Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco first quarter 2020 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal operator by pressing star and zero. I would now like to turn the conference over to Mr. Paul Mahon, President and Chief Executive Officer of Great-West Lifeco. Please go ahead.
Thanks, Ariel. Good afternoon, and welcome to Great-West Lifeco's first quarter 2020 conference call. I hope this call finds you and all of your families safe and well during these unprecedented times. Before we get started, I want to take a moment to acknowledge and thank all of the frontline workers around the world who've put themselves at risk as we all do our part by physically distancing. We're truly grateful for your courage and commitment in helping us get through this crisis. With me on the call today is Garry MacNicholas, Executive Vice President and Chief Financial Officer.
Garry and I will deliver today's formal presentation, and also joining on the call are David Harney, President and Chief Operating Officer, Europe; Arshil Jamal, President and Group Head, Strategy, Investments, Reinsurance, and Corporate Development; Jeff Macoun, President and Chief Operating Officer, Canada; Ed Murphy, President and Chief Executive Officer, Empower Retirement; and Bob Reynolds, President and Chief Executive Officer, Putnam Investments. Before we start, I'll draw your attention to the cautionary notes regarding forward-looking information and non-IFRS financial measures on slide two. These cautionary notes will apply to today's discussion as well as to the presentation material. Our presentation will follow a slightly different format this quarter, where I will start by addressing the company's response and positioning as it relates to the COVID-19 pandemic.
I will discuss the impact the pandemic has had on the company to date, the actions we're taking in response, and our expectations for the near term. Garry will then take you through a more detailed financial review. Following their prepared remarks, we'll open the line to questions. I'll ask you to turn to slide four. From the onset of the COVID-19 pandemic, we made safeguarding the health and well-being of our employees our number one priority. In mid-March, we enacted our business continuity plans across the organization. Today, 98% of our employees around the globe are working remotely. I would like to thank our 24,000 employees across Canada, the U.S., and Europe for their resiliency and commitment during this period of extraordinary change. I could not be prouder of how we as a company have embraced and adapted to these new ways of working.
We've maintained business operations by leveraging the investments we've made in technology, and we've quickly adopted new digital ways of working. This includes allowing e-signatures on virtual claims and increasingly using tools like SimpleProtect, our online life insurance application. We're also helping our customers weather financial and personal challenges. We've extended grace periods for life insurance premium payments, and we're providing mortgage payment deferrals for those who've lost their income because of the crisis. We're also helping our Canadian customers manage their physical and mental health by connecting them with healthcare professionals via Dialogue, a virtual healthcare app we have invested in. On the group side, we've reduced health insurance premiums for employer-sponsored plans, supporting over 26,000 small and medium-sized businesses in Canada. We're also allowing plan sponsors to extend disability coverage and other benefits for temporarily laid-off workers.
In the U.S., Empower Retirement is waiving fees on all new retirement plan loans and hardship withdrawals, and Irish Life is providing health insurance customers with rebates following the temporary nationalization of private hospitals in Ireland. In addition to a greater use of digital tools, we're adapting our processes to align with the realities of physical distancing. We have temporarily relaxed some of our medical underwriting requirements at Canada Life in Canada, allowing us to fulfill a wider range of customer needs. In the U.K., where traditional approaches to property valuations are no longer feasible, we are transitioning to remote valuations for equity release mortgages. Across the organization, we've extended call center hours and increased call center capacity to accommodate higher call volumes. We've also been partnering with governments, regulators, and the industry to support the economy.
In line with OSFI guidelines, we've suspended share buybacks and have no plans to increase dividends for the time being. The premium rebates announced by Canada Life are an extension of our participation in the Canadian Business Resilience Network and will continue to work with the federal government to champion relief measures for Canadian businesses. We've donated over CAD 2 million to relief efforts in communities across Canada, the U.S., the U.K., and Ireland. These contributions will help support food banks, frontline workers, and those most vulnerable in these challenging times. These types of responses from governments and businesses, along with the amazing commitment of the frontline workers, have helped to create some stability. We recognize that there is still much uncertainty ahead as countries and economies gradually reopen, but it will take discipline, adaptability, and creativity to manage the way forward.
Fortunately, our company has entered this period in a strong financial position. Our balance sheet, the strength of which was borne out during the financial crisis 11 years ago, is even more resilient now with lessons learned from that crisis. In the years since, we've invested heavily in our risk management capabilities and taken action to de-risk our investment portfolios. These actions stand us in good stead to navigate the current environment. We entered 2020 with a strong capital position. Our LICAT ratio at the end of the first quarter was 133%, well above our internal target range of 110%-120%. We have a diversified and resilient business model that is balanced across geographies, products, and risk types. Our investment portfolio is conservative and of high quality, and our asset liability matching philosophy largely insulates us from interest rate movements.
Beyond this, our disciplined and sophisticated risk management capability has supported important scenario-based analysis we've done related to this crisis. Discipline extends to every aspect of how we manage our business, from pricing to reserving to how we approach M&A. We're also disciplined when it comes to expense management, and we will continue to look for opportunities to reduce costs with continuing to invest in important initiatives. Please turn to slide five. While the crisis only took hold in mid-March, the swift and severe downturn in markets had a significant impact on our first quarter results, reducing net earnings by approximately CAD 300 million. As a reminder, we've adopted a new non-IFRS earnings measure called base earnings to help describe our results. Base earnings were CAD 0.59 per share for the first quarter, up 2% year-over-year.
