Q2 2019 Earnings Call
All participants please standby your conference is ready to begin please be advised that this conference call is being recorded.
Good morning, and welcome to the many life Financial's second quarter 2019 financial results Conference call for Thursday August eight 2019.
Your host for today will be Ms. Adrian O'neil. Please go ahead.
Thank you and good morning.
Welcome to Manulife earnings conference call to discuss our second quarter 2019 result.
Our earnings release financial statements and related Mdna statistical package and webcast slides for today's call are available on the Investor Relations section of our website at an annualized dot com.
We will begin today's presentation with an overview of our second quarter highlights and an update on our strategic priorities by Roy Gori, Our President and Chief Executive Officer.
Following Rois remarks, Phil Weatherington, 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 provide preliminary indications of the Companys annual review of actuarial methods and assumptions, which will be completed in the third quarter of 2019.
After the prepared remarks, we will move to the 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 two for a caution on forward looking statements and slide 32 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.
This 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 Adrian good morning, everyone and thank you for joining us today.
Turning to slide five yesterday, we announced our financial results for the second quarter of 2019.
We delivered solid net income and core earnings of $1.5 billion with double digit core earnings growth you Nigel.
You business value generation increased 14% with particularly strong growth in the U.S. and now solid core earnings contributed to book value per share growth of 13%.
With the walkout ratio of 144% and leverage down to 26.4%. The company is in a strong capital position with substantial financial flexibility.
These are solid results given the 90 headwinds that we faced this quarter, including the temporary suspension of coli sales in Japan and suppressed our you MIT growth year over year in our global wealth and asset management business as a result of challenging market conditions in late 2018.
Turning to slide six.
We are executing on our five priorities and are pleased with the progress that we made this quarter.
Portfolio optimization continues to progress ahead of schedule.
In the second quarter, we executed on initiatives, which resulted in a capital benefit of approximately $400 million.
Including two reinsurance transactions on legacy life insurance blocks in the U.S. and then expanded segregated fund transfer program in Canada.
The initiatives announced to date have cumulatively released $3.7 billion of capital and are expected to release, a total of $4.3 billion once fully executed representing 86% of our 2022 goal.
We believe this further opportunity to reduce risk and free up capital for redeployment.
We'll continue to evaluate all options, both organic and inorganic to optimize the remainder of our legacy portfolio.
We continue to aggressively manage cost to drive expense efficiency.
Our expense discipline resulted in modest core expense growth of 3% year over year in the second quarter, and just 1% year to date.
As a result, our expense efficiency ratio for the first half of 2019 improved.
To 51.2% from 51.6% in the same period last year.
Expense efficiency initiatives continue to progress well and delivering savings ahead of schedule.
Updated estimates now project incremental savings of 400 million this year.
When added to the 300 million that we delivered in 2018. This brings our estimated 2019 cumulative pre tax expense efficiencies $700 million.
We are well positioned to achieve $1 billion of pre tax expense efficiencies by 2022.
I'll flip priority is to accelerate growth in our high potential businesses and a week and we aspire to have these benefits businesses generate two thirds of total company core earnings by 2022.
During the quarter, we further expanded our footprint in Asia entry into a joint venture agreement with the asset management arm of Mahindra Finance, one of India's leading non bank financial companies.
Hi potential businesses.
Paul performed well and delivered core earnings growth of 10% in the first half of the year outpacing our other businesses.
Overall, our highest potential businesses continued to account for over half of total company core earnings in the first half of 2019.
Our fourth priority is about our customers and how we're using technology to attract engage and retain customers by delivering an outstanding experience.
Our target is to increase our net promoter score by 30 points by 2022.
In Singapore, we launched an into an online insurance platform in collaboration with DBS Bank.
Which will enable customers to fulfill insurance needs on a self serve basis.
In Vietnam, we were recognized as the best Life Insurance company for digital transformation by Global banking and Finance Review magazine.
And finally in Canada, we expanded our POC product shelf by offering enhanced payment flexibility, giving advisors more options in choosing the right permanent insurance product for their clients.
Our continued success in the power market contributed to individual insurance sales growth of 62% year over year.
A final priorities high performing team and our target is to achieve top quartile their employee engagement compared to global financial services companies by 2022 in the second quarter. John Hancock was named to Forbes first ever ranking of America's best employers by state.
And in the Philippines, where we employ other 6000 people.
Manualize one the accolade will to accolades at the best employer Awards held in June .
In the U.S., we are piloting the use of virtual reality to bring our strategy to life.
And improve the onboarding experience for employees.
We're also piloting it's used to create a dynamic and engaging training process Braille salesforce to ensure that they have the right skills to execute on our priorities.
Q2 was another constructive quarter for the company and I'm confident that we will continue to build momentum and deliver on the various targets that we've laid out.
Phil with Harrington will now review the highlights of our financial results Phil.
Good morning, everyone.
Turning to slide eight and our financial performance for the second quarter 2019.
We achieved solid core earnings and net income of $1.5 billion in the quarter.
We delivered strong growth in new business value of 14% while expense growth was a modest 3%.
Net flows were neutral in the quarter, which was largely in line with the prior year and a significant improvement from the prior quarter.
And remain same substantial financial flexibility with a light catch ratio of 144% and a leverage ratio of 26.4%.
I will highlight the key drivers of our second quarter performance with reference to the next few slides.
Turning to slide nine.
Core earnings in the quarter of $1.5 billion were largely in line with the prior year on a constant exchange rate basis. This reflects in force business growth in Asia, and higher investment income in our surplus portfolio offset by the non recurrence of a tax related benefit and notably positive group insurance policyholder experience in Canada.
Which totaled $94 million as well as the impact of portfolio optimization initiatives.
If we exclude the items that favorably impacted results in the prior year quarter as well as the ongoing earnings impact of reinsurance and older portfolio mix initiatives core earnings increased by 9% year over year.
Net income attributed to shareholders was $1.5 billion in the second quarter up 14% from the prior year, primarily driven by the non recurrence of a $200 million restructuring charge.
Of note, we delivered investment related experience gains of $246 million in the quarter driven by higher than expected returns on our older portfolio and strong credit experience.
This allowed us to report $100 million of investment related experience gains in core earnings and $146 million outside of core earnings.
Our strong investment related experience since the beginning of the year has allowed us to report close to $500 million of gains in excess of what has been included in core earnings year to date.
Slide 10 shows our source of earnings analysis.
Expected profit on in force increased 1% on a constant exchange rate basis as in force business growth of 7% in Asia was largely offset by the impact of portfolio optimization activities on our legacy business in North America.
We delivered solid it's new business gains in the quarter, driven by higher sales improved margins and a more favorable product mix in the U.S.
As well as a more favorable business mix in Asia, and higher sales in Hong Kong and Asia other.
Partially offset by the temporary suspension of corporate owned life insurance sales in Japan.
