Manulife Financial Corporation (MFC) CEO Roy Gori on Q1 2020 Results - Earnings Call Transcript

Manulife Financial Corporation (NYSE:MFC) Q1 2020 Results Conference Call May 7, 2020 8:00 AM ET

Company Participants

Adrienne O’Neill - IR

Roy Gori - President and CEO

Phil Witherington - CFO

Scott Hartz - Chief Investment Officer

Steve Finch - Chief Actuary

Mike Doughty - General Manager, Canada

Marianne Harrison - General Manager, U.S.

Rahim Hirji - Chief Risk Officer

Naveed Irshad - Head, North American Legacy Business

Anil Wadhwani - President and CEO, Manulife Asia

Paul Lorentz - President and CEO, Global Wealth and Asset Management

Marianne Harrison - General Manager, U.S.

Conference Call Participants

Tom MacKinnon - BMO Capital

Steve Theriault - Eight Capital

Humphrey Lee - Dowling & Partners

Mario Mendonca - TD Securities

Gabriel Dechaine - National Bank Financial

David Motemaden - Evercore ISI

Meny Grauman - Cormark Securities

Darko Mihelic - RBC Capital Markets

Doug Young - Desjardins Capital Markets

Sumit Malhotra - Scotia Capital

Paul Holden - CIBC World Markets

Scott Chan - Cannacord Genuity

Operator

Good morning and welcome to the Manulife Financial First Quarter 2020 Financial Results Conference Call. Your host for today will be Ms. Adrienne O’Neill. Please go ahead, Ms. O’Neill.

Adrienne O’Neill

Thank you and good morning. Welcome to Manulife’s earnings conference call to discuss our first quarter 2020 results. For the first time in our company’s history we are conducting this call virtually.

Our earning release, financial statements and related MD&A, embedded value report, statistical information package and webcast slides for today’s call are available on the Investor Relations section of our website at manulife.com.

We’ll begin today’s presentation with an overview of our first quarter and then update on our strategic priorities by Roy Gori, our President and Chief Executive Officer. Following Roy’s remarks, Phil Witherington, our Chief Financial Officer, will discuss the Company’s financial and operating results.

We will end today's presentation with Scott Hartz, our Chief Investment Officer who will discuss the Company's general account invested asset portfolio and the effectiveness of our hedging programs.

Following the prepared remarks which were recorded earlier this week to ensure optimal sound quality, we will move to the live question-and-answer portion of the call. We ask each participant to adhere to a limit of two questions. If you have additional questions, please re-queue and we will do our best to respond to all questions.

Before we start, please refer to Slide 2 for a caution on forward looking statements and Slide 44 for a note on the use of non-GAAP financial measures in this presentation. Note that certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from what is stated. The slide also indicates where to find more information on these topics and the factors that could cause actual results to differ materially from those stated.

With that, I'd like to turn the call over to Roy Gori, our President and Chief Executive Officer. Roy?

Roy Gori

Thank you, Adrienne. Good morning everyone and thank you for joining us today. Turning to Slide 5, I'd like to start by acknowledging the significance of the situation that we find ourselves in as a global community, we also at the deepest sympathy to those who have been directly impacted by COVID-19, and our immense gratitude to frontline healthcare and other essential workers for their crucial contributions. I believe that it's a time likely that we have a responsibility to step up and protect the health and welfare of our employees, customers and communities, and that's exactly what we're doing at Manulife.

Health and safety of our employees is a top priority, as is our focus and commitment to supporting our customers around the world. We're very proud that enacting our business continuity plans enabled 95% of our global employees to work from home during the pandemic. As of today, approximately 90% of our employees are working from home, as many of our colleagues have returned to the office in China and Hong Kong. We have short salary continuance and also flexible arrangement to employees who encountered COVID-19 related challenges with remote work.

This is a challenging time for many people and we're focused on ensuring that our customers are receiving the highest level of service and support possible. We remain open in every market that we have presence and continue to offer all products and services. In order to make things easier and safe for the customers as well as for our employees, advisors and agents, we responded to the crisis by leveraging technology to rapidly deploy various client solutions.

In some instances, these were new tools that we already had in the pipeline, and in other cases, we moved fast to deploy existing technology to new markets. I will share some example later in my presentation. In addition, we've dedicated $20 million as financial relief to customers who are experiencing hardship.

These include extended premium grace periods on a number of insurance products across our segments, mortgage payment deferrals through Manulife bank, and waiting to see 401k hardship deferrals in our global wealth and asset management business, and we're donating fund to cause supporting healthcare workers and hospitals providing COVID-19 care and to aid programs that provide food security to vulnerable populations in our communities.

Before we move on, I'd like to acknowledge how incredibly proud I’m of the Manulife team. There are countless examples of how our team members have risen to the challenge and gone above and beyond to be there for our customers when they needed us most. Many of them are on the call today and thank you to each of you.

Slide 6, we are very pleased with how smoothly our employees across all levels and functions were able to transition to working from home. This was possible because we've made key strategic investments in our network, equipment and tools over the last few years because we already had a matured work from home culture.

For example, 99% of our North American employees have been working remotely since mid-March, resulting in VPN usage increasing to 2.5 times regular levels and yet during peak periods our average network utilization is less than 55% of that total capacity.

We are keeping team members up-to-date by hosting enterprise-wide town halls, posting regular video updates from senior executives and launching a speaker series to tackle various topics of interest including mental health. Finally, our online learning tools are well developed and as a result, participation in training programs has continued at pre-crisis levels. In addition, we leverage this expertise to pivot to online learning for our agents and advisors around the globe.

Turning to Slide 7, as I said earlier, we responded to the crisis by rapidly deploying new and existing technology. This included launching Chatbot technology to manage call centers volumes, Docufy to enable contactless transactions and reinforcing our existing digital tools such as e-applications for life insurance in Canada and the U.S. And we've enabled non-face-to-face processes for sales in all markets in Asia.

Prior to the crisis, we've been using this technology in China and thanks to that experience, our capabilities were well developed. In the crisis hit and isolation measures were put in place around the world, we accelerated our plans to roll out this technology more broadly in the region. This enables our distribution partners and agents to engage with our customers according to their preferences. It also positions us well to capitalize on any changes in customer sentiment post COVID-19 and supports productivity and retention of that agency force.

The ultimate test is to weather these measures are working well through the MPS call, and we’re happy to report that we’ve actually experienced the slight improvement in our transactional MPS call since the onset of COVID-19, which we see as the big win, given our elevated core volumes and the pivot to working remotely.

Turning to Slide 8, Manulife entered the quarter in a position of strength, thanks to the work we've done over the past decade to de-risk our business and reduce our company's sensitivity to market movements. In the first quarter of 2020, our market ratio improved to 155% and our leverage ratio of 23% was considerably lower than it was two years ago and is now below our medium term target. This combination results in more financial flexibility than we've had in recent years.

We have a high quality invested asset portfolio with 98% of fixed income assets right in investment grade. Scott will go into our general account portfolio and the effectiveness about hedging progress in his presentation. We diligently worked towards becoming a digital customer leader, and as you heard before, this is serving us well in the current environment.

Finally, expense efficiency has been one of our highest priorities and we've made meaningful progress towards our 2022 target with the delivery of total expense savings of $700 million and a strong culture of expense discipline is serving us well in this environment. As a result of these strengths, I'm confident that Manulife is well positioned to navigate this crisis and the associated economic downturn.

Turning to Slide 9, yesterday we announced our first quarter financial results. As I noticed, the coronavirus continues to disrupt economy and capital markets worldwide. Our operating conditions during the first quarter were understandably affected. Despite these challenging conditions, we delivered solid results demonstrating the diversity and resilience of our businesses.

We delivered net income attributed to shareholders of $1.3 billion and core earnings of $1 billion. The relatively small variance between these two figures admits challenging macroeconomic conditions is a testament to the performance of our equity market and interest rate hedging programs.

Core ROE was resilient at 8.2% and we achieved net inflows of $3.2 billion in Global WAM with all business lines contributing positive net flows. Book value per share rose to $26.53 and we also reported embedded value of $58.1 while $29.79 per share as of December 31, 2019. It's worth noting that embedded value only reflects a portion of the value of our businesses, as it attributes no value to future new business and only tangible book value throughout growing wealth and asset management businesses as well as our P&C reinsurance operations in Manulife bank.

