Sun Life Financial Inc. (NYSE:SLF) Q1 2020 Earnings Conference Call May 6, 2020 10:00 AM ET
Leigh Chalmers - Senior Vice President, Head of Investor Relations & Capital Management
Daniel Fishbein - President, Sun Life Financial, United States
Jacques Goulet - President, Sun Life Financial Canada
Leo Grepin - President, Sun Life Asia
Dean Connor - President & Chief Executive Officer
Kevin Strain - Executive Vice President & Chief Financial Officer
Mike Roberge - Chief Executive Officer & President, MFS Investment Management
Kevin Morrissey - Senior Vice-President & Chief Actuary
Randy Brown - Chief Investment Officer, Sun Life & Head of Insurance Asset Management
Conference Call Participants
John Aiken - Barclays
Steve Theriault - Eight Capital
Doug Young - Desjardins Capital Market
Gabriel Dechaine - National Bank Financial
Meny Grauman - Cormark Securities
David Motemaden - Evercore ISI
Sumit Malhotra - Scotiabank
Darko Mihelic - RBC Capital Markets
Tom MacKinnon - BMO Capital
Mario Mendonca - TD Securities
Scott Chan - Canaccord Genuity
Good morning, ladies and gentlemen. My name is Dikitriya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q1 2020 Financial Results Conference Call. All lines have been placed mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.
The host of the call is Leigh Chalmers, Senior Vice President, Head of Investor Relations and Capital Management. Please go ahead Ms. Chalmers.
Thank you, Dikitriya, and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the first quarter of 2020. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com.
We will begin today's presentation with an overview of our first quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean's remarks, Kevin Strain, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions on today's call.
Turning to slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events.
And with that I now turn things over to Dean.
Thanks, Leigh, and good morning, everyone. Let me start with a heartfelt thank you to all of our frontline health care workers and those providing essential services. Their response to this crisis has been heroic and we are eternally grateful. I also want to acknowledge the swift and bold actions taken by governments around the world to help bridge jobs, families, communities and businesses through to the other side.
Turning to slide 4. Here's how Sun Life has been responding to the COVID-19 pandemic. Our employees and advisers quickly mobilized to work-from-home to ensure that we continue to be there for clients. We were able to get our trading desks and call centers stood up immediately and today 25 -- excuse me 95% of our people globally are working from home. Client service has continued to be strong.
We rarely talk on these calls about the functions that really act as the central nervous system of the company, including finance, risk, actuarial, ALM, legal and compliance, HR and technology. These teams at Sun Life have deep experience and expertise. They are the reason why we were able to move to work-from-home so seamlessly. They have adjusted rapidly to the new norm, for example, with our first and perhaps not our last virtual quarter-in process. This remarkable effort is reflected by all of our employees and advisers around the world. Their laser-like focus on clients, their resilience, their capacity to care for one another has been truly amazing to watch.
We've rolled out free virtual health care services to our Canadian employees. We also recognize that mental health is extremely important during these trying times and have created numerous resources for employees and families to support their mental well-being.
Our clients need us more than ever. And we're doing our very best to accommodate and anticipate their needs. The pace of change has been tremendous. For example, in Canada we decided to roll out virtual health care on mass through our Lumino Health platform. Doing a video consult with a nurse or physician supports physical distancing and lessens the load on Canada's emergency health services, while helping our clients manage their health during a stressful time. And two million Canadians who are members of a Sun life Group Benefits plan will be able to access this now along with their family members.
We expanded our AI-driven underwriting model to cover more clients at larger face amounts with reduced need for lab tests, which are of course difficult to get right now. In the U.S., we made it easier for plan members to keep their benefits during temporary layoffs. We added COVID-19 to critical illness policies at extended grace periods for clients to make premium payments. We launched a series of town halls to explain to clients how disability benefits paid family and medical leaves and the government's new COVID-19 support all work together.
In Asia, we have extended health coverage to include more hospitals and clinics, offered additional cash benefits to cover hospital expenses, expedited claims, waived waiting periods and offered continued coverage for lapsed policies due to quarantine or hospitalization. We're working with regulators to expand the digitization of the end-to-end sales process including replacing a wet signature with a digital one.
In Hong Kong now our clients can purchase designated insurance products anytime, anywhere through the new digital sales system and interact remotely with our advisers. In asset management, teams at MFS and SLC Management have doubled down on client communication, including the use of virtual tools with proactive outreach to individuals, as well as webinars and other ways to provide our interpretation of market events.
We're working with tenants, mortgagors and other borrowers to find solutions when they can't meet their rent or monthly loan obligations. We've moved quickly to design and launch two new products in SLC Management. We've also donated over $2 million to charities in the communities, in which we operate to support at-risk populations and provide access to food banks. In the Philippines and China, we donated digital life insurance coverage to doctors, nurses and other medical staff.
So we're doing our part to be part of the solution. Today our clients need us more than ever and our purpose of helping clients achieve lifetime financial security and live healthier lives has served as our sun, our bright light during these challenging times.
So with that, let's move to our first quarter results on slide 5. Our reported net income of $391 million was down 37% from the first quarter of 2019, mostly due to the impact of equity market declines. Underlying net income of $770 million was up 7% over the first quarter of last year and underlying earnings per share were up 9% over the same period. We generated an underlying return on equity of 14.2% for the quarter. And yesterday we announced our common share dividend of $0.55 per share consistent with the prior quarter.
We came into this crisis in a position of strength. We didn't know when the markets would turn or what would cause them to turn, but over the past few years we have been steadily reducing risk in our general account portfolio. For example, by selling down equities and moving up in credit quality.
Our LICAT ratio at SLF remained unchanged from December 31st at 143%, a very strong level, well in excess of the supervisory minimum and that includes $2.4 billion of excess cash at the holding company. Our low leverage ratio of 20.7% provides for significant capital flexibility. And our four-pillar strategy provides us with balanced and diversified streams of earnings and cash flows with a business mix that is less sensitive to interest rates than many of our competitors.
In the quarter, we grew wealth sales 66% over the prior year and a lot of this growth came from MFS, which finished the quarter with record sales, driven by continued strong performance and continued investments in client relationships.
Barron's ranked MFS number one on its list of top fund families for 2020 and more importantly for five-year and 10-year performance, MFS ranked second and fourth respectively marking the 11th time in 12 years that it has ranked top 10 or better for five and 10-year performance. So, a testament to their long-term focus and ability to generate alpha.
Sun Life Global Investments, our Canadian retail wealth manager also had a strong quarter with $1 billion in net flows, up 61% over the prior year, a quarter in which the industry overall saw net outflows.
This growth was driven by our multi-channel distribution platform across GRS, segregated funds and mutual funds by improved wholesaler productivity and by continued strong performance.
As of March 31, 2020 five of our Granite-managed portfolios received four-Star Ratings and four MFS sub-advised funds maintained their five-Star Morningstar rating over the five-year trailing period.
Insurance sales were slightly down from prior year at $776 million. This is mostly from lower large case Group Benefits sales in Canada as well as lower stop-loss sales in the U.S.
That said, the first quarter is typically lower for stop-loss sales, and overall this business has seen tremendous growth as evidenced by its reaching U.S. $2 billion of business in-force in the quarter, which is a doubling in size over the past five years.
In Q1 of this year, we combined our International and Hong Kong businesses in Asia under one leader, and we're now calling this International Hubs. This brings our high net worth businesses together so we can offer our clients and distribution partners, competitive solutions and services across geographies. Insurance sales in International Hubs increased 148% over the prior year with increases from both Hong Kong and International.
