Manulife Financial Corp (MFC) 2001 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the John Hancock Investor Relations Conference. At this time, all participants are on a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your hosts for today's conference, Ms. Jean Peters, senior vice-president of John Hancock. Ms. Peters, you may begin your conference.

Thank you Denise. Good morning everyone. Thank you for joining us on this morning's conference call. We hope you have all had a chance to review the fourth-quarter press release and the statistical supplements. They can be downloaded from our website jhancock.com should you need them. This morning, Tom Maloney, John Hancock Chief Financial Officer, will take you through the results of the quarter and talk about our outlook for 2001. Also, on hand are a number of members of senior management who will be available for question and answer. David D'Allesandro, our Chief Executive Officer; Cathy Gravland, head of retail; John Deciccio, our Chief Investment Officer; Maureen Ford, president of J H Funds, and Jean Livermore, our head of the GNSFP. Before we begin the remarks, I wanted to report some news in the quarter lest anyone should question the John Hancock growth story. We are pleased to announce that Madeline McClennan Charity was born to Alicia and Reynard Charity last night at 11p.m. She weighed seven pound six ounces and is 19 and a half inches long, and Alicia will be back Tuesday to give you all the details. This call is also being Webcast at www.vcall.com and can be accessed from www.jhancock.com, and replays will be available on those sites as well. Finally, before we begin with the discussion of earnings, I will provide cautionary remarks about forward-looking statements. During the course of this conversation and discussion, management may make statements that are forward-looking within the meeting of the private securities litigation reform act. These statements may include projections, estimates, and descriptions of future events. These such statements are subject to a variety of risks and uncertainties that may cause actual results to differ materially. In this regard, we refer you to the cautionary statements contained in our press release and our 10K and 10Qs and other periodic reports. Also, guidance that was provided in the press release and that will be discussed today should be able to be relied on until the end of the quarter unless updated or modified by company statement. After the end of the quarter, the company enters the quiet period, which will continue until the earnings are released. With that, I will turn the call over to Tom Maloney. Thank you Jean, and let me give my welcome to everyone for joining us today on our first quarter 2001 conference call. Today what I am going to do is discuss our solid first-quarter results and our general outlook for the balance of the year. At 61 cents per share, first-quarter earnings demonstrated the inherent value of John Hancock diversified product base as well as exceeded street expectations despite the very difficult environmental stemming from the equity markets and a slowing economy. After tax operating income of 61 cents is up 5% over the 58 cents reported in the fourth quarter. In the first quarter of 2000, earnings of 65 cents included 7 cents of non-recurring income, so our core results are also up about 5% year over year. We have said previously that the 10-12% earnings per share growth we expected for 2001 would emerge mostly in the latter half of this year. This is still the case. We achieved solid first-quarter earnings largely due to swift and focused expense control, good investment results, and improved earnings from our institutional spread based products and other products in our portfolio. All these drivers helped to offset the impact of the market decline on the quarter, which was less than two cents per share. Going forward, this kind of performance should allow us to hit our earnings per share target in line with the guidance we provided you several times since our annual investors' meeting back in November. Please note that this guidance presumes the stock market rises modestly 4-5% over the rest of the year and that we don't slip into recession, which we think is unlikely at this time. I am sure each of you has your own view of the economy, and that will be factored into your earnings forecast. It also takes into account revised forecast for growth in long-term care and variable annuity sales. We expect long-term care sales growth to grow 10-12% versus our previous 12-20% estimate. We expect variable annuity sales to be flat to up 5% compared with the previous 25-30% estimate. Lower expected variable annuity share sales could be partially offset by potential higher fix annuity sales growth of about 20%, which compares with the previous estimate of 10-15% growth. We think recent results continue to demonstrate that John Hancock's brand broad distribution and balance earnings base provides a degree of protection against economic and market downdrafts. We maintain a competitive portfolio of both equity and fixed-income based products, because we believe it is extremely important to be prepared for the kind of shifts in consumer preferences we have seen in the past six months. For example, investors variable annuities when they saw the equity prices were not hard-wired to increase forever. We had new, competitive fixed products on our distributors shelves and they are more than offset the clients' invariable annuity sales during the quarter. Also, we continued to more deeply penetrate a variety of distribution channels such as direct brokerage, banks, and broker dealers by levering the power of the Hancock brands and by making it easier for our partners to do business with us. For example, the direct brokerage areas Signator generated 31 million dollars of total life sales in the quarter, up 255% over last year. This operation barely existed when we went public in January of last year. Additionally, the deepened relationship in the bank channels and our ownership of assets helped fix annuity sales to more than double over the last year, and Hancock is not dependent on retail products alone. Demands for our gift and global funding agreements is strong and the cost of funds remains very attractive as the institutional investors seek out the high quality fixed [term] income returns we can offer. On the financial side, we continue to uphold several levels to maximize growth. We brought back 3.6 million shares in the quarter on top of the 3 million shares repurchased in the fourth quarter of last year, and on the expense front, we have been very disciplined. As you know, we are committed to net savings of 30 million dollars in 2001. However, when it became clear that the equity markets would be weaker than anticipated in the first quarter, we targeted savings that could be accelerated as well as revenue enhancements that could contribute to offset the resulting revenue shortfalls from the market impact. We have also identified additional expense initiatives that we can use to mitigate the impact of the weaker first quarter market on the balance of 2001. Reductions will come from throughout the complex via department restructuring, elimination of activities, reduced reliance on consultants, and continued focus on reducing non-deferrable marketing and distribution costs. However, we remain committed to increase spending on the product, services, and distribution product we deem vital for our long-term and current growth plan. To be sure, there will be plenty of bumps on the roads for the rest of this year. We again