Turning to Slide 10, despite the challenging environment, I believe that we've accomplished a great deal in the first quarter. We successfully completed our 2022 portfolio optimization targets of $5 billion of capital in the fourth quarter of 2019, three years ahead of schedule. While we achieved our targets, we generated an additional $265 million of capital benefit in the first quarter of 2020 through a variety of initiatives.

The initiatives announced to-date have resulted in cumulative capital benefits of $5.3 billion. We remain focused on aggressively managing costs to drive expense efficiency, which resulted in modest core expense growth of 2% in the first quarter of 2020, which is well below average our historic average.

Our third priorities accelerate growth in our highest potential businesses, and we aspire to have these businesses generate two-thirds of total company core earnings by 2022. In Asia, we extended our exclusive strategic bank assurance arrangement with bank Danamon Indonesia to 2036, and in Global WAM, we launched a large case U.S. retirement plan worth $2.6 billion with over a 100,000 participants.

Our core priorities are our customers and how we're using technology to attract, engage, and retain customers by delivering an outstanding experience. As I previously mentioned during the first quarter of 2020, we've leveraged our digital platforms to better serve our customers during the COVID-19 pandemic.

Our final priority is high performing team. Our target is to achieve top quartile employee engagement compared to global financial services in insurance peers by 2022. In February, I was delighted to announce the appointment of Karen Leggett as Chief Marketing Officer. And in March, we were named one of Canada's best diversity employers for the third year in a row by Mediacorp.

Moving to Slide 11. In conclusion, we have a fantastic diverse franchise and a winning team. We are in a position of strength and we remain focused on maintaining financial flexibility and operational resiliency. The long-term fundamentals and demographics underpinning our strategies remain unchanged.

Funds such these reinforce the importance of insurance, wealth management and retirement products, which we believe will drive high demand for our products in the future, and even stronger customer preferences to interact with companies who have digital capabilities and streamline processes.

We are in an unprecedented macroeconomic environment and there are many possible scenarios on the length and nature of the impeding recovery. The possible recovery remains to be seen, but I'm confident that we are in a position of strength. We remain committed to our dividend along with our medium-term financial targets.

Thank you. And I'll hand over to Phil Witherington, who will review the highlights of our financial results. Phil?

Phil Witherington

Thank you, Roy, and good morning everyone. Turning to Slide 13 and our financial performance for the first quarter of 2020, as Roy mentioned, considering the challenging conditions, we delivered solid results. I will highlight the key drivers of our first quarter performance with reference to the next few slides.

Turning to Slide 14, core earnings in the first quarter of 2020 were $1 billion, down 34% from the prior quarter on a constant exchange rate basis. The decrease in core earnings was driven by the unfavorable impacted markets on seed money investments, the absence of core investment gains, revenue business volumes in Japan compared with a very strong quarter for Japan COLI in the prior years and unfavorable policyholder experience in North America, including elevated travel insurance claims related to COVID-19.

These items were partially offset by the impact of in-force growth in Asia and higher fee income from higher average assets levels in our global wealth and asset management businesses. We are pleased with the resilient performance of our businesses during these challenging times, and believe that Manulife is well positioned to continue to succeed through this period of uncertainty and the subsequent recovery. We deliver net income attributed to shareholders of $1.3 billion in the first quarter.

Of note, recognized losses of $608 million from investment related experience, driven by lower than expected returns on over, primarily due to the impact of sharp declines in oil prices. The feasible impact of fixed income reinvestment activities, as we took advantage of wider corporate spreads served as a partial offset.

Regain of $2.1 billion from the direct impacted interest rates was primarily driven by wider corporate spreads and realized gains on the sale of AFS bonds partially offset by the impact of lower risk free rates. The charge of $1.3 billion from the direct impacted equity markets reflects significant declines in global equities during a volatile quarter. We also reported a $72 million gain related to a tax benefit from the U.S. CARES Act as a result of carrying back net operating losses to prior years.

Slide 15 shows our source of earnings and analysis. Expected profits on in-force increase a modest 3% on a constant exchange rate basis driven by growth in Asia. New business gains were lower than the prior year, quarter due to lower sales volumes in Japan. As a reminder, the first quarter of 2019 was an exceptional quarter for Japan COLI sales.

Overall, policyholder experience in the first course was unfavorable primarily due to higher travel claims in Canada related to COVID-19 traveled interruption and cancellation and higher claims in our U.S. life insurance business. LTC policyholder experience was neutral in the first quarter of 2020.

Turning to Slide 16, we delivered core earnings growth of 6% in our global wealth investment management business driven by higher average asset levels. Core earnings in Asia decreased by 7%, driven by low and new business volumes in Japan, you may recall within the first quarter of 2019, we experienced a significant increase in COLI sales in Japan.

These customers anticipated with the introduction of unfavorable tax changes. In contrast, our businesses in Hong Kong and Asia, other posted double digit core earnings growth, which served as a partial offset. In the U.S., core earnings decreased by 13%, driven by unfavorable life insurance policy holder experience.

Core earnings in our Canadian business decreased by 16% primarily due to unfavorable travel claims experience related to COVID-19. We delivered core ROE of 8.2% in the first quarter of 2020 against the backdrop of challenging market conditions.

Slide 17 shows our new business value generation and APE sales. In the first quarter of 2020, we delivered new business value of $469 million down 11% from the prior year quarter. In Asia, new business studies decreased by 14% compared with the first quarter of 2019 as growth in Hong Kong and Asia other was more of an offset by a decline in Japan. In Canada, new business value increased by 24% from the prior year driven by higher sales across all business lines. And in the U.S., new business values decreased 23% primarily due to the impact of lower sales volumes and less favorable business mix.

In the first quarter of 2020, we delivered APE sales of $1.6 billion down 9% from the prior year quarter. The decline in APE sales growth is driven by the impact of tax changes on coding product sales in Japan, which offset growth in Hong Kong and Asia others.

In Canada, APE grows to 44% compared with the first quarter of 2019 was driven by large case group insurance sales and continued growth of our individual insurance business.

In the U.S. APE sales were largely in line with the prior year quarter as low as domestic universal lifestyles following regulatory changes in the fourth quarter of 2019 more than offset by a term and international sales.

Turning to Slide 18, our global wealth and asset management business generated net inflows of $3.2 billion in the first quarter compared with net outflows of $1.3 billion in the prior year with positive contributions from all business lines despite higher retail redemptions in the U.S. and Canada and mid equity market declines in March.

In the U.S., net outflows of $0.2 billion in the first quarter of 2020 improved compared to $4 billion of net outflows in the first quarter of 2019. This improvement was driven by higher retail gross flows primarily from strong institutional model allocations and intermediary sales as well as the sale of a large case retirement plan.

In Canada, net inflows of $2.8 billion improved compared to net inflows of $2.1 billion in the first quarter of 2019. The improvement was driven by higher gross flows into institutional asset management equity mandates.

In Asia, net inflows of $0.6 billion were in line with the prior year quarter as high net inflows in retirement were offset by higher mainly institutional redemptions. Our core EBITDA margins remained solid at 27.3% in line with the prior quarter and up 30 basis points from the prior year quarter. Our average AUM remained stable compared with the prior year quarter as the unfavorable impact of markets was offset by net inflows.

Turning to Slide 19, we have entered this downturn with a strong balance sheet and regulatory capital position. Our financial position has strengthened further in the first quarter of 2020. We have $31 billion of capital about the supervisory target and our LICAT ratio improved to 165%. The 15 percentage point increase compared to the prior quarter was driven by the positive impact of widening corporate spreads and lower risk free rates, partially offset by the impact of low public equity and overvaluations.

Our leverage ratio declined to 23%, 2 percentage points below medium term targets of 25%. The decrease in the leverage ratio was driven by the impact of lower interest rates, which increase the value of AFS debt securities. The $500 million subordinated debt redemption was occurred in January 2020, the favorable impact of a weaker Canadian dollar and growth in retained earnings. These factors were partially offset by share buybacks. Given the high levels of market volatility and overall uncertainty, we believe this is proven to have strong levels of capital and liquidity and to adopt a longer time horizon than in normal conditions to address the future financing needs. Our relatively low leverage ratio allows for this cautious approach to pre-financing.