Overall policyholder experience in the second quarter was unfavorable primarily due to on first launch claims experience in our us life insurance business, partially offset by favorable experience in Asia.
Of note long term care policyholder experience in the quarter was modestly favorable in aggregate.
Core earnings on surplus increased compared to the prior year quarter, driven by higher investments income from growth in our surplus portfolio, we extended duration of surplus assets and lower bad debt expense.
Turning to slide 11.
We delivered double digit core earnings growth in Asia, Despite temporarily suspending sales of coated products in Japan.
Core earnings in our Canadian business decreased due to the favorable impact on prior year results of the items I mentioned earlier as well as the impact of recent portfolio optimization actions.
In the U.S. core earnings declined due to the impact of recent portfolio optimization actions as well as unfavorable policyholder experience and our life insurance business.
Core earnings and our global wine business were largely in line with the second quarter of 2018, reflecting similar levels of average are you I may in both periods.
We delivered core ROE of 12.7% in the second quarter and 13.4% on a year to date basis in line with our 13% plus medium term target.
Turning to slide 12.
We expect to achieve $700 million of pre tax expense efficiencies and 2019 up from our previous estimates of $500 million and we are well positioned to achieve $1 billion of expense efficiencies by 2020 two.
Our insights expense initiatives are progressing well, our voluntary early retirement and voluntary exit programs as well as other restructuring initiatives have resulted in over 1600 departures to date with a further 300 expected by the end of the year.
We have also renegotiated a number of contracts with third party technology vendors, leveraging our global scale to achieve better rates and delivering expense efficiencies of almost 20%.
And in Canada individually, new business individual insurance, new business volumes increased significantly due to manulife path, while underwriting expenses remained flat primarily as a result of the development and adoption of artificial intelligence to adjudicate less complex applications.
Turning to slide 13.
Our continued cost discipline is delivering meaningful benefits on a constant exchange rate basis, we contained growth in core expenses to a modest 3% in the second quarter and 1% for the year to date.
This compares favorably to our historical growth rate of 9%.
As a result, our expense efficiency ratio for the first half of 29 team has approved by 0.8 percentage points to 51.2%.
Slide 14 shows our new business value generation and HPP sales.
In the second quarter of 2019, we delivered new business value of $479 million up 14% from the prior year quarter.
This was driven by growth in AG sales of 7% as well as improved margins in the us and Asia.
In Asia, New business value increased 7% from the prior year driven by a more favorable business mix, partially offset by lower sales due to the temporary suspension of coli new business in Japan.
We relaunched coty sales on the 18th through July following the issuance of revised tax deductibility rates and corresponding adjustments to our customer solutions.
In Canada, New business value was in line with the prior year as higher insurance sales were offset by business mix changes in group insurance and the withdrawal of certain capital intensive legacy annuity products.
And then the us new business value nearly quadrupled on a constant exchange rate basis to $50 million, primarily driven by recent actions to improve margins and a more favorable product mix.
Turning to slide 15, our global wealth and asset management business continued to deliver our global wealth and asset management business delivered neutral net flows in the second quarter largely consistent with the prior year quarter and significantly improved from the fourth quarter of 2018.
Compared with the second quarter of 2018, lower gross flows in our retail and institutional asset management businesses were offset by lower redemptions in our Asia retail and to us retirement businesses.
Our core EBITDA margin of 26.9% was largely in line with the prior year quarter.
Our wealth and asset management businesses continued to be underpinned by strong macroeconomic fundamentals, especially in Asia, and retirement, which positions us well for long term growth.
Turning to slide 16, we continued to make progress on portfolio optimization by executing on transactions that will result in a capital benefit of approximately $400 million.
In the U.S., we completed two new reinsurance transactions on universal life blocks, releasing $265 million of capital.
In Canada, we expanded our segregated funds transfer program, which resulted in additional customers converting their contracts to a less capital intensive option. This offers them increased flexibility and higher potential returns. This initiative will release $85 million of capital.
We also released approximately $50 million of capital through older sales in the second quarter.
We are pleased with our progress on portfolio optimization and the initiatives announced to date once fully executed are expected to deliver $4.3 billion of the overall 5 billion dollar target.
Turning to slide 17, like capture ratio of 144% for our primary operating company with strong at the end of the second quarter and represents $25 billion of capital above the supervisory target.
The ratio was unchanged from the prior quarter as the funds as the favorable impacts of lower risk free rates and portfolio optimization actions were offset by lower corporate spreads.
Our financial leverage decreased 60 basis points from the prior quarter, primarily due to higher equity.
Net share buyback activity in the second quarter was $234 million after taking into account dividend reinvestment and we and we will continue to tactically buying back shares in 2019.
Slide 18 outlines our medium term financial operating targets and our recent performance.
Core EPS growth and core ROI for 29 team are both on target, reflecting not only solid core earnings growth, but also the impact of net share buybacks.
Our capital position remains strong and we have made progress in reducing our leverage ratio towards the medium term target of 25%.
Expense efficiency and capital release from portfolio optimization actions are also tracking ahead of schedule.
I would now like to turn the call over to Steve Finch, who will discuss the preliminary indications from the ongoing annual actuarial review Steve.
Thanks, Phil and good morning, everyone turning to slide 20.
We will complete our annual review of actuarial methods and assumptions in the third quarter of 2019.
This year's review also includes a comprehensive long term care experience study, which we conduct on a tri annual basis, while the review is not yet complete preliminary indications suggest that the impact to net income in the third quarter will be neutral in total and for LTC.
This excludes the impact of new guidance issued by the Canadian actuarial standards Board in July specifically, the 15 basis point reduction in the ultimate reinvestment rate as we indicated last quarter, we estimate that implementing the updated you on our standard will reduce net income by approximately $2.5 billion post tax in the third quarter of 2019. This will be reported outside of core earnings within the direct impact of interest rates.
For long term care there has been a significant increase incredible claims data since the last review due to the natural aging of the block. This additional data and the substantial progress we have made in our study so far is reinforcing our confidence in the adequacy of our LTC reserves in aggregate.
I will now describe describe briefly some of the key drivers we are observing in our LTC study.
In 2016, we embedded a conservative amount related to future premium increases in reserves. We have made good progress in securing premium rate increases and will update our assumptions to reflect this as well as our expectations for further progress.
Consistent with previous practice, we will maintain our approach of being conservative in the amount of premium increases reflected in reserves.
Our experience shows that a portion of our customers choose to reduce their benefits rather than paying increased premiums on their LTC policies. We expect that reflecting this experience will allow us to reduce reserves.
Most LTC claims occur when customers are over age 18.
Due to the natural aging of the block we have significantly more claims data on older Insureds in the current study, which increases our confidence level when setting our reserve assumptions for total claims costs.
As a result, we expect to modestly reduce certain margins for adverse deviation embedded in the reserves.
Our LTC study is also showing lower termination rates during the elimination or qualifying period, which is the period between when the claim is filed and when benefit payments began.
