Manulife Financial Corp
TSX:MFC
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Manulife Financial Corp
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Please be advised that this conference call is being recorded. Good morning, and welcome to the Manulife Financial First Quarter 2019 Financial Results Conference Call for Thursday, May 2, 2019. Your host for today will be Ms. Adrienne O'Neill. Please go ahead, Ms. O'Neill.
Thank you, and good morning. Welcome to Manulife's earnings conference call to discuss our first quarter 2019 results. Our earnings release, financial statements and related MD&A, statistical package and webcast slides for today's call are available on the Investor Relations section of our website at manulife.com. We will begin today's presentation with an overview of our first quarter highlight 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. We will end today's presentation with Steve Finch, our Chief Actuary, who will discuss the company's embedded value. After the prepared remarks, we will move to the question-and-answer portion of the call. [Operator Instructions] Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 31 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?
Thank you, Adrienne. Good morning, everyone, and thank you for joining us today. Turning to Slide 5. Yesterday, we announced our financial results for the first quarter of 2019. We delivered strong net income and core earnings of $2.2 billion and $1.5 billion, respectively, with both measures increasing significantly year-over-year. And the strong core earnings contributed to core ROE of 14.2%. New business value generation increased 31% with solid growth across all operating segments. We also reported embedded value of $55.6 billion as of December 31, 2018, an increase of 17% year-over-year. Net flows were negative but improved substantially from the prior quarter. And EBITDA margins improved due in part operating efficiencies as we continue to leverage our global scale. The company also continued to be in a strong capital position with increased financial flexibility. Turning to Slide 6. We continue to execute on our 5 priorities and are pleased with the progress that we made this quarter. Portfolio optimization continues to progress well. In the first quarter, our initiatives resulted in release of more than $300 million of capital. We saw ALDA, which released $250 million of capital, bringing the total release to ALDA sales to $2.1 billion. We've now exceeded our $2 billion target and while we may sell a few more alternate long-duration assets in the coming months, the program is largely complete. We also completed a reinsurance transaction on the Canadian legacy block and executed on the newer portions of the previously announced payout annuity reinsurance transactions. The initiatives announced today have cumulatively released $3.3 billion of capital and are expected to release a total of $4 billion once fully executed, representing 80% of our 2022 goal. We continue to aggressively manage costs to drive expense efficiency. We achieved total expense saves of $300 million in 2018 and are on track to save a total of $500 million in 2019. These savings contributed to flat year-over-year core expense growth in the first quarter, which in conjunction with pretax core earnings growth of 8%, drove a 2.1-point improvement in our expense efficiency ratio to slightly below 50%. And as I mentioned last quarter, the previously announced initiatives that are currently implied are expected to deliver $700 million of expense savings in 2020. Our third priority is to accelerate growth in our highest potential businesses, and we aspire to have these businesses generate 2/3 of total company core earnings by 2022. These businesses continue to perform well and accounted for over half of total company core earnings. Our highest potential businesses grew 13% in the first quarter, more than 6x the pace of our other businesses, including those that we categorize as legacy. In particular, Asia delivered core earnings growth of 17% and 23% growth in new business value. Global WAM core earnings declined 1%, dampened by lower AUMA levels early in the quarter; however, margins remained strong and we're confident in the outlook of our global WAM business. Our fourth priority is about our customers and how we're using technology to delight them and to deliver a great experience. This will be achieved by putting customers first and our ambition is to increase our Net Promoter Score by 30 points. We've implemented NPS systems throughout the organization that track both relational NPS and transactional NPS. Timely reporting of this metric will enable us to adapt quickly to ensure that we are focused on delivering the best customer experience. Our NPS score was 1 in 2017 and 9 in 2018, an improvement of 8 points, which represents substantial progress towards our aspiration to increase NPS by 30 points. Our final priority is high-performing team. Our target is to achieve top quartile employee engagement compared to global financial services companies by 2022. In April, we made several important changes to our leadership team that will better position us to accelerate our transformation. These changes result in our new Head of Technology, the Chief Marketing Officer and a newly created Head of Global Operations, all reporting directly to me. With these leadership changes, we'll not only continue to deliver on our goal of becoming the most digital customer-centric global company in our industry, but also move forward with greater speed and focus, unlocking significant long-term value for all our stakeholders. I believe that we've accomplished a great deal in the first quarter and are off to a good start for 2019. Phil Witherington will now review the highlights of our financial results. Phil?