Turning to Slide 20, we continue to maintain strong liquidity at both consolidated and legal entity levels, and we are confident in our ability to meet all our payments and obligations. Approximately one quarter of the assets in our general account portfolio, are liquid government bonds and cash. I would also like to reiterate our capital allocation priorities, which remain unchanged.

Organic investments in our highest priority businesses remain our top priority, followed by sustainable dividend increases, opportunistic share buybacks, and then M&A. It's worth noting that it is not unreasonable to expect that subsidiary remittances would be lower in this interest rate environment. However, we do not expect this to be a constraint to our capital priorities. As an example of our appetite to deploy capital, within the last few weeks, we have extended our exclusive bank assurance agreement with bank Danamon Indonesia until 2036.

Slide 21 outlines our medium term financial operation targets and our recent performance. Core EPS growth, core ROE and expense efficiency were below our targets primarily driven by the challenging macroeconomic environment in the first quarter of 2020. And like most other companies, we expect the second quarter of 2020 to be a challenging one, given the isolation measures that have been in place around the world.

In light of the current environment, we would not expect to achieve our medium term core EPS growth targets are 10% to 12% this year. We are in a strong position and we remain committed to our dividend along with our medium term financial targets.

I would now like to turn the call over to Scott Hartz, who will discuss general accounts investment portfolio. Scott.

Scott Hartz

Thank you, Phil, and good morning everyone. I'm pleased to provide you with a more in depth update on the direct impact of equity markets and interest rates and our results in our investment related experience. I will also provide some additional color on the strength of our investment portfolio.

Please turn to Slide 23. As you might recall, our dynamic program hedges variable annuity risks on a best estimate economic basis and our macro program hedges the remaining equity market risks not covered by the dynamic program. Our BA hedging program was severely tested this quarter given the significant volatility we saw in interest rates and equities. The program performed quite well offsetting 93% of the increase in the liability.

The slippage was roughly half due to the trading needed to rebalance the hedge and half due to the underlying funds to underperforming our hedging benchmarks. This fund underperformance typically reverses when markets normalize. Our interest rate hedging program uses a combination of long bonds in the cash market, forward starting interest rate swaps, treasury forwards and treasury futures. We do also use interest rate for us to hedge minimum interest rate guarantees in our liabilities.

Our sensitivities to interest rates and equity markets have been significantly reduced since the 2008 global financial crisis. Starting from 2013, when we achieved our hedging targets, you can see the impact from interest rates inequity markets have largely offset each other and overtime have had an immaterial impact on net income.

During the first quarter of 2020, we saw the U.S. 30 year risk free rate drop over a 100 basis points. The S&P 500 dropped 20%, the VIX increased to 80% and corporate spreads widened by roughly 150 basis points. In these volatile market conditions, we recognized the $792 million gain as losses related to the direct impact of equity markets and falling risk free rates were more than offset by widening corporate spreads.

So, while we are certainly in a period of extreme market stress, our hedging programs have been effective at mitigating net income variability, and we remain within our equity and interest rate risk limit.

Next Slide 24 shows a recent history of our investment related experience, as a reminder investment related experiences derived from three resources. One, fixed income reinvestment which compares our purchase and sale activity to our reserve assumptions; two, credit experience which compares the impact of downgrades and defaults to that assumed in our reserves; and three, all in other which compares how the total return on our all the investments performed relative to our reserve assumptions.

As a reminder, all short for alternative long duration assets is our term for private non-fixed income assets comprised largely of real assets. Over the past three years investment related experience has been significantly in excess of the $400 million, we can include in our core earnings. Gains from fixed income reinvestment has been strong and steady over this period and we're a significant contributor this quarter because we took advantage of the very wide spread environment to redeploy government bonds into high quality spread product.

Credit results have also been a reliable contributor up to the current quarter. In recessionary periods, we do expect credit results to be worse than our through cycle reserve assumptions. Although, it was a significant drag this quarter, particularly due to the markdown of our oil and gas portfolio given the significant decline in energy prices. We do expect variability in our all the portfolio quarter to quarter due to its mark-to-market nature, but we also expect significant recoveries when market conditions improve. Through the cycle, our all the portfolio has largely performed as expected.

Now, turning to Slide 25, our invested assets are diverse and have high quality. Over 98% of our fixed income assets are investment grade. We hold a diverse mix with a focus on defensive asset classes and we'll expand on this later in my presentation. We provide all the preferred to generate enhance yield. This has removed the need for us to chase yield through riskier or fixed income assets. For example, our exposure to below investment grade is limited to only 2% of our portfolio and we do not have any exposure to collateralized loan obligations.

Finally, a key component of our risk management framework is our credit team. As a company, we take credit risk very seriously and manage it within a highly experienced team, which has been through many credit cycles. Our approach to credit risk has served us well in downturns, including the 2008 global financial crisis.

Turning to Slide 26, you'll see it illustrates how strong our long-term credit performance has been. Our portfolio losses have consistently stayed below benchmark levels since the financial crisis, based on our portfolio as at March 31, 2020 the long-term expected level based on Moody's default studies applied to our aggregate credit exposure is approximately $108 million pretax per quarter.

Further, relative to our internal credit loss assumptions, we have generated positive credit experience each calendar year since 2010. The chart on the slide represents actual impairments while the accounting credit results also include increased credit reserves for downgrades. These reserves will ultimately be released into income. This chart reflects the ultimate impact of credit center income.

While we have certainly been pleased with this performance, we would remind everyone that credit is inherently cyclical. We will expect some adverse impacts in the current market environment, but that is the nature of the cycle and therefore credit losses are likely to be elevated throughout the recession.

At the same time, we were taking advantage of the market conditions and investing in very high quality issuers at spreads not seen since the GFC. This should provide an offset to our temporarily unfavorable credit experience.

Now turning to Slide 27, we show our investment grade fixed incomes rating distribution relative to the U.S. industry benchmark. As I mentioned earlier, 98% of our fixed income portfolios investment grade with 75% rated A and above. Relative to the industry benchmark is represented by Barclay's U.S. Corporate Index, our portfolio has a significantly higher weight in bonds rated A and above. While the BBB component of the corporate bond universe has increased in recent years, our has been stable and is well below the market weight.

In addition, within our BBB portfolio, only 17% is rated BBB minus which is the weakest category. Our below investment grade holdings, which I previously mentioned are only 2% of our fixed income portfolios are well diversified by industry sectors and proportionately lower than our holdings at the time of the global financial crisis.

Turning to Page 28, we show our fixed income portfolio by sector. A portfolio is quite diverse and built to endure significant economic stress. The portfolio is weighted most heavily in government and utility sectors, both of which have more defensive in nature. Our energy holdings, which constitute 8% of our portfolio, are currently under higher pressure given the significant demand destruction we are witnessing, and I will cover the details of that portfolio in a few slides. I'd also point out that we have a modest 3% weight in the more exposed consumer cyclical sector.

On Slide 29 which shows the composition of our all the portfolio. We continue to believe all the represents an integral and complimentary component of our investment mix backing long-term liabilities. In combination with fixed income assets, which back the first 20 to 30 years of liability cash flows, we believe alternative assets has a potential to increase expected returns while managing the level of risk.

We have strong in house capabilities and experienced investment professionals in each of our alternative asset classes. As you may recall, we recently sold over $5 billion of all the supporting our North American legacy businesses, which allowed us to release over $2.2 billion of capital. This helps us reduce our exposure in guarantee checks.

Currently more than one third of our all of our supports participating in pass through businesses. We assessed our actuarial assumptions every year, but has no reason to believe are all the return assumptions are unreasonable over the long term period.

Slide 30 summarizes our fixed income energy exposure of which is topical considering current depressed oil prices. Here you can see the sub-sector diversification. More than one-third of our portfolio is in midstream, such as pipelines, which largely transport natural gas and liquids and are less susceptible to changes in commodity prices.