While the year started off strongly in a number of areas, the onset of COVID-19 negatively impacted base earnings by CAD 0.07 per share. Approximately half of the impact was due to seed capital losses at Putnam, and the remainder from impacts on fee income in Canada, the US, and Europe. Net earnings of CAD 0.37 per share were down 45% year-over-year and included the negative impact of actuarial assumption changes and management actions and other market-related impacts. Garry will take you through details of the earnings in his formal comments. I will now comment on slides six and seven. These slides will give you more color on what we are seeing in each of our businesses. We've also provided details on our near-term actions and expectations moving forward, recognizing there is still much uncertainty regarding how this pandemic and its economic impacts will play out.
Across Lifeco, fee income was negatively affected by the market declines, but the impact was relatively modest given the timing later in the quarter. Expectations for fee income going forward will depend on future market movements. We did not see any material impacts from mortality across the businesses. We would expect limited financial impact from increased mortality given the age demographic and diversification of our life and annuity liabilities. In Canada, we've seen lower health and dental claims as clinics have closed, and we provided premium reductions to reflect this reduced access to services. We've also seen a modest increase in disability claims. We expect health and dental claims to gradually return to normal levels and will closely monitor disability claims experience. Beyond adjusting price as access increases, we will leverage our prescription drug and disability management services to help employers navigate this complexity.
Increasing unemployment could lead to impacts on our group businesses in Canada, Ireland, and also Empower. While there is potential for an increase in plan terminations, government programs and the flexibility we have introduced has limited any significant impacts to date. We've seen a slowdown in the group sales cycle across geographies as some businesses remain in lockdown. However, to date, we've also seen this offset by lower than expected plan terminations. At Empower, we could also see declines in assets and fees as plan participants under financial stress borrow or withdraw from their retirement savings under the CARES Act. To date, we have seen limited withdrawals from plan participants and they've stayed invested. Of note, we've seen increased interest in digitally delivered managed account advisory and financial wellness offerings.
One great aspect of the Empower platform is that it focuses the participant on their future monthly retirement income rather than their current account value. This creates less sensitivity to market movements and limits reactive selling. We have also expanded the availability of one-on-one counseling sessions at Empower to meet the needs of retirement investors seeking advice. At Putnam, market volatility in the first quarter led to elevated redemptions, in particular in the short duration and the Ultra Short Duration, lower fee fixed income products, and as well as seed capital losses. In April, as markets stabilized and improved, seed capital losses have partly recovered, and Putnam has moved to positive net cash flows overall. Putnam continues to focus on strong investment performance with 28 funds having Morningstar four or five-star performance.
In the U.K., we've seen a slowdown in individual and bulk annuity sales as market instability and lower asset values keep people and pension funds on the sidelines. We expect this is temporary, and we expect to see a return to more normal sales levels as markets stabilize. As noted, there's been a slowdown in equity release mortgage originations, but our transition to remote valuations could help on this front. Similar to Canada, rising unemployment and lockdowns could impact group risk sales in the U.K. and Ireland, but we expect this will be offset by lower plan terminations. At Irish Life Health, premiums are down because of the rebates, but these are essentially offset by lower claims due to the temporary nationalization of private hospitals in Ireland. Turning to our newest reporting segment, Capital and Risk Solutions, we started the year with a strong sales pipeline, which remains intact.
We expect more demand for life capital solutions in the U.S. and Europe. While demand is currently strong for European longevity, we do expect it to slow later in the year and early next year. Pricing and demand are solid for P&C reinsurance. We will continue to participate in that market in line with our risk appetite. Please turn to Slide eight for a deeper dive on our invested assets portfolio and the actions we've taken to de-risk the portfolio since the financial crisis. Today, the portfolio is diversified, high quality, and well-positioned for the current economic challenges. It's made up of 69% bonds, of which 99% are investment grade. Since the financial crisis, we have reduced below investment grade exposure to CAD 643 million, or 0.5% of the bond portfolio. Our European subordinated bank exposure is one quarter of what it was in 2009.
Turning to our U.K. retail property related portfolio, I would note the following high-level points. There have been no new purchases of direct non-food retail property since 2010. We have limited new commercial mortgage exposure and all post-crisis loans are at low LTVs with strong covenant protection. We have taken opportunities to reduce direct retail property assets and pre-crisis commercial loans. More specifically, our U.K. retail property related portfolio is CAD 2.4 billion, a little over 1% of invested assets. Mortgages have an average LTV of 51%, and the majority of mortgage and investment property exposure, a little over 70%, is grocery, warehouse, and distribution centers. These are properties which are more resilient, both to online shopping trends as well as economic downturns. Across Lifeco, the negative earnings impact from corporate bond downgrades in the quarter was CAD 19 million.
There was a CAD 32 million after-tax negative impact related to U.K. property related investment losses. We expect to see impacts of a similar magnitude for the next few quarters as companies remain challenged and the downgrade cycle continues. While we remain cautious, we expect the impacts of downgrades and defaults in our corporate bond portfolio resulting from the current credit downturn to be manageable in the context of our total invested assets. Please turn to Slide nine for a summary of other results in the quarter. In Canada, strong individual wealth sales were driven by our new segregated fund shelf, and higher individual insurance sales were driven in part by a new par product we launched on January 1st. While COVID-19 has impacted advisor-customer interaction, tools like our SimpleProtect app have helped sustain momentum.