Before passing it to Kevin, I'd like to make two general points. First, when a crisis of great proportion occurs, this time a health, economic and even humanitarian crisis, there is often a rush to judgment about how the world will be permanently changed.
Amid all the speculation, there's one thing we believe to be absolutely true. The acceleration of everything digital from how we advise clients to, how we sell to, how we provide solutions pay claims and provide service will be a permanent benefit coming out of the crisis.
To be clear most of our retail clients will still want to work with advisers, but adviser productivity and effectiveness will be turbocharged through data, digital and analytics. At Sun Life, we've invested a lot to digitize our business. With industry-leading technology in many areas, we will leverage this time to further accelerate the development and adoption of everything digital.
And the second point is that realistically, this will be a challenging year for financial institutions and there will likely be reductions to sales premium and AUM levels, credit impacts and other experience.
Kevin will speak to some of the early signals we've seen through to the end of April. I'd say that we've got confidence in our business model, and think Sun Life is very well-positioned to navigate through to the other side given our business mix, our risk stance, balance sheet strength and above all our people and our culture.
And with that, I'll now turn the call over to Kevin, who will take us through the results.
Thanks, Dean, and good morning, everyone. I'd like to start by echoing Dean's comments on COVID-19. The global pandemic is having a dramatic impact on many people's lives and our thoughts are with all those who are affected.
These are very challenging times and Sun Life remains committed to doing what we can to support our clients, staff, advisers and partners through this time while managing the business to deliver strong results for our shareholders.
Turning to slide 7, we announced reported net income of $391 million for the first quarter, a decrease of 37% over the same period last year. Our reported net income was impacted by declining equity markets, partially offset by net interest rate impacts and negative ACMA.
On an underlying net income basis, we had earnings of $770 million, an increase of 7% from Q1 2019. And underlying EPS was $1.31, up 9%. Our underlying return on equity for the quarter was 14.2%. The growth in underlying net income was driven by higher investment returns and business growth.
Investment returns were driven by investing activity gains, AFS gains and improved credit experience, partially offset by losses on fixed income seed investments in surplus and foreign exchange losses on economic hedges. Business growth was driven by expected profit growth of 10% and new business gains.
Mortality was a small loss on a few large claims and IFM in the U.S. Morbidity was overall positive, but down versus a strong first quarter last year. Expense experience was weaker on small variances across the businesses.
Other experience was down primarily related to some experienced losses in our Asian joint ventures and higher project spend. Book value per share increased 4% from year-end, mostly due to foreign exchange gains included in other comprehensive income.
Capital ratios remained strong with Q1 LICAT ratios of 130% at SLA and 143% at SLF, unchanged quarter-over-quarter as the impact of lower interest rates was offset by share buybacks and the widening of corporate spreads that we saw in the quarter.
It is worth noting, some of the actions taken by our regulator in response to COVID-19 related to capital. On March 13, OSFI announced that they expect all federally regulated financial institutions in Canada to halt share buybacks and dividend increases for the time being.
Further, on April 9, OSFI announced changes to capital requirements under the LICAT guideline. These changes provide capital relief for payment deferrals on mortgages, leases and other loans and on payment deferrals for insurance premiums to policyholders -- by policyholders. This means that deferrals will continue to be treated as performing assets, and therefore will not attract higher capital charges.
OSFI also granted relief for participating lines of business reducing the impact of a discontinuity in the LICAT ratio caused by a scenario switch related to interest rates. This change effectively smooths the impact of a scenario switch over six quarters.
You'll recall that in the third quarter of 2019, we discussed the possibility of switching interest rate scenarios within our sensitivities, creating a discontinuity in LICAT results that would have caused an immediate drop in our ratio. While we did not experience a shift in the interest rate scenario in the first quarter of 2020, we did adopt the new guideline.
SLF cash at the end of March was $2.4 billion, a slight increase since Q4. Prior to OSFI's announcement halting share buyback programs we had repurchased $200 million worth of shares in the quarter under our NCIB. Our financial leverage ratio was 20.7%, down quarter-over-quarter reflecting growth in total capital, primarily related to accumulated OCI.
Assets under management finished the quarter at $1.023 trillion, down by $76 billion, mostly from unfavorable market movements, partially offset by the impact of foreign exchange translation and business growth.
Turning to Slide 8. Despite a challenging economic environment, we had reported net income growth in three of our four pillars and underlying net income growth in all four. On a reported net income basis, Canada reported a loss of $42 million in Q1 reflecting unfavorable market-related and ACMA impacts.
Market-related impacts were mostly driven by the decline in equity markets, partially offset by the impacts of credit and swap spreads. Canada's underlying net income was up $256 million, was up 8%, driven by business growth and higher investing activity and AFS gains, partially offset by lower net investment returns in surplus, unfavorable expense experience and unfavorable morbidity experience in group benefits.
The U.S. saw a 32% increase year-over-year in reported net income, driven by favorable market-related impacts predominantly from widening credit spreads, partially offset by unfavorable ACMA impacts.
In the In-Force Management, for underlying net income, the U.S. had 7% growth driven by higher investing activity, higher AFS gains and new business gains, partially offset by unfavorable mortality experience and positive but less favorable morbidity experience.
Last year we had elevated favorable morbidity experience in the first quarter of 2019 which we noted it would revert to the mean over time. The after-tax profit margin for Group Benefits in the U.S. was 6.8% on a trailing 12-month basis compared to 7.9% in the prior year.
Asset management reported net income grew 9%, driven by favorable fair value adjustments on MFS share-based payment awards, partially offset by higher acquisition and integration costs related to the BGO acquisition and the pending InfraRed transaction.
Our asset managed businesses grew underlying income by 7%, driven by higher average net assets in MFS and higher income in SLC Management, driven by the BGO acquisition that closed in 2019, partially offset by lower net investment returns in MFS seed capital, mostly driven by widening of credit spreads.
Asia reported net income grew by 25%, stemming from growth in underlying net income, which increased 27% over the same period last year. This growth was driven by favorable credit experience, new business gains, primarily in International Hubs and improved mortality experience, partially offset by unfavorable joint venture experience.
Slide nine provides details on our sources of earnings. Expected profit of $816 million was up 10% year-over-year from a continued business growth, particularly in our Canadian and asset management businesses, which increased 16% and 12% respectively. Excluding the impacts of currency and asset management, expected profit increased 12% from the prior year.
New business gains were $6 million in Q1 compared to the new business strain of $11 million last year, driven by higher gains in our U.S. business and lower strain in Asia, as a result of higher sales in International Hubs.
Experience losses of $111 million pre-tax were largely driven by unfavorable market-related impacts, primarily from the recent decline in equity markets and interest rates, partially offset by the impact of credit spreads. Experience losses also include unfavorable credit experience, policyholder behavior expense and other experience offset by investing activity gains.
ACMA of $66 million pre-tax for the quarter related to an increase in the provision for adverse deviation for fixed income asset credit spreads. The sharp increase in credit spreads during March meant credit spreads at the end of the quarter were outside the historical range, which drove higher credit spread experience gains during the quarter. The increase in credit spread provisions partially offset these experience gains in our source of earnings.
Other in our sources of earnings includes acquisition, integration and restructuring costs, partially offset by favorable fair value adjustments on MFS share-based payment awards. The restructuring costs we recorded in our corporate segment includes severance costs as a result of various ongoing projects initiated in the fourth quarter of 2019 to simplify our organizational structure and drive efficiencies.