This portfolio is high quality with 94% rated investment grade. Should in our limited exposure to high yield issuers we do not expect widespread defaults. Although given the significant pressure on oil prices, we would expect downgrades.

Slide 31 summarizes our energy exposure through ALDA. As noted earlier, our ALDA oil and gas portfolio generated experienced loss this quarter. Our private equity, oil and gas holdings are in the U.S. and are valued based on the forward strip. When prices fall, we might typically see a delay in the loss recognition as we are dependent on valuations from our fund managers.

In this case given the drastic price swing, we did not wait for our fund valuations and estimated some of the loss that would normally have been recognized in Q2. Our conventional Canadian oil and gas properties are managed by our subsidiary, NAL Resources. These assets are valued by an independent appraiser whose forward price that typically moves less than the forward market curve, but this quarter is moved more than the market which exacerbated the loss.

While the losses material this quarter, it was largely a mark-to-market fair value adjustments, the ultimate loss will depend on realized prices well into the future. And while in the short term, prices will likely stay depressed, we would expect a significant recovery when demand is restored as shut down production will be difficult to restart. Both our Canadian and U.S. holdings are largely unlevered, so they should be able to manage the short term stress the industry is experiencing.

Moving onto Slide 32, in summary, I want to reiterate that our invested assets portfolio is high quality and diverse. It is designed to endure significant economic stress. We have a very strong history of favorable credit experience, which is a testament to our credit teams and underwriting processes.

Our oil and gas prices are stressed. We continue to believe these are high quality assets that our holdings will rebound in the medium term when markets improve. Finally, risk premiums have increased significantly. And we have taken advantage of these as we continue to be cash flow positive in this environment and are putting that to work and attractive investments.

This concludes our prepared remarks. Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

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

Tom MacKinnon

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

Roy Gori

Yes, let me tackle that, Tom. Firstly good morning and great to see you, while at least remotely. Yes, obviously, the sales is going to be one area that impacts our business and we're expecting to see a lot of volatility as quite frankly, you know, different geographies that just to the impacts of isolation and social distancing. I'm quite pleased actually with our first quarter results on new business value is still highlight in our prepared remarks were 469 million. Actually when you adjust the Japan or when you look at it on an x Japan basis, we’re up 12%.

April 1st month of the quarter, we're basically looking at across all geographies, a net 10% off the same quarter of last year. But again, this is obviously going to be an area of significant movement. So it paints a bore, a trend line from that to conclude on how the quarter is going to end or how we're going to look to the rest of the year. So that's something we're watching very closely, but pleased with the resiliency of our franchise. And quite frankly, our organization has adapted given the challenging circumstances to use new technologies to interact with customers and to continue our sales momentum as we still in Q1. April results are encouraging, but still much more work for us to do on that front.

Tom MacKinnon

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

Roy Gori

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

Mike Doughty

Sure. So thanks, Tom. This is Mike. In Canada, as Roy said in April, we didn't see any material change and we came out of with very strong momentum. I would say that we're looking at some places very closely. We've obviously done a lot of work over a number of years to digitize a lot of our sales process. So, we're seeing a lot more take up of some of the tools that we have. We've also been expanding that over the last six weeks.

So, electronic applications are up, electronic contract delivery and receipt are up, electronic signatures are all up. So none of that is really getting in the way now of us being able to continue to process business. The place that we are seeing a significant slowdown is the social distancing, the effect that it's had on paramedicals being able to visit homes to collect evidence. So at the larger end of the market, we're seeing much more of a slowdown than at the smaller end of the market.

Also, just lastly, comment on our group benefits business. We're definitely seeing that in the, certainly -- we're certainly seeing continuing to see sales. We've switched to virtual finalist presentations, et cetera, but we are seeing a slowdown in sort of small business quotes is as those business owners are really primarily have been, really primarily focused on just making sure that they manage their business. So, I'll stop there and maybe pass it to Marianne.

Marianne Harrison

So, hi, Thomas, it's Marianne. In the U.S. very similar story to what Mike just said. You know, in terms of the capabilities that we have building, been building over the last couple of years, getting e-applications, e-signatures, e-delivery. It's been relatively smooth because we had those tools in place, even though there historically hadn't been a lot of take up on it, there's certainly is now.

Our April month was actually a pretty good month and we are seeing business holding, but we are seeing a change in mix as you might expect, less of the permanent more of the term. Just because of what Mike was talking about in terms of being able to do the parameds exams, we can't do that. And so, we have changed some of our underwriting standards as well. Things like 80 and above, we're not currently writing and looking at some of the substandard pretty closely just because of the fact that we can't get the premeds done, so that's basically where we are in the U.S. Over to you, Anil.

Anil Wadhwani

Thanks Marianne. Thanks for the question, Tom. So, in Asia, it's different depending upon each of these markets and we have been witnessing the outbreaks since the third week of January. And it firstly emerged in China, quickly followed by Hong Kong, and Hong Kong and China started to get better. The outbreak then kind of spread to Japan and South Asian markets, which are now experiencing pretty severe levels of lockdowns and isolation measures.

What we're witnessing in China is almost 90% of our folks are back to work, and in Hong Kong its now north of 70%, so that kind of positive. And I think it's only going to get better as the quarter progresses; however, the customer activity is still not at normal levels, and that's on the count of the economic uncertainty that upon us.

What I think is again in live with what Mike and Marianne say. The investments that we made in our business are really paying off. So for example in Asia, we’re now have non-face-to-face enabled in all our market and we're looking to constantly improve our processes. And thereby really kind of enabling our distribute partners to engage with our customers what for -- if there are going to be extended seated of lockdown.

And again, we've introduced that in our agency force are now extending progressively to our bank partners. So, I think it's kind of a mixed bag for us. As I said, China and Hong Kong are getter better, and in fact in April, we saw China and markets like Vietnam getting very close to levels of what being experienced in April of last year. But again in other markets on account of lockdown, they are much more severely impact. And we believe that while the measures were ease, the lockdown measures will be with us in some form of shape, as you go through the quarter.

Tom MacKinnon

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

Paul Lorentz

Yes. Thanks, Roy. And Tom, it's Paul here. Just -- I'll just add to some of the sentiments offered by Anil, Mike and Marianne. We're seeing similar trends that related to non-face-to-face sales opportunities and particularly the impact on the small business owner on our retirement business. So that is something we're expecting. And I guess the other one that's somewhat unique to us in Asia admit some of the market volatility, we have seen a shift into more cash in bank deposits in Asia, which does have an impact.

But having said that, we are competent, our ability to generate a net flows or positive net flows over the long-term. And I think some encouraging signs from my perspective are that, you know, in Asia, we were able to lower our positive net flows this quarter despite COVID-19 impacting Asia earlier than some of the other regions. We also entered the year with a stronger pipeline on the institutional side then we started last year. So that set us up well for this year.

And then thirdly, we've been very proactive with customers and advisors in terms of engaging with them during this period of time, whether it's support leadership, et cetera. And it's been very appreciated by them. And I think it sets us up well as we navigate this crisis and come out of it to just really be true partners for both our customers and our advisors moving forward.

Tom MacKinnon

Yes, thanks. And this is a follow-up. Is there any -- what are you seeing in terms of your property cat retrocession covers? Are you seeing any -- as you set up any provisions, is there any claims activity? How should we be thinking about that business?

Phil Witherington

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

Operator

The next question comes from Steve Theriault from Eight Capital. Please go ahead. Your line is now open.

Steve Theriault

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

Scott Hartz

Yes, David. It's Scott. Thanks for the question. And you take it about right, our losses were about 750 million this quarter and that was a mark-to-market. Some of that loss will undoubtedly stick as some of our properties are currently drilling and producing oil and selling oil, and they're selling it at lower prices than we would have expected. But it is a mark-to-market based on 10 plus years of expected cash flow and marking it all sort of current market levels. And we did as you pointed out, and I pointed out my prepared remarks, try to fairly fully take that through on our NAL subsidiary, we have an outside appraiser and that is the way it works.