recorded positive net sales in the mutual fund company, but net sales closed in variable annuities, and our independent investment subsidiary remained negative. There is also the growing likelihood that state tax legislation will change significantly. We began to see softness in variable life survivorship sales as potential customers and their advisors just waited to see what happened in Washington. We have warned since last summer that the state tax issue would likely impact our survivorship sales, although even the total repeal would hit the bottom line by only three cents per share in the first four years of repeal, and that is before any mitigation actions we would be taking. We responded by introducing new, competitive single life products, [term] and COLI products and to collaborate with our producers on new strategies for life insurance for a variety of protection and asset accumulation needs. The slowdown and survivorship sales took hold in the first quarter and the ramp up of new sales efforts and single life products will follow over the next several months. Nonetheless, our producers found increased demand for our new COLI products in career, direct brokerage and M-channel resulting in strong total life sales for the quarter. Now let's turn to highlights of the first-quarter results and how they compared with the fourth quarter of last year. In protection, non-trade pretax earnings rose to 47 million dollars versus 35 million in the fourth quarter. The increase came mostly from improved mortality, higher net investment income, and lower expenses. These were partially offset by the impact of weaker separate account performance, which reduced results by about 2.5 million dollars and by increased amortization of the results of new DAK models we introduced at the start of 2001 as part of our financial systems upgrade. Long-term care earnings were up 10% for the fourth quarter driven by forwarders as well as by lower expenses and improved morbidity. In a traditional line, pretax earnings were down about 800,000 dollars versus the fourth quarter. That was the result of a transfer of assets to the corporate segment related to the reinsurance of the close block. Turning to the asset-gathering segment, John Hancock Funds continued its solid recovery with a 22% increase in operating income over the fourth quarter to 22.1 million dollars. A gain was driven by lower expenses, which more than offset a drop in advisory fees caused by market depreciation of 2.5 billion dollars for year-end 2000. John Hancock Funds net sales picture continues to improve. First quarter net sales were up 50% from the fourth quarter to 261 million dollars. That also compares favorably to the first quarter of 2000 during which the funds group saw net redemptions of over 300 million dollars. Driving the turnaround at J H Funds is its success in diversifying sales across multiple fund types, money flow into new funds, and expanded marketing and wholesaling. In the retail annuity line, the story is mixed. In the fixed business, pretax operating income was up 7% over the fourth quarter to 23.5 million dollars driven by higher net investment income, lower expenses, and improved lapse rate. Sales grew 18% over the fourth quarter to 314 million dollars and average account balances were up 3.5% the 5.5 billion dollars. Fixed annuity spread narrowed about 30 basis points during the quarter primarily due to a lag in reducing crediting rates at the same pace as portfolio rates fell. We have taken steps to mitigate this trend by changing crediting rates on both new sales as well as in renewal rate. In the variable annuity line, pretax operating income grew to 6.3 million dollars in the quarter versus 1.2 million in the fourth quarter. Lower expenses and the fee increases we discussed last quarter were partially offset by increased amortization as a result of the new DAK models mentioned earlier and by the impact of poor separate account performance. Clearly variable annuity earnings remained under pressure. First quarter lapse rates were up 60 basis points over the last quarter to 12.7% after netting out the impact of internal exchanges. Weak separate account performance reduced earnings by 4 million dollars. Sales were down 21% from the fourth quarter to 240 million dollars amid the market's sharp decline. We believe that sales will improve and lapse rates decline as the market stabilizes and as our Signator representatives work through the conservation program and are refocused on new sales. Turning to the institutional segment pretax operating income and the guaranteed in structured financial product segment rose 16% from the fourth quarter to the 88.6 million dollars. A driver was our spread base business were pretax net was up 23%, the 78.6 million dollars compared with the fourth quarter. A gain came from higher average investor assets, which were up 1.6 billion dollars to 19.9 billion and higher spreads which expanded 5 basis points to 141 basis points. We are also making an exciting push into new institutional markets. During the quarter, John Hancock was selected by a fortune 500 company to offer annuity payout option for its retiring for 41K participants. This is an early indication of how employers are beginning to think about fashioning and income stream for retiring employees from a define contribution asset base and signals a potential from emerging new market. In the investment management segment, pretax operating income was 9 million dollars down from 11.5 million dollars in the fourth quarter. Most of decline resulted from our affordable housing unit, which did not participate in any deals in the first quarter, which is really typical at the start of the year. Earnings form the segments largest business, independent investment, were 5 million dollars versus 5.6 million in the fourth quarter driven by decline and advisory fees. The unit's net redemption were 1.3 billion dollars in the first quarter above the level independent experience on the quarterly basis during 2000. The management of independence believes they are on track to see a turn around in fund flows by the end of the year. Performance versus their benchmark was good across the board for the fifth quarter in a row and they have exciting new products in the market place that are being well received. In our final segment, corporate other pretax operating income was 23.6 million dollars versus 47.2 million in the fourth quarter. Maritime Life our Canadian subsidiary reported higher earnings on improved performance in its individual group line. That was offset by a drop in earnings from corporate operations driven primarily by lower investment income. This segments decline in net investment income was due to its lower capital base and we moved effectively deploying capital to support business growth repurchase our shares and pay shareholder dividends. It is also important to know that our strategy of investing in significantly tax preference assets, which impact pretax income, has helped lower the cooperate tax rate by about 1% overall. In wrapping up, we are very pleased with the results of this quarter especially given the volatile economic and difficult legislative conditions we faced. We are looking forward to solid growth from my total retail and institutional businesses and we believe we are on track to hit our earnings per share target for the full year. We will continue to manage expenses tightly and react is necessary for changing market's condition and as David had said many times we are a company that remains committed to adding to long-term share holder value. We will now open the call to your questions.