In the U.S., Empower recorded sales of CAD 25 billion, driven by higher mid and small market plan sales. The year-over-year decline reflects a large plan sale with 200,000 participants that we booked in Q1 2019. While the sales cycle has slowed, Empower's pipeline remains strong. At Putnam, gross sales were up, net outflows increased significantly with steep decline in market towards the end of the quarter. In Europe, sales were up 47% over Q4 2019, down 14% compared to Q1 last year. Lower annuities were partially offset by higher equity release mortgage sales in the U.K. Sales were lower in Ireland compared to Q1 2019, which included a large fund mandated ILIM, there was higher pension sales in Germany. Turning to Slide 10. Lifeco fees were level year-over-year, excluding Q1 2019 fees related to the sold U.S. Individual Markets business.
As equity market declines occurred later in the quarter, fees reflected higher average equity markets and assets when compared to the first quarter last year. Excluding fees related to the sold U.S. Individual Markets business last year, fees in the U.S. were up 8%, reflecting participant growth at Empower and improved performance fees at Putnam. Fees in Europe were down due to the Scottish Friendly transaction in the U.K. and other income in Ireland. Turning to Slide 11, dealing with expenses. Lifeco's operating expenses were up 3% year-over-year, reflecting continued expense discipline company wide and strong business growth in Capital and Risk Solutions. With that, I will now turn the call over to Garry. Garry?
Thank you, Paul. Starting with Slide 13, base EPS was CAD 0.59, up 2% year-over-year. This includes the combined impact of the sale of the U.S. Individual Markets business, which had contributed CAD 33 million to base earnings in Q1 last year, and the substantial issuer bid, which offset the dilution through share buybacks. In Canada, base earnings improved 6% from last year, with strong trading gains being partially offset by higher disability claims. In the U.S., we saw good underlying business growth in Empower, with participant growth at 6%, but this was offset by seed capital losses of CAD 30 million in Putnam, driven by market declines. As noted, the prior year included CAD 33 million from the Individual Markets business.
In Europe, base earnings were down 19% due to lower new business gains and a swing in the impact of credit downgrades, which were positive in Q1 last year and a negative this quarter. The Capital and Risk Solutions segment saw very strong year-over-year business growth, particularly in longevity reinsurance solutions. Base earnings were up 60%, which also reflects new business strain last year that did not repeat this quarter. Overall, before COVID-19 emerged, base earnings had been on track for a strong year-over-year growth, driven by buoyant markets coming into 2020 and good underlying performance with growth in all segments, particularly reinsurance and Empower. By quarter end, market turmoil caused by COVID had negatively impacted both base and net earnings, as highlighted in more detail on the next slide.
Turning to slide 14, the upper table on this slide is a reconciliation of base to net earnings. It is important to note that not all the items excluded were COVID-19 related. For example, the negative CAD 52 million of actuarial assumption changes and management actions included negative CAD 98 million related to COVID and a positive CAD 46 million for other actuarial reviews. It is also important to note that the market-related impacts include CAD 35 million of a U.K. tax benefit as a result of the market declines, which led to a low overall tax rate but did not affect the tax rate on the base earnings. The lower table sets out the impact of COVID-19 on both base and net earnings.
The impact on base earnings was a negative CAD 65 million compared to expectations, largely reflecting the fall in markets in March with fee income impacted by CAD 31 million and seed capital by CAD 34 million. The fee income variance is a run rate impact, with the go-forward outcome clearly dependent on the trajectory of markets and average levels over time. The seed capital loss is a mark-to-market impact, an unrealized gain loss position that gets evaluated at a point in time. For example, at April month-end, seed capital had recovered some 40% of the reported loss as markets rebounded. For excluded items, the actuarial assumption changes relate to updated equity return assumptions following the market decline in the quarter. The market-related impacts included remeasuring segregated fund liabilities from the lower starting point at the quarter end market levels.
It also includes the impact of hedge ineffectiveness and the U.K. tax gain noted earlier. Please turn to slide 15. This table shows the segment and total Lifeco net earnings results from a source of earnings perspective. As a reminder, the SOE categories above the line are shown pre-tax. Excluding US Individual Markets, expected profit was up 10% year-over-year, reflecting market gains during 2019 and strong business growth at Reinsurance Empower noted earlier. New business strain of CAD 86 million pre-tax in quarter was a little higher than Q1 2019, largely in Canada individual insurance business due to declines in interest rates that have not yet been fully factored into repricing. Experience gains and losses reduced earnings by CAD 195 million in quarter, which includes CAD 237 million related to COVID-19 and a positive CAD 42 million from other experience.
Management actions and changes in assumptions reduced earnings by CAD 81 million this quarter. Updates to equity return assumptions reduced pre-tax earnings by CAD 134 million. Other changes in assumptions contributed to positive CAD 53 million. Again, these are pre-tax. Earnings on surplus of CAD 4 million in quarter reflected CAD 37 million pre-tax losses on seed capital, primarily at Putnam, due to the COVID-19 market-related impacts. Seed capital gains had been a positive contributor both in prior quarter and in the prior year. The effective tax rate on shareholder earnings was marginally negative this quarter, as net earnings benefited from approximately CAD 35 million of U.K. tax recoveries following the market decline. Note this benefit is excluded from base earnings. The effective tax rate on base earnings was 9%, which reflects the jurisdictional mix of income this quarter. Please turn to slide 16.