Earnings on surplus of $116 million were down $9 million compared to the first quarter of last year, driven by lower net investment returns on surplus assets and losses on seed investment returns, as a result of widening credit spreads, partially offset by higher AFS gains.
Our effective tax rates on reported and underlying net income were 42% and 18.5% respectively. Our effective tax rate on reported net income reflected the impact of tax-exempt investment losses, primarily driven by the widening of credit spreads. These losses were offset in actual liabilities on an after-tax basis. On an underlying basis, our effective tax rate was within our range of 15% to 20%.
On Slide 10, we show our sales results for the quarter. Total company insurance sales for the quarter were relatively flat year-over-year at $776 million with Canadian sales down 19%, due to the lower large case sales in our Group Benefits business and lower third-party individual insurance sales.
First quarter sales in the U.S. were up 2% on a constant currency basis from the same period last year, as higher employment benefit sales were offset by lower sales in our medical stop-loss business. We had strong individual insurance sales in Asia, up 22% on a constant currency basis, driven by strong growth in Hong Kong and International as well as the Philippines.
Wealth sales across the company increased 66% year-over-year, as Canada had strong sales across most product lines including GRS, which saw heightened retained sales. MFS saw high retail and institutional sales, which drove the 65% growth in asset management sales on a constant currency basis.
Overall MFS experienced net inflows of US$1.8 billion in the quarter, a significant improvement reflecting the strong retail net flows and moderate outflows from institutional clients. During the last two weeks of the quarter, MFS saw retail flows slow down due to market conditions but this slowdown was offset by better institutional flows as some clients rebalanced towards equities.
Finally, wealth sales in Asia increased by $409 million or 22% year-over-year excluding the favorable impacts of foreign exchange translation, driven by money market sales in the Philippines and the pensions business in Hong Kong.
Total VNB was $380 million in the first quarter of 2020, a decrease of 1% compared to the same period in 2019 reflecting lower VNB in the U.S. on pricing margins and Canada from lower insurance sales, partially offset by higher VNB in Asia from higher sales in International Hubs.
Turning to Slide 11. Operating expenses of $1.7 billion were up 3% on a constant currency basis. Controllable expenses were also up 3% compared to the prior year and include our investments in digital as well as costs to support our growing businesses.
Restructuring costs of $37 million this quarter are in addition to those we recorded in the fourth quarter of 2019. Cumulatively, we expect this will result in expense savings of approximately $85 million pre-tax with some savings starting to come in through 2020. In addition, we are taking a look at non-FTE related expenses and to achieve savings such as, in travel, consulting and slowing down some projects in a way to save costs during the year.
Turning to Slide 12. We've included a high-level view of our invested assets as at the end of the quarter with some highlights on our debt and mortgage and loan portfolios as we are faced with heightened uncertainty on potential credit impacts in this recessionary environment.
Overall 97% of our fixed income portfolio is investment grade and our BBB exposure is skewed towards the higher end in terms of quality. 35% of our BBB exposure is in private debt with strong collateral and covenant protections. Our portfolio of invested assets is well diversified and of higher quality, which is a testament to the work we've done over the years to derisk the balance sheet, reduce our exposure to volatile sectors, and develop strong private loan origination capabilities.
Turning to slide 13, we provide some additional details on sectors that we believe pose higher risk, at this time. We've been preparing for late stages in the credit cycle for a while now, but we certainly did not anticipate the current crisis. We have taken deliberate and substantive steps to derisk the portfolio. This includes reducing our BBB minus rated securities by $1 billion and reducing our exposure to the energy sector by over 10%.
The exposures we've included here are those we expect to be most affected by the slowing economy, social distancing measures and lower oil prices. This includes our oil and gas exposures, in addition to aviation, hotels, restaurants, leisure and certain real estate holdings.
Approximately 97% of our debt securities and private loans across these sectors are investment grade with approximately 47%, BBB-rated. And as I mentioned before, a good portion of our BBB-rated portfolio is in private loans which are well collateralized and have strong covenants against them.
Turning to slide 14, we are actively monitoring the impacts of COVID-19. And we know that a lot of you are interested in what April looks like for sales, claims and other items impacted by the COVID-19 crisis. We think it is important we give you a view into what we are seeing.
Throughout April, we've been able to continue sales activities, using digital tools and processes. Overall in the month of April, sales were mixed, with total individual insurance sales and wealth -- individual wealth sales at approximately 80% and 90% respectively, of the prior year.
We saw some markets growing, as a result of digital tools, pre-existing sales pipelines, repricing and return-to-work efforts in China and Hong Kong. But some markets like the Philippines, India, Malaysia, Indonesia, saw significant declines in April, from strict quarantine protocols impacting face-to-face and bancassurance sales. For Group Benefits and pensions, April premium volumes and assets in-forced were relatively unchanged from the end of first quarter.
As a result of the mixed experience and uncertain return-to-work timeframes and economic conditions, Q2 sales levels remain uncertain at this time. To-date our mortality and morbidity cases have been small, amounting to less than 5% of our monthly average for mortality and disability claims paid.
And some of the additional COVID-19 claims experience has been offset by lower claims in other areas. Q2 experience remains uncertain, and will be greatly impacted by the jurisdictions and industries where we do business, and the success these jurisdictions have, in reducing the spread of the virus.
To support our clients who may be facing financial hardships, we've extended grace periods for premium payment for individual insurance and Group Benefits clients for up to 90 days. This extension of grace periods has not created a significant impact on premiums.
Should we experience a prolonged period of non-payment, we may see increases in lapse and other policyholder behavior. Similarly for our borrowers and real estate tenants, we have granted interest, principal, and rent payment deferrals, on a case-by-case basis. During the month of April, we granted payment deferrals of just less than $15 million with additional requests currently under assessment.
The month of April saw MFS, AUM grows 8% to US$471 billion. Going forward, there are many potential impacts that could result from a prolonged economic downturn and the path the virus might take, which may affect our business in different ways. This includes the impact of markets on, our wealth and asset management businesses, the impacts of downgrades and impairments on our asset portfolio or continues to operate in an even lower for longer, interest rate environment.
We are actively monitoring these aspects, and the impact they may have on our results. To conclude, we came into this pandemic with strong capital and liquidity positions, supported by a low financial leverage ratio, strong LICAT ratios, and $2.4 billion in excess cash and other liquid assets at March 31st 2020. This coupled with our diversified business mix, strong risk management framework and track record of bringing digital solutions to our clients, underpin why we believe we are well positioned to manage through this situation.
With that, I'll turn the call back to Leigh to begin the Q&A portion of the call.
Thank you, Kevin. To ensure all that our participants have an opportunity to ask questions on today's call. I would ask each of you please limit yourself to one or two questions and then to re-queue with any additional questions.
With that, Dikitriya, please poll the participants for questions.
Thank you. [Operator Instructions] And your first question comes from the line of John Aiken with Barclays.
Good evening. Given the measures taken by the regulator, in terms of limiting the dividend increases and buybacks, how do your capital allocation priorities shift? And has there been any guidance from the regulator, in terms of restricting potential M&A?
Hi John, it’s Dean. Thanks for your question. I think the -- as you note the OSFI and Kevin referred to this OSFI changed the rules I guess in March to limit dividend increase -- to restrict dividend increases and buybacks. I mean, I think the way we think about that is buybacks have been one aspect of capital allocation for Sun Life in the past.