I think we are waiting to go to the question and answer session. Thank you Ms Peters. Ladies and gentleman if you have a question at this time please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue please press the pound key. Our first question comes from Ed Spear of Merrill Lynch.

Good morning, everyone. I had a couple of questions. First of all I was wondering if you could tell us on the comment of the release about to the assumption of 4% to 5% appreciation in the market. Is that referring to from the level we are currently or from where we were at the end of the first quarter and secondly I was wondering if you could talk a little bit more about the change in the DAK policy and specifically what changes were made. Thanks.

Ed, this is Tom Maloney. In reference to the first part of your question, the 4 to 5% appreciation that was geared off of the end of the first quarter, so as of the end of March I am expecting that overall 4-5% appreciation from there. In reference to the DAK model question, let me talk about it and then if you want to delve into it deeper we can turn it over to Barbara Lotti. One of the things we have been doing is upgrading all of our financial systems across the whole organization and including in the retail finance area. As part of that we have upgraded and spent a lot of time and effort on developing new liability models including the DAK model. These new DAK models actually allow us access to much more information that is much more on a real time basis and everything else and as a result of that what we have done is actually come up with the new amortization set of schedules that is affecting both the non-trad lines and the variable annuity lines.

Are you ok with that, Ed?

I guess there may be any change in the long-term rate or return assumptions for the market or persistency of the business, anything like that it is noteworthy.

No, the only thing that we have actually done in our forward-looking projections here is as I indicated, we have adjusted the outlook for the growth and long [term] care and then in variable annuities.

Ok, thank you.

Our next question comes from the Vanessa Wilson of Deutsche Bank.

Hi good morning. Since you gave some targets in November, in some way is the environment has really been much more challenging than I guess you would have anticipated and you have backed off from some of your growth targets for a variable annuities and long-term care but as I listen to your comments it sounds like you have a higher confidence level in that 10 - 12% growth rate. Could you talk about what the sources of that confidence are and also give us a feel for what are the key drivers of the stair-step increase in earnings from this solid 51 cents reported in this quarter as

Vanessa, we had a little trouble, your question broke up a little bit in terms of the growth rate. What was the growth rate, you want this to discuss the confidence levels in?

The confidence levels to 10-12% have increased as the year has progressed and what is the source of that confidence

And that's in earnings and how it is going to emerge in the second half.

Yes

Ok, thank you.

Vanessa, this is Tom Maloney. On the 10 to 12% I will say that the confidence level is really about the same as that it has been all along. What we had to do and we were surprised somewhat because of the first quarter being down more than what we had originally anticipated. We took the additional expense actions that we talked about in the call and have talked about in the press release and so that has mitigated some of that and we still feel confident that the second part of the year from an economic environment will be stronger than what we have seen so far. Clearly the month of April was encouraging but then the last few days haven't been so encouraging and that is the reference to the bumps in the road that I made in the discussion we just had. I think we are still anticipating to see a small continuing move up in Q2 earnings and then much stronger movement up in Q3 and 4.

And Tom, when you referenced the economic environment, are you thinking of terms of demands in your products or you are thinking in terms of investment results.

I think it is both but probably more oriented because of the real impact of the what the market has on its new sales, tend to not have a big impact early on in their life cycle but are more longer term.

Thank you.

Our next question comes from Nigel Dally of Morgan Stanley.

Good morning. I have question on consolidation. In light of the recent views by to buy American General, there has been a lot of speculation that Hancock be next. I was wondering whether you could comment on that.