These tables expand on the experience results and changes in assumptions to highlight various items in the quarter. Again, these are on a pre-tax basis. Starting with experience results, yield enhancement continued to contribute positively. While there was some limited benefit from the widening spreads in March, this could be an opportunity going forward. The market-related impact on liabilities includes the impact on the value of segregated fund and variable annuity guarantees, including legacy blocks in Irish Life and Reinsurance, largely a result of remeasuring the liabilities using the market level and interest rates at the end of the quarter. Experience losses also include some hedge ineffectiveness on our GMWB products, given the extreme market volatility. Also included is the impact of a decline in market value of certain U.K. properties, which support insurance contract liabilities, as Paul noted earlier.
We observed mortality gains on our annuity and life books across Canada, U.K., and Ireland this quarter, although we have not yet seen the expected increases in mortality, particularly at the older ages, as a result of COVID-19. The credit-related impacts arose from bond downgrades in the quarter, mainly in the U.K. portfolio. Please turn to slide 17. Our book value per share was CAD 22.34. While the substantial issuer bid impacts the year-over-year comparison, you can see good sequential growth, primarily due to currency translation. Lifeco cash rose to CAD 900 million with additional dividends from Canada Life in period. This in turn reduced the Canada Life LICAT ratio modestly since the Lifeco cash balance is not included in LICAT. Business growth, particularly Reinsurance, added to requirements, which also tends to lower the ratio.
Given the LICAT design, the market impacts were minimal, and we remain well-positioned from a capital standpoint. That concludes my formal remarks, Paul. Back to you.
Back to you, Paul.
Thanks. I was being very eloquent there on mute. Apologies to everyone on the call. I'd ask you to turn to slide 18, where I'll conclude the formal presentation by emphasizing our focus on protecting, adapting, and growing our business. First, we turn to the safety and securities of our employees, advisors, and customers, which remains paramount. As jurisdictions open up, we will be cautious as our business model is working very well the way it is today. Second, we've seen an acceleration in adoption of digital platforms, perhaps two or three years of expected progress in one month. We will invest further, both in our existing businesses and through acquisitions, to advance this and improve customer and business outcomes. Third, we recognize that more than ever, capital is critically important to our stability, adaptability, and growth.
We will actively and prudently manage our capital with a balance focused on stability and growth. Finally, despite the challenges presented by COVID-19, we remain proactively focused on growth. We view this as a time to identify and act on opportunities that will drive long-term growth and shareholder value. Before closing, let me reiterate my thanks to all of our stakeholders for doing their part to collectively respond to and overcome this crisis. With that, I'm going to ask the operator to open the line for questions. Given our team is spread across multiple locations, I would ask that analysts please direct all questions to me, and I will steer them to the appropriate respondent. We should just recognize there may be a pause as people mute and unmute, and I think I'm a perfect example of that just a couple of minutes ago.
With that, operator, could we now please open the line?
Certainly. Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Gabriel Dechaine of National Bank Financial. Please go ahead.
I got one question about your European business and specifically about the regulators and some of the restrictions that are being implemented on dividend payments to shareholders. I'm just wondering how you're thinking about that in relation to your European sub dividending earnings to the Canadian holding company and how that affects the Canadian dividend to Canadian shareholders. It looks like the U.K., more flexibility, Germany as well, but Ireland might be a bit of a hitch. Thanks.
Yeah. Gabriel, I'll take that one. I'll start off by just outlining that we do recognize the importance of dividends to our shareholders and remind listeners that we have a long track record of maintaining dividends, even including through the last financial crisis. Of course, we can't predict the future, but as things stand, we actually expect to be able to continue paying dividends at current levels, and we'll be monitoring the situation. To your point, we operate in a number of jurisdictions and local regulators can, from time to time, delay dividends up to our holding company. The reality is we've actually managed through those issues in the past, and today, our capital position and liquidity at Great-West Lifeco remains strong. If I go to jurisdictions, Canada, there's been direction to not have any increases or buybacks.
In the U.K., there's just been guidance to insurers to use prudence and take into account stress scenarios. In Ireland, yes, there has been a recommendation or a direction to defer until we fully assess risk. I would say none of this is out of the norm. We feel quite comfortable right now.
Can you remind me of previous instances when this was a problem or an issue or whatever?
This would have just been when we were going through various restructuring or acquisitions and the like. It wouldn't have been a systemic issue. It would have just been as we were managing our affairs.
Okay, thanks.
Our next question comes from Tom MacKinnon of BMO Capital. Please go ahead.
Yeah, thanks. Good afternoon. A couple questions. First is just why the move to base here? Traditionally, you just really focused on reported numbers. Why are you moving to this base earnings metric?
Did you have a second question, Tom, or was that the single question?
Yeah, sure. That's a good point. The second question is really just given lockdown and everything else, just wondering how sales are progressing. I think you did mention your positive net flows in April at Putnam, but just seeing how sales are going kind of globally with you guys in April, and both on the individual side and the group side as well.
Okay. We'll deal with those in the order in which you asked them, Tom. I'll defer to Garry in a moment in terms of base earnings. We essentially believe that we can better describe our earnings and our movements by using this non-IFRS measure. I think it provides insight into our sort of core operating income as opposed to the movements on the balance sheet. We think it's a good way to differentiate those two. We also think it will serve us very well as we transition to IFRS 17. I'm going to let Garry add a little more color on that, and then he can pass it back over to me to deal with the sales. Then I'm going to actually refer on to some of our other leaders to provide a little bit of insight on where sales are at in April.