Thank you, Roy, and good morning, everyone. Turning to Slide 8 and our financial performance for the first quarter of 2019. We achieved another quarter of strong core earnings and net income. We delivered solid top line growth in our insurance businesses with double-digit growth in new business value. Although we experienced $1.3 billion of net outflows, redemptions have moderated significantly following a very challenging fourth quarter. I will highlight the key drivers of our first quarter performance with reference to the next few slides. Turning to Slide 9. We generated core earnings in the quarter of $1.5 billion, up 15% from the prior year on a constant exchange rate basis. This was driven by the favorable impact of new business in Asia and the U.S., higher investment income in our surplus portfolio, including the impact of the recovery in equity markets on seed money investments, greater expense efficiency and improved policyholder experience. This was partially offset by the impact of actions to optimize our portfolio, namely reinsurance agreements and the sale of ALDA. Net income attributed to shareholders was $2.2 billion in the first quarter driven by strong core earnings, investment-related experience gains outside of core earnings and the direct impact of markets. Of note, we delivered investment-related experience gains of $427 million in the quarter driven by higher-than-expected returns on our ALDA portfolio and favorable credit experience. This allowed us to report $100 million of investment-related experience gains in core earnings and $327 million outside of core earnings. Gains related to the direct impact of markets reflected the recovery in global equities partially offset by the impact of narrowing corporate spreads. Slide 10 shows our source of earnings analysis. Expected profit on in-force increased 2% on a constant exchange rate basis as growth in expected profit of 8% in Asia was largely offset by the impacts of reinsurance transactions on legacy blocks and our ALDA portfolio mix initiative. We delivered solid new business gains in the quarter primarily due to strong sales of our corporate segment product in Japan ahead of potential changes in tax regulation, higher sales repricing activity and a more favorable product mix in our U.S. insurance business as well as the continued success of Manulife Par product in Canada. Overall, policyholder experience in the first quarter was favorable driven by Asia and the U.S. Long-Term Care policyholder experience was neutral this quarter, continuing its trend of being roughly neutral on average since our last triennial review. The core earnings on surplus increased compared to the prior year quarter driven by higher investment income, including mark-to-market gains on seed fund investments in the corporate and other segment. Turning to Slide 11. We delivered double-digit growth in core earnings in Asia and solid growth in U.S. despite the impact of recent actions to optimize our legacy portfolio. Core earnings in our global WAM business was largely in line with the first quarter of 2018 as lower fee income from lower average retail AUM was mostly offset by actions to drive cost efficiencies. The growth in core earnings drove an improvement in our core ROE to 14.2% in the first quarter, above our target of 13%. However, we are not ready to claim victory as we continue to focus on achieving sustainable consistent performance through the cycle for this metric. Turning to Slide 12. We continue to make progress on releasing capital from our legacy businesses in the quarter. We released approximately $250 million of capital through ALDA sales in the first quarter and have released $2.1 billion cumulatively, exceeding our $2 billion target for this program. In Canada, we signed a reinsurance agreement on a portion of our individual annuities business, releasing $65 million of capital. And in the U.S., we executed on the remaining portions of the previously announced reinsurance of our payout annuities blocks. The initiatives announced to date, once fully executed, are expected to deliver $4 billion of the overall $5 billion target. We view the ALDA sales program as largely complete, but will continue to dispose of ALDA when it makes commercial sense to do so and this may release a modest amount of additional capital. Turning to Slide 13. Our continued cost focus is delivering meaningful bottom line benefits as it's evident by the improvement in our expense efficiency ratio. Our core expenses in the first quarter of 2019 were in line with the prior year quarter on a constant exchange rate basis as a modest increase in Asia was offset by declines in our North American businesses. Expense growth compared favorably to our pretax core earnings growth, resulting in an improvement in our expense efficiency ratio for the quarter. Slide 14 shows our new business value generation and APE sales. In the first quarter of 2019, we delivered new business value of $519 million, up 31% from the prior year quarter. This was driven by growth in APE sales of 23% as well as improved margins in North America. In Asia, new business value increased 23% from the prior year driven by higher sales across Japan, Hong Kong and Asia Other, partially offset by less favorable business mix. As I mentioned earlier, sales of the relatively lower margin corporate segment product in Japan increased significantly ahead of potential changes in tax regulation. Coupled with the decline in interest rates in Hong Kong and a less favorable product mix in Asia Other, this drove a 2.3-percentage-point reduction in the NBV margin for Asia. We have temporarily suspended sales of COLI products in Japan until the tax regulations are further clarified. These products contributed approximately USD 45 million posttax to new business gains in the first quarter of 2019, approximately USD 15 million higher than in the fourth quarter of 2018 and USD 35 million higher than the first quarter of 2018. In Canada, new business value increased 27% due to the continued success of our recently launched Manulife Par product. And in the U.S., new business value more than quadrupled due to improved margins as a result of recent repricing, a more favorable product mix and a 20% increase in APE sales. Turning to Slide 15. Our global WAM business experienced net outflows of $1.3 billion during the first quarter. This was primarily due to lower gross flows in institutional asset management and U.S. retail. We also reported higher redemptions in our U.S. retail business in part from the rationalization of a number of small investment management teams to focus on differentiated capabilities where we can generate further scale as well as portfolio rebalancing by a large adviser. Our Asia and Canadian businesses attracted net inflows in the first quarter despite lower gross flows in institutional asset management. And our EBITDA margin improved as we continued to tightly manage expenses, offsetting the impact of lower fee income in the quarter. Turning to Slide 16. The LICAT ratio of 144% for our primary operating company was strong at the end of the first quarter and equates to $24 billion of capital above the supervisory target. The 1-point increase in the ratio was primarily driven by strong net income and our portfolio optimization initiatives, partially offset by debt redemption. The impact of markets in the quarter was neutral. Our financial leverage decreased 160 basis points from the prior quarter due to higher retained earnings, including strong net income and redemption of $500 million of subordinated debt, partially offset by a stronger Canadian dollar. Net share buyback activity in the first quarter was $17 million after taking into account dividend reinvestment. We will continue to tactically buy back shares in 2019. Slide 17 outlines our medium-term financial operating targets and our recent performance. Core EPS growth and core ROE are both exceeding our targets. Our capital position remains strong, and we have made progress reducing our leverage ratio towards the medium-term target of 25%. I would now like to turn the call over to Steve Finch, who'll cover embedded value. Steve?
Thanks, Phil, and good morning, everyone. Yesterday, we released our 2018 embedded value report and on Slide 19, we illustrate the change in embedded value for the company. Of note, embedded value as of the end of 2017 was restated to reflect the transition from the MCCSR capital regime to LICAT on January 1, 2018. This resulted in embedded value at the end of 2017 being reduced by $1.4 billion. We reported embedded value of $55.6 billion as of the end of -- as of December 31, 2018, an increase of 17% from the prior year. Since we started disclosing this metric in 2014, embedded value has grown at an annual rate of 10%. In 2018, contributions from new business and in-force, called embedded value operating profit by some peers, increased embedded value by $6.5 billion or 14%. This compares favorably with a compound annual growth rate of 11% since the start of 2014. New business accounted for a strong $1.7 billion of the 2018 increase, a 20% increase from 2017 on a constant exchange rate basis. The increase in embedded value also reflects the appreciation of the U.S. dollar, Hong Kong dollar and Japanese yen relative to the Canadian dollar, which more than offset the normal course payment of common shareholder dividends. Importantly, embedded value of $55.6 billion or a $28.20 per share reflects only a portion of the value of our businesses as it attributes no value to the future new business and only tangible book value to our growing wealth and asset management businesses as well as our P&C reinsurance operations and Manulife Bank. This concludes our prepared remarks. Operator, we will now open the call to questions.
[Operator Instructions] The first question is from Tom MacKinnon from BMO Capital.