The and the unfavorable impact of lower termination rates on reserves will be partially offset by lower incidence rates as we are seeing policyholders starting claims at a lower rate than expected.
We're also seeing that once payments begin the length of the payment period for claims has not changed materially since the last study.
And finally, our data continues to support the assumptions of both future morbidity and mortality improvement. However for Prudence, we expect to reduce the rate of assume morbidity improvement, which would increase reserves.
This concludes our prepared remarks, operator, we will now open the call to questions.
Thank you.
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The first question is from Gabriel Dechaine as National Bank Financial. Please go ahead.
Good morning.
Finally, the questions here.
Is that reduced the morbidity improvement assumption there was a 1.6 billion dollar reserve.
Item, how much you reduce that by second.
In Japan, the resume sales.
When do you expect sales to rebound and rebound.
A rebound in new business gains.
You were generating previously and lastly.
Why were you compelled to flag the loss of a new business gain that we should expect on the radio growth.
17 was there anything.
This transparency or something else.
Notify of them.
Thanks, Steve I'll start with your first question around the LTC morbidity improvement.
I'll touch on the assumption itself I can't tell you exactly how much we're reducing it at this stage as we're still in the study, but I'll just touch on the assumption and then the reserves in aggregate.
I think the important thing is we continue to see evidence in our data that supports the inclusion of both morbidity and mortality improvement assumption.
And we strongly believe in that correlation that exists between the two assumptions as I noted in my remarks, we do expect to reduce it and we'll give you details are in our third quarter results.
But I always like to remind people to look at the the overall aggregate of our reserves. We have over 10 billion of margin in our reserves are p. fads and conservative assumptions on our premium increases the margins represent an increase of more than 40% over our best estimate assumptions and I think you need to put that in context with looking at U.S. reporters and they're under locked in assumptions weve been updating our assumptions consistently over the years. They are locked in until they get to the point that they have zero margins. So you need to look at our reserves in aggregate the over 10 billion, 40% increase over best estimate margins and that I think overall the the conservatism of our reserves is among the strongest in the industry.
Hi, Gabriel I'll take your second question on clearly this is Emil us so as you know.
We had to stop our quarterly sales in quarter two on account of the introduction of the new tax rules.
We did get a clarification on the new tax rules at the beginning of quarter, three and pretty much within 10 days of clarification, we resumed our quarterly sales. The emphasis has been a two train on all our channels are died agents, our NGL partners as well as high as five five distributors and I guess, it's going to take us a quarter, if not to to be able to understand and comprehend how the market and the customers react to our value propositions in light of the new tax changes Needless to say we are also working on some product ideas and solutions are in light of the tax rules, but my reckoning would be that we'll be able to kind of only indicate that in about a couple of quarters based on the reactions that we received from the market.
Great and Gabriel this is Phil.
To answer the third component of your question. Firstly. Thank you for that question I have for 17, you are referring to the comments that we make in R&D anyway.
About the potential impacts of adoption of IR for 17, we did refer to this in our 2018 and DNA and there's nothing that requires all compelled us to.
Provides us additional disclosure that we do believe in transparency and therefore, given the stage of development Solidfire for 17, we felt it was appropriate to highlight.
Two of the many changes that I have for a 17 will bring a bit too that we felt could be.
Meaningful in terms of the impact of the standard so the first we highlighted was.
The impact of the discount rate and the second that we highlighted was.
The almond ire for 17 basis, the the fact that new business gains will no longer be recognized.
However, there would be enforce earnings.
Whereby the.
New business gains that had previously been recognized would be just would be recognized over the life of those contracts. So we just wanted to pull backs out in the interest of transparency.
Thank you I'll leave it there.
Three questions and broke through.
[laughter].
Thank you. The following question is from Meny Grauman of Cormark Securities. Please go ahead.
Hi, good morning.
Question on your indirect rate sensitivity yields falling to multi year lows and I'm wondering if you could just review your indirect exposure as you see it in specifically.
Talk about your ability to offset those pressures on earnings and then also what.
The current yield environment means for your portfolio optimization efforts, if it has any implications for that.
Yes. Thank you many Roy Gori here I'll start and then I'll hand over to the to talk a little bit about the portfolio optimization efforts and activities.
I think that the overarching comment I'd make on interest rates is that low interest rates is not a new phenomenon for us and we've been in a low interest rate environment. Some time now and we've demonstrated over quite a long period of time strong returns and profitability. Despite that environment. It's also important to note that we have significantly reduced our sensitivity to interest rates over the last 10 years in fact interest rate sensitivity today is 110th of what it was in 2008.
It's clear that the industry, our industry benefits from higher rates, but we do have.
Some ways to mitigate and they include hedging repricing scale and growth as well as cost management. So we feel that.
We are well equipped to.
Deal with a lower interest rate environment and again, that's going to be the continued focus that we've had over the past and it will continue to have.
Kevin you may want to talk a little bit about the activities of portfolio optimization ship sure. Many.
On the portfolio optimization transactions, we have not really seen a change in market appetite.
Interest rates are just one of the very best many variables to consider when evaluating transactions.
It's really important to note that our legacy blocks are backed by seasoned assets.
And so we're going to continue to pursue both organic and inorganic initiatives that are in the best interest of our shareholders.
And this is Phil just to supplement on the interest rate question to give some.
I will draw your attention to our sensitivities from an accounting perspective, you'll be able to see from our mdna that the sensitivities are modest.
There is also some information in our embedded value report, which is a is very relevant.
And that what that shows is that the impact on embedded value of 50 basis points a parallel shift in the yield curve is in the order of 850 million to $900 million and the impact of that really from an earnings perspective would flow through over a long period of time through through lower defense.
One other area to draw your attention is that our.
Sensitivity disclosures are point in time disclosures based on the balance sheet. We will also be an impact on.
New business gains on a Canadian I for our spaces and the business value of lower rates, but as Roy said one of the tools, we have at our disposal as the ability to reprice, so whilst whilst the can be an impact on the business gains I see that as a short term impact during that period that we go through a repricing exercise.
Thanks for that and then just as a follow up just wondering if it's a low rate environment will impact your ability to hit your medium term targets in any way or is there any concern of that especially the the core EPS growth target.
Some may we remain committed to our core earnings per share target and quite frankly, all of the other targets that we established at Investor day. So we were not walking away from any of those commitments and targets that we've established absolutely. This is Phil again, and just to just to provide some granularity there.
We have set out the 10% to 12% target, we expect approximately six percentage points of fat to come from.
The emergence of Inforce profitability.
But then to supplement that we have the impact of our expense program, which his contribution to the bottom line, we expect expect.
Higher rates of growth from wealth and asset management.
And also the contribution from our new business, we have growth businesses around the world that we expect to contribute to earnings. So we feel good about the tense 12%.
Thank you.
Thank you.
The following question is from Humphrey Lee of dialing and partners. Please go ahead.