Garry, over to you.
Paul, I think you've hit the two key points. One is, we are aware that, reading the reports, that a lot of people do adjust out and try to make adjustments for various factors. We've called them out in the past in the term of adjusted earnings for things like restructuring and some of these other items. We already had an adjusted metric, and we found that formalizing the measures and making an effort to align it with some of the peers in the industry so that there's some level of consistency, and in preparation for IFRS 17, we just felt it was the right direction to go.
Again, at the time we were bringing it in, IFRS 17 was two years away, and it seemed like the right time to be making this move to, again, regularize the adjustments and have them clearly defined and laid out in the MD&A. Then, as I say, for the market related, a lot of that is where we see things going on the IFRS 17 side. That's the background to it. I should add, well, for the benefit of all, that this in no way signals a change in our views on the importance of any of the aspects of it. We continue to manage our affairs the same way. This is a presentation to try and make it easier period over period to see the underlying growth in the business.
We've had a history of positive contributions from some of the items that are now excluded, and we're still managing our balance sheet in the same fashion. I wouldn't leap to any other conclusions in that. Just I want to reinforce that it hasn't changed our view on our total earnings.
Thanks, Garry. Tom, the other thing I would say is this is something we've been working at, as Garry pointed out, for about a year. We've been back testing and looking at it and thinking about this. Our timing was interesting given the fact that COVID-19 was upon us mid-March. The reality is we decided it was still the right thing to proceed ahead. We had sort of developed all of our information around that. Turning to your question on sales, I'll just generally say that while the whole issue of physical distancing requires a change in approaches in terms of the sales processes and the sales cycle, we've actually been quite pleased with what we've seen through April. The reality is you can't kind of guess exactly how the future will play out.
We have seen pretty good resiliency in the whole sales process and sales as they've flown through. Maybe I'll ask each of the leaders in each of the regions, and I'll just call on you one at a time to provide a little bit of color on where you see sales at. I'm going to start with you first, Jeff Macoun, on Canadian sales in quarter in April.
Paul Holden, thank you. Tom MacKinnon, so let me expand on Paul Holden's question. I'm quite pleased to say that our strong start in the quarter on individual life and wealth business has continued into April. As a matter of fact, in April, we saw an increase in April in 2020 over 2019. Now, I will say that we do come into this with a relatively large pipeline, and I would suspect that we'll start to see that drop a bit in May and obviously beyond. A very strong April. I'd also say on the life side that it's interesting, as Paul Holden outlined, we've transitioned nicely to the digital world. In the month of April, close to 70% of our transactions were done non-face-to-face using SimpleProtect, which Paul Holden talked about earlier. Strong in April.
I'm also pleased to say that the product enhancements we made on the wealth side late in the year and into 2020, that we saw positive flows in the month of April on our wealth side in our proprietary funds, third party, and SEG. Although gross sales were down, positive flows. On the group side, we have seen lower amounts of activity. Quotes are down about half, and that would be similar in the industry. I am pleased to say, though, that terminations were very low in the month of April. With lower quotes, you get lower terminations. I would say that's the same for both the life and health and retirement side. Paul.
Thanks, Jeff. Maybe I'll ask Ed Murphy just to speak to what he's seeing in Empower.
Thank you, Paul. We had a very strong first quarter sales. April sales were a little bit weaker, off about CAD 1 billion versus prior year. The pipeline remains very strong, over CAD 600 billion. Our large mega market had a strong first quarter and had a strong April. Where we've seen a little bit of softness is in the smaller end of the market, call it under 1,000 employee companies. That's also where we have a pretty significant pipeline. I would say that I'm pretty optimistic on the year. I think that the sales cycle's been extended, elongated a bit in light of COVID-19. I'm encouraged with the pipeline and the activity that we're seeing in the marketplace.
Bob, is there any other color you'd like to provide on sales that you're seeing at Putnam? Obviously, I made reference to positive flows and sales coming back. Any additional color on that?
No, the only thing I would say is, having 28 foreign five-star funds by Morningstar, performance is strong across the board. The primary outflow in the first quarter was in one fund, the Ultra Short Duration, where at a point in March, the spread of rates really ratcheted up due to liquidity issues. It was driven by primarily one fund.
Thanks, Bob. Finally, David Harney, do you want to provide a little color on what you're seeing going on in Europe on the sales side?
Yeah, like as Tom suggested, it does vary between retail and non-retail. In Germany, most of our sales are retail related, I think that country has been less impacted by the crisis than the U.K. or Ireland. Sales in Germany actually continue to be good, year to dates are up on last year and ahead of target. Within the U.K., we have less exposure to retail sales. The story in the U.K. has been lower bulk annuity, well, no bulk annuity sales in the first quarter, there are signs of activity now returning to the market there, we would expect bulk annuity sales over the rest of 2020. Within Ireland, I suppose our sales are split between retail and corporate.
Corporate business sales have been very good in quarter one and in April also, and we are seeing a slowdown in retail sales, but overall, Ireland sales would still be up on last year. I suppose the category that's outside of all of that is our large institutional investment-only type sales, and they're not really impacted by the crisis. The winning of those mandates, that they're pretty lumpy, and they just vary over time anyway.