Two questions here. One with respect to Asia, and I noticed there's -- what you showed on Page 13 of your SIP was some experience gains in Asia in the quarter. Typically, these things have been negative and in this quarter, they were positive 15. So wondering what that is related to, how it relates to policyholder experience or expense experience? And I have a follow-up.
Tom, this is Anil. So let me kick it off and I'll then kind of hand it to Steve. So as you know, we have been very focused on improving policyholder experience and taken a number of steps across a broad set of markets in Asia. What we witnessed is a meaningful improvement in both gains experience and lapse experience year-on-year, so we've had positive gains experience in quarter 1. And while our last experience is negative, it continues to improve from a year-on-year basis as well. We've also seen some improvements on the maintenance expenses and as well from a year-on-year perspective and a combination of these factors is really driving the positive impact that you're seeing on policyholder. In fact, total experience for Asia. Steve?
Yes, just to supplement, it was great to see the favorable policyholder experience. Claims gains really across the region that we're not 1 big number, but across the region. And as Anil pointed out, nice to see lapse experience improving. In terms of that experience gain line, Tom, as you referred to on Page 13, that also includes expense experience or a portion of our Asia regional overhead. And there was also, I would point out, there's a bit of geography between the Asia segment and the U.S. segment related to an intercompany reinsurance, so that benefited Asia a bit this quarter with the offset in the U.S.
And how should we be looking at that number then going forward, Steve? Should we be thinking it's going to be kind of net neutral now or it's typically been negative? Or there is something that's inflated it artificially in the quarter?
Well, the geography item was close to $10 million. I won't forecast experience gains. Like I said, it's great to see the positive experience, but it's hard to forecast, because in previous quarters, they've been modestly negative.
All right. And is there any update when you might be back in the Japan quarterly markets? And -- or any of your competitors coming back in the market? I assume you're waiting for the new regulations and the new tax code to get drafted with respect to this product, but can you give us some timing?
Sure, Tom. Sure, so let me step back and just kind of explain a little bit in terms of what's going on in Japan because, I think, it's a topical subject, and I'm sure there is a broader interest in what's happening there. So in February, there was an indication that there is going to be a revision to the tax laws in Japan that's specific to the COLI product. And in line with the rest of the industry players, we temporarily suspended to offer the COLI product. Now what happened was that we had a pretty healthy pipeline and that led to an increase in the bookings of COLI as we kind of went through quarter 1, because we obviously did not want to disadvantage our customers, but did at the same time suspend our COLI sales. We, since then, have received a consultation paper from the tax authority, and we are doing a number of things. So firstly, the good news is that the laws are not going to be retroactive. And we are in the process of responding to the consultation paper. We believe that the points that have been enumerated in the consultation paper will eventually convert themselves into the regulation. Additionally, we are looking at our existing products in light of the tax changes and seeing how we can redesign them to be able to make it more attractive for our COLI customers, because we still believe that there is going to be a significant need no matter the changes that we were going to see on the tax laws. The third piece is again, I think, in light of the changes, it's going to offer up an opportunity or two for us to come up with new product ideas. So this is not the first time that we are kind of dealing with the regulatory change. We have had number of regulatory changes across market and have been able to successfully respond to it. And we feel confident that we should be able to come out with new value propositions in light of the changes. And last but not least, we are also training our corporate channel to offer other retail and other wealth products. Just to remind you that we have a number of value propositions in Japan other than COLI. So we have the whole-of-life, we have a combination of savings and investment, we have the regular and premium annuity product, we offer them in both foreign exchange and euro-denominated offering. So we have a number of offerings, and we are in the process of training our corporate channel. So I just want to reiterate the fact that this is not the first time that we have kind of responding to a regulatory changes and what I just said, we feel pretty confident to be able to, a, respond to the consultation paper, but also design value propositions in the -- in light of the new tax laws.
And how long should we -- the lift you've got from new business gains from that COLI product, albeit they were inflated in the first quarter as a result of sales kind of pull forward, if you will. How long should we envision that to be lower than kind of a run rate or -- So if we look at that thing, it sort of been in the 20 to 30-ish range on a run rate for Japan COLI. How long should we envision that, that would be closer to 0? Or how quickly would that be replaced by something else?
Yes, I think it's a little tough for me to kind of predict that to what that number is going to look like. So I understand what we believe is once we responded to the consolidation paper, which is due on the 10th of May, I believe that based on our past experience, we should be able to get clarity in about 3 to 4 weeks' time. And post that, we should be able to go back into the market with our modified as well as some of our newly crafted value propositions. So we are expecting to get further clarity within the quarter, but it's hard for me to say when that is going to appear. But we are obviously kind of getting our value propositions ready as and when we do get the clarity from the regulators in Japan.
Yes, Tom. Let me just add. I think, as Anil said, it's really hard to pinpoint when we'll see the complete clarity as it relates to tax regulations, but we're encouraged by the consultation paper and the progress that's being made there. And we're obviously pivoting accordingly.
The next question is from Steve Theriault from Eight Capital.
A couple of questions for me. First, starting with WAM and nice accounts obviously in the AUM, but can we talk about flows for a minute? This quarter or last quarter, there's been commentary around team rationalizations, rebalancing. Last quarter, I think there was mention of an absence of short-duration product and we've gotten quite use to positive WAM flows for a long string of quarters. Can we talk a little bit about how big of an uphill battle it is to get back to consistent positive flows? Or is it an uphill battle and is part of it just a function of the disruption at the end of the year, and so on?