Good morning, and thank you for taking my questions. A quick question about Japan in core earnings. So I fully appreciate that the suspension of coli sales would have an impact on new business gains on the hurting deviate the results in the quarter well if I were to look at the quarter over quarter drop in core earnings for Japan, or even comparing to the new business gains in Asia for this quarter that they're calling seems to be greater than the new business gain contributions by the coli product that you laid out in the first quarter presentation.
I was just wondering other than the suspension of coli sales were there any kind of sales impact in Japan that could cause a lower new business gains and low course, earning a core earnings in the quarter.
Thanks, I'm sorry, this is anil again.
So so you're right that we did see a decline on the new business gain line, primarily on account of the temporary cessation all flock early sales in Japan that impact on a post tax basis up from a year on year basis was about $10 million on a quarter on quarter basis on a post tax basis, it was $45 million.
In addition to that we had to all involved mainly strong response.
Two our Riyadh shy as a product in Hong Kong via Giants is the voluntary health insurance scheme as the tax advantage scheme that was recently introduced by the government off our Hong Kong odd to motivate us citizens of Hong Kong due to save and kind of didn't get insured afford for health protection and we introduced a couple of value propositions. They got some very strong responses are all the margins on on these products are pretty healthy. However, they do create a first year strain as and that's pretty much. What you are witnessing on the new business.
New business line. So it's largely a combination of the lowest quarterly sales as you alluded to a combined with the positive response that we got to be a child's Humphrey ROI you. Let me just add we spent a lot of time talking about the strength in the diversity of our franchise, both globally and within Asia and I think this quarter is a classic example of that diversity, you really coming to the for Asia was able to demonstrate and deliver 12% core earnings growth. Despite some very significant headwinds as mentioned previously so we feel really good about the strength of the franchise and the continuing focus on diversifying our business and as Anil highlighted whilst we have some challenges in Japan, which we've seen some more recent relief and as Anil noted, we'll we'll see that come through.
Over the next coming quarters, we had the strength of our Hong Kong franchise and other franchises that are that are also lifting at the same time.
Fair enough.
Shifting gears looking at kind of a kind of legacy business actions to date. So in your Investor Day presentation, you kind of highlighted hundred $33 billion of legacy life and annuity reserves I was just wondering how much of that have you been addressed through your legacy actions to date and then also kind of on the the SEC funds in Canada in Canada like.
How much more can you pursue those kind of transfer offering to further release capital.
So Humphrey it's maybe here.
We have oh in terms of.
The amount we were talking about 23 billion of capital backing a legacy blocks of business at Investor Day, and you can see where we're at in terms of the the capital at least so far.
Over 4 billion.
No.
In terms of the transfer program in Canada, We actually think this is actually just one of the first of I think many that will run across various product lines in both Canada and the U.S., we really like buyer and transfer programs.
Does it create an opportunity for win win solutions for our customers and the company.
And so in fact, we are working on a full slate of these programs.
In which we'll execute in coming quarters. This includes.
You are structured settlement exchange program pilot that we launched in June .
You ask Universal life secondary guarantee a pilot program that will launch later this year or early next year.
A U.S. variable annuity GMWB program.
Around the same thing timeframe late this year early next year similar to the Canadian program, we have an LTC return of premium cash a program that we are.
I have just recently for the Florida.
And other programs are being developed so to be Frank I think we're we're just scratching the surface on them.
Thank you for the color thinking.
Thank you.
The following question is from John Aiken of Barclays. Please go ahead.
Good morning, and I'm going to ask a question about the growth in agent agents in Asia and I apologize if you've addressed this before we've seen some very strong growth in would you classify as Asia other.
In terms of the numbers can you give us some more color as to what's going on what's actually driving these increases and his manual wife actually shifted its philosophy because my understanding was that manual I didn't want to just grow Asia agents that only had one or two products, but wanted to actually have true consultants in the business are we shifting away from that or are we actually attracting very strong agents in the region.
Thanks for the question. This is a male middle again, so we actually believe that one of our key strength in Asia is the diversified nature of our distribution. So we have a strong agency we have great bank a partnership or partnerships. We have eight exclusive anode all hundred our bank partnerships across Asia, and we're also kind of gaining strength in our in our broker channel I guess the.
Agency focused on growth of agency has been an ongoing focus for us and now it's kind of starting to translate into the growth that you are witnessing across a wide range of markets and Hong Kong in specific I do want to point the fact that.
It's not quantity over quality it has to be both quantity and quality and I guess, what what that the couple of evidences of that so one we are now number three when it comes to NDRC rankings. We were number five a couple of years back and even if you look at our active agent ratio or rather active agent count that active agent count is also increasing at a similar pace as compared to our agency ignored. So agency again is an ongoing focus again I wanted to emphasize the fact that.
Then kind of complement that actually helps us gain more strength given the diversified nature of our distribution in Asia.
And then the 20% or almost 20% year over year growth, we're seeing in Asia. Other is that across broadly across the region are there are there any other geographies that are.
Actually experiencing higher growth.
Yes, So I guess the agency heavy markets are typically Vietnam, a China, where we started and are now witnessed double digit growth of our Philippines again, we've kind of seen some strong growth. So those are typically the agency heavy markets, where weve experienced some solid growth on agency.
Great. Thank you Ritu.
[noise].
Thank you.
The following question is from Steve Terrile of a capital. Please go ahead.
Thanks, very much maybe starting with the question on on the wind business.
You had a nice recovery from the weak Q1 in terms of flows.
Holly Paul your business is obviously market dependent but how are you feeling going into the second half are you confident in getting back to positive flows in the absence of a big downdraft in markets I hadn't how did how did flows trend I guess through the quarter.
In Q2, and maybe what are you seeing early Q3.
Great. Thanks, Steve its Paul.
Yeah as we as we look at the quarter I guess and you look at the results you will see we continue to have positive flows in Asia in Canada, and while they were negative in the U.S., we're actually quite pleased with the progress we're making there we continue do continue to see improvement.
In our us retail business in the U.S. overall from what we saw in Q4 to Q1 and Q2, considering it was a relatively weak quarter for Q2 active flows in the U.S.
We also have seen our sales team pivot to a lot of the funds that are selling our one of our funds intermediate bond fund in the U.S. is the AUM is up 20% year over year and we recently just launched some new products to fill some of the gaps that I mentioned on previous calls in particular short duration bond fund that should give us some traction in future quarters. So we feel pretty good from from that perspective, and I would say overall, if you look in aggregate.
There was also some large case impacts this year, we did have a large.
Termination, our Canadian retirement business that was 1.4 billion and that's going to happen from time to time in skew the flows both positive and negative.
Lots of an earnings impact typically in the large case, but it will kind of impact us in any given quarter.
If I just take a step back and look at the franchise, we have a very strong market positions across our different businesses, our investment performance and strong and I guess more importantly, because of the global footprint. We have in the diversification of our business line, we feel we're well positioned to capitalize on a number of the you know the very meaningful global trends, whether it's you know the global retirement funding gap the growth of the Asian Middle Class you know, we're seeing a shift from cash to more traditional investments and lot of emerging markets.