Yes. I think we'll close maybe with that. We're taking a bit of a trip around the world, Arshil's business is actually virtual because it's in every continent. Arshil, maybe you can comment on Reinsurance, Capital and Risk Solutions and activity there.
Yes, Paul, happy to give a little bit of color on the reinsurance side. We're having very active conversations with all of our existing clients, staying on top of the performance of our existing transactions. More importantly, the clients are very open to considering us not only on our traditional product ranges and on the P&C side, but also on the longevity side. We see a very strong pipeline and good conversations underway. On the structured capital solutions side of the business, as people are feeling pressure or expecting to feel pressure on their businesses in the coming months, there are a lot of conversations underway. Again, I'd be very optimistic that any disruption will be very short-term or whatever, and by the end of the year, that we'll be in a very good position from a sales perspective.
Thank you, Arshil. Tom, we took a lot of time. That's probably the longest answer you've ever had to a question, but it was a fairly broad one. I thought it was helpful that all call participants would get some insights into that. Operator, next question.
Certainly. Our next question comes from Paul Holden of CIBC. Please go ahead.
Thank you. Good afternoon. Paul, in your prepared remarks, you made some comments that you're remaining committed to capital deployment options. Wondering if the current situation alters the way you're looking at some of those options or maybe focuses you on certain priorities over others. Maybe within that, you can comment around comfort around timing of completing, say, a large M&A deal.
Yeah. I may not get to the level of detail that you're hoping for there, but I'll give you some context. The way we look at a period like now where there's dislocation is that it is always more difficult to price a transaction at a period like this where you have a lot of market volatility and instability. Are you pricing it off of market levels that start at beginning of March, end of March, what's happened today versus next week? But as markets stabilize, you can get some better comfort around the underlying value. I think that's both a mindset for the buyer and the seller. You're trying to find the right value. I think the second I'd say is that dislocation actually creates some opportunity.
We would characterize ourselves as having strong capital, you've got to make sure that you're balancing your capital relative to the apparent risks today, but also thinking about opportunity. If I reflect back on our move on Irish Life, if you go back to as we were looking at it through the 2011, 2012, into 2013 period, when we moved on it, one of the things that would characterize that move was that there was dislocation and some of the other people who might have been, or organizations that might have been seeking that business chose to pull back. Our view is dislocation, if it's a good value property, it's one where it could create some opportunity.
The other factor I would put into play is that I think we've always been thinking about making sure that our businesses have scale, but also thinking about how do you enhance capabilities from a digital perspective. As we're looking at transactions now and thinking about The uptake and leverage in digital capabilities, it's something that is top of mind as we're assessing opportunities and targets right now. Is this going to be something that's going to really enhance our business? I think a lot of this shift in behavior is not going to be short-term in nature. I think a lot of it's going to be locked in terms of the ways of working or ways of selling or ways of advising into the future. That would be another mindset we'd have.
I would say that from a geographic perspective, we continue to view the U.S., Empower in particular, as a place where there's going to be opportunities to both bolster scale and capability. Putnam, the right target in terms of scaling assets there. Europe, we will continue to have a focus there. Again, we will look at all of these things in the context of ensuring that we feel confident in the valuation and we feel confident in our ability to execute in an environment that's going to have a little bit more uncertainty. That's the context I could provide on that.
Great. That's helpful. Second question from me is if you can provide us some context for take-up on premium deferrals. I don't know if you can give it on an aggregate basis or maybe sort of on a segmented basis. That's the first part of the question. The second part of that question is how do premium deferrals flow through on an accounting basis in terms of the SOE?
Okay. I think that's a two-parter. When I think about premium deferrals, that's been predominantly a Canadian phenomenon. I know that within the Empower business, there's been allowing for people to not be charged loan fees. That is not a material amount. Take-up hasn't been high there, and it's not material. In the context of Canada, I think Jeff Macoun could provide a little bit of insight into whether premium deferrals, what's the scale of it. I don't think Jeff's going to provide you an exact dollar amount, but he can give you a sense of whether it's sort of meeting where our expectations were. Then secondarily, I think Garry could provide a little bit of color on the accounting treatment of that.
I'm going to turn that over first to Jeff Macoun for a little bit of context on the premium deferral activity we've seen.
Thank you, Paul. I think as you know, and Paul called out in his comments, we did have premium credits, we'll call it, to the small and medium-sized businesses, about 26,000 across Canada. That's the context of the scope, where we put through a credit in the month of April. We indicated we would be looking at that on a monthly basis. We will be moving forward again in the month of May, and we'll continue to monitor that month by month to see where we're at with regards to dental clinics and paramedical services, et cetera. The take-up on that would be 100% of all the clients, and the feedback has been, as you might imagine, outstanding for the clients. We do provide a credit on that, and the percentages vary by the benefit.
That'll continue on month-by-month until such time that we feel we're back in a position where everything is running smoothly. On the individual side, we haven't had significant take-up on the deferrals in terms of moving call it days. I would say it's been relatively small as a percentage of our overall block at this point. Those are the comments I would offer, Paul, at this point.
Yeah. Paul, the point I'd make on the premium deferrals that Jeff is referencing there is those were calculated, frankly, to offset the reduction in claims that we were seeing. The actual impact that we'll see will be lower revenue and lower claims broadly offsetting one another. From the standpoint of other deferrals, we really haven't been deferring premiums beyond that because this has allowed employers to keep their plans in place. As we previously outlined, we're not seeing a spike in terminations. We're actually seeing terminations that have come down. Garry, any comments on the accounting treatment of that? Or is it just sort of flow through?