Thanks, Steve. It's Paul here. We will get variability in our quarter-to-quarter, but our expectation is that we will continue to capture positive net flows in a long term because of the quality and diversification of our business. More specifically, if we look this quarter, I guess a couple of high-level points at the global WAM level and then I'll talk to the U.S. specifically. But it's important to note that the comments still made on the rationalizing investment teams, that was worth about $1.6 billion in the quarter. Without that, we actually would have been positive for the quarter at the global WAM level. So I just wanted to first point that out. Just some other points. Net flows were positive or Asia and Canada in the quarter. Our institutional business surpassed $100 billion in AUM for the first time ever and our global retirement business continues to capture market share from an already strong positions in the franchise and a really good spot. Looking more specifically at the U.S., the team decision was roughly $1.6 billion outflows. Just some context on that decision. We felt we had a number of teams that were not sufficiently differentiated at scale. We made the decision to exit those. We retained about 80% of the assets and other mandates, and what's leading in Q1 is really institutional separately managed accounts and where they came to us for that specific mandate and so that left. That decision was accretive to earnings and accretive to EBITDA margins. So overall, we're quite confident in the decision we made for the business. There was another impact in the quarter as it relates to model allocations that Phil mentioned, for the large adviser. That is not a new decision. That's the same decision that was made in Q4. If you recall on the call, I mentioned, some of that allocation would trickle into Q1. That was worth $900 million in the quarter, so the combination of those 2 was $2.5 billion. So those were the 2 events that impact results the most. As it relates to the short-term and ultrashort bond that I talked about on Q4, if you take about the short-term and ultrashort, it was still the top category in Q1 where we don't have a solution. We are in the midst to working on a solution to launch to complete our portfolio, probably be in the market by midyear. But we did see some would start coming back on, intermediate bond, as an example, was the top 3 category in net sales. And we do have a product there and saw a material uptick in our net sales in that quarter. So we're feeling good that we have the right products set as investors looked at more risk to their portfolios. And I think overall, we believe, we are well-positioned to capitalize and grow on this and drive positive net flows like we've done over the last consecutive 9 years.
And the team rationalizations, that's fully run its course as far as you can see? Do you have that retention?
Yes, it has. Yes, all the decisions have been done. The last components were these institutional separately managed account and those -- its clients decided to leave. And those teams, for the most part, had exited by the end of calendar year 2018.
Okay. And second one, quicker one I think. Canadian individual insurance sales were up almost 50%. Can you talk a bit about how much of that is the new Par -- newish Par product? And are you now in full flight with respect to Par in terms of where you'd like to be in terms of penetration levels relative to the broker network? Or is there still brokers getting acclimated to you guys being back in the Par market?
Thanks, Steve. It's Mike. So yes, we are very pleased with the growth and the penetration that we've had with the launch back into the Par market. And that is -- that really has been the sort of engine driving both our sales growth and our new business value growth, which was also significant in Q1. In terms of what kind of runway is left, I think there is more growth potential. We actually will be launching in the next month, the sort of other half of Par, which is the life pay, which represents a significant portion of the market. So we continue to think that there's both advisers that have not yet sold Manulife Par that we just need to sort of reach, but also opportunities to add a product. The only other thing I'd add is, I think, we were pretty vocal about the fact that we believe that by getting back into the Par market, we can start to attract other business from those same independent advisers and we're quite pleased to start to see our term business, our living benefits business, our vitality business were all up in the first quarter, so we're feeling quite confident about our prospects there.
Okay. That's great. Could you give us -- do you have a number in terms of what sales would be ex Par for Canada versus the, I think, 44%?
Well, in terms of a percentage, we really didn't have it in the first quarter of last year, so it's sort of an infinite increase. Our actual volumes at Par were $25 million in the first quarter.
The next question is from Gabriel Dechaine from National Bank Financial.
I'll stick to the 2 questions here and ask about the buyback first and what you mean exactly by you're going to be tactical, because we've seen a pretty good drop off from the activity from Q4 to Q1. And on that basis, it's almost insignificant, although I do like you seeing buyback below where you're issuing under the DRIP.
Thanks, Gabriel. Roy, here. So can think the overarching comment that I start with is that we're obviously delighted with our capital position and this is really a result of our focus on portfolio optimization, which has been priority for the company and seeing that we're delivering results here is obviously tremendous. And very specifically in relation to the buyback, we continue to believe that our stocks undervalued and that we will be a net acquirer of shares, so we will be buying back shares today. Since the program started, we've repurchased 33 million shares, and we've issued approximately 18 million under the DRIP. So we have been a net repurchase of our shares, and we're expecting that it's going to continue throughout the course of 2019 given where the stock levels are relative to where we think the appropriate value of the stock is.
Okay. Then for the actuaries or CFOs in the room, the -- or whoever, the URR guidance there, the potential charge of $500 million. Is that something you would include in the Q3 actuarial review? Or could it drift into Q4? And I guess more broadly, what's the -- is there any indication of how that could affect your overall actuarial review this year taking into consideration the LTC thing as well.
Thanks, Gabriel. It's Steve. So this month, the Actuarial Standards Board issued an exposure draft on the URR and the draft included a reduction of 15 basis points to the long-term URR, which is the most important for Manulife. We do expect that this should be finalized around the third quarter. So as of right now, we would anticipate looking in the third quarter. And based on our calculations, we expect this will be approximately $0.5 billion posttax Canadian charge, which is consistent with the sensitivity disclosure that we provided at the end of 2018 as well. In terms of the -- you hit on the other parts of the annual review. And as is typical, we would anticipate providing some information and guidance when we release our Q2 results.
The next question is from Humphrey Lee from Dowling & Partners.
Just to follow up on WAM, especially on flows. You've talked about the wirehouse is rebalancing. There's some kind of spillover effect in the first quarter in the tune of $900 million. Do you anticipate any kind of additional spillover impact in the coming quarters? Or do you feel like that's largely behind you?
Thanks, Humphrey. It's Paul here. We're not aware of any material model allocation decisions new from Q4. And even the ones announced in Q4 have now been complete. This was the last one from the large adviser. So at this point, we are not aware of anyone that will trickle in the next quarter.
Got it. And then looking at Asia WAM, your EBITDA was down year-over-year even though your AUMA grew during the period. I was just wondering is there any kind of one-off expense coming through in the quarter or anything that is notable for the result in Asia in the quarter?
Yes. No, I think if you look quarter-over -- if you look back to Q1 of the previous year, there were some one-time benefits that were nonrecurring. And so -- and I guess the other point is that if you look at the market, Asian markets were down for the entire year for the most part unlike North America, which ended the end of the year. So some of that is just the change in AUM and some of it is a one-time benefit in Q1 of the prior year.
Humphrey, just one additional point to that. So if you look at year-on-year, you're right. Our Asia earnings on WAM are slightly down, but we've also kind of seen an upswing quarter-on-quarter. So the Asia WAM earnings have been sequentially down from quarter 2 of last year. This is the first quarter after 3 quarters that we have seen a material upswing quarter-on-quarter, so I just wanted to reiterate that.
