Manulife Financial Corp (MFC) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the John Hancock Investor Relations fourth quarter conference call. At this point, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. If you are using a speaker phone, please lift the hand set before asking a question. If anyone should require assistance during the call, 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 host for today's conference, Ms. Jean Peters, Senior Vice President of Investor Relations. You may begin your conference.

Thank you, Denise, good morning and welcome to John Hancock's earnings conference call for the fourth quarter of 2002. As you are aware, our fourth quarter press release and financial supplement were released last evening. They are available on the website. This morning, Thomas Moloney, John Hancock's Chief Financial officer will take you through results of the quarter. Also on hand are members of the senior magistrate, they include David D'Alessandro, John Hancock's Chairman and CEO, Mike Bell, Senior Executive Vice President for Retail, Jim Benson, Senior Executive Vice President Retail Sales and Distribution, John Deciccio, our Chief Investment Officer, Maureen Ford, President of John Hancock Funds, and Jeanne Livermore, head of GNSP.

Before we begin discussion let me make cautionary remarks regarding forward-looking statements. During the course of this call, management may make statements forward-looking within the meaning of the Private Securities Litigation Reform Act. These may include descriptions of future events. They are subject to a variety of risks and uncertainties which may cause actual results to differ teary. In this regard, we refer you to the cautionary statements contained in our press release and 10-K and 10-Q's and other filings with the SEC.

With that, I'll turn the all to over to Tom.

Thank you very much and thanks, everyone for joining us on this call on this morning's call. I am pleased that John Hancock ended the year with solid operating earnings growth in the fourth quarter. Fully diluted operating earnings per share was 78 cents, up 9.9% from the prior year. That brought full year 2002 operating earnings to $2.82, up 7.6% from the prior year. Given the difficulties we have experienced throughout 2002, we believe that our fourth quarter results positioned us well to meet our objectives or operating earnings growth in 2003. I will talk more about our guidance of 7 to 11% operating earnings per share growth for the coming year in a few moments.

As you know, we indicated in December during our web cast investor meeting we expected the fourth quarter to include pretax gross credit losses of about $185 million, including $95 million, if United filed for bankruptcy. United did file, but we also sought three new defaults in in January that together added another $58 million of impairment to year-end 2002 results. As a result, pretax gross credit losses reported for the fourth quarter for $241 million. On a net income basis, net realized capital losses in the quarter were $109 million after tax, to close box equity gains and other offsets, net income per chair for the quarter of the 39 cents versus 34 cents for the quarter a year earlier. We continue to carefully monitor the credit outlook for 2003, given the weak pace of economic recovery and overarching global concerns. The fourth quarter rise in GDP of seven tenths of a percent was very disappointing. And most of the deliverers are scaling back 2003 projections for GDP and corporate earnings growth. Exascerbating the picture of the sluggish economy and volatile stock market are the major uncertainties of looming war in Iraq, and the threat of an associated increase in terrorism activities, which all contribute to consumer confidence being at the lowest point since 1993. Even so, we expect to see a significant decline in gross bond losses in 2003 from the 582 million dollars experienced in 2002. Given the current level of economic and GEO political uncertainty and our exposure to the troubled airlines and power industries, a precise estimate would not be realistic. Instead, we expect a decline in gross bond losses to range from 20 to 25%, in a weak economic scenario, to 40 to if I have% in a strong scenario. While this range would put gross losses above long permanent average, it is more in line with the performance we had in 2001.

Please note that gross losses are before taxes, and positive offsets from the closed block of participating businesses and changes in DAC amortization rates which overall average about 50%.

For mortgages, we expect to see gross losses rise perhaps three fold from 2002's low level of $16 million. We have not seen any serious problems in and you are mortgage portfolio. But there have been deterioration in the markets we are in, and we assume that the after shock of the recession will take its toll. As I said in the onset, despite the continued rugged credit environment, John Hancock's outlook for operating earnings growth is solid and we have not changed our EPS guidance of 7 to 11% increase in 2003. In 2002, our retail segment had strong sales and grew market share in key product lines without sacrificing returns. Core life sales which exclude corporate life insurance and bank on life insurance were up 17%. Retail annuities grew 62% and long-term care sales were up 25%.

In our international spread based businesses, average invested assets were up 13% for the year, even as market demand was weak, and we stepped back from deals that didn't meet pricing requirements. The spread business sold a half billion dollars in new products, including signature notes, in the retile broker/dealer channel whose sales topped $300 million since being launched in August. All told, assets under manage stood at $127.6 billion at the end of the year. The highest level since the third quarter of 2000. Just as important, we maintained stable spreads in 2002 and we expect to do so again in this coming year. Spread on retail fixed annuities should remain at about 200 basis points while spreads on institutional products, including GICs and funding agreements should hold understand the upper end of our pricing range of 120 to 145 basis points.

Unlike many of our peers, John Hancock does not take interest rate risks and prepayment income is booked in realized capital gains and losses, not in a net investment income. If we had booked repayment as investment income, our quarterly earnings would be six increase higher. Using hedging strategies honed over many years, we tightly managed the relationship of liabilities. We use floating rate asset extensively to fund floating rate liabilities. Locking in spreads even in today's low-rate environment. In retail fixed annuities, we have aggressively managed crediting rates to keep pace with falling portfolio rates. And still have room to lower rates further if necessary. We will drive earnings with continued strong product sales, including the first full year of the federal long-term care contract. We expect whole life sales to grow 10 to 12%, long-term care to be up 15 to 20%, and annuities to increase 10 to 15% off of very strong growth last year. While GIC and funding agreement sales will be down slightly from 2002, we expect signature notes in a rebound and group annuities to fuel overall spread based sales growth of 10 to 15%. There has been significant competitive procession in the market for GICs and annuities and we continue to lose bids by wide margins but we will not play unless we can get our required returns.