It's taken mark-to-market in the current quarter, for a bigger U.S private equity portfolio, we are reliant on the private equity firms who manage a lot of those assets to give us marks and typically we don't get those in time and things tend to be lagged a quarter and sometimes even too. But given the precipitous drop in prices, we tried to estimate best that based on prior experience. The last time, we had a major drop in prices, we tried to estimate where those marks would come out and put through an estimate, doesn’t mean that there will be future losses as we get those marks in.

And I would say the last time we did see losses continue to dribble in a bit after the first big initial markdown, but we have accelerated those, and we feel like we've gotten a lot of it behind us.

Steve Theriault

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

Scott Hartz

Well, it really is marked to mark and it's just a question of when do we get the mark. And so, again, for NAL we, get the mark at quarter end, a real time mark, it's just we're delayed on the private equity portfolio. And that -- so for small movements, we're not going to try to estimate what that is. But when we see a big movement like that, we do try to estimate it. And I would, again end with some of this undoubtedly, will be real losses given, the cash flows in the short term.

But we would expect your prices to recover, we're going to see shut into production, which we really did not see the last time we had prices go down, and it becomes hard to restart. We'll need to see much higher prices to try to restart and there's -- and in a lot of cases, restarts are difficult to do and don't produce the same level. So, if prices get up, prices need to give it north of $50 to encourage, a significant shale drilling or taking off the shot ends and those kind of price levels we would expect significant recovery in our portfolio.

Steve Theriault

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

Scott Hartz

Sure. Happy to do that and Page 30 of the Slide deck does show that breakdown. And you have highlighted, I would say the two sectors of most concern for us. We also have midstream which is much less of a concern. And you can see the quality distribution here is largely investment grade, a fair amount in BBB, but most of that midstream would be BBB. And the majors are high quality and we'd expect to be in good shape that they oilfield services, probably the one of most concern, they make a lot of their money for drilling activity, which is going to pretty much cease here.

But our portfolio, there is higher quality. It's more skewed to the single A range, mostly in the top three service providers. So we probably get some downgrades there, but we would expect to see those stay investment grade. Offshore drilling, sort of a sub-component of that, we did spike that out, it's a very small part of the portfolio, but that will -- that is below investment grade. That is -- if we're going to see impairments here, that is where we're going to see it, but it is a very small part of the portfolio.

And then the E&P exploration and production, which is a little bigger part of the portfolio. There's a real mix there. We do have a couple of billions there of sort of national oil companies CNOC in China, National Oil Company of Korea, and those will be well supported by the sovereigns, no concern. But we do have a fair amount of independent producers who are more in the BBB range, and that is where we would expect to see some downgrades to below investment grade, but they started investment grade, they're strong. We do not expect impairments there, but we do expect some downgrades.

Operator

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

Humphrey Lee

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

Steve Finch

Hi, Humphrey, it's Steve Finch. I'll take that question. And yes, we've done fairly extensive stress testing on our portfolio and your question with respect to businesses that have either mortality or longevity exposure. So, Manulife, overall we've got a diversified mix of business and in a pandemic like this, we would expect charges in some lines of business with offsets and other lines. So charges in our life insurance business, but offsets in businesses with longevity exposure such as annuity and long-term care, so in those businesses where there's a direct exposure to mortality or longevity.

In a scenario where there were a 100,000 U.S. desk, we would expect a charge of approximately 30 million Canadian post-tax. With the caveat that we do insure large policies particularly in the U.S. so there could be lots of variability, but roughly 30 million post tax for a 100,000 U.S. deaths. We'll see other impacts as well from claims. Notable the travel claims that we booked in Q1, and we're also closely watching our group businesses in Canada for the effects that, the impact of the economy could have on claims there, but we're not observing any material trends at this point.

Humphrey Lee

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

Steve Finch

That's total company.

Humphrey Lee

Okay, that's helpful. And then in terms of investment portfolio, I appreciate it all the colors that you provided in terms of the exposure and where you see the pressure points, but have you done any stress tests in terms of maybe constraints due to the previous crisis running through from a thumbs up approach where you see could be a potential kind of capital impact from impairments and defaults?

Roy Gori

Let me start with that, and Steve, you can certainly add. Every crisis is a little bit different and this one is a bit different from the GFC. I guess one of the differences I'd call out is that, in the GFC we saw, it was really focused in the financial sector and was really tough on the investment grade banks and other financial institutions. And so, we actually saw defaults on investment companies that started out as an investment grade.

This time around, it’s very different and I think the central banks globally have really reacted so much quicker and so much more than they did in the GFC that they provided liquidity to those companies, and its liquidity that’s really the big issue in the short run. And given what we've seen, I don't really expect much in the way of investment grade defaults, which is why we focus so much on the below investment grade part of our portfolio being only 2%.

They are the smaller, weaker companies, they don't have access to a lot of the stimulus coming out of the central banks is where we might expect impairments. So it's a little difficult to compare to the GFC. And you know, we do expect most of our experience, this cycle to be hence more downgrades than defaults. And downgrades while they create a hit to earnings, as we increase reserves in the current quarter, they get released and subsequent for us, the extent we don't have defaults.

And it just as we've looked at that and look at sort of stress testing and what might happen, one thing to give you a bit of a guide is. If we saw 25% of our whole portfolio on a pro rata basis be downgraded one notch, and by one notch, I mean, there's typically three notches in a rating category. So for triple B, there would be triple, triple B plus, triple B minus. And so if they moved down one notch, we would expect about $250 million post-tax reserve increase and hit to earnings.

And the way we do it the things have to move a full category, have an increase in reserves. So we would see the triple B minus has been downgraded to below investment grade is what would create that charge. And about half of that overall charge we would see does come out of our triple B portfolio. So that's a little context for you.

Steve Finch

Yes, I'll just add in terms of our overall stress testing. We do routinely do a stress testing on the entire company on the balance sheet, and we have stressed more severe scenarios than what we saw in the global financial crisis, and everything that we've been doing over the years building up our hedging programs, that portfolio optimization initiative. We enter this time in a position of strength where we wanted to make sure that the Company can with strategy, withstand very severe shocks and still be in a strong position. And so, we were confident in the capital position of the Company based on the stress testing that we've done.

Operator

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead. Your line is open.

Mario Mendonca

Good morning. Perhaps, one thing I was looking for and I couldn't find was, the asset default assumptions. Steve, is that something you would be comfortable disclosing to them? Yes, so the default assumptions and the reserves is -- I was going to ask actually what the dollar amount of the reserve is in the default reserves.

Steve Finch

Sure. So what I can do is describe our process. So as with other assumptions we go through with detailed regular reviews closely with Scott's team, we look at the Moody's long term default averages and our experience has been over a long period of time, has been better than what we see in the moody studies. We have not gone all the way to our experience. So we've reflected some of our own experience in some of the industry experience. And as you can imagine, the default assumptions vary by ratings category by tenor, et cetera. So it's quite a detailed set of assumptions. Overall we estimated that the amount of provision for credit in our reserves, it's approximately 3.5 billion. That was at the end of 2019. So as a Q1, its likely gone up a little bit because of the currency movements and about a 30% to 40% of that is PAT or margin.

Mario Mendonca

And then just a quick clarification, Scott, when you referred to $50 oil, were you talking in WTI U.S. dollar?

Scott Hartz

Yes, yes, I was. Okay.

Mario Mendonca

And then, sorry, just real quickly Steve, the $108 million you referred to for Moody's, you're saying that's the estimated or the expected losses. I think what you said there is that that's not what's in the reserve 108 million, that's just for information purposes.

Steve Finch

That's correct, yes. Okay. Thank you.

Operator

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

Gabriel Dechaine

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

Scott Hartz

Sure, Gabriel. Thanks for the question. So, yes, let me give you a little perspective on this. We really think, our ALDA through the cycle will perform about what we put in our reserve. So, we talk about 400 million of expected performance, that's really coming out of a combination of credit and fixed income reinvestment, and they do tend to be negatively correlated to each other.

So when times are good and we're getting credit releases, it's very difficult to add value in our fixed income portfolio. We do historically manage to do some every year, but as you'll have seen in this first quarter here, we actually had 370 million of fixed income gains in one quarter. And that was due to the volatility in the market, the wider spreads, the opportunities we saw accompanied by a $50 million credit loss.