The next question is from Scott Chan from Canaccord Genuity.
Just switching over to the U.S. side. If I look at your core earnings by segment, U.S. insurance is up -- was up 31% year-over-year. Can you kind of maybe talk about that and how much of that growth came from closed business versus new insurance sales and new business?
Yes, it's Marianne here. Thank you very much. Most of it is coming from new business. So we saw a lot higher sales volume in the first quarter, and we've seen improved product margins. One of the things I had said about a year ago now was that we're really focused on our brokerage business in the U.S. and making sure we have profitable business. So a lot of work has been done in terms of some repricing work, expense rationalization as well. And so we're in a much better position from a margins perspective. And then with the added volumes as well, that's been the big driver on the insurance side.
Okay. And then maybe, while I have you, on the U.S. annuity side, it was down 31% year-over-year. So kind of the opposite. Is there anything pertinent to note on that side?
So the biggest thing on the annuity side is the reinsurance field that we did at the end of the fourth quarter, the payout annuities that we reinsured, that was about $20 million worth of impact on the earnings.
Okay. Great. And then just lastly, there's been a lot of media reports last night and for the last couple of months on China opening up the banking insurance to foreign firms. And just on a high level, just wondering if there is any kind of thoughts on how that could affect Manulife? Is there certain segments that could be affected or certain segments that could open up to you guys?
So China obviously is a big priority for us and a big group driver for Asia and overall for our company. And the positive steps that we have kind of seen coming out of China in terms of ownership rules, I think, is absolutely -- we're absolutely delighted with that. I just want to kind of remind you the fact that we have a very strong joint venture on the ground with Sinochem. We have 51%, which is a majority stake, and a lot of our success that we've seen in China over the last 3 to 4 years is attributable to the strong partnership that we have in the ground. So while we are obviously excited about some of the development, we obviously have to take our partner along and we have had extremely strong partner in the ground, which has contributed to the success that we've seen in China.
Yes, Scott. I'll just add to Anil's comments. I think he covered the key points. But we obviously welcome the intention of the regulator to open up the market, that's something that obviously is in the best interest of the industry overall. But as Anil pointed out, we are in a very unique position in China and that we do have 51% share and that is not normally the case. There is a rule that limits foreign ownership to 49% currently. So we have benefited from that. But we also have a great partnership, which has really helped us to achieve the growth that we have achieved, and we don't see our partnership as a limiting factor in any way, shape or form.
The next question is from Sumit Malhotra from Scotia Capital.
Let me start with Anil. So I appreciate the disclosure on the contribution that the COLI new business gains have made. Just looking at the numbers that you provided here in aggregate. So your -- on the U.S. dollar basis, your Asia growth rate continued in the double digits. But if we backed out these COLI new business gains year-over-year, you're down to something like 4%. So I think that the direct question I'd have is with the changes you're anticipating, should we be thinking about the new business gains going to 0? Or is there an offset that maybe I haven't fully appreciated? And in the interim, how do you think this affects your aggregate growth rate in the Asia franchise?
Sumit, so I just said earlier as well, this is not the first time we've been faced up with a regulatory challenge. In fact, if I were to draw your attention to the quarter 1 of last year, in fact, the first half of last year, COLI sales did get impacted. The reasons were different, because we got some excessive competitive pressure and we held our ground to protect our new business value, but we did get and we have seen similar circumstances before. I also wanted to point out the fact that we run a very diversified franchise in Asia. So it's not that we're only dependent upon Japan. We have good growth in Hong Kong and some of the Other Asia market. With respect to the numbers that you mentioned, Sumit, if you look at Asia core earnings, ex of COLI, on a constant rate basis, the number that I have is 6%. And if you broadly look at how Hong Kong and Other Asia has grown, we continue to be pretty pleased with the core earnings growth that we have witnessed in quarter 1. So Hong Kong grew 17% year-on-year on core earnings and while Other Asia showed 1%. That is on account of the fact that we have -- we had a one-off positive item in Singapore reinsurance in quarter 1 of 2018. So if you normalize with that, Other Asia would grow on a normalized basis by 16%. So it's not that we're only dependent upon 1 market, we have a diversified set of franchises. And just given the opportunity and the potential that we have in our Asian markets, we feel there's enough trajectory and enough runway for us to continue our growth in Asia.
So the impact on sales and new business gains from this change are pretty evident. But, one, I want to make sure I appreciate here is that for you or for Steve, is there any other ramifications to Manulife from these tax changes? Will there -- will we see something impacting experience in Japan as a result of these changes? Or should it only be sales and new business value that are impacted?
So we don't believe so. And as I said, the -- and I just wanted to kind of ensure that I reiterate that COLI products are not off-the-shelf and they just want to modified in light of the new tax changes, right. And as I said, we've been accustomed to responding to some of these regulatory changes in the past. And again, given the product suite that we have, given the diversified nature of products that we offer in Japan, we feel pretty confident to be able to come up with value propositions that will continue to be attractive for the COLI segment in Japan.
It's Steve, I'll just add that in terms of the potential impact on policyholder experience, the changes would be grandfathered, so we wouldn't anticipate adverse impact there.
Last one for me is going to go to the balance sheet. So continued good progress on leverage. I think we're at the lowest level in terms of balance sheet leverage in more than 3 years. So for either Phil or for Roy, you introduced the NCIB and the discount on the DRIP at the same time. With leverage having improved significantly, what would have to happen for you to remove or what's the situation or the factor that would cause you or allow you to remove the discount on the DRIP? And then maybe somewhat related, Phil, you had mentioned, there's another $1 billion of debt redemptions that are pending in 2019. Have you reached any conclusion on how much of that will have to be refinanced? And I will leave it there.