Hi this is David D'Allesandro. You know I considerably understand - I think we can all understand the speculation strictly as intensified with the recent activity from AIG, AGC I must say that we're somewhat bewildered by what has been written in light of that speculation and let me just tell you if you look at the facts associated with our take over protections versus what has been written. I remember reading in one report that we could actually negotiate and pre-announce prior to February of 2002 that we have been acquired by somebody and that I read some place else that all protections will be eliminated in February of 2000. I think it is probably important to at least state a couple of facts since our demutualization was approved on a somewhat different basis than some of what has been reported. Our approved plan says that until February of 2002, no one can even offer that is offer to acquire that alone acquire so that would certainly say that we could not even entertain the idea of an offer even if it wasn't associated with a specific dollar amount until that time. In 2002 for one year as of February of 2002, we still have another version of protection and that is no company may offer to acquire us, that is offer to acquire us before they even set a price without prior approval of our board of directors, without prior approval of our board of directors. We will be happy to send anyone the exact language which I am sure you can get from our IR people and furthermore, the Massachusetts Commission of Insurance has very broad discretion in that one year. Now let me just also say that we think investors should invest in our company because we are focused on building shareholder value and because we continue to look at all options in this changing environment and we will continue to look at all our options and our board will continue to look at all options, but I think it is important that the facts about our protection are established and that we continue to tell you that we are committed to the long-term issues associated with shareholder value and we look at all options.

Our next question comes from Bob Glasspiegel of Langen McAlenney.

Langen McAlenney. Good morning everyone. Fixed annuity spreads, when should they start to stabilize question 1, and question 2, what is the outlook for tax rate per 01 and those are the two questions. Thanks.

Hi. This is Cathy Gravland. I will answer the fixed annuity spread. In the first quarter spreads were about 217 basis points, certainly on the low end of our target range and we are already making moves to move that target to 200 to 240 and I would say that the actions we will take in the first quarter, I mean in the second quarter, you should start to see results right away. We are looking for improvements in both renewal and credited rates, so I think in the second quarter that is when we will see that happening.

Thank you.

Hi. This is Tom Maloney. In reference to the question on the tax rate outlook, I think what you're seeing in Q1 for the total company tax-rate, which is about a 100 basis points lower than last year's is one that you can rely on for the rest of this year.

Thank you. If I could just follow up - long-term care, what is behind the downward sales target specifically in respect of competition and what do you see in respect of skill

Hi. It's Cathy again. A couple of things are going on here. As you know, we have been retooling the Signator channel and that is where you are seeing the lowest production now. It is down 27% over same time last year and what we are doing now is the movement of or hiring less green tea so used to come into the firm and that was the first product they sold. Now what we are doing is stabilizing that channel, hiring more in the experienced agent category and as a result you are seeing a fall off in long-term care. What we are looking for is a brokerage channels, which have been up over the first quarter last year and over the fourth quarter to make up for that lag. What I will tell you in terms of guidance going forward is we are definitely seeing our competition in the brokerage end of the business, both on from a pricing perspective and from a compensation perspective. And those are the major reasons for giving you guidance downward on long-term care. The competitive situation and also what we are looking for is the crossover from the point in time when we stabilize the career agency system to continue to sell them a more stable level of long-term care and brokerage picking up at the levels will make up for that.

Thank you.

Hi. This is David D'Allesandro. Let me add a couple of comments about long-term care. I think we are all going to see some choppiness in what products sell this year. It is still rather unpredictable across the lines. I think it is unpredictable across the industry based on all distribution in retooling and the industry trying to figure out what people might buy in this uncertain period. But long-term care is a product that everyone is concerned about out there because they worry about our margins. Well, the fact of the matter is you can sell that product today if you want to do two things, if you want to drop your margins by the price and by underwriting. And this company refuses to do either and so we are not tempted to drive LTC sales because variable annuity sales are down, for example. This company will hold its margins even if it means taking something less in sales. Our next question comes from Colin Devine of Salomon Smith Barney. ) Good morning everybody and certainly congratulations on a very solid quarter, given the markets. I wonder if I might come back and revisit a little bit of protection and asset-gathering sales. On protection, to be candid, I just back up the quality because of the frumpiness. And when I do that and I really start to focus in on Signator. I was quite surprised to see variable life sales flat given the very strong growth that we have seen from American General, we have seen from Lincoln, we have seen from Nationwide and other companies have reported this quarter and then if we flip it over to asset gathering, again I think really honing in on Signator, what is happening or perhaps what is not happening there. BA shares being down as much as they were, I mean, Essex had a fabulous quarter and hats off to him on the fixed side but looking at Signator particularly back up the internal exchanges your sales seem to be considerable weaker than anybody else out there and I was wondering if you just might tell sort of what is going on and when we might see that turnaround.