So that was offset. And I wouldn't, I wouldn't assume 370 million a quarter going forward, but we should expect elevated fixed income investment gains during this period when we have credit losses. So, that's how I see those two sorts of upsetting each other and providing a reliable stream of investment gains.

On the ALDA front, it is the part of the portfolio that's sort of brutally mark-to-market and is going to have volatility in the best of times. And in these sort of times you should expect losses and we should expect gains in better times. Frankly, a part of the losses due to higher risk premiums being baked into those valuations and that would portend, higher returns going forward.

So, we feel very comfortable with our long-term assumption. We will revisit that this year as we do every year, but I have no reason to believe we would change.

Gabriel Dechaine

Okay. And then my question on Manulife bank, can you tell me the composition of the portfolio, how much of it Manulife one, how many of your mortgage customers have sought payment deferrals, and if you're seeing any behavioral changes in terms of how the Manulife one product is used? So I think it's pretty flexible in terms of how you can access your money if you need it.

Mike Doughty

Let me take that one. It's Mike. So just in terms of the sort of makeup of the bank portfolio, it is primarily, residential mortgages. So, about 91% of the assets are made up of the residential mortgage is pretty, pretty well distributed across the country. We have not seen any sort of material deterioration. We're obviously watching this very closely, as are all financial institutions.

We have like a lot of the other banks, we did introduce a deferral program, we are at about, it changes every day, but we're about 7000 of our customers have deferred most of those on a three month basis. So, again, we're watching this very closely, we think the bank's in very good shape. And just lastly, I'll just say we stress test this regularly. And even under extreme stresses, it's something that the Company can handle and manage fairly effectively. I don't know if someone wants to add into that.

Gabriel Dechaine

And how many customers you have 7,000, the number but percentage?

Mike Doughty

Yes, it's about 100,000 and change.

Operator

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

David Motemaden

Hi, good morning. I just had a question and it's good to see the 155% LICAT ratio, but I wanted to drill in a little bit on Phil's statements that you still expect lower remittances this year. The 155 LICAT wouldn't suggest that you would need to half lower remittances this year than the 2.8 billion last year, so wondering what the disconnect is there?

Phil Witherington

Thanks, David for the question. This is Phil. So as we've said before, in environments where we see declining interest rates, we do expect to see lower remittances particularly from our subsidiaries in Asia, and we noted on previous calls that Hong Kong in particular, is a regime that has sensitivity to interest rates in terms of its surplus capital levels and therefore ability to remit.

As we've reiterated a number of times, remittances will bounce around from year-to-year but we do remain confident in our remittance capacities for the medium term. And combined with the strong LICAT position that you highlighted 155%, increase from a 140% at the end of the year.

And the strong liquidity position of the Company that does enable us to continue to service debt and dividends through times of market stress. Final point that I'll add is that we are a diversified company and we're not exclusively dependent upon any of our segments or legal entities for generation, of our businesses.

David Motemaden

And maybe just on the Hong Kong point that you just brought up, Phil, what was the HKIA capital ratio there? And what's your target? And do -- I mean is that something where you think you need to inject capital with rates at these levels?

Phil Witherington

So, David, we don't set out the individual levels of capital in each of our jurisdictions. There is some information on strategy targets included in the embedded value report, but the strong LICAT position, and the leverage means that we do have the ability to deploy resources wherever they are needed in the group.

And I think in the interest of transparency, I will tell you that this year as a result of the sensitivity to market interest rates in our overseas, some of our overseas subsidiaries, we have downstream assets and that combined with some other measures that we have taken to mitigate the impact of those market sensitivities, it means that we don't expect to inject further material the capital into those overseas operations.

And just to be totally transparent and one of the reasons why in my remarks we do refer to an expectation of lower emissions by the end of April the aggregate amount that we have downstream is in the older of CAD2.5 billion.

David Motemaden

You're downstream 2.5 billion that to Hong Kong specifically or that's across all of the subsidiaries U.S. as well?

Phil Witherington

That's a number that is an aggregate number for all of our subsidiaries, but the U.S. is a very stable liability valuations and we not needed to downstream any money into the U.S.

David Motemaden

Okay, got it. And then if I could just follow up, I guess kind of relatedly on that point, just on Slide 20, where you talk about consolidated liquidity. I guess I'm more interested in terms of cash that you have at the parent at the Holdco. I'm wondering if we can get an update on where that stood at the end of the first quarter. And also if you can size, the cash needs as a Holdco for the rest of the year outside of the common dividends.

Phil Witherington

Thanks David. This is Phil again, as you may or may not be aware, corporate structure is one whereby Holdco that he listed company, MFC has one subsidiary and ally. So that's the vertical structure and I'll practice is not to hold assets at the in the holding company, the listing company. And that's really impossible because both MFC and the wholly-owned subsidiary, MLI, are both entities here in Canada that regulated by the same regulator, OFSI.

And there are no special restrictions or approvals that would constrain us from moving funds between those entities. There you've referenced to the slide where we do point out to the approximately one quarter of our invested assets are held in either cash or liquid government bonds. That is a consolidated number but I can also say that it's a number of this cruise to Canada as well, so in terms of the capital and liquidity position something that I really don't believe is a constraint.

Operator

The next question is from Meny Grauman from Cormark Securities. Please go ahead. Your line is now open.

Meny Grauman

Hi, good morning. I'm just wondering about exposing the investment books to specifically aviation, hotels, restaurants and leisure as a group what would the exposure be?

Scott Hartz

Sure, Meny. Its Scott, I'll take that question. As you mentioned, consumer cyclical is a low sector for us at 3%. And within that, hotels but to answer your specific question, hotels are being very small number within the credit book of less than 150 million to premiere names. Within the commercial mortgage book, we have only 300 million. We typically don't lend the hotels and two of those would be premier hotels in Boston with quite low loan to value. So, yes, hotels are going to come under significant pressure, but we don't believe that's going to be a concern to our portfolio.

Restaurants we have very little exposure to restaurants and what little we have is to McDonald's and Starbucks are strong, strong companies that we do not have much concern. On retail we tend to stick to the sort of things that are now considered essential service that are high quality, the sort of Costcos, Walmarts, home depots of the world. And we do, we have a $1.4 billion exposure to sports games and this is the case, you're getting kind of the theme for the portfolio.

We tend to stick with the strongest company. So we do stick with the strongest commercially oriented teams. These would be stadium financings and these are underwritten, assuming there will be a last season, we had assumed the strike season, not what's going on. So again, don't see any issues, probably not even any downgrades there unless this really does extend out into probably the next calendar year. So we feel very good about that part of the portfolio.

Meny Grauman

Just in terms of the overall real estate exposure, can you just talk about vengeful for Barron's experience in the quarter and then what you saw in April and I guess even May know that most rents are in?

Scott Hartz

So, there's two parts of the real estate portfolio. There's the mortgage portfolio and then the real estate on portfolio. In both cases its retail where we're seeing the most pressure. And in the commercial mortgage portfolio in April, we receive payments as scheduled on 98.5% of the books. So 1.5% we did not, that was focused in retail. And in those cases, in almost all cases we just gave forbearance on principle, not on interest, although there were a couple of cases where we did defer those as well.

And again, these are deferred so they will defer typically for three months to be paid. It's still early. But the numbers are trending in a very similar direction on real estate owners side again, our exposure to retail is very small. It's three, 3% of the portfolio. When you look at specifically retail to include all the retail, some office buildings have a little bit of retail on their podium. It gets up to more like 4.5%.

And that's where we're seeing most of the issues. Although we are seeing some rents from co-working spaces, asking for referrals and so forth. So it's a little higher number. It's about 10% of the lease payments were not made in April and we gave a deferrals on those and thus far in May, again, it's early but trends are looking similar.

Operator

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

Darko Mihelic

Thank you. My question is for Steve. We note that there's neutral impact from the quarter from long-term care. I was wondering, what your early read here is, on the long-term care side, and I'm asking it from two different angles. One is just what you think that happened here. What I'm potentially concerned about is premier rate increases might be difficult going forward. Maybe lapses will change certainly interest rates. So that from your reserving perspective, which you've already read and what you're seeing. And then secondarily, we have seen some instances of statutory reserve being, reopened and challenged. I'm wondering if you can give us any update on that side as well.