And frankly, the integration of ESG into core investing so we feel we are well positioned to ahead of those trends in terms of our footprint and have lots of strategic choices for the business to continue to grow and I guess the last point I'd make is we also have an ability to leverage the global scale with our business coming together to help maintain margins and continue to offer competitive products.
And in the past in the U.S., you talked about outflows from fixed income and.
Losing those because you didnt have a short duration bond fund offering it was that in place for the full quarter and like has there been more of that or is that stemmed.
Yes, so the short duration Bond fund was just launched and it'll take us a little bit of time to get it on the shelves of our large distributors. So we wouldn't expect to expect to see a meaningful impact this quarter, but we would expect to start seeing in Q4 and as we head into next year.
The intermediate Bond fund, we did have and we started shifting the sales team towards that when we saw what's happening in the Q4 and we are seeing some traction there, but it was from a relatively low base. So the team is doing what where they can we are shifting to focus where the flows are and feel we are well positioned as we move forward.
Okay. Thanks, and second question on on Asia.
You mentioned in the notes a new online insurance platform.
You've undertaken with DBS in Singapore, just wondering like is that a digitization effort around what you had been doing with DBS in terms of the bancassurance.
Activities or is this a new online offering sort of across Singapore that you just are undertaking with DBS.
So this is nothing again, so yes, we are buying a lot of effort and don't self digidyne digitizing our processes as well as.
Coming up the direct to customer processes, thereby we make it very simple for customers in Singapore.
To be able to access and by.
Insurance products online I guess, the reference that Youre, making is an effort in that direction. So this is three to flow hopefully process straight through.
And within seconds, the policy would be in your in your inbox and.
This is pretty much.
Early days, but we aren't going to starting to see some good response.
And to me the customers are reacting to direct to customer you don't straight to processes that we have launched the DBS I also wanted to emphasize that one of the advantages that we have with DBS partnership is that you pretty much get access to every single household in Singapore.
And if you combine that and make things easier for customers to buy I guess that pump combination could be a potentially strong combination and then you would like to accessing up we'll market going forward.
I'll just reinforce one point that that an ILS alluding to and that is that this is an interesting pivot for us in the bancassurance space traditionally bancassurance sales are done through the relationship managers of the of the bank and its typically done in the office of the bank and with these new digital tools, it's giving us access to all the customers in the bank that don't come into the branch and frankly don't speak to relationship officers. So they'll get a pop up when they go online to do their online banking or quite frankly, even if they just reviewing their statements. So it's really exciting for us is still very early days, but we think we can gain some tremendous learnings from this with DBS and as possible expansion and extension of that to our other bank partnerships as well.
What are the other things that we've done the DBS is a recent addition to the customer dashboard. So for example today of DBS customizable at the kind of log in online and see their state beds. They can now see debt insurance relationship, which is obviously driven by driven by us. So I think thats. A invaluable addition, and if you combine that with making things easier for customers I guess that could only kind of augur well for on from a direct to customer and digital sales perspective in Singapore.
Great. Thanks for the time.
Thank you. The following question is from Sumit Malhotra of Scotia Bank. Please go ahead.
Thank you good morning.
A couple of interest rate related questions to start first for Phil on the you are our assumption.
So you reduce this in 2016 and know a you'll you'll do so again next quarter in 2019.
There's a there's a comment in the mdna that.
Based on your conversations it sounds like this.
Assumption will not be revisited until the.
Industry transitions die for 17, so irrespective of what happens with rates, where Ah where three years away a at the earliest from from this being looked at again.
So assuming its Steve I think I'll I'll take that question.
So that when the actuarial standards board reviewed <unk> bass and they look over a very long period of time you. Originally they anticipated only adjusting every five years or so they've done it a bit more than that but they when they published the guidance. They spit explicitly wrote that they did not anticipate further updates prior to the adoption of AI for 17. So that's what we're basing our comments on we don't expect further updates before I address 17, and that's 20 to 22.
Yes.
And Uh huh.
At this point from where it was for that.
The the second rate related question I guess, a a phrase it this way is.
In regards to your your ALDA portfolio.
Over.
If I go back many years at many life had talked about.
The loan duration as the alternative long duration assets as being a differentiator for further investment portfolio at least early on when ROI. When when you took the seat we.
The actions we had heard was to move to reduce some of this portfolio of although you said quite explicitly at the time that we aren't planning to take this materially lower and that's been the case in fact, the the book has continued to climb so I don't know this or ROI or for Scott, but as we.
Think about a another leg down in rates here does all to become a more important component of the of the menu life investment strategy again or.
Is is the capital impact associated with this portfolio still something that you're looking to reduce.
Tom Let me thought somebody then I'll hand over to Scott. So from the outset I'd say the older is an important asset class for us it's an asset classes delivered.
Great returns for us over a longer period of time and.
Really matches our liability.
Portfolio really very well from a tenure in duration perspective, we did rightsize the portfolio through actions that we took in 2017 late 2017 and subsequently.
But we feel good about where we stand today, but let me, let me hand over to Scott to provide some more commentary on that.
Yeah, Hi, so my.
So we've we've had the strategy for a long time, we've been in the all the markets for a long time and have built upgrade capabilities. So we do sometimes get questions is our strategy a reaction to the low rate environment I think as Roy mentioned earlier, we've been in a low rate environment for quite a while and Thats really not the case. He suggested you know we think it's just the appropriate way to invest for long tailed liabilities sort of regardless of the interest rate environment. So.
I don't really see any changes to our strategy based on.
Rates being a bit lower and I wonder if they go further lower I really don't see an adjustment to that strategy.
And then last one for me is a is around capital deployment. So this this is likely for the Chief Executive Officer.
It wasn't that long ago that.
Buybacks ranked quite low on on the menu life pecking order when it when it came to capital deployment and.
Over over the past three quarters the company as repurchased close to 50 million shares. So we're hearing now about some potential.
Opportunities from competitors in Asia, maybe looking to to shift their their portfolio with the balance sheet progress. The company has made both with like minded leverage.
How are you thinking about external capital deployment for Manulife at this stage or.
When you look at the.
At least I'll speak from from my seat. This some of the frustrating macro volatility in the stock does share repurchases, just given where your valuation is still rank.
At the high end of where you want to put the excess capital of manual effect.
Yeah. Thanks for that question. So I mean, I'd say you know I guess from the outset that you know, we're really pleased with the capital position and the focus that we've had in this space the light cat ratio at 144.
Represents 25 billing capital above the supervisory target and despite that robust capital position in our core our ALLETE remains really very strong at 12.7% I'd also say in parallel with all that we've been aggressively looking to reduce our leverage ratio and our leverage ratio now is down to 26.4, which is significantly down to where we were well from where we were last year, which also provides us with tremendous financial flexibility doesn't know how to redeploy that capital you know, we're going to be pretty consistently that messaging here.
