, but what I see in that chart is credit has been a tailwind, but that's going late temporarily, but 4 to 5 years where the ALDA experience was negative. I know there's oil and gas affecting a couple of years, but maybe walk me through some of the other issues that may have arisen and what I should interpret from that chart?

Scott Hartz, Chief Investment Officer

Sure, Gabriel. Thanks for the question. So, yes, let me give you a little perspective on this. We really think our ALDA through the cycle will perform about what we put in our reserve. So, we talk about $400 million of expected performance, that's really coming out of a combination of credit and fixed income reinvestment, and they do tend to be negatively correlated to each other. So when times are good and we're getting credit releases, it's very difficult to add value in our fixed income portfolio. We do historically manage to do some every year, but as you'll have seen in this first quarter here, we actually had $370 million of fixed income gains in one quarter. And that was due to the volatility in the market, the wider spreads, the opportunities we saw, accompanied by a $50 million credit loss. So that was offset. And I wouldn't, I wouldn't assume $370 million a quarter going forward, but we should expect elevated fixed income investment gains during this period when we have credit losses. So, that's how I see those two sorts of offsetting each other and providing a reliable stream of investment gains. On the ALDA front, it is part of the portfolio that's sort of brutally mark-to-market and is going to have volatility in the best of times. And in these sort of times, you should expect losses, and we should expect gains in better times. Frankly, part of the losses in energy is due to higher risk premiums being baked into those valuations and that would portend, higher returns going forward. So, we feel very comfortable with our long-term assumption. We will revisit that this year as we do every year, but I have no reason to believe we would change.