A record level of assets under management and robust wealth product sales drove an 18% increase in Manulife’s MFC first-quarter earnings over first-quarter 2012. On an operating basis, the company earned CAD 619 million in the quarter, or CAD 0.32 per share, meeting our expectations. Core return on shareholders’ equity was 10.6%, consistent with the levels achieved in previous quarters. GAAP income was CAD 540 million, which included investment gains of CAD 147 million and a charge of CAD 208 million related to the impact of equity markets and interest rates. The company ended the quarter with a regulatory capital ratio of 217%, a 6% improvement from fourth-quarter 2012.

Insurance sales took a hit in the quarter, as the company was the first in the market to institute pricing actions. Sales dropped 31% in Asia and 24% in Canada, as a result of tax and product changes last year as well as a price increase in light of lower interest rates. Mutual fund sales, on the other hand, were in sharp contrast to insurance sales. This was to be expected, as the equity market had been performing relatively well in the quarter. Overall wealth sales increased 43% compared with first-quarter 2012, with Asia fund sales more than double the year-ago quarter. U. S. wealth sales increased 45% due to record mutual fund sales and robust retirement plan services sales. At the end of the quarter, the company managed CAD 555 billion of fund assets in a diversified portfolio, with limited exposure to GIIPS sovereign debt.

Despite a CAD 208 million charge, the company has made good progress in cutting the company’s earnings sensitivity to the equity market and interest rates, in our view. Earnings sensitivity has been reduced by more than 80% since the peak of financial crisis due to re-pricing and de-risking of products. As evidenced in this quarter, Manulife has stepped up efforts in 401(k) and mutual fund sales and deemphasized liability-based products. These actions should lead to a more sustainable business model that is less sensitive to interest rates, in our view.