First and foremost we want to continue to improve our leverage ratio. We've got a medium term target of 25% and we see a path to that goal.
In the not too distant future.
We're going to continue to repurchase shares we think that our stock is undervalued and repurchasing shares is in the best interest of shareholders, we're going to fund organic growth and opportunistic. We will also look at inorganic opportunities and we'll do that very strategically, though and I think the good news on that last point. Some of it is that to deliver our core earnings per share goals, we don't need inorganic opportunities and I think that puts us in a in a.
In an enviable position now we will still look at them and I think the strength of our capital positions means that where we see an opportunity that fits strategically what we're trying to do and if we can leverage and generate good value we will certainly.
Be interested.
But we don't need it to generate our goals and our targets and we want to make sure that we're not just making acquisitions for the sake of a of doing a transaction.
Thanks for time.
Thank you.
The following question is from Doug Young of day. Her then capital. Please go ahead.
Okay. Good morning, So Steve just wanted to go back to long term care insurance and I think in your comments you mentioned.
Increased claims data that is giving you comfort on if you in a few areas. So I just wanted to go back and see because I know I think in the past you've kind of given some numbers around there is about a million policies outstanding about 30000 around claim.
Just wondering if there is an updated data that you could give around that and then 30% to 40% of claims are really related to Alzheimer's and dementia have you seen that kind of a pivot in that and then just you know the average age of the book.
If you can update us a little bit around that just trying to get a sense of that increase claims that and what that's telling you.
Sure Doug it it's.
If you look at the increase in data as I mentioned in the prepared remarks, it's it's in those older ages that really drives the ultimate claims costs and that's where you know.
When the block was younger we just didnt have the data the industry Didnt have the data on which to sat assumptions. So on that older age block over age 80 or 85, we're seeing in this study almost double the amount of data that we've had to study in the past so that that does increase the confidence.
That level in the reserves and that that's really what the comment is about.
And how much of your book would be now.
Over 80 85.
I don't have the stats you know we provided the stats at Investor Day in June .
In that presentation, we can refer back to that we can update you with the disclosures that Q3, but its progressing gradually from that position that we disclosed that at the last investor day.
Yeah, maybe I can follow up and then second just and maybe this is for for ROI are now you entered the India asset management market through a JV.
We've had discussions in the past about your potential interest in India.
Just wondering what your strategy is there and then you know the natural.
It would be what is your strategy or are you do you have any interest in entering the India insurance market I know, there's been a lot of challenges in the insurance market in the past it seems like it.
Pivoted and taken a positive turn but just wanted to see but your.
Inorganic interest in entering that market place. Thank you.
Yeah.
So thanks, Doug we're obviously very excited about that.
A new joint venture partnerships that we've announced we think there's a lot of opportunity let me ask Paul.
Who runs a little when to share a little bit more about that and then I know can provide some commentary as it relates to the insurance market in India, great. Thanks, right. Yes, we're very excited about our entry into India. Its a very attractive market with very strong growth prospects, particularly in the wealth and asset management space and I guess just to give a little context of may hinder our partner there are recognized and trusted brand with a strong customer base across I think India, they're very high integrity prior and frankly have a history of successful partnerships with large.
Foreign companies and they have a very similar culture to awesome shared values around improving the lives of our customers. So the fit from a culture and just commercial enterprise perspective is very strong we really complement that partnership with investment management expert expertise, where cios year, something we can bring to the relationship as well as our ability to build wealth and asset management business and a lot of emerging markets. So they've seen what we've done in other countries look at the capabilities, we have and feel like it's a great partnership as we do with them. So we're quite excited about that and again just positioning ourselves in front of some of the larger trends, we see in the wealth and asset management space I'll pass over to Neil maybe just a comment about the lifecycle.
I think India is always going to be an interesting market just kind of the scale the demographics and the potential that we have in the market.
It's quite quite interesting I guess the challenge has been some off the shelf holding a rules in India, having said, which we believe.
Given the newly elected government be hoping that that might result into further liberalization, which would make the entry into India, an interesting proposition for us I think whats are aiding our focus right now is the joint venture partnership I think landed a is a fantastic brand. If you then combine that with the Golden investment capabilities that we have it's a solid partnership and in many ways. It will allow us to test waters in a market like India and if the rule is about to change then we may want to kind of explore the opportunity on the insurance side in the future.
Essentially you have to be able to have over a 50% ownership stake in the JV partnership on the insurance side to really be interested in the market is that a fair characterization.
Yeah, I mean that would be the preferred option they are up and the other objectives is about the right partner the right business model.
A lot of existing insurance plans in India. So we have to they don't feel considerations.
To evaluate before we kind of decide or the opposite or the the possibility to explore the opportunity uninsured into India, yes.
I would just summarize by saying that our priority and focus right now is to get our JV in the wealth space to work, we think that's an exciting opportunity, but that could provide a springboard for other opportunities and we'll see how that pans out.
Okay. Thank you.
Oh.
Thank you.
The following question is from Mario Mendonca of TD Securities. Please go ahead.
I just have a couple of things I want to clarify no first the.
The new business margin in Asia, and I'm, not referring to embedded value im referring to just taking new business and comparing it to the annual premium equivalents.
That ratio is down a fair bit relative to the last couple of years I suspect. This is really related to the voluntary health product in Hong Kong is that fair.
That's correct. So that did create an extra level of strain in quarter, two and you'd expect that to continue for for I guess for as long as this product remains fairly popular and and actives.
Yes, as I mentioned.
The new business sell margins on via guys are pretty healthy and.
We just kind of into the first three months of offering there. So we believe that based on the response that we've kind of gotten caught up to that is likely to kind of continue into foreseeable in the foreseeable future. Okay, and then perhaps for Steve and the what creates the strain in this product is it the distribution cost or is it because this is a long term product with a lot of guarantees associated with it.
Hi, Thanks, Mario it's a it's a yearly renewable so under the standards, we have to hold the unearned premium reserve. So were not deferring acquisition costs as Neil said, we expect the margins on this product could be quite good. So while we do incur the upfront strain it will contribute in the future quarters, and we're quite happy with the product. My I also wanted to emphasize one more thing I mean, if you look at the Hong Kong growth. The VR tires is only about 50% of the go there are lot of other value propositions that we have in Hong Kong, we have a diversified set of offerings and that continues to grow as van and as you can tell from the growth that we have seen in our agency. The the strength that we are Oh, we haven't accounted for DBS partnership plus the strides we are making on the broker side.
There are other opportunities in Hong Kong other than to be a giants I just wanted to emphasize that.
Now how do you get the just going back to the firm on how do you get comfortable with the new product like this with guarantees I. Appreciate your yearly renewable so you can reprice, it but what well how do you get comfortable with the new product like this.
Well I think we look at the underlying need the strength of our distribution and.