Hi Colin, Cathy. I got your comments about COLI but let us go back to the summer of last year when we said we are going to pay a lot of attention to what was going on with the state-tax issue and what we did was we focussed on poor product initiative. One of them was a brand new COLI product for what we would call the mid to small case size COLI business. On top of that launch Magnastar with M group. The third was the new-term offering and then the fourth was the new single-life product, the edge product which just came out in March. I think what you are seeing in the numbers is the result of those two new COLI products which have experienced significant growth. You can see the numbers. It is up 314% over the 4th quarter and I think it is like 360% over same time last year. Both those products are doing well in the COLI market. And because of the fall off in the VL sales, we really looked at what was happening in the underlying numbers and where we saw the fall off was in survivorship and you know anecdotally from that the agency system and also even from our higher-end producers. There are a lot of people who are fence-sitting and I know you are saying that Hartford and Lincoln and Nationwide had strong sales and the way we look at that is they are very strong companies in the broker-dealer channel and that is why their VL sales were up. We are so new in the broker-dealer channel having just cut in to Smith Barney and done the training in January and Morgan Stanley that we just are not going to be able to penetrate that as quickly as people who have been there, as you know, 8-10 years. So, the growth is there in the broker-dealer channel. We are pushing hard there and I think we are making great inroad. On the Signator side I think we will continue to see a little bit of shine relative to people fence-sitting and holding off in survivorship. But the good news is that both the COLI products are strong and also the new edge product. Lot of excitement about that product and I think you will see results from that in the second quarter. So, what I would say to you is as far as life goes in the protection segments goes that you will see COLI moderating as the new single-life product catches on and over the course of the year we are still sticking to our 15% to 20% growth. Now on the annuity side, in Signator, the biggest thing happening there right now from a variable annuity perspective is the exchange program. We have a lot of excitement, a lot of momentum around the variable annuity program and I would say that is probably the main reason in the first quarter for the net sales being down. When you look at the fact that we launched that in February we have automated it now in the second quarter and the results in the first quarter were about 64 million dollars was exchanged in the VA line. And in the beginning of the third quarter, we are north of triple of that. So we are seeing incredible results in that and we believe we will continue to see that throughout the quarter because there has been major effort around our program. I think what you'll see happening in the third quarter is more of a focus on new sales and obviously the tail end of the conservation program. So that was the reason for I think our new guidance in the variable annuity line. Cathy, one quick follow-up. I was wondering if you might comment on various legislative developments out there right now for long-term care and what that may do to your sales?

I think there is a couple of things going on you know, there is a federal employee act which was passed and right now what is happening there is a lot of people are partnering up and looking to answer the RFP that will come out on that which is due to come out in June. We are actively participating in that and we believe that will have an impact on our sales. However, I think you will see it more in 2002. Other legislation for, you know the menu driven program on long [term] care, all of that will help us because what it does is create free PR and greater awareness about the long-term care product and long-term care need. Do you expect we are likely to see to see long [term] care premiums made tax-deductible?

I am sorry I did not hear that.Do you expect that we will see long [term] care premiums made tax deductible?

I would not comment at this time. Okay, thank you.

Colin, this is David D'Allasandro. Couple of follow-ups. We are certainly not depending on LTC premiums being tax deductible in terms of our goals but we will certainly welcome it. In terms of sales, we spent a lot of time on this. Let me remind every body that at the April conference we talked about the diversification and flexibility of this company and I think that these times demonstrate why we feel that way. If something is not selling we will sell something else. That is why COLI was selling and I remind everybody that you know the first month the equity markets actually behaved reasonably well. It was not until February that we started to see them tank and I think what happened is, well we know what has happened. We have ton of business, submitted business sitting around here on state tax but not being taken because the administration and congress have not resolved the state tax issue. We would actually feel better if some resolution were to happen quicker because our sales forces are all keyed-up to sell new product if the state tax were to be repealed as an example or the limits were higher. It is this problem of not being able to sell into a market that is so unsure at the moment. What we are doing in turn though I think is introducing a lot of new product and we are very ready to take advantage of the market and that includes Signator. Cathy and I have talked to a number of Signator people and I can tell one thing about commission sales people, if they were concerned they would be calling us rather than our calling them and in our calling them they all seem to be very happy with the new product lines and they like us would like some resolution on the state tax. The other thing I would like to say is this diversification of flexibility we have I think has been demonstrated what happened in fixed annuities what's happened in COLI and our group engine or sales engine may sputter from time to time but it will not stall and it will not be stopped.

Our next question comes from Ron McIntosh of Fox-Pitt Keltin. Good

morning everybody. Just a couple of quick questions. Number one, if I can get update on the watch list within the bond portfolio where that stood at the end of this quarter. Number 2, I am interested knowing what was be incremental expense lever that you pulled in the quarter. I know you had targeted 30 million you were obviously doing better and than that. The absolute numbers tell us that. If you could just give us a sense of what that incremental target was. Then lastly, you did mention he had better investment results this quarter. It's harder to calculate a portfolio yield given a reinsurance. Could you bring us up and whether that portfolio yield, I guess has been in a range of some 0.9 to 8.1 whether it is still within that range this quarter.