Steve Finch

Thanks, its Steve here. I'll take those in order. So as you can imagine, we're tracking very closely a lot of emerging data on all of our businesses. But LTC is one that we're particularly focused on. We did not see a lot of observable changes or trends in the first quarter. In April we are beginning to see a couple of trends. It has been widely reported, high utility rates in nursing homes and assisted living facilities. So we have seen in April some trending up in reported deaths there can be a lag in long-term care, with getting all the data.

And we have seen some early indications of lower incidents or new claims occurring. We will be tracking very close to any last experience and all sorts of trends that we may see on this business. It is a very long-term business. So, I think we may see some noise in the short term and we will probably see some offsets to elevated claims in our licensed businesses. But I think it's too early to estimate long-term trends. But as you can imagine, we'll be paying very, very close attention to this and recording on what we're seeing as we're going forward.

On your second question, with respect to statutory reserves and regulators challenging companies, there was a peer I think that you're referring to there. What I can comment on other companies, but I can talk to you about the regulatory process and the conversations that we've been having. The regulators have increased significantly the amount of information that they're looking for on long-term care.

There's a very detailed filing that we do. It's bilateral between the companies in the States called 1851 where we provide very comprehensive information on our assumptions, on our experience. And we've had follow up very in depth dialogue with a group of regulators that's been overseeing this. And they had lots of questions. We engaged very constructively with them and they've raised no concerns with the adequacy of our reserves.

As you know, we went through a very comprehensive review of assumptions in the third quarter of last year. We have a professional third party peer reviewer that reports to our audit committee and those assumptions into our best estimate assumptions on our U.S. NAIC, adequacy testing on LTC. So there's been a very robust process to go into those assumptions.

And as part of asset adequacy testing in the U.S. even though we've got adequate margin in long-term care, we also look broadly at the total margin in the Company when assessing adequacy of reserves. So based on all the facts that I've just laid out, I don't see a risk to us of having state regulators challenging our LTC reserves. I see no evidence of that.

Darko Mihelic

Thank you for that. So that's a good answer. And just a very quick follow-up, for Naveed, I think, you managed to get $5 billion of capital. What's the outlook now? And is it possible that we should think about your work and your activities being very muffled in the current environment?

Naveed Irshad

Yes, hi, Darko. I see a short term, it probably has delayed some transactions we were working on. I think the increased volatility, especially on asset prices, make it difficult to transact in this environment. In some case getting bandwidth from regulators may be challenging in this environment.

But actually in the medium to longer term, I actually think it could create more opportunities. I've talked to some third parties, including private equity dot companies, and they did indicate that they have a considerable amount of dry powder available and attractive yield opportunities. So I think those are things we'll look at the appropriate time.

But I think I've said before that we've been focused on pivoting to organic, enforced management. So things like re-pricings, adjusting crediting rates and actually we think that as we get out of this crisis, there'll be an opportunity to ramp up our buyout programs, which can be a win-win for customers, and the Company, as customers are looking for the clarity.

So I think it's very much influx, but I feel that there's still quite a bit of opportunity here.

Darko Mihelic

Okay. Thank you very much.

Marianne Harrison

Hi Darko, its Marianne. I was just going to answer that question on losses. You had a question for Steve. On the -- for not losses, on the rate increases for LTC, so we've actually gotten a couple approves since the crisis has started. And only two states have actually said that were not to file rate increases during this time. So we are continuing to go when we saw momentum in terms of filing the rate increases.

Darko Mihelic

Thank you, Marianne. That's helpful. And what have you are you considering doing with some other your peers are doing in the U.S. which is dropping 30 year term productsand reading significant changes in fact to the whole product line up given given the interest rate environment?

Marianne Harrison

Well, as you probably know, our product lineup is about 20 products in that product portfolio. And they are very much adjustable already. So I would say that we have done a lot of those changes over the years versus where our peer companies are. So I think we're in a good spot where we are right now.

Operator

Thank you. Your next question is from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is open.

Doug Young

Hi, good morning. I guess this question is probably for Steve. As per your disclosure, lower interest rates now positively impacts earnings by 300 million and I would get there some new answers and to the extent that we can have a simple discussion as to, what those new answers are, that would be fantastic. Just hoping to get some color on that?

Phil Witherington

Sure Doug. Thanks. Yes. The first point to make is that we've not changed our hedging program. So they have been designed, and the change in that sensitivity this quarter. It's primarily due to a divergence between the economics, the underlying economics, which we hedge to and our accounting basis as a result of the market movements, specifically, its corporate spreads.

So the major spread widening that we saw means that our liability sensitivity changed by less than the asset sensitivity. Remember, we don't hedge corporate spreads, we view them as often a nice offset to perhaps stressed equity markets, which is what we're seeing in the first quarter.

And the key thing is that if corporate spreads were to revert back to two or towards your own levels, we would expect it our sensitivities would revert back as well. So I would view it is more of a temporary situation.

Doug Young

So we should use Q4 sensitivities really as a base case, when we're thinking about interest rate impacts. Is that fair?

Phil Witherington

Yes, a couple of other comments. I mean, when you look at these sensitivities relative to the size of the balance sheet, and our net income, it's really quite modest. We've really immunized for parallel moves on current period impacts. And another place that pointing to is in the embedded value disclosure, where we disclose that a 50 basis point decline in yields results in overtime, approximately 350 million hits to embedded value. I think it really demonstrates the power of the hedging programs that we've put in place.

Doug Young

Okay and just a second follow-up on your claims exposure to COVID-19. As you said it was 100,000 deaths, is that 100,000 deaths across your own book? Is that the way to think of it, and the way that you stress it?

Phil Witherington

No, good point for clarity. A lot of people have been benchmarking on stress scenarios saying how many deaths would that mean in the United States population? So that's 100,000 U.S. population deaths. And currently, the figure the reported figures on the order of 70,000. The other thing that we're watching as well is that there may be under recording of the meeting COVID deaths that are not specifically identified as COVID. So I'm really talking about all access mortality related to the U.S. population.

Doug Young

And so that's 30 million just for your U.S. book. But you said that was actually across your entire book is that…

Phil Witherington

That's across our entire book, and I think it -- there's offset in there, right. I commented that because of the diversified nature, we've got some businesses that have exposure to claims experience -- to mortality rates and other businesses with exposure to longevity. Maybe the other thing that I'd add is what we're seeing is the pandemic is disproportionately hitting the lower income part of the population, and the insured population tends to be of a higher economic situation. So that's also factoring into the results. We've also reflected the expected mortality rates by age as older ages are also more impacted.

Doug Young

Okay. That’s great. Thank you very much.

Operator

Thank you. The next question is from Sumit Malhotra from Scotia Capital. Please go ahead. Your line is open.

Sumit Malhotra

Thanks. Good morning. I'll try to keep this brief. Firstly for Scott, just in the earnings on surplus. This is not the first time we've seen some reference to see capital March for Manulife. Obviously, it's a larger number this quarter. Just hoping you can educate me here on what the total size of this investment is for the Company that runs through this line? And specifically, what are you using to mark these investments on a quarterly basis?

Phil Witherington

So, Sumit, this is Phil, I think it makes sense for me to start on that and have Scott supplement with anything he'd like to supplement. The value of the seed capital investments in our surplus segments, it's approximately $1.5 billion and that does include a mix of equity funds and balance and bond funds. In Q1 2020, the after-tax impact of marketing rose to market was $176 million. That loss compares to actually mark-to-market gain in the first quarter of 2019 of $98 million. So, the year on year swing that we've seen here in terms of distortion to core earnings is in the order of $217 million.

Now that impact is greater than you may expect based on our disclosed equity sensitivities because of the, what's happened this quarter is that the mark-to-market on equities has been combined with widening corporate spreads that has reduced the value of the bond funds and also the bonds within balanced funds. And so that's what's causing the slightly larger impact than you might expect. The portfolio mix if you look at the whole portfolio, it's roughly 60% equities, 40% bonds. Is there anything Scott you'd like to add to that?

Scott Hartz

The only thing I'd add Phil, is that these are all public securities, so they are absolutely marked to market at current levels.