Thanks, Sumit, for the question. This is Phil. You're absolutely right, we have ended the quarter in strong capital position, 144% LICAT ratio and that does provide us with significant financial flexibility. We have executed on the redemptions of debt to deploy some of that capital, so there was an additional $500 million of subject redemption in the first quarter. With respect to how we see future of debt redemptions playing out, we are committed to our 25% leverage ratio target. We do have $1 billion of debt available for redemption in the fourth quarter. And we'll make a decision on that closer to the time based on the facts around capital position and market factors, but we really do have the financial flexibility to be able to do much should we wish to do so. Also worth noting that in the first quarter of next year, 2020, we have another $500 million of debt that's maturing that provides us some flexibility there should we wish to redeem it at that time to further act on the leverage ratio. Now in terms of your questions on the NCIB and the DRIP, we like the combination of the NCIB and the DRIP as tools in our -- tools that we can use as part of our overall management strategy. I think it is worth being explicit in the statement that we consider the current capitalization of a company to be below what the underlying value is. So we're very satisfied and comfortable in continuing to buy back shares in the current environment. And as Roy mentioned earlier, we have actioned since the NCIB was introduced. We bought back approximately 1.8% of the company's share capital. And in dollar terms on a net basis, net of DRIP, that's a return of $370 million of capital to shareholders. But we feel there's further for us to go, so we will continue to tactically execute, but we have no intention to withdraw the DRIP. There will be a net return of capital, but no intention to withdraw that.
And I'll stop here. I mean you've done a good job in buying back stock at book value, but I would think if you don't need the -- so I think you brought back 33 million shares and initiated about half of that via the DRIP. Assuming if the leverage ratio and capital are moving in the right direction, why do you need that additional equity pickup from the DRIP? Would be my question and I guess that's when we can talk about going forward.
It's really a tool in our capital management, toolkit that provides flexibility for us, Sumit. So I think given that we have an NCIB that has a capacity up to 5%, we have the flexibility with the 2 items combined to return capital to our shareholders.
The next question is from Meny Grauman from Coremark.
Question on expenses. Strong performance in Q1. Core efficiency ratio below your 2022 target. So I'm just wondering is this performance a reason to sort of say that you achieved your target, that victory is here? Or is there something in there that you would expect to be more volatile going forward in terms of your core efficiency ratio?
Yes, let me start, Meny, then I'll hand over to Phil. Obviously, we've been focusing very deliberately on expenses and cost management and directionally, we're really pleased with the results. In 2018, we saw expenses grow only at 3%, which is significantly lower than historic average of our expense growth. And in Q1, as Phil highlighted, it was flat -- extensively flat to the prior year quarter, so 0% growth. I would impose a rate 0%. I think directionally, we're focused on really containing expenses and there's still much, much more for us to do. And the fact that we're under our long-term target of 50% efficiency, that's going to bounce around a little bit. So we might bounce under it in quarter and then we'll be slightly up in another. Directionally, we want to get to the 50% goal consistently and obviously, we will be aiming for even lower than that. So the key message I may give is that expense efficiency in driving optimization of our business is a big, big priority. We see it as a huge value enabler. We're seeing good traction and good results. There's still much more for us to do in that space, and we will be obviously investing in key strategic priorities that are going to provide the foundation of future growth. So that is another key important element of our expense management equation. Phil, would you add anything?
Yes, just a couple of supplements. Thanks, Roy. So the first item I'll say is that we've emphasized throughout that this is about efficiency and not only taking costs out of the organization. So being able to fund growth is very important to us. So a key metric that we look at is that differential between the rates of growth in pretax core earnings and the rate of growth in our expense base. And the gap between those 2 is effectively what drives the improvement in the efficiency ratio. So what -- I think it's fair to say what we'll be shooting for in the coming quarters and years will be growing revenues or core earnings, the pretax at a higher pace than general expenses. The second point that I would like to make is around the variability you might see with the expense ratio. There is an element of seasonality to expenses. It's always hard to predict earnings business momentum. So I think this is a ratio that may bounce around from quarter-to-quarter, including as we make reinvestments to fund future growth, which is something that we said we would do at Investor Day. We said we'll ring fence $1 billion over a 5-year period to reinvest in the execution of our strategic initiatives. So there's much more work for us to do so that we can get to a position where we deliver an expense efficiency ratio of 50% or less quarter after quarter, so there's no room for complacency here.
And then just a second question just on seed capital. We're seeing a lot of volatility there and appreciate the markets from Q4 into Q1 are a big part of that. But the question is, is that an acceptable amount of volatility in your eyes? If you continue to see this kind of movement, would you reconsider those seed capital investments? Or is there something you can do to temper that volatility?
Thanks for the question. This is Phil, again. So the seed capital investments are actually really important part of our wealth and asset management strategy. It provides us with the ability to launch new customer solutions and that provides us with a competitive advantage. We have a risk appetite that determines how much we're prepared to invest those seed capital initiative and we're well within that appetite. So in the fourth quarter, we said we had experienced $115 million of declining value of seed capital investments. And that really was, I think, an exceptional quarter and it's somewhat reassuring that when you look at the first quarter of 2019, the majority of that bounced back, it came back and that's part of what has caused the improvement year-on-year in core earnings of 15%. I would just like to highlight as we look at the impacts of seed capital investments in Q1 and link that with the favorable impact that we're seeing from factors, such as new business gains, the extent to which the first quarter results are flattered by a number of favorable different -- a number of favorable items, it's in the order of $100 million in aggregate.
The next question is from David Motemaden from Evercore.
Just a question for Anil and just the new business value margins in the Asia Other were down a bit year-over-year. Just wondering what geography and what products specifically drove that down? And if there are any changes that you're making to the mix to improve that going forward?
Thanks for the question, David. So if you look at Other Asia, historically, David, Other Asia has been the fastest-growing segment for us and should not come as a surprise just given the fact that we have several high-growth markets that constitute Other Asia. In quarter 1, as you can tell, we grew our sales by 20% and our new business value by 10%. There were a couple of factors that impacted new business value. So, one, was the product mix. We had a successful launch in the first quarter sales campaign in China. And while we got an increased sales on a critical illness offering as compared to year-on-year, we got more than expected volumes on the savings part. So that had an impact on the product mix as compared to what we had anticipated in China, but in a positive way, but had an impact on the downstream impact on new business value. Secondly, we also saw a decline in interest rates in China and that also had a knock-on impact on new business value. But in terms of the trajectory that we are witnessing and again, just given the underpenetration of insurance in most of our Other Asia markets, again we think that there is a significant runway for us to continue the growth that we witnessed in the Other Asia segment in the past.