And of course, right now it is moot, because OSFI has put these rules in place. But when that requirement is eventually lifted and I can't say when, I don't think anybody can say when. But when that requirement is eventually lifted, share repurchases will be back in the line-up as one of the tools we use to allocate capital.
As far as M&A goes, I think the -- we continue to be looking at opportunities that fit our strategy, that tick all of the boxes that we've talked about before. I think the -- in this environment, it's natural that we would evaluate those M&A opportunities, in light of both our sort of base case scenarios and our severe stress scenarios.
As you would expect, we've built scenarios for the business going forward, depending on how things unfold. And we would make sure that we think about these opportunities in light of both the base case and the severe case scenarios. And I would expect that OSFI would want to see those kinds of analyses, as we go forward with any opportunities, we might see. So I'll stop there.
Thanks. And just to reiterate though, outside of your own appetite, no explicit restrictions on M&A from the regulator?
Correct. If they had put them in, you would have seen -- I expect you would have seen them publish that and you've not seen that.
Great. Thank you very much. Over to you.
And your next question comes from the line of Steve Theriault with Eight Capital.
Thanks very much. Couple of questions. Maybe starting with hedging. Can you talk a little bit about the -- how pleased or if there was any issues with the hedging program, just given the extreme volatility we saw this quarter? And thanks for the expanded disclosure in the appendix. I wanted to ask the $57 million of basis risk, that's about 10% of the equity market impact. Is that pretty normal? Or does that pick up in times of volatility? Yes, I'll leave it there.
Okay. Steve, its Kevin Strain. I'm going to give the first part of this answer and then I'm going to turn it over to Kevin Morrissey. If you look at that basis changes, it's about half of that is from fund performance and so the underlying funds underperformed the indexes and about half is from hedging volatility, which kind of gives out your first question. And then I'm going to let Kevin go into a little bit more detail on how the hedges performed in addition to that.
Hi, Steve. This is Kevin Morrissey. So I wouldn't attribute kind of any proportions to the basis risk. It's pretty idiosyncratic on what happens in the quarter. I would say, overall, we were very pleased with the hedging programs. They were quite successful. All our metrics were very much in line with our expectations.
And to give you a sense for the size of the performance, the actuarial liability increased by about $1 billion in the quarter related to market movements and the hedge payoff covered almost all of that. So we were very pleased with the results overall for the hedging including the basis risk now.
And is there any expectation that hedge costs go higher at all after the market decline?
So there is an increase -- Steve, its Kevin again. There is an increase in the hedge cost. So we have a dynamic hedge program. So there's rebalancing costs and with higher volatility in the market, the cost did increase. But that's kind of a natural consequence to that hedging program and it did turn out to be a huge number in the quarter. But it is something that was elevated and just a natural consequence of having that type of dynamic hedging program.
Okay. And then last one, if I could. The MFS results were very solid obviously. But I just want to ask about performance. I would have thought that the Lipper metrics that you give us regularly would rise on a significant market correction, but they -- not that they moved a whole lot, but they did deteriorate, especially, at the shorter end. So just wondering, is this at all related to the resilience of sort of the Fang stocks? Is there anything we can take away from that? That would be helpful.
Hey, good morning, Steve. This is Mike Roberge. Yes, when you look at -- obviously, we direct everyone to look at the longer term numbers. We think that's more relevant to what clients are looking at. But what I would say, on the shorter time frame, given our credit focus in fixed income, we were impacted by the significant widening of spreads that we saw in March and we would expect over time that, particularly, given the backstop that the Fed and other central banks have provided, the yield will come through the portfolios.
The way that those numbers are constructed or based on the A share class, which has distribution fees, we started showing that a decade-plus ago. Most of that A share class assets or a lot of them are in fixed income, so it skews the results. When you look at it based on where clients are, the client experience, if I use our institutional shares, which doesn't have the trail commission the one-year number would be 91% are outperforming.
So some of that is just a function of the share class that we're pulling relative to the industry share class. And so, we're not at all concerned about performance. Long-term performance continues to be strong. Where we've seen a little bit of underperformance on the fixed income side, we think we will come back over time through yield in the portfolios.
Great. That’s helpful. Thank you.
Your next question comes from Doug Young with Desjardins Capital Market.
Good morning. Just first question back to the disclosure around 80% to 90% -- where April sales were in individual insurance and wealth around 80% to 90% of last year's levels. You gave a little bit of color and I didn't catch it all, I apologize, for Asia. Can you talk a bit more broadly by geography, Canada U.S. and a little more granularity in terms of what you're seeing?
So I'll start out Doug and I'm going to let Leo go in a little bit more detail on Asia. And Jacques and Dan can talk about their business groups as well. But that comment was related to, overall, across the company. And what you do see is that, jurisdictions that are sort of going back to work and coming out of the work-from-home, social distancing environments like China, Hong Kong, are picking up. And then the jurisdictions that are -- experience strict quarantine are declining.
We are doing a lot on the digital front to support our agents across the world selling, including electronic signatures. So a lot of regulators were not in favor of electronic signatures, up until COVID-19 and they're becoming much more open to that. And we think that that's a really, really good development for the industry going forward. So we saw that happening in a bunch of different areas. But I'll let Leo talk a little bit more on the experience in Asia and maybe Jacques and Dan can add some color.
Hi, Doug, it's Leo here. So for the experience in Asia, what we saw overall is pretty consistent with what Kevin described at a global level. For April, our sales were about 80% of last year on the insurance side and about flat to last year on the wealth side. And what we're experiencing is very similar to what Kevin just talked about. Basically we've got a barbell situation across our different markets. You've got certain markets that are out of lockdown and where the economy has started to pick up again and where activity is strong.
So, for example, in International Hubs, in China and in Vietnam, we're seeing some strong sales. And then you get other markets like the Philippines, India, Indonesia and Malaysia, where we're still in lockdown mode. And in those markets, we're seeing more depressed sales compared to prior year.
So really what you're seeing across the region is, you've got basically the impact of lockdowns, so that's one big factor. The second impact is, once you're out of lockdown, how quickly sales and the economy pick up again? On the basis of places like Vietnam or China, we're actually seeing a reasonably strong pickup and we think we've used our time well over the course of Q1 to really strengthen our non face-to-face capabilities for our advisers as well as our banca partners as well as pushing recruiting across the region. So we're driving sales, but obviously there's some uncertainty based on the economic environment and the restrictions with social distancing.
Doug, this is a Jacques. Maybe I won't repeat all that Leo and Kevin have said. But I have to add a bit of color on Canada as we have the individual, but also the group businesses. In GB and GRS what we are seeing right now is employers really focused on managing their business during the COVID crisis. So there is indeed lower level of activity.
Sorry, Jacques to cut you off. Could you maybe move your keyboard away from the phone it's making quite a loud noise.
I - no sound of keyboard.
Yeah, I think its Doug
I think, it’s Doug.
Can you hear, me?
That’s me. I will stop typing here?
Doug, we are impressed with the speed of your typing.
I will be a secretary in my second career here. So, yes.
So Doug -- you want me to start at the beginning? I guess, I'll just give you some additional points that weren't raised mostly by Kevin and Leo. And on the group side in Canada both GB and GRS what I was saying, Doug is our clients are really busy managing their business through COVID right now and we are seeing less activity. Now it's not just less activity for us, it's less activity in my view across the industry.