We're not we're not taking material long term market risks, so where we like this business we were happy to write a.
Lots of this business and also.
And also my buyer. What this does is it allows us to kind of build relationship and deepen relationship with both our existing and new customers. So if you want to acquire discuss.
Our customer to be a child, which is an attractive proposition. It also opens up avenues to be able to upsell and cross sell different value propositions to the plans going forward. Okay, and then real quickly on the assumption review, Steve you indicated that you released some p. fats or you expect to release, some p. fads associate of the long term care business as part of the assumption are you yeah, what would I be correct in saying that that number is not very large in because it's a very long term business. The annual impact on your expected profit shouldn't be something to think about that much.
That said that's a good way to look at it Mario wallet side, a driver of some of the movement that were seeing in the LTC review the changes quite modest relative to the size of the LTC business.
When you look at either our P. fads.
Over $10 billion.
We expect that the P. fads will still be over $10 billion. After this this change so yes, the run rate earnings impact would not be notable that covers it. Thank you.
Thank you. The following question is from David Mann of Evercore ISI. Please go ahead.
Good morning.
Just just a question for Steve on the long term care review.
Just wanted to get a sense for the commentary around incidents being better than expected I was wondering specifically on the older age cohort that you have I guess more experience now what exactly are you seeing them on incidents there specifically.
Yes so.
The comments that I made in the prepared remarks were around that.
What we're seeing on incidents is some lower level of.
Of customers going on claim that are in our valuation assumptions I think it crosses most of the ages.
I think a key thing at the older Ages and one thing that we really watch out for on trends is the length of stay.
Right. So once people qualify for their benefit start receiving them how long do they stay on claim and that is not driving our results were seeing quite stable experience there and that.
I think one of the things I get asked about a bit is what's what's driving that and Doug actually asked earlier about the alzheimers experience that we're seeing.
Alzheimer's is getting detected in diagnosed earlier, but it does not necessarily mean that people are needing long term care services earlier and so that's I think a key driver in terms of why we're not seeing an increased length of stay.
And we'll provide more color I in Q3, when we disclose that the final results of the review.
Okay great.
That's that's helpful. And then I guess just thinking about I know this is on a.
On a Canadian IRS basis, but just thinking about on I'm, just the legal entity basis and you Matt.
Statutory cash flow testing.
And it looks like you guys only have I think around or.
About.
$23 billion of Stat reserves in the U.S.
If there is do you foresee any need to add to those from cash flow testing reserves and if so.
Is that just a mere transferring assets out of Canada into the U.S. or could you I guess just talk about your expectations around that.
Sure I mean do I do asset adequacy testing every year has required on our total business and on the LTC block stand alone and while the margins are not as large as the margins on the IRS basis, we do still have margin material margin on any I see basis. So we don't see any any erosion to RBC levels or any need to find anything related to LTC in the U.S.
Okay, great. Thanks, and just a question just on <unk>.
If I look at core earnings before tax on a constant exchange rate basis, they were up.
Just about 2% year over year.
Is this the kind of growth that you'd expect to continue until until police sales came back or come back in Japan.
Yeah, Hi, David This is let me know.
So let me just clarify that right so the quarterly earnings.
Our before tax on an ex Japan basis grew approximately 10%. If you will then to adjust this for minority interest impact related to tax that are included in this figure the growth is actually on an ex Japan bases in the region of about 15%. So I think.
There are some noises that that that and then I guess.
If you look at on an ex Japan, and then X and Y basis, the growth is actually 15%.
Okay, and just a follow up there.
I saw the annuity sales were down in Japan.
Around 16% year over year ex FX.
Is this something understood just a broader question around FX products in Japan, because I think thats around the other half of your sales with the other half being wholly.
What's your outlook here on on the FX products because.
Some of your competitors have said that these are I guess a bit less attractive to consumers just given the current.
Foreign exchange and interest rate markets.
Yes, David so so.
On an annuity sales you're right that the annuity sales were down 16% having sandwich.
The annuity sales phenomena is not only the stricter Japan I guess, it's more in response to the volatility that we have seen the market's pretty much kind of planning from the back end of last year. Our vision that if you look at if FX annuity sales were only down by about 8% and if you then look at FX sales, the only which is a large component of our nonqualified business that actually up on a quarter on quarter basis by about 1%. We again believe that FX products are going to be a pretty kind of integral part of our value proposition makes a in Japan on something that we've kind of seen and ongoing demand from customers. More importantly, the regulators have supported that just kind of given the yields on foreign denominated product versus the local denominated products. So I'll, even notwithstanding some of the.
Macro level changes, we believe that there is an ongoing plays for FX products in the product mix that we are going to be offering to our Japanese clients.
Great. Thanks for the answers.
Thank you.
The following question is from Tom Mackinnon of BMO capital. Please go ahead.
Yeah. Thanks. Good morning, just wanted to continue on the capital deployment theme I get that you don't have to do an acquisition to get your 10% to 12% medium term.
A core earnings growth target.
But to it if you look year over year, you are losing about $40 million post tax.
Per quarter as a result of your.
Ah portfolio optimization strategy here.
And that's probably in the area of you know two and a half maybe 3% of your earnings.
Oh are how are we how do you look at replacing that in terms of trying to get back to that or to get to that 10% to 12%.
Earnings growth target you you upped your NC I'd be at a 5% would you be comfortable kind of moving your.
In moving your share repurchase is up to you know to compensate for this loss of earnings as a result of this portfolio optimization.
Yes, Tom really here, so again, I'd say that the focus from a capital redeployment perspective, we will continue to be the prioritization of the items I mentioned earlier leverage.
You know repurchasing shares and organic growth and I'd. Just again, just reiterate that we've been able to demonstrate core earnings per share growth in fact year to date. This year were at 11% growth versus last year. Some of the driving force behind that are the growth of our sales in fact year to date, our new business value growth, it's been 23% so the organic.
Power of the franchise has as being very strong and that's contributing to that uptake. We are obviously benefiting from the repurchase of shares and we remain committed to repurchasing shares and Thats. Obviously also helping our earnings per share growth upwards per share growth. So we feel confident that we can deliver against our core earnings per share growth targets.
Through the deployment activities and the efforts that where we're placing.
And Tom This is Phil just to add a bit of granularity on some of the short term capital deployment options. The options at our disposal Roy talked are about to the lowering leverage to get to attempt to 25% medium term target, we actually have $1 billion of debt that becomes available for redemption in the fourth quarter. We haven't made any decisions with respect to that that that maturity at this point.
But it's certainly an option to deploy a billion dollars of capital.
And then further to that in the first quarter 2020 , there's another $500 million issuance that would be available for full potential redemption. So I think in the short term, we have various options to deploy capital by strengthening the balance sheet or continuing the NC I'd.
I'll just add to the portfolio optimization activities that you referenced also has been a real good trade off for us and quite frankly for the shareholder.
It's been about a 160 million earnings on an annualized basis.