Got it. And just to level set, I guess, how big is China as a percentage of the total Asia Other new business value?
So we don't disclose that, David, but it is a significant part. I would just kind of leave it at that. I guess importantly, the investments that we are making in China and just the way we are positioned in China across our insurance joint ventures, MTEDA, the WFOE, the MOU that we have with ABC, we feel very confident that we have a strategic advantage in terms of the way we would like to grow our business in that critical market.
And David, this is Phil. Just to supplement, we can reach out to you off-line to draw your attention to some of the disclosures we have made -- country-by-country disclosures we have made for our business in Asia as part of our 2017 Investor Day. That provides a good indication of how significant China is relative to Asia as a whole.
Okay. Great. And then just a question for Steve. LTC experience is neutral in the quarter. Just wondering if you can give some of the puts and takes, and I would assume it's a favorable mortality quarter from seasonality perspective. But any sort of detail you can provide on the puts and takes for the LTC experience this quarter would be great.
Sure, David. So what we saw, interesting, if we go back to last year in the first quarter, we saw elevated levels of mortality across our businesses and we reported gains in Long-Term Care, gains in annuities, offset by losses on life claims. We didn't see the phenomena to anywhere near the extent that we saw it in 2019. But what we did see in LTC, which was neutral this quarter, as I've commented in previous quarters, some of the same trends were there that we've seen, higher-than-expected claims costs offset by higher-than-expected lapses on policies where there's been a premium increase or through benefit reductions. So those factors are part of our comprehensive review of assumptions that's ongoing now as well as the favorable progress that we've made on achieving in-force premium increases. So those will -- those trends will all be reflected on our annual assumption update in Q3.
The next question is from Doug Young from DesJardins Securities.
I guess my first question is for Naveed. Just wanted to understand how the rate environment has impacted your ability to transact on the legacy block. And I guess, where I'm going is in this quarter, there was a reinsurance deal in Canada, but it was relatively small. I would have expected a little bit more activity, and I know there's a lot more going on behind the scenes, so hoping just to get a bit of an update.
Okay. Thanks, Doug. So Naveed, here. So in terms of the rate environment, we have a number of processes that we're looking at that we're sort of looking at right now. We have not seen a pullback yet in terms of what we have on the market, certainly something to keep an eye on. In talking to some of the potential reinsurance partners, we are seeing a lot of this is very much dependent on the reinsurance -- the reinsurer investment strategy and many of them are using asset classes where they're actually hasn't necessarily been a big pullback. So again, we're not really seeing that impact yet in any of the pricing.
Okay. So no real big shift in terms of your pipeline at this point in time, doesn't sound like.
Not yet. Again, as we've talked about before, we're targeting a number of ongoing transactions every quarter, so I think you're going to continue to see that.
Is it more kind of single and double versus larger? Is that kind of the way you've, I guess, characterized it in the past. I guess that hasn't changed either?
We're definitely going from single to doubles, but we have some other things in the middle also. So we'll definitely deliver on the ongoing regular transactions with potential for more.
I'd ask what those are, but I'm sure you're not going to tell. I guess second, just on the Long-Term Care insurance, and I don't know if this is for you Naveed or Marianne. Naveed, I think, there's been discussion in the past about the landing spot experience, and I'm just curious how the landing spot expedience has been going relative to expectations. I know you've been doing copays as another way to kind of try to manage the block. I'm just wondering how that's going relative to expectations. And Steve, you brought it up, progress on in-force premium increases. Just wanting to see how that's gone relative to what your expectations that you gave a while back.
Doug, it's Naveed, again. So on the landing spots, we were able to offer them. We continue to see positive experience relative to expectations. Oftentimes, we'll get 50% plus of policyholders elect the landing spot in view of the premium increase, and that's where trend is continuing. You mentioned the co-pay. That's a new landing spot that we've been implementing, getting regulatory approvals for throughout the last few months. We've been getting our initial approvals on that. Implementation of that will be later this year, so we haven't seen the experience yet, so -- but we'll continue to monitor it.
And it's Steve here. With respect to the progress on premium increases, I answered the question last quarter on this, and at Investor Day, we had disclosed that our reserves included only $0.8 billion of future premium increases, and I disclosed last quarter that we had achieved $0.5 billion of that. We continue to make progress and as part of our Q3 disclosures, we'll provide updates on further progress. The last thing that I would point out there is a reminder that while we are conservative in terms of what we include in our reserves, there's multiple billions of dollars above that, that we have filed for and expect to achieve over time.
The next question is from Paul Holden from CIBC World Markets.
So I'm going to ask a follow-up on that Long-Term Care and the prospect for rate approvals. And in the context of some of your competitors or at least 1 competitor highlighting that certain state regulators that have been reluctant to give favorable approvals, seem now much more accommodative. So without giving us any numbers, I'm wondering if at least you can comment if that -- if you're seeing the same trend and probability and progress has improved more recently.
So it's Marianne here. Yes, we are seeing some states where in the past they hadn't approved and now they're talking about doing some approval, but it has been very small. There hasn't been a large number of them. In general, we've been doing pretty well across all of the states, getting 100% in some spots, but in other spots, they're basically giving us a cap and then we come back year after year. But overall, the -- it's been fairly good experience that we're seeing. But like I said, some of them you do have to go back multiple years.
Okay. Next question is related to the interest rate environment. And this one is more, I guess, geared at your NBV margins and -- in Asia, but perhaps you can also globally into the conversation as rates are definitely lower than probably where most of us would have expected. So what kind of actions, like real actions can you take to offset that, whether that's in investment portfolio, repricing, if you think about in the context of expense efficiencies, et cetera, versus just what the URR impact is for the real business implications and how you respond to it?
It's Steve. I'll start on that and if Anil wants to add on Asia. What we've seen typically is that when interest rates move, typically what will happen over time is markets will respond, right? So products will be repriced. In general, higher interest rates are better for Manulife, better for the industry. But we've been shifting to nonguaranteed products where you can pass through the experience both positive and negative. So that doesn't have as much of an impact on the NBV. And more broadly in Asia, we think the bigger driver is the growth and success that we've had across the region, the sustainable scale that showed up in our NBV and our new business gains that you've seen over time. And I think when you look over the medium or longer term, all those aspects are there and the opportunity to expand NBV and NBV margins remains.