So while there's a potential impact on sales, but I would expect similarly that will have a positive impact on retained business. So that's the additional commentary I will give you. As Kevin said lots of deployment of digital tools and so on and the April impact has been minimal. Now as we've all said the question is how long is this going to last? And we'll start seeing more of an impact over time. But at the moment that would be what I would comment on April.
And Dan, if you had some color for the U.S.?
Yes. Let me just add a little bit Doug, this is Dan Fishbein on April. Interestingly, what we've seen in each of our businesses in group, in our full scope business and stop-loss was increased sales in April 2020 compared to April 2019. It was up modestly in group, significantly actually in full scope and quite significantly in stop-loss. Some of that is that April maybe tends to be a somewhat smaller month so you can have some volatility. But clearly we were happy to see that sales are holding up and even more than that.
Now we are looking very closely at pipeline as well. In our group business pipeline is down significantly. So that suggests we could see lower sales in the next few months. Interestingly the stop-loss pipeline is stable. It has not dropped suggesting that that's a business where sales activity may very well continue. And as Jacques said though if we have lower sales in group that is an industry-wide phenomenon because human resources departments are very focused as they should be on other things right now. So it also means that our existing business wouldn't be going out to bid as well. So while we might see lower sales we would also see lower lapse rates in our own business as well.
And Doug, it's Kevin. I would -- Kevin Strain, again. I would say that while we've given you April, April is one data point and it's six or seven weeks into the pandemic for most of our businesses our North American businesses. So it may not be reflective of what we will see going and then may be different by jurisdiction and by sector. And you know, do you have a second wave and some of those essential things. So what we can say is that we're doing everything we can to continue to see sales occur to manage that to create digital tools and to work virtually. But there can be lots of plausible outcomes going forward around sales depending on the path of the disease and the economy.
Perfect. I appreciate the full – of the answer. Thank you very much.
And your next question comes from the line of Gabriel Dechaine of National Bank Financial.
Good morning, all. I'll just push my typewriter aside. First of all, thanks for the disclosures, a lot of enhancements here that are very helpful. One thing I want to go over in your COVID-19 business impact-type of items you talked about the policy behavior and other mortality morbidity I couldn't get my head around that. But can you tell me what you're thinking with regards to lapse and other? In some cases lapse could be good sometimes it could be bad and then the other. What do you guys have in mind for people? What do you have in mind?
So Gabriel, it's Kevin Strain. And the -- what we're trying to say there is that we've been offering premium deferrals right? And premium deferrals of up to 90 days. And we've done that in many locations and extending that. And that gives people a chance to -- if they're out of work for a short period of time or on furlough or those types of things to get a chance to react to that and get back to paying or get back to work.
And so if we're in an extended period where there is drops in unemployment rates and those types of things and premiums can't get paid you might expect that there'll be more lapsation. And then on the Group Benefits business, if you see unemployment and terminations you'll have less members. And that would also have an impact. So we're -- and those impacts on the Group Benefits side will likely be different by sector and jurisdiction. So we're just sort of pointing out that it's too early to say whether this will have a significant impact on lapse or maybe changes in investments or those types of things policy loans that type of thing.
Okay. But you're -- I mean from a lapse standpoint it could go either way like it could be good could be bad is that not right?
That's correct. It depends on the products, right?
Okay. So next question is on credit. And I'm wondering if there's some, sort of, a rule of thumb. So we have a $50 million net credit loss experience loss on a gross basis $39 million or $40 million was due to downgrades. Is there any way to quantify how many bonds that was associated with? Because I really don't know how to connect the dots between downgrades and some, sort of, earnings impact on the downgrade front especially. And then yield enhancement gains big numbers this quarter with wider spreads and some asset revaluation. Is that something that could potentially continue at a high rate?
Okay. Those are -- it's Kevin Strain again. Those are big questions Gabriel. So, I'm going to start with credit. And I do want to point out some things that it's -- first, it's important to remember that we are under the Canadian Asset Liability Management method IFRS 4 and we don't follow IFRS 9 and we do have different sort of accounting treatment in the U.S.
And if you think about that our provisions for credit are inside of the actual liabilities where we hold a reserve of $2.7 billion and that includes the best estimate assumption and the PfAD. That reserve also includes provisions for credit rating and credit downgrades. And you saw that we had a hit in the quarter of $39 million related to downgrades. That was actually a small number of downgrades. So, it wasn't a big number.
And in fact, in April, we continue to just see a small number of actual downgrades. But we -- that gets provided for. That's part of the $39 million that's in the reserves. And then in addition to that we had an impact of $1 million on impairment. And those impairments are again a small number of the main -- that part goes through investment income. And so it's really good to think about these in two different portions. Does that help?
Yes. Well, there's a small number of downgrades I guess that's the -- I get the mechanics of how it works. It's just -- yes. And then the yield enhancement?
On the yield enhancements, yes, so in terms of investing in AFS gains there was a decline in interest rates of course during the quarter and that allowed us to sell some fixed income asset to gains. We were able to take those gains. And then sometimes at the same time the credit spreads widen, right?
And there were some really good names that came out with very positive credit spreads. And we were able to acquire some fixed income assets that we put against the liabilities that were high-quality names with good credit spreads.
And so you actually got sort of both impacts. You've got the lower sort of base interest rates creating gains on the more public sort of investments more government investments and then you've got the positive impact of the widening spreads and some really good names we're able to invest in.
Yes, that's something I could continue with.
Well, interestingly, it was outsized of course in the quarter. If you look at the 8-quarter average ending this quarter it would have averaged $33 million. And I think that's probably a good way to think about on average what we'd expect from investing gains.
At the same time you should remember this quarter that we did see the widening of credit spreads impacting some of our cede investments in fixed income. We've been ceding some investments in Sun Life Capital and we've been ceding some fixed income investments in MFS as part of their strategy.
And when the credit spreads widened we actually took a loss on those investments. So, it's a bit of a balance between the investing gains and the cede capital losses with the impact of the credit spreads.
The next question comes from the line of Meny Grauman with Cormark Securities.
Hi good morning. Question. We know that Asia is ahead of us in terms of dealing with the pandemic and coming out of the lockdowns. So, I'm just curious given the spread of your operations if you look to Asia as a guide for what's in-store for North America for your business are there any lessons that you can start to draw from that?
Leo, do you want to take that?
Yes, I can try Dean. Although sometimes it feels like Asia is now behind North America in many ways. If you look at the scale and scope of the pandemic in North America. But definitely we went into this sooner and what we saw obviously is quite different responses across different markets even within Asia.
I think you're seeing the same thing in North America between states and provinces. What we learned from a business standpoint is obviously in situations where the markets like Hong Kong where the markets don't go and complete locked down or in places like Vietnam, the business has continued to run reasonably well.
Advisers are out meeting with clients and client demand is actually quite strong. What we're perceiving is that the demand for our products have never been stronger. The awareness of their needs by clients has never been stronger. So, I think that's one learning in places where movement is still possible across markets.
The second thing that we're seeing is that in markets like China where the lockdowns were effective and where the economy reopened and people went back to work even though there were social distancing-types of norm still in place, we saw a very sharp rebound in sales. And so in markets in North America where that may be the case, I think there's some potential optimism to see for the industry.
And then the third thing that I'd say is that across our markets we're seeing digital everywhere being the norm. Clients are using our applications our portals a lot more than before. Our advisers are also leveraging our capabilities a lot more and I'd expect that that behavior will continue post the crisis. So investment in digital which is something we've been doing very, very actively I think will pay off.