Ron, this is John Deciccio speaking on the question of the update on the problem list and our problem number from the end of year was 217 million dollars the same as our default number and that number at the end of the first quarter is at 269 million dollars a modest increase in that number. And that's driven almost completely by particular bond that we have been proactive with which is in the energy sector in California but it is actually unregulated subsidiary of one of the energy companies in California and we are just categorizing that as a problem at this point, although we were fully receiving payment and no issue on it yet.

Ron, this is Tom Maloney. In the reference to the additional expense kind of initiative that we tipped off to the declining market the number is about 7 to 8 million dollars and that actually came across from all parts of the company. As you know, we have been on this project that we call the competitive positioning initiative. Anybody else would call it an expense reduction program but we've come up with a good name for it and we have been looking across the whole company and that actually helped us working with each of the division heads to come up with this additional dollar saving.

Ron, John Deciccio again on the portfolio yield. The numbers that we were attracting at the end of the March, we have a net yield in the portfolio at about 765 and looking forward that is basically a net yield after expenses. I am not sure he will refer to the growth shield or net yield. We were often about an 8 percent gross yield in the end of the first quarter. ) If I could get one quick followup within the long-term care business the way we will calculate loss ratios from the outside obviously it looks like it is going up. You did mention morbidity was good in the quarter. Is that just another way of say that were still getting better than price for persistency and if we are still accounting for that persistently improvement.

Ron, hi this is Barbara Lotti. Yes that is true that persistency is still better than what we price for although the nice side of it is that morbidity is also better than we price for but as you know we do have to hold the higher reserves for the improved persistency. We have the benefit ratio as being slightly up in the quarter, but we do expect to see it trend back down and little bit goes through the rest of the year. Alright, thank you.

Our next question comes from Joan Zief of Goldman Sachs.

Just wanted to ask a couple of questions the first is can you talk about your general investment strategy at this point given the markets, given the economy. What asset classes are you looking at? What are you most concerned about? Where do you think that there are opportunities and could you just tell me if you do buy a lot of these CBOS and what your outlook on that is and also then could you talk about the balance sheet you continue to have a very under-leveraged balance sheet. How fast are you going to be able to redeploy that excess capital?

Joan, John Deciccio. Your first question in terms of our strategy and investment. We're seeing very attractive opportunities in terms of spreads. As you know we have a corporate policy that we will not have below investment grade bonds over 10 percent of invested assets. We are about 8.5 percent right now. We are not looking to expand that given the uncertainty going forward but we are certainly replacing those that leave the portfolio and we are very happy with the spread levels available to us and certainly even at the triple B levels, we are talking about very wide spreads and attractive opportunities. Some of the areas that we have looked at and we told back a little bit on in the retail area we're a little bit cautious there. In terms of things we're bullish on I think the development of the energy and the need to develop more energy plans has done some tremendous opportunities for us, especially in project finance equity. We have find very attractive deals that were getting put together and we are looking to do some of the deals. In terms of the CBOs we have a very small position of CBO equity in the portfolio and it is very modest related to our overall size.

Joan, Tom Maloney.

Hi Tom.

Hi, how are you doing. In reference to excess capital and the question right now, we would project by the end of this year we would probably have barring any unusual things which I will talk about 700 to 900 million. That is consistent with what we talked about in the last conference phone call. However, during the first quarter of this year, we bought back 135 million dollars worth of stock. We have been very active in that particular arena with what we did in the fourth quarter of last year that about 226 million dollars worth those buyback. We continue to actively look at acquisitions in order to augment the growth of the overall complex which is still in our estimation fairly pricey but we will continue to actively look at a variety of opportunities in all. It was hard predict exactly when we will use up you know the total excess capital to recognize what is going on with the balance sheet the income statements and earnings per share growth and all the rest of it and we are actively working on that.

Could you just talk a little bit more about the acquisition. What type of acquisitions are you looking for? Are you looking for loss of particular businesses, are you looking for distribution and how confident are you about your ability to integrate systems?

Hi Joan, this is David D'Allesandro. We continue to look at not only everything that has gone by but we continue to shake the trees on blocks of business that other companies may own that in these economic times they may want to get rid of. Interestingly enough no one is willing to part with their life insurance business at the moment and no one seems to willing to part with their annuity business that actually is making money. At the same time we are very cautious and do not look at businesses that we consider non-core and there have been certainly a few of them offered up recently. We continue to look at not only mutual fund companies but we look at investment managers, which is another way for us to grow. But again as I have said in past calls we are astounded at the prices and we were astounded at the assumption that the bankers are expecting us to make on how acquetive these acquisitions can be because from our prospective while we were confident about our ability to integrate some of these organizations we are not confident that these acquisitions will be acquetive anywhere near as fast as the investment bankers will appear to have reason to try push deals these days more than ever are suggesting. So, we continued to not only look at what is been offered but we are also looking and I spent a fair amount of time talking to other executives trying to pry something loose what pretty apparent these days although is everyone is hanging on unless they have a real dog on their hands. Thank you.