ER for $4.3 billion, where the capital, which we freed up so that's a pretty good trade off in terms of return and the ability to actually a re purpose that for the benefit of shareholders. We feel is a is quite strong.
Okay. Thanks for that and the second question has to do with any.
Inorganic portfolio optimization plan for long term care.
Can you talk about any progress or what you're seeing in the marketplace. We did have one.
Transaction, a while ago, what's happening in the market place there what do you or what are you seeing and are you doing anything to try to.
Transact on the long term care Inorganically.
Yeah. So let me off the beat to talk talk to that.
Hi, Thanks for the question.
So yeah, you're right, we did see that the transaction last year.
From our end, we're focused on both organic and inorganic options on long term care whatever is in the best interest of our shareholders. So we'll pursue.
Hi, there.
To make great progress on the organic side.
On the inorganic side, we continue to see that there are parties out there that are interested in transacting.
No it's something that obviously, we need to look at.
I cannot comment further on any specific.
Is it a lower rate environment is that been a a deterrent to their interest we haven't seen that.
No again as I said earlier the interest rates are only one variable to consider in evaluating the transaction and our.
Legacy block, including our long term care block is backed by seasoned assets.
Okay. Thank you.
Thank you.
The following question is from Darko Mihelic of RBC capital markets. Please go ahead.
Hi, Thank you for taking my question. So late in the call just I'll try to be quick.
First in your Mdna.
You mentioned in the U.S. business that you continued momentum to improve.
The new business profitability in brokerage and international channels. So the question is.
When I look at the U.S. business and I see the increase in impact of new business like 34 million versus $3 million last year is the vast majority of that coming from the international piece and when you say building momentum do you think 34, new business gains can be improved upon and how significantly from here.
Thanks for the question is maryanne.
In terms of the new business value. It is a combination of the brokerage and the international but there is a big piece of it that is the brokerage piece, we've been focused over the last couple of years of trying to turn around the profitability in the brokerage taking a number of different actions.
To reduce getting rid of businesses like Holy Moly.
Getting rid of products that had been unprofitable looking at our distribution and making sure that they are being.
Factor in terms of reorganizing the distribution and then driving expenses out so all of those things combined.
In addition, we've had an increase in sales has been driving the new business value for us and we're really pleased with the actions that we've taken in the results and Todd we still think that there is some upside.
And we're continuing to focus on not on the on the NBV side.
You commented that the NBV has year over year. If you look at this quarter, it's pretty much everything we did in 2017 for the full year. So we're really happy with the progress we've seen.
Okay and a question on the balance sheet there is.
The significant increase in derivatives quarter over quarter year over year can you just.
And provide some color on that and what impact that might have going forward.
Darko This is Phil so the increase in derivatives that you see on the balance sheet Rudy is reflecting the impact of the evolving market conditions over the course of the last year. There's no no material change in this the hedging strategy that we have pursued.
Okay, all right. So he and I, we do you see increases in notional amounts over time as well.
As part of our hedging activities, we do there on derivatives rather than.
And and threaten them completely offset them or.
And every so often we actually go through a compression exercise, where we actually both.
Thank you and then lastly.
With the actions you've done two you've taken to reduce all the I'm surprised that the sensitivity to a change.
In all the assumptions is going up can you describe why that is and why we shouldn't expect that sensitivity to actually decline.
Hi, it's Steve I can take that question. So the the marginal impact of reducing our all the portfolio did reduce that sensitivity, but the business continues to grow the balance sheet continues to grow both on the on the in force, but more importantly on the on the new business and where we deploy all the on our new business is really now primarily in products, where we pass through the experience of the returns to our customer both favorable and unfavorable so yes. We would have we saw at the margin we did see a meaningful reduction in that sensitivity, but it's masked by the continued development of the balance sheet.
This is Phil one supplement to that prior to the commencement of the.
All the portfolio strategy change.
We were in a different us tax regime, so U.S. tax rates have come down notably in our disclosures sensitivities up post tax so thats, an effect being a headwind on a sensitivity basis.
Okay. Thank you.
Thank you.
The following question is from Paul Holden of CBC. Please go ahead.
Thanks, I'll just keep it to one question for interest of time.
Regarding the OEM business EBITDA trend in the U.S. looks different than than Canada, and <unk> and Asia. So just trying to get a sense of whether that's due to the industry pressures are all well.
Aware of.
Or theres, some kind of incremental costs going through that geography related to the rollout of new product that you've talked about.
And then tying that together when should we expect EBITDA margin trends to to improve.
Yes, Thanks, Paul It's Paul here, Yes, the primary driver that we use as a business mix shift.
Really what were the market has moved here is that shorter duration fixed income relative to some of the risk that the model changes you know change where we had some redemptions in Q4, so it's a little bit of a business mix in the us in terms of looking forward on when you'd expect that return I think it's really a question of when the markets would.
You know the investor appetite just with some of the volatility our view is just to position the portfolio and make sure. We have the right investment solutions for for retail investors to independent of what market cycle. We're in.
And again, we'll continue to drive global leverage to try and maintain margin there as we look forward.
Okay. So you don't think you don't believe this is ongoing secular change in your ability to maintain margins you think there is a more.
Temporary in nature.
No we feel quite good about our ability to manage expenses and drive global leverage and frankly, just what the products. We have you know our view is that somewhat temporary just because of the market. We're in and the investor choices of types of fund, but we feel quite optimistic about our ability to maintain margin and that continue to grow the business.
Great. Thank you.
Thank you.
The last question is from David mode Madden of Evercore ISI. Please go ahead.
Hi, Thanks, Thanks for taking my follow up just wondering.
All the return assumption.
I think it's 9.5%.
Given the low rate environment, I guess are you guys thinking about reevaluating that return assumption.
Just given where we are on on risk and potentially lower go forward returns.
Hi, Scott.
As you know we did reduce those assumptions.
Was it last year Steve.
I think that we reduced them before like a year before.
And I you know looking at where we are seeing transactions in the marketplace I'm comfortable with where those assumptions are now.
But those are things we look at every year.
And they are very long term assumptions were not up to react to.
Short term changes in the market so.
Bottom line, we will continue to reevaluate them at this point I think we're comfortable with where they are.
Okay, and just a quick follow up what what portion of the order book is backing the long term care a book in the U.S.
The way the way we look at it is that the all the backing our legacy or long term businesses. We tend to look at those investment strategies in aggregate. So we don't have as an investment strategy for LTC in particular, it's more we group. These long term type businesses together so.
That U.S. block in Canadian block, they've got consistent levels of all the in the portfolios.
Okay. Thanks.
Thank you.
This concludes the question and answer period for today I will now turn the meeting back over to Ms. O'neil.
Thank you operator, we'll be available after the call if there any follow up questions. Thank you for joining us and have a nice morning.
Thank you. The conference has now ended please disconnect your lines at this time, we thank you for your participation.
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No as you put all this it confirm also that the whole piece.