And then the final thing that I'd mentioned is unemployment has been going up across markets in Asia. And for us that's allowed us to continue and be quite aggressive on recruiting of advisers. And it's allowing us to find very high-quality candidates for our agencies. And so I could see that as also being something that ports over to other markets.
Operator, can we go to the next question?
Yes. Your next question comes from David Motemaden.
Just a question for Dean just following up on M&A. Just wondering I guess how you view M&A now compared to the end of 2019 where Sun Life is definitely still in a very solid capital position with $2.4 billion of cash at the holdco and a strong SLA LICAT ratio. Valuations have come off a bit since the end of 2019. Do you foresee being a bit more active as a result?
David thanks for your question. I would say that, we continue to be active looking at opportunities around the world across our pillars that fit our strategy and tick all of our boxes. We entered this as we've said and as you've noted with a very strong position very strong capital position. Anything we look at we'll evaluate it against our different scenarios, including a severe stress scenario.
One of the things that we're watching for is to what extent is the opportunity set widening. And we saw that during the global financial crisis more things came to market there were fewer bidders. Those with strong balance sheets and strong financial positions had the capacity to execute on M&A. So it's too soon to declare anything on that particular point. But that's something that we're watching for as well. But I would say, we continue to be active and pursuing opportunities that fit our strategy, and we'll see where that takes us.
Understood. Thanks. And then if I could just ask a question for Mike on MFS just in terms of how we should think about operating expenses within MFS where they were up about 6% year-over-year if we take out MFS share-based comp. I guess where do we think, where should we think about that trending over the rest of the year just given market levels?
Hey, good morning, David. This is Mike. Comp expense, which is our largest expense will come down as profitability comes down depending on where the market settles in for the year. We're going to be pretty cautious on. Obviously, discretionary T&E is an expense that effectively gone to zero and some of our other distribution costs that support clients have come down. And so costs will naturally come down. We're not looking to cut labor as part of this or cut headcount, because clearly there's another side to this and people give us their money to manage for hopefully a long period of time. And so we're going to continue to look through that. And so expenses will come down naturally, but they won't come down – they don't decline quite as much as revenues tend to decline. So there is some negative operating leverage in it.
And so I think for the balance of the year, it's hard to think about what earnings look like only because it depends what the market does and it depends on when the market either goes up or goes down from a timing perspective. And so we think about this looking through looking over the next three to five years having an expense base that we think makes sense through that period of time. The market will go up for periods of time it will go down for periods of time. And we can flex down discretionary costs during periods like this. But the more important thing for us is kind of think about it on a multiyear basis.
Got it. Great. Thanks. That makes sense. And if I could just sneak one more in Mike. The $471 billion of AUM at the end of April and there was I guess some mention in the prepared remarks on the flows in retail which are – clearly have been very strong those kind of tapered off at the end of March and were offset by higher institutional flows that are offset by that to a large extent. I'm wondering if you could just maybe talk about what you've seen through the end of April on both just on the net flows front. So, if we're thinking about both sales and then redemption activity?
Yeah. I mean, I guess, I would characterize it – I don't know what maybe Kevin can jump in, when I'm done what we made public. But I would just characterize that the market -- and this is true when you look at industry sales in April coming into the year January and February were decent industry months and we obviously outperformed that. March was a big outflow month for the industry. In April, if you look across the industry looks more normal than what we saw happen in March. And I think it's important to say that for the quarter is we had record gross sales for the quarter, we actually had a record gross sales for March relative to other March as well. So we continue to see really high activity.
When we look at net flows across the industry if you look at the top 25 players in the U.S., there were only three that were net positive in the quarter, MFS was one of those. The other managers tend to be fixed income-oriented and we're a multiproduct, selling a lot of equities. So we're clearly gaining share within the marketplace. And when you look year-to-date of the 700-plus providers in the U.S. selling product we're number three in net sales through the end of the first quarter.
And so we continue to think that the industry is going to consolidate in those active managers that our counterparties have confidence in we're seeing that in our business. We saw that in the first quarter the flows across the industry has normalized some in April. And if the market stays here, we would expect that to continue to happen.
Mike, I think you've covered all the aspects I would cover. We don't disclose flows on a monthly basis, and so I think we did give the number and MFS does always publish the number for AUM at the end of each month and we disclose that.
Great. Thank you.
Your next question comes from the line of Sumit Malhotra of Scotiabank.
Thanks. Good morning. A couple of questions on credit to start for Kevin. You touched a little bit on this since you're giving some update in April for parts of the business. Would you be able to comment? I think you said there's been downgrades have continued, but in aggregate how has credit experience trended thus far in Q2? And related to that when you were going over the slides you made mention of your private loan portfolio. Just wondering, because there's different pieces of loans you have the mortgages obviously you have some corporate loans. Are these marked in terms of experience the same way as the debt securities was in terms of downgrades effect on the most? Or is this based more on actual default experience and impairments?
Okay. So Sumit, I'll start with the first part and then I'm going to let Randy Brown give some more detail on the privates, and how we do the ratings on the privates. And as I said for the first quarter in Q1, we reflected everything we saw in terms of downgrades and impairment and it was a relatively small number. And in April we continue to see a relatively small impact for downgrades and impairments. Going forward that can be a lot different right? Remember that, we're just six or seven weeks into the COVID-19 crisis in North America, which is the biggest part of our balance sheet. And so we're – under our accounting treatment, we're reflecting everything we need to and can reflect inside of the actual liabilities and inside of the impairments. And those are the numbers that you're seeing. They're relatively small at this point. But it is something we're watching really closely and that's why we gave the additional information on sectors and on some of the investment – the BBB ratings and those types of things. So maybe I'll turn that over to Randy to just add some detail on the privates and how we do the ratings?
Thank you, Kevin, and thank you for your questions Sumit. This is Randy Brown. So within the private asset classes the process is exactly the same as it is for the public. Asset classes we look – really track the exposures every day. And if there's downgrades we look at the security also if there's impact on cash flows, then we look at them from an impairment basis. So, remember downgrades are more forward-looking impairments are more real time. So we've continued to follow that process.
We did note a couple of things Kevin spoke about in his opening remarks which is we have taken significant opportunity to derisk their portfolio in prior periods, which included reallocating some credit exposure from publics to privates. The reason for that is that we have covenant protection. We're in a senior secured position typically in our private portfolio relative to publics which are unsecured. And so we have a long history of experience in the asset class in originating them internally. And if you look at that, the credit experience is significantly better than comparably rated public bonds.
And Randy I asked because on page 24 of your supplement, you do gave us some information on impairments and allowances for the mortgage and loan portfolio. Would the privates be captured in that loan bucket there because at least sequentially it doesn't look like there was any deterioration at all?
Yes. Yes it would be.
All right. That's something we'll monitor going forward. And then last one for me back to Kevin. On the assumption change in the quarter related to the widening of credit spreads, just wanted to make sure I understand how this reflects in the experience going forward. So by making this change you have essentially -- maybe this is the wrong term to use, but mark-to-market the widening in credit spreads. How would that affect the yield enhancement experience gains that the company has consistently derived from being able to pick up additional income in the market? Are those two related in any way? Or am I not thinking about this correctly?
So Sumit, I'm going to turn that over to Kevin Morrissey.