Thanks David.

Our next question comes from Caitlin Long of CS First Boston.

Good morning everyone. Two questions, John could you gave us the mark-to-market on the high yield portfolio. I know at year-end when you valued the equity kicker you actually had a positive mark-to-market. Just curious how much that changed at March 31 and then also Tom, you had a comment about potential new market developing for this pay out options on the 401K product. I'm curious whether you fill your well position without being a major player in 401K to really capitalize on that market or is that really a market has being driven by the major kick players that as yourself from distribution perspective. Thanks.

Caitlin, John Deciccio on your question on the mark-to-market on the high yield portfolio. If we take out the impact of change accounted from change of FAZ 133 where we changed from healthy maturity asset to available for sale. The overall increase in value is about 115 million dollars on the below investment grade bond portfolio. I'm sorry, FAZ 115.

Ok, thank you.

Our next question comes from Steven Schwartz of Raymond James.

Actually, I think Caitlin had one another question. On the payout annuity market, we sold probably about 50 to 60 million of that product last year and we are trying to grow that business. We think that there is growth opportunity as the baby boomers start retiring. I think you're right though. The people who have the full service 401K platform have a better opportunity to access that market. But it is still very early in the marketing right now and we are trying to position John Hancock wherever we can as the annuity provider without that platform and we are also looking at the possibility of a joint venture with people who do have a platform. Can we go to Steve Schwartz now for his question?

Hi can you hear me?

Yep.

Ok great. Good morning everybody. I would like to discuss 3 issues. The first I would like to talk about fixed annuity and whether you think that growth in that product because may be you are little late in lowering your credit rates. I would like to review the DAK question. I don't think we got Ed's true question of what exactly was changing within the DAK model through cause the amortization increase and then I don't now is this is possible, but if you can quantify the earnings of that and the transfer of assets due to the reinsurance.

Hi Steve, it's Cathy Gravland. I'll take the fixed annuity question. I don't think its because of obviously, we were probably very competitive during that time, but we were certainly not in the top 10. So, I don't believe that this is just an issue of crediting rates. I think it is also the fact that we grew, it is because of our product story and also our distribution story. On the product side within the bank channel, and also in the Signator channels, we had the new GPA product and with long [term] care riders on them, and also we penetrated the bank channel more effectively with proprietary annuities in both HFBC and Michigan National. The proprietary products are really taking on significant hold in these banks. On top of that, fidelity product sales in their immediate annuity area were very strong. So, I would say it's across the distribution channels we saw good sales as well as good penetration with our new product line.

) Steve, it's Barbara Lotti. Let me try to address the DAK question. Basically what we did is try to build new model offices for our businesses. We have to choose representative subset policy to represent the business as a whole and the one that we were using wasn't granular enough to really pick up all the complexity of our product and distribution system. So, we built new ones that gives us much better information. What we are finding is that it does speed up DAK amortization a bit and I think that you should expect to see on a go-forward basis we will have some additional DAK amortization versus our prior run rate.

I understand but I guess I want you to get down to the assumption here that persistency in these parts is going to be less, profits in these parts would be less, I mean, what is the difference?

) We did not actually change assumptions. I mean if you are asking that we do that DAK unlocking as a result of this. It is not an assumption change the way you would normally think of DAK unlocking. It is really just picking a different subset of the business to represent the business as a whole and a better subset that gives us better information. So, arguably we were not doing the true-ups to add to our current profit margins as precisely in the past as we are now.

And on transfer of assets out of

That's about 3-4 million dollars a quarter on a pre-tax basis.

Hi, this is David D'Allesandro. Going back to the comments about what is happening in the annuity market. I would harken back to the diversification story because as predictable it is long you look at Hancock's history on annuities. As soon as the equity markets drop, the banks become our friends once again, and one of the reasons we have been keeping our annuity products up-to-date not only in making certain it's in front of banks but as Cathy said on a proprietary basis, we have been keeping the features up-to-date and investing in it because one never knows when the market is going to change, but I think this is a typical example of how our strategy works, that if the broker dealers are going to run the other way invariable, you can always depend on the banks to come back because they will sell a fixed annuity right alongside a CD when people get nervous about the equity markets.

Can I ask one quick follow-up for Cathy. Cathy, you mentioned competition LTC in the brokers market. Are we are still talking about a certain company based here in Chicago.

I don't think that is appropriate to say. We are just seeing general competition on both the compensation side and the pricing side, and its not just one company, there are a few companies that are out there that are getting aggressive on pricing.

Ok, thank you. Our next question comes from Sabra Brinkman of KBW.

Good morning, just two quick questions. On the guaranteed and structured financial products business, I was curious what your outlook is for sales going forward since we are in an environment that probably means more people are checking the guaranteed returns check on their 401K plan. Second quick question, this quarter a lot of us have been asking questions about guaranteed minimum death benefits on the variable annuity business, and I was curious that if you could just comment whether or not you reinsure that business.