I'll just clarify two things. One is to the extent we've had, I'll call them premium reductions rather than deferrals, just to get the terminology. To the extent we had a premium reduction and we're on the anticipation of lower claims, then both those adjustments, the lower premiums, lower claims, will go through, experience gain loss, and obviously, we're looking to set that out so it's roughly balancing. On premium deferrals where we extend grace periods or something, that won't have an impact on earnings. I think to the extent, and sort of going to the next step in your question, if eventually people can't pay and there's lapses, that lapse experience, positive or negative, would show up in the policyholder behavior side. The act of a premium deferral itself, extending the grace periods, doesn't have any earnings impact.
That's helpful.
Any material earnings impact.
Thank you. Thank you for your answers.
Thank you, Paul.
Our next question comes from Doug Young of Desjardins Capital Markets. Please go ahead.
Good afternoon. Just, I guess a few questions. The actuarial assumption change, the CAD 98 million related to changes in economic assumptions, I apologize if you covered this in your prepared remarks, but can you flesh that out? As well, the CAD 149 million. That you kind of strip out. I think you said that also factors in the CAD 35 million U.K. tax gain, that's taken out of base earnings. I just wanted to clarify that, I have one follow-up after that.
Okay, Garry, I'm going to let you take those two.
Sure. I'll answer the first one, and as I write my answer down, I'll get Doug to just reiterate the second one in a moment. The first one on the CAD 98 million, that's the equity growth returns. These are for equities, the common stocks, that are backing our long-tail liabilities in Canada. We take a certain portion of our long-tail non-participating liabilities, and we back those with equities. We've adjusted the growth assumption on that. Typically, for small movements, you can assume that the markets rebound, or in the case of market moves up, they come down again towards your central assumption. The market move was so large that we're bumped up against actuarial limits, and so we had to just lower our overall growth assumption to align with the standard. That's what that really was, is just the long-term equity growth assumption came down.
Doug, Garry-
If you don't mind repeating the second one, that would be helpful.
Garry, just before you do that, I would characterize, the reality is it was following actuarial standards and as always, we're going to approach these things with the appropriate level of conservatism because that is the reality of the way actuarial standards work. Garry? Oh, Paul. Doug, the second question, can you provide a little more color?
Yeah. Just maybe if I could follow up on that one before we go on. Do you mark-to-market the equities backing liabilities, or do you use a corridor approach, in that you're just kind of adjusting that corridor approach?
It is more of the latter. It's more of a smoothing approach, and there's no further room to smooth those. We took it, and it effectively works a bit like a mark to market on the amount that was outside of that corridor smoothing. I think where you're maybe going is the converse of that, is it would tend to reverse as markets improve, or obviously it could go the other way if markets got worse. It will move-
Would you tell us?
around a bit more.
Yeah.
we would call it.
How much would the market.
Sorry.
Go ahead.
Yeah, no, I was just going to say, how much buffer do you have in that corridor, if you're willing to tell us. How much do you typically have before you have to make a change to your reserves backing long-term liabilities?
Yeah, I don't have a dollar quantification for it.
Okay.
It's more of a complex smoothing mechanism. I think we are closer to the limits of that. That's why a lot of the change went through the markets. Again, as markets improve, a lot of it comes back. It is more complicated than just a dollar figure corridor.
Fair point. Second question is what the one-.
It is a smoothing mechanism.
Okay.
Yeah.
Doug, your second question?
Just on the CAD 149, I think you said it factors in the CAD 35 million tax gain, like that's embedded in that. You are backing that out. Is that correct?
Correct. It would've been CAD 184 and then the tax benefit was a positive, so it's a CAD 149.
Okay. Lastly, I think you said in your presentation, the U.S. expense growth, if you exclude US Individual Markets last year, was about 10%. I didn't see any indication what was happening there. I'm just looking for a little more detail as to what drove that.
I think the main driver of the growth would've been just the growth in the business at Empower. I think the participant growth alone was up 6%. I'm not sure off the top of my head whether currency had an impact, but a lot of it was due to growth in business.
Fees.
Putnam would've grown-
Fees were up 11%.
business-wise. I beg your pardon?
I was just saying fees were up 11%.
Yeah. The fees would've gone up commensurately with it. That's where I was going.
Okay
is you have growth on both sides.
Yeah. Perfect. Okay. Thank you.
Thanks, Doug.
Once again, if you have a question, please press star then one. Our next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good afternoon. Could you just clarify that CAD 134 million that Doug was just referring to, it is possible then, given how sharply markets have rallied since the end of the quarter, that a portion of that could come back in Q2. Is that fair?
That is correct.
Specifically now on the CAD 215 million, the market-related impact on liabilities that goes through experience gains and losses. Has the company provided any sensitivity we could use to gauge the potential gains and losses going forward? The experience gains and losses now.
Garry?
Yes. In fact, we've expanded our disclosures in this last financial tape just to add both a 10 and a 20. We found that with the potential market swings, perhaps a 10% plus or minus was not enough, so we've added a 20%. We do have the impacts that can arise from these changes. Some of the elements such as hedge ineffectiveness, they would not be in the sensitive. That's an in period of extreme market volatility, so you wouldn't see that. It's more just the actual liability changes from the movements in markets. That's really the way you do your integrity funds using the current market levels as the start point to run all your various liability models.