Thanks for the question Sumit. It's Kevin. So, those two are not related. So the ACMA change in the quarter was related to the future reinvestments that we were assuming in the valuation. And so what we did is we increased our provision trackers deviation related to our best estimate assumption the greater level of uncertainty given the credit spread volatility. We felt it was prudent to strengthen that a bit.
As credit spreads widen, we saw significant gains from investing activity. That will still be available and that will not be impacted by this assumption. This assumption is really related to that forward-looking assumption in the actual reserves and it will release naturally if credit spreads revert back to more historic levels as well.
That’s helpful. Thank you for your time.
The next question comes from the line of Darko Mihelic with RBC Capital Markets.
Thank you. Just real quickly I also wanted to sort of focus on credit here. When I look at page 24 of your supplement you were just talking about it with Sumit, I noticed that the sectoral went from $20 million to $21 million quarter-over-quarter which in the grand scheme of things is basically immaterial. So, the question is, is this perhaps something that's sort of on autopilot right now and then later you do a deeper dive on credit and there's a potential here that you will have to build a much larger sectoral reserve say in Q3 when you do your normal deep dive? Or is in fact the $21 million sectoral provision against the $50 billion portfolio actually adequate right now?
Darko, I'm going to say that that question is really for Kevin Morrissey. So, I'm going to let Kevin Morrissey start with the answer and Randy and I may add some more detail as he sort of works through that.
Hi Darko its Kevin Morrissey. So I'd say from a reserving perspective, a couple of things maybe to provide a bit of context to what we're doing. So we are monitoring the -- both the claims experience from COVID-19 and also the resulting economic streams that we're seeing as a result of the pandemic. And when we're setting our assumptions it's based on a long-term time horizon and it really is meant to be appropriate through the economic cycle.
So although we haven't seen anything significant in terms of actual experience so far in Q1 and in April it's been fairly modest, we do still see potential for a wide range of plausible outcomes from the pandemic. So as the experience unfolds, we'll continue to reassess as we did in Q1. However, most of our assumption method changes following Q3 and we do expect that to be the case of our review this year. But we'll have to monitor and see at this point. We reflected everything that we noticed as Kevin has noted.
Okay. And so that's just -- so I think we're talking about the same thing, but we are talking about a sectoral provision against potential credit problems right?
Yes. I think Darko Kevin was answering the broader question of all the assumptions. But credit works the same way right? We're reflecting -- what we saw during the quarter we reflected inside of our reserves or inside of our impairments. And it was -- you're right it was a relatively small impact. But COVID was two weeks in the quarter right? A lot of the impacts will likely come I think you're alluding to this in the next several quarters depending on the path of the disease and the economy and the ability of government packages to spur the economy and second waves and there's a whole bunch of things that will be factored into the thinking. But what we're trying to reflect is what we actually saw happen. And that's what was reflected at the end of Q1.
Okay. Okay. And just real quick follow-up, Kevin you mentioned that there were very few downgrades again in April. Sometimes rating agencies are a little slow. And as I look at your presentation you have a big chunk of oil and gas sitting at BBB aviation hotels. I'd imagine there's a good chance that there's a lot of the stuff that's sitting in BBB that will fall lower. Can you give me maybe an example using some sort of average duration concept here? Like what happens if $100 million of these exposures drops from BBB to below or non investment-grade status. What is the impact on earnings and capital? Can you give us something like a general range?
Yes. So again I think your question is more for Kevin on that than for Randy, so I'll pass that to Kevin.
Darko, it's Kevin Morrissey again. So that's a really difficult question to answer. And really because it has to do with the actuarial assumptions looking forward right? So as you mentioned when the ratings changes we look at -- reassess our expectations around future losses and that really has to do with not just the size of the exposure as you mentioned, but also the asset class the change in ratings. So where do you start, where do you land and the duration of the security. So it's a combination of all those factors. So it's not kind of an easy formulaic thing that I could give you a simple answer to.
Okay. All right. Thanks very much.
Your next question comes from the line of Tom MacKinnon with BMO Capital.
Yeah. Thanks very much. Good morning. I want to talk about e-signature capabilities. I think you'd mentioned that there were some regulatory issues, but you've got them on board. I'm wondering where do you have them. Where did you just get them onboard? And how do they vary between individual and group? And maybe just a little bit of color as to how they vary by geography as well? Thanks.
Tom, it's Dean. Thanks for the question. Why don't we start with Leo and then we'll go to Jacques and Dan. We could take you through the geographies in both retail and group. So Leo?
Hi, Tom, it's Leo here. So I can talk a little bit about Asia. And I would actually broaden the topic a bit for Asia. For us, it's not just about e-signature capabilities, but it's also about whether the regulators have allowed us to conduct non face-to-face sales. So you've got markets where you can do an e-signature, but you need the adviser to witness the e-signature face-to-face. So it's a little bit more complicated than just having e-signature.
So with that said, basically if I kind of go through different markets in Hong Kong, we've got e-signature. And currently what the regulators have allowed us to do is to conduct non face-to-face transactions using these capabilities for a subset of products. So you can use it for par protection products UL, but not yet for investment-linked products like VUL. So there's still some constraints in the context of Hong Kong, but they've significantly loosened the parameters so far.
If you go over to the Philippines, we currently can do digital signatures and the regulators are allowing non face-to-face, but only on a temporary basis. So right now they've authorized insurers to do this until June 30, I believe or the extension of enhanced community quarantine whichever comes last. Now they're likely to extend that as we learn from the situation, but that's kind of a moving target.
Then you've got Malaysia, where e-signatures are authorized, but you need a physical copy of the documents. And right now the regulators have loosened the requirements for a temporary period of time. And it's not clear whether they're going to make that permanent or not. And then probably the most restrictive right now is Indonesia where e-signature is allowed, but you need the process to be face-to-face for investment-linked products which are a big chunk of the market. You can do non-face-to-face transactions for protection-types of products, but it's a smaller chunk of the volume of sales of the industry.
And then if I look at Vietnam, you can do both non face-to-face and e-signature both are authorized by regulators there. Then you've got China and India where also the electronic capabilities are more available. The regulators have basically authorized those processes. So it really depends geography to geography.
In terms of our own capabilities, basically we're currently geared up to take advantage of what the regulators have allowed across these different markets. And what we're currently working on is basically smoothing out the client experience and the adviser experience across each of these markets to make for example the automatic loading of data easier, the different stages of the process move more smoothly from one stage to the other and so on.
Over to Jacques.
Tom, Jacques here in Canada. As you know in Canada, we've been on a strong digital journey for a while now. And what this crisis has led to in my view is a much stronger focus on digital tools and capabilities on the part of advisers. Clients are worried. They want to engage and they want to talk to their advisers. This is certainly a time where the value of advice, the value of having a trusted person to help you navigate is very strong. So we're using Zoom a lot to the point that Leo was making on non-face-to-face. Essentially, our advisers today can sit down with over Zoom with their client and essentially go from what I would call A to Z, so identification of need, doing a financial plan all the way to completion and fulfilling of the products. So it's very much in that vein and we're making very good use of it and that's one of the reasons why we've continued to see relatively good sales through April.
And it's worth adding that that capability has been in place for the past couple of years. And so we've had a chance to road test it and integrate it with sales tools e-signature and so on. So it's -- that's allowed Canada to move quickly. Dan?
The group contract -- sorry to interrupt the group gross contracts and the individual contracts can all be signed with e-signature?