Sumit Malhotra

All right. So I think by giving us a notional fill, there's at least something we can think about how that trends, last one is for Anil, I'm sure you'll be happy for the business that on a trend line basis, it's now been a full year since the repositioning of the COVID product in Japan. I mean, your insurance sales in that country have sequentially moved higher and every quarter since Q2 earnings have been in a reasonable range. If I try to separate the outlook here between what's happening with the impact of the pandemic versus the positioning of the product as far as you're concerned, has the take-up of your redesigned COVID product now reflected your expectations? And it has more to do with what happens with the broader economy in that country as opposed to where Manulife is positioned?

Anil Wadhwani

Thanks for the question. So from COVID perspective, you’re absolutely right. So from an enactment perspective, we saw that in quarter three and then sequentially we’ve seen sales improvement in fact in quarter one of this year as you righty pointed out. We witnessed $164 million, which was just about 28% quarter-on-quarter and our earnings dropped as well by 17%. So, I think we at least with the momentum, the challenge is that Japan continues to be under the cloud of COVID and is right now faced up with a lot of restrictions around lockdown. So, the mobility of both the customers as well as our agents is impacted and it doesn't help that economic uncertainty would obviously kind of add to the customer sentiment as you can imagine.

What we’re focused on, just kind of provide you a little bit of color on that. Number one if you look at product mix right now only third of our sales, possibly would to the overall sales that we generated, 40 sales not contribute to the overall sales that we generate in Japan. So we kind of in many ways been much more resilient product mix and have moved away from our dependence on COLI which, as you can reckon, if you were to kind of face it back to quarter one of last year was quite high. The second piece is distribution is going to be pivotal, as it always is. Towards that, we have been investing in building up MFH channel on the success that we've seen in Singapore. We are up to 170 advisors.

And also inviting more MGA to on board, in addition to that, we've also been training our MGAs to offer the non-COLI products which is again, as you can see starting to show some results. And last but not least, as I had mentioned, the last time around as well, we are looking at expense efficiency measures in Japan, given the new one in trajectory that we experiencing there. So from a sequential perspective, we are pretty pleased with what we have seeing. Unfortunately, on the account of COVID there is a huge amount of uncertainty and it kind of becomes hard to predict as to what the new normal would look like.

Roy Gori

Sumit, if I could just jump in. I think Anil summary was spot on. And just to punctuate one of the key points that he made was around diversity. One of the things that we've been really focused on over the last four to five years has been strengthening the diversity of our franchise. That's true for us globally, but it's absolutely true for us in Asia. So reducing the reliance on any one market or one line is something that we've been gradually focused on and have seen improvements in success.

And again in Japan with seeing just reliance on COLI and specific acquisition channels as something that we're going to continue to focus our efforts on in the course of this year and beyond. So, that really is a big element of our Asia strategy is just that diversity of geography, diversity of channel and distribution as well as diversity of products as well.

Operator

The next question is from Paul Holden from CIBC World Markets. Please go ahead. Your line is open.

Paul Holden

Thank you. Good morning. Ask you a question again related to oil and gas portfolio within the ALDA. And I guess what I want to better understand is what's kind of the contribution it had been making to core earnings and given the impairment charge and where WTI is now, what the impact is going forward to super potential impacts to the quarter?

Scott Hartz

Sure. It's Scott, I'll take that one. So for quarter you may recall that we will put up to a $100 million of investments gains a quarter into call core earnings up to 400 million for the full year. And that's a combination of the all the performance, the fixed income and the credit. And as I mentioned earlier, typically the fixed income and the credit that contributes to the most of that, all the really contributes some volatility, but has been pretty much on our assumptions over longer term.

So within all the ALDA, oil and gas is a very small component. It's 6% of our ALDA portfolio. So it plays a very small role. I would say unfortunately in the last five years, it's played an outsize role in the wrong direction. But the nature of investing is that things do cycle around and actually in the first decade of the 2000, oil and gas was the strongest contributor to our ALDA returns. And in the last decade, they've been the lowest contributor. So, it's been a bit of a drag on our overall investment experience. But despite that, we've on average been able to produce 400 million of investment gains in recent years.

Paul Holden

So what you're saying here is despite the impairment charge or maybe not impairment, but markdown in Q1, that's not necessarily really going to be a drag on forward core earnings? And that's what I mean?

Scott Hartz

I think for this year, it's going to be very difficult to get investment gains in the core earnings. We're starting at minus 600 million. We'd have to recoup all that before we could put it into core. And frankly, I do expect future credit losses. They will likely be offset by fixed income gains. But we'll also probably see some additional all the losses. So I think it's unlikely you're going to see your contribution to core from investment gains this year, but we'll turn the page the next year and I would expect to be back on track.

Paul Holden

I understand. Second question is related to new business gains in Asia. So if I just take a simple look of Q-over-Q and total sales from Asia roughly up, but business gains were down now, I'm assuming that's due to lower interest rates, but is that correct and or maybe there some other factors at play as well?

Anil Wadhwani

Yes. Thanks for the question. This is this is Anil. Let me take this and then kind of turn it to Phil if you have any supplemental comments. But I think if we looked at the quarter-on-quarter new business gains, there are three essential factors that impact it. So one, from a proportionality perspective, we saw higher sales in Japan and just the margin makes an have impact from a quarter-on-quarter perspective.

Secondly, we saw some very strong a door opening in China. This was on the back of savings and annuity product. Unfortunately, the COVID hit us in the third week of Jan, so February and March we were not able to cross them as well as get the right product mix so that happen often in fact as well.

And the third one was the product mix in Hong Kong and on account of the outbreak, there was a bit of a skew from a customer segment to a shopping product, which again impacted the product mix, I should, however, underscore the fact that the new business value marching in Hong Kong continues to be north of 60%, which we believe is a very, very heavy but the three things that really contributed were the ones that I just articulated.

Paul Holden

Okay. It sounds like…

Roy Gori

Maybe I just supplement with a couple of points. One is that new business gains are one of the items that we've commented a few times to tend to bounce around from quarter-to-quarter and year-to-year. There is naturally a correlation with the volume of new business that we write as well as the next one is, as Roy had commented on earlier, we are in a challenging environment. I think it is we look forward. It's hard to predict exactly what volumes will be. And that's that will be one of the drivers of new business gains for the remainder of the year.

Operator

Thank you. The next question is from Scott Chan from Cannacord Genuity. Please go ahead. Your line is open.

Scott Chan

Good morning, Scott. It's maybe just a follow-up on, on Paul's question on core investment gains. The 608 that has to catch up, does that -- you said at end of the year or does that have to make up the difference in order for you to book on invest in gains starting today in Q1 2021?

Phil Witherington

This is Phil, it resets on the first of January.

Scott Chan

It resets. Okay. And maybe just the last question for Roy. He talked about the capital priorities organically and talks about the bank insurance agreement, committed to the dividend obviously, buybacks are halted. But M&A, is M&A feasible in this environment? Are you looking at stuff? Or are you more concerned about the first priority?

Roy Gori

Yes, Scott. Thanks for the questions. Again, I stopped by saying that we feel very confident about our capital position. And again, we entered into this crisis from a position of strength. So that's really put us in good order.

And as mentioned earlier, our focus, from a capital prioritization perspective really hasn't changed. We've always talked about the fact that organically growing our business is where we see the greatest opportunity. And that again, will continue to be the case for us as we look forward. And then obviously, we are obviously very committed to the dividends and tactical share buybacks when you see the price of our stock not reflected accurately or correctly.

On the M&A front, we're in a fortunate position in that we don't feel we need M&A to deliver on through the cycle or medium term targets. But opportunistically, if there are opportunities that align to our strategy, and that allow us to accelerate our agenda for growth, and we would certainly look at, so we again feel that the strength of our capital position puts us in good state to navigate the situation and at the same time, opportunistically if there are great value opportunities on the M&A front, we would definitely consider them.

Operator

Thank you. There are no further questions register at this time, we turn the meeting back to Ms. O’Neill.

Adrienne O’Neill

Thank you, operator. We'll be available after the call, if there's any follow-up question. Have a nice morning everybody.

Operator

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