Yes, so just a couple of points to supplement that. So in each of our geographies, we have opportunities to improve new business value. And we're not necessarily at the scale that we would like to be and even in a market like Hong Kong, where we have scale, we still believe that there is opportunity to kind of improve our new business value margins as we kind of acquire scale. So we have a couple other levers like we are driving much more -- we are driving consciously a much more stronger product mix that should kind of drive better margins for us. As well as Phil mentioned, driving a lot of focus on expense efficiency as well. Just because we are a growth region does not mean that we do not have an opportunity to do a better job on expense efficiency.
Okay. So the trend to higher NBV margins is not disrupted by lower rates, that's the message?
Yes. I can say on multiple levels trend. We are pressing forward on all levels, as Steve mentioned as well.
The next question is from Darko Mihelic from RBC Capital Markets.
Just a few questions. All of my questions are actually related to Slide 12 of your presentation this morning and they're really geared towards Naveed and Roy. The first couple of questions on this slide, I have been keeping a running total of the cost of the $4 billion, but maybe you can -- on the slide, if you could think about in the following way, if maybe you can give me a couple of numbers here to sort of compare against the ones that I have. How much does this cost you, the $4 billion of the $5 billion target in terms of actual book value? What was the loss to earnings? And then the more difficult question, how much does this saved you in terms of earnings volatility? Or how much does this lowered risk for the company? And then I have a follow-up.
Darko, this is Naveed here. I can give you the answer on the foregone earnings. So as you know, we -- for all of these transactions, we talked about how much earnings keep up there is. So in the first quarter, the total earnings forgone, related to the $3.3 billion executed and the $4 billion line of sight, was $33 million of foregone earnings. So that includes $7 million on the ALDA side and the rest related to the reinsurance transactions.
Okay. Great. And no measure possible on the risk or what does this saved us in terms of volatility or...
Yes, we -- there's probably no single measure we can give you on that. Certainly, when you look at the blocks where we have done the reinsurance, the -- taking out of interest rate risk and taking out longevity risk, all that sort of is self-explanatory. But no -- I guess no specific measure on that. You've something to add, Steve.
It's Steve, I'd just add that, you know, where we're taking all that, it's really in the guaranteed segments and where we can't pass that experience, it's the shareholders account. So we have seen reductions. It's reflected in our disclosures. All other things being equal in our disclosures around impact of shocks to our ALDA portfolio. The other thing that I look at in terms of risk reduction are some of the organic things that we're doing, such as in Long-Term Care, the landing spots reduce the future benefits. So it reduces the variability around LTC claims. So we look at the risk reduction from a variety of different standpoints from the inorganic as well as the organic work that Naveed's team is doing.
Okay. And then just the overall strategic question then. It's as I look at this, the way I sort of thought about your actions to date and I don't want to diminish them in any shape or fashion, but it seems as though the $4 billion of the $5 billion has been what we would call, we are thinking through this like the low-hanging fruit and maybe the easier sort of transactions to sort of do and which leaves me with the question of, will there still an awful lot of capital tied up in the businesses that -- precisely that are more concerning. And so the question that is, does the $5 billion target need to be reevaluated? And how much more difficult will that last $1 billion be to get you to the $5 billion?
Yes. So Doug, let me start, and I'll ask Phil and Steve to jump in. I think the first thing I'd say is that when we decided that this was going to be a focus and a priority for the organization, I think it sent a very clear message that this is where we felt that there was a lot of value and upside for the franchise. And the first thing I'd say is, I'm delighted with the progress that we've made. We set the $5 billion target over the 5 years, and we're really with that line of sight to the $4 billion well and truly ahead of the 2022 ambition. And as Naveed pointed out, we've been very efficient with how we've executed that in terms of the earnings forgone. And again, if you look at our Q1 results, the fact that we were able to see our LICAT ratio at north of 1 40 together with core ROE of 14-plus-percent, I think it really does bring home the key point that this has been a very efficient way to drive capital allocation. But you're absolutely right, of course, we're going to focusing on the low-hanging fruit first. And I think it's going to get harder. This is just what we anticipated and what we expected, but we still feel very optimistic about our ability to not only achieve our target and once we do, we will assess where we are and see whether the next phase of our efforts in the space need to include and incorporate a new vision for our focus areas. I'd say that again, the other point of focus, which again has been very important for us from a capital optimization perspective is not just the inorganic place, but the organic focus on legacy is also generating tremendous value. And Naveed sort of touched on some of the things that we're doing there, but I wouldn't discount the focus on legacy both from an inorganic perspective but also the organic.
This is Phil. If I could just supplement. It's really important to us that at the start of the program, we really got moving and demonstrated that we were able to execute on large reinsurance transactions, because I think it had been something that we talked about for some time that it was really only in 2018 that we've made significant progress on that. So it's somewhat intentional that we actioned on the low-hanging fruit, as you described it, upfront in the program. But I think it's also fair to say that we are looking at some of the more difficult blocks, that is something that is high in our priority list. I can't provide an update now, but you just need to know that we are looking at it. In terms of the guidance that we issued, $5 billion remains our target. It's too early at this point to provide any update to that guidance, but we're very confident that we can get to the $5 billion or exceed that target.
It's Naveed here. I just like to supplement and there's still -- there's actually still some more runway on the reinsurance transactions, the so-called low-hanging fruit, likely saw the Canadian longevity transaction in Q1, so we are continuing to be engaged in a number of processes. And at the same time, we are pivoting to the larger, more problematic blocks, as Phil suggested. And we're pivoting on 2 organic initiatives. In Q4, we ran segs fund transfer program that feed up $120 million of capital. We're running another program in Q2. We are piloting a buyout program of structure settlements in the U.S. in Q2. We are looking at piloting a buyout program on the no-lapse guarantee universal life products in U.S. later this year as well as a buyout program on the US BA -- GMWB product on Q4 of this year, Q1 next year. So I still feel good about the run rate of initiatives.
Thank you. There are no further questions registered at this time. I'd like to turn the meeting back to Ms. O'Neill.
Thank you, operator. We will be available after the call if there are any follow-up questions. Have a nice morning, all.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.