Yes. It's a good question on group. I mean, we're certainly I think exchanging with clients electronically pieces of paper and then scanning and sending signatures. I don't think the contracts are the same Tom, but we can get back to you on that.
Okay. And is there anything in the U.S.? Is that -- what about the employee benefit contracts? Can they all be done e-signature?
Yes, Tom, this is Dan. We actually had e-signatures already in place for a number of things and we expanded it pretty dramatically, since we've gone to work from home. We use a third-party vendor that has very good capabilities for this so that we can now accept the e-signature for virtually anything including contracts claims submissions really virtually anything at this point. And as Leo and Jacques said, we've also taken this as an opportunity to significantly expand other digital capabilities. In late March, we introduced a new set of digital online capabilities through our Sun Works claims system that's for disability.
We also have just introduced a full mobile platform for Maxwell. Maxwell already had a mobile site, but you could not do full enrollment soup to nuts. Now you can. And we're going to be leveraging the Maxwell platform quite a bit for enrollment. In fact, we're getting a lot of interest in that. And we've also found as Jacques mentioned through Zoom that we can really do virtually anything that we were doing face-to-face. We've been doing finalist sales presentations, we've been doing enrollment meetings, we've been doing meetings with brokers et cetera. So I think we're well-equipped to continue the business forward with all of these tools.
Okay. Thanks for the color.
Your next question comes from the line of Mario Mendonca with TD Securities.
Good afternoon. Kevin maybe just real quickly here on the provision -- or yeah, the credit provision associated with asset impairment, the $2.7 billion. That's on a base of I think fixed income securities or fixed income investments of call it $134 billion. So first of all are those the right numbers to be looking at? Those are the comparable things, the $2.7 billion is on the $134 billion of bonds and mortgages and loans?
So Mario I think your question is again for Kevin Morrissey, so I'll pass it to Kevin Morrissey.
Mario yes that's right. That is the right base for that number.
And can you help me, just think that through between best estimate and PfAD? Because I think of the PfAD is something you're going to have to leave there and best estimates that can be released as you did this quarter. Can you give me the breakdown between those two?
Sure. I'll provide you a bit more detail on that. So maybe just first of all some context on the $2.7 billion. That includes the par and non-par business. And when you think about the split of that, you're right that there's a best estimate piece in the PfAD and the best estimate is about 60% of that total and the PfAD is about 40%.
What I would maybe advise a bit different from what you said is both the PfAD and the best estimate that unwind or released from the reserve quarterly, so that happens naturally. The best estimate portion goes against actual experience and that's reported in the credit line of our source of earnings. And the unwind of the PfAD portion of that risk is also on a quarterly basis and that happens through the expected profit line in the source of earnings.
So that's a meaningful number, the 60%, or even if you look at the total -- like if you look at in total it's about 2% of the exposure. What does that really imply about annualized loss rates then on a best estimate basis?
Well, when you think about it if you look at the disclosure that we provided in terms of the credit release for the quarter, you could see that that was $25 million the best estimate portion. So that's kind of after-tax number for the quarter. So if you annualize that and convert it to pre-tax, it's about $135 million per year.
And that would be the annualized expected best estimate credit losses in that fixed income portfolio? So I could just back that up?
Yeah. So that's right. The only piece I'd add to that Mario is that's for the non-par only, so that was related to the shareholder income. So that the $135 million is the non-par piece, yes.
Yes, I do the math myself.
Yeah. It's Kevin Strain. I might just point you to the -- what you see is the experience coming through in any given quarter when it's different from that $25 million. And if you remember Q1 of last year we had the PG&E experience, right? And that came through -- so the experience comes through in the quarter when it's in excess of the $25 million release. And that's -- you also see that this quarter with the downgrades of $39 million and the impairment of $1 million.
Right. I'm just trying to get a sense at what's expected.
Yeah. And you can trend that over a long period of time and you would have seen that we typically trended positive to that $25 million, which is probably what you would expect, right? Because credit is one it's idiosyncratic. But it also relates to -- will go up in times of trouble and will be less when things are more normalized.
I think you also need to think about -- yeah, you also need to think about our split between how the private fixed income works versus the publics. And there's a lot of elements in the privates where we potentially have collateral and work out arrangements with the debt and those types of things, right? So it is more complicated than just the big number. You have to look at the pieces. And that's part of the reason we tried to give the sectoral information.
Okay. So now I get it. I think I have a good understanding of what's expected on the fixed income side. The equities are also very large. And you can back into the effect, it was about an 18% decline in the fair value of your equity portfolios. Are there any triggers that you would use that would necessarily require an impairment on the equities? Like let's say down 25% for an X amount of time next quarters? Is there any formulaic trigger that would necessitate an impairment on the equity?
I'm going to let Kevin jump in and answer it in more detail, but we've given you the sensitivity on the equities. And then inside of our reserves, we're assuming an 8% return on the equity. Are you getting at the return question? Or are you getting at an impairment trigger?
No, I'm just saying impairments -- equities are down a bunch. And I would have expected some impairments on your equities given how much equities were down in the quarter.
So I'll let Kevin answer that. But the downturn in the equity is fully reflected right?
No, not if it's offset by the liability. Like what I'm saying is if the equities are down, but the liability is also down then there's no effect on your earnings.
Yeah. So Mario, it's Kevin Morrissey. So the impact on the equities does come through. So we do see that full amount coming through and reflected in earnings in the quarter. You mentioned a trigger point, so I'd say that there's kind of two pieces. There's accounting side and the actuarial reserve side.
In the accounting side there are triggers around reflecting impairments on surplus assets that are held AFS. So you can have those triggered. On the actuarial reserving side, as I mentioned earlier the way we look at that is really a long-term through the cycle assumption and so we would expect to see volatility in gains and losses. And we wouldn't normally reset that long-term expectation unless there was a fundamental change in our forward looking assumptions.
Okay. I'll follow-up. Thank you.
Okay. And I just wanted to point out that we're closing on 11:30, so we're going to make this the last question on the call. But we will be available after the call, if people have further questions.
Your next question comes from the line of Scott Chan with Canaccord Genuity.
Thanks for fitting me in. I'll just keep it to one question. Mike just going back to MFS and if I look at the gross sales quarterly trajectory over the last several quarters, it's increased nicely. And in Q1, you hit almost $50 billion. I think it was up 65% year-over-year in constant currency. What was the main driver of that? Was there like a big mandate? Or were there certain products that helped facilitate that bigger rear gain?
Yeah, good morning Scott, thanks for the question. We've seen -- as I said earlier, one of the things that we're seeing particularly in the retail channel is the firms that we do business with continue to pair down their provider list. And so firms going to fewer funds, fewer providers. And what we've seen is we're a net beneficiary almost every time that we see that happen.
And so if you look at calendar year last year, I think we did something like if you look at U.S. products, $1 billion of sales in 16 different products and gross sales. So the diversity of our sales has just been incredible. And so we're seeing flows in the U.S. and U.S. equity categories across the capital spectrum. We're seeing it in non-U.S. equity categories, we're seeing it in fixed income categories and that is suggestive of firms that are putting multiple products on their shelf. And so we benefited over the last 1.5 years. We see it accelerating in this environment to the concentration of the business and fewer managers. And we continue to see that in our business.
Okay. That’s all from me.
Okay. I guess that ends our call. It is just close to 11:30. So I would like to thank all of our participants today. And if there are any additional questions as Kevin said, we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. Thank you and have a good day.
This concludes today's call. Thank you for your participation. You may now disconnect.