Okay, I'll find that. Just one final quick one. I think in your opening comments, I think it might have been you, Garry or maybe Paul referred to the strain being higher because you hadn't priced in the reduction in interest rates. Is the suggestion that you have the flexibility to raise pricing and we could see strain come down meaningfully in the short term?
I think there's two issues to that. If we raise pricing for sure you would see the strain on new sales come down. You always have the flexibility to raise price. The question is, where are we at relative to where we want to be from a pricing perspective? I'd say right now we're taking a close look at that. We took some pricing action in the first quarter on certain Canadian products. I think Jeff could provide you some context on that. The key question is what do we do on pricing now relative to our life and individual disability products, where we would've seen that strain. Jeff, any comment on pricing actions taken and, obviously you're not going to provide guidance on specific pricing action, but the way you're thinking about it?
Yes. Thank you, Paul and Mario. We did get ahead of this on the UL side a number of months back. You'll see that start to flow through. On the term insurance side, of course, we have plans to get after that as well. I would say the UL is the main area.
Yeah. What you see in any given period is products that would've been underwritten or applied under a pricing basis that was a couple of months ago. To the extent that the sales that are flowing through are on a higher pricing basis, you'll see some less strain coming through.
Thank you.
Thanks, Mario.
Our next question comes from Darko Mihelic of RBC Capital Markets. Please go ahead.
Hi. Thank you. Good afternoon. I just wanted to go back to the dividend question for a second just whereas I understand you're committed to it, I think what might help also is just the level of importance of Ireland and say, the U.K. in terms of cash that's pulled up back to the holdco, I should say. Any other levers you could pull that would give investors comfort that you could bridge a short-term moment here in time by pulling on other cash levers. I understand the CAD 900 million at the holdco. I'm just wondering how much else you could pull from other subs and/or other cash resources you could use to bridge a period of time where regulators may restrict you from pulling cash out of Europe.
I'll start, and then I'm going to turn that one to Garry. I'll start out by saying that the overall disclosure we provided was that given the current conditions and looking at the current environment, we are comfortable with our ability to continue on with dividends at their current levels for the foreseeable future. That is the comment we've made. In the context of the various jurisdictions, as I outlined before, Ireland is a place where they've said until things stabilize a bit. The reality is we do have excess capital in various parts of our businesses. The other comment I'd make is that when we report on our overall European business there's also elements of our business where we're reinsuring and using our internal reinsurance capabilities.
Not all of our earnings that would come out of Europe are going to be fully limited by any actions taken by a regulator. I think I'll let Garry start off with that, and Arshil may want to provide a little bit of context as well. Garry? Garry, I think you're on mute.
Oh, sorry. I am on mute. Which aspect in terms of the geographic split of the earnings?
Yeah. Just our comfort in terms of having access to enough liquidity for an interim period if there was any restriction.
Well certainly, first of all, we are starting today with the Lifeco cash up at CAD 900 million. There's a fair bit there to start. Our overall capital ratio is at the LICAT ratio well above our target. Again, there is room there within the European segments. That's just one segment. We've got the reinsurance, which is by and large outside of the European jurisdictions. There is a subsidiary there, but most of reinsurance is outside of Europe. The other thing we do have internal reinsurance arrangements for some of our European business. That's actually reinsured outside of a Solvency II for capital management purposes. That does allow any profits on that business to flow up again, not through Europe as well. Those are some of the elements.
Okay. I guess the question is there's CAD 900 million of cash, which is substantial and could certainly pay. The question, I guess is what is accessibility? Like how much more cash could you quickly access over the course of the next year or so? Because one of the things that we worry about is if one jurisdiction prevents you from pulling cash out. Others could quickly follow suit because they don't want to be rated either, right? The concern would be that eventually what we see, and perhaps some jurisdictions that actually ask you to downstream capital. What is the capability of you raising cash rather quickly here over the course of the next year to make sure that the dividend, both pref and common, are taken care of?
Yeah. Well, certainly we do have untapped leverage capacity at the moment. We're a fair bit under the ratio sets. Everyone do their own estimates, but probably CAD 2 billion-CAD 2.5 billion of capacity there. I think I would not be unfair to say we'd have good access to the Canadian market, and we have tapped both the U.S. market and European markets in the past in terms of debt raising. I think we've got flexibility in terms of which markets, and I think we would have good access to markets, and we have leverage room at our current ratings.
Yeah. The other point I'd make, Darko, is that we haven't had to Oh, sorry, I'm getting a bit of an echo there. Maybe anybody who's not on mute could go on mute. We haven't had to inject any capital into any of our subsidiaries. I'd point out we have very strong RBC ratios in the U.S., so that gives you a sense of the capital strength and resiliency there. We are above our Solvency II target ranges in our European operations. Again, there's strength there. We're not short on having overall capacity. The core issue is do we have the flexibility? What we're saying is that as we look at our situation, we believe we have enough flexibility in the system.
That's great. Thanks very much. Appreciate that.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Mahon for any closing remarks.
Thank you very much, Ariel. I just like to close and say I do want to thank everyone. I realize this has been an exceptional quarter end for our organization. I'm sure it's an exceptional quarter end for all of you in the work that you do. I know there's been lots of information coming from us, coming at you. I appreciate your thoughtful questions. I will say that we totally look forward to hopefully a more stable end of Q2. In the meantime, please take care of yourselves and your family and your loved ones. Thanks very much.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.