Hi, it's Jean Livermore from guaranteed and structured financial products. We have actually seen demands pick up in the first quarter about 30% over what it was last year, so that there is lot of demand and if you look at the industry data, the people are moving money from the equity options into the stable value options in their 401Ks. So, I think that demands given the volatility of the market will be much stronger this year. It was very weak last year. So, we are looking for some pickups there. We manage our and funding agreements together, and we are looking at the writing business that is probably around 4-5 billions dollars this year.

Hi, this is Tom Maloney. On the guaranteed minimum death benefits question, we do not reinsure that business. We continue to look at it from time to time. I think the important point here is that on an annual basis, we would look here at something like 1.5 to 2 million dollars worth of death benefits associated with the guaranteed minimum death benefits, and we actually collect these at 3 million dollars. So, we keep looking at the economics, but it does not tell us that we should be doing anything at this point in time.

Do you build up a regular reserve for that?

No we do not. We can feel it is covered in the overall reserve that we have.

Ok, thank you.

Our next question comes from Michelle Giordano of JP Morgan.

Good morning. Hoping that you can address what impacts specifically the retirement bill that was approved by the house would have been approved on your business. Specifically related to the increased contributions that the individuals will be allowed to their 401K and IRA.

Hi Michelle, it's Cathy. I think that you are talking about the Portman-Cardin Bill, and basically, we are looking at this as a great bill. We are not sure what is going to get in the final analysis, and additionally, it could bode well for negotiations on the state tax because I am sure there will be trade offs. But what we see is that it is going to be good for our small business market. It does provide regulatory relief for the small companies, up till now only 20% have been able to have a qualified plan. We like the fact that they are raising the IRA limits and also the 401K. Generally, we are seeing that this has some positive points to it for both life insurance annuities and also mutual funds ultimately. So, we are liking what we see there.

Do you think it can take away some of the fixed and variable annuities.

It is hard to say. It depends on I think how companies are going to attack this and market it. I think the mutual funds companies are going to come at this big because it's going to be a major source of new mutual fund business. So, I think it is going to be a battle of who has got a great story, and I think you are going to continue see annuities being a strong play in this market no matter what.

Thank you.

We have time for one last question, operator.

Our last question comes from Eric Berg of Lehman Brothers.

Thank you and good morning. Just a couple of questions. One, Cathy I wanted to follow up on the answer of the question that you had from Colin Devine. It seems to me that the issue with the state tax is straightforward, highly educated affluent people are sitting on the fence because they don't know whether they need the coverage, given what may lie ahead in Washington. That is what you have been saying for months, and we fully agree with it. What I don't understand is, why would it make a difference if the product is bought through a stock broker or through a Signator agent. I still don't understand why your sales have suffered and others have not, may be there is something that others are not telling us. Secondly for David, pretty much all the companies are done reporting now and with certain exceptions generally speaking annuity sales have been down both sequentially and year-over-year. Is there any lesson at all, what does this say about the annuity business if anything, other than that when stocks go down, the people get little nervous. Is there is anything else that we should draw or is the annuity business is still a good business I guess is my question. Thank you.

Hi Eric, it's Cathy. First of all, congratulations on the article you wrote about the implications on the state tax, I think it was very well done and certainly as far as we can see right up there in terms of correct. As far as the difference between a stock broker and Signator. Stock brokers are selling variable life products because they are using it as accumulation retirement income focus whereas on the Signator side you see much more of our selling along the estate planning line and that is the whole reason for our estate tax readiness program where we are retooling these guys to switch over to other to other themes related to retirement income, advance business situations, and also accumulation. And on top of that, keep in mind how new we are to the BD channel and penetrating that. So, we have got 2 issues going on there. I difference in sales process and also the profile of those sales.

That answered the question, thanks.

Eric, David D'Allesandro. Let me just add to what Cathy was saying and put it more bluntly. The BDs are selling primarily a single variable life and some estate tax. So, your question was how are they selling "estate tax related life insurance". They aren't selling as much as they are selling variable life product, which is quite understandable, and as regarding the annuity business, the annuity business from our perspective has been and is what I call a nice business. I am happy it is not a majority of our business. It is a good ancillary business, and we like the fact that we have good fixed and variable business that can shift back and forth. We don't like the price wars, we don't like the margin wars, we don't like the movement towards bonus products, and we don't like a dependancy on a product that has such a commoditization that it's difficult to make margin in it. Now, the fact that it produces 10-15% of our operating income, we like, but again we are happy if not producing 30-40% of our income, because we think that is far to variable and too choppy for our interests. So, I think that you will not see Hancock trying to triple its size in the annuity business, and besides, you guys are always pushing very hard and understandably so on what are the margins in that business and how can anyone compete without huge scale, and the fact that if you could compete at reasonable scale with great brand, good price, and good margin without trying to dominate. I think we saw what happens when you try to dominate one of these businesses, and it turns badly on you and you can suffer 2-3 horrible quarters.

That's great, thank you.

Operator, thank you very much. We'd like to end the call now and thank you all for