Of course, potential changes continued in the President's economic packages could affect our overall sales outlook. It is far too early to say whether congress will approve the proposed elimination of the double tax is a of dividends, or the creation of new savings and retirement accounts with far more generous tax and withdrawal rules than those for current IRA's and 401 K's. It is likely until the future of these proposal ares clear, some customers could delay buying decisions. At this point, we have proven track record of continuing to grow and adapt our business inspite of legislative turmoil the our product development statue has been successful in their attempt to meet changing economic, tax and legislative environments. As an example, we have weathered the estate tax situation which certainly looked troubling to our life business just a few years ago. New single variable life and universal life product sales have more than made up for the loss of survivorship sales. We also have distribution force that's been motivated to maintain their income and shift their markets accordingly, assuming we give them the right products. In the long-term, we remain convinced the aging of the baby boom generation will present enormous marketing opportunities for John Hancock. The President's proposal would not alter the need for protection products, our bread and butter and could increase the demand for products providing immediate income streams, another of our strengths.

Another 2003 earnings driver, as I mentioned would be investment express stable with 2002 levels. In addition our asset liability matching strategy, we continue to manage spreads from the crediting rate and investment sides of our business. Investments are driven in part by high quality, high yielding leveraged leases and those through flow through earnings this year. We expect higher fee income on our equity-based products as asset levels rise on assumed market appreciation of one to 2% per quarter, and for DAC amortization costs to decline.

Overall, we plan to reduce expenses by 25 to $30 million although that would be offset by higher pension costs and expensing of stock options. Following the annual audit committee and auditors' review of actuarial assumptions used for the retirement plans, we have adjusted the discount rate to 6.75%, down from 7.25% in 2002. We have also adjusted the expected return on planned assets to 8.75% down from 9.50% last year. We expect these assumption changes to cost about 14 to 15 cents per share, versus 2002. Also partially offsetting 2003 earnings gains will be interest losses and default securities, and increased product development spending to support new fee-based institutional products. Hancock ended 2002 with a strong capital position, even after the impact of capital losses. Our risk based capital ratio stood at 307% within our target of 300 to 325 percent, and among the highest of peers. This year we expect to generate about $700 million in statutory net gain from operations, and John Hancock's book value including FAS 115 increased 17% in the last two years even after absorbing unusually high credit losses.

Wrapping up, we are optimistic about our growth prospects for 2003 despite the challenges we face. Stronger sales and stable spreads combined with the first full year of the federally long-term care case, effective management of expenses, capital and tax rates will add to another year of solid earnings growth.

Thanks and I will open the call to questions. Operator?

Thank you. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or if you wish to remove yourself from the queue, please appreciation the pound key. If you're using a speaker phone, please lift the hand set before asking your question. One moment for our first question. Our first question comes from in Nigel Daly of Morgan Stanley.

Great, good morning. A couple of questions, first objects fixed annuities, one of your competitors are saying the bank channels get a lot for competitive. In contrast, from spreads seem pretty stable and you continue to have a strong asset growth. I'm hoping you can help us reconcile how your approach differs, and I have a follow-up follow-up.

Hello Nigel. Mike Bell, here. I think some of the people are trying to get into the bank channel by productivity of the success we've had there. It's not quite that easy to get in. I think we have to look at Essex history and how long they've been tailoring marketing programs for the mid market banks. Secondly, we tend to be in the mid market as opposed to some of the really large banks, where some of the other folks are going to. So we have not seen the level of competitive pressure in that channel that others have, primarily because of not only who we're competing against, but also where we're competing. The second thing is the spread question, I think there were two things: One is we have been very aggressive in maintaining our spreads primarily by cutting rates as we've had to, and we have about 100 basis points to cut should it be necessary. Also and John DeCiccio's mentioned before, we have a consistent investment strategy that we don't take interest rate risk. That's been a lot of the problem with other people compressing their spreads.

Okay. Interested why you're confident that losses would decline 25% even if the economy was weak. Also I wanted to check up on other than temporary impairments, given [INAUDIBLE]. If you can comment on that.

John DeCiccio, in terms of outlook going forward, in a fairly weak but still some growth economy, we're looking at some net growth, we've pulled in the assumptions from good about mid threes to something around two and a half %, we would think in that environment we will see better results out of the current situation versus what we saw in the year 2002. You know, we took some very big hits in 2002, and in terms of the impairments on United Airlines and a number of energy positions and we look very carefully at our portfolio, at what's coming at us. And again we think given some strengthening in other areas where we've seen losses in 2002, that the main activity will be in those two problem areas. Also, I will point out that Moody's is projecting lower default rates in their high yield projections going forward, as are other observers observers. You had another piece of the question that you'd asked about the impairments, net impairments?

Right, the other than temporary impairments [INAUDIBLE] the SEC was questioning about them the accounting for their impairments if you can provide some color on how you account for other than temporary impairments and whether you've had any dealings with the SEC?

Well, most of the losses that we took in this quarter, it was basically the other than temporary impairments, that $242 million of losses were other than temporary impairments. Every quarter we have a very careful process where we look at all of the securities that are quoted at less than 90 cents on the dollar, if we believe that that security will not recover in value, we will impair it down to the fair value. If we believe the security will recover, and we intend to hold it until it recovers, we will not take a realized loss but we document the current issue spacing the issuer, we then describe why we expect the recovery. We share that information internally, I go through a meeting every quarter with our bond people on this, our CFO is involved in reviewing the information as are our outside auditors, our committee of finance, et cetera, it's a very robust documentation, and process that we have in place. And basically, you know, that's the way we've gone. We increased, as you might remember, back in second quarter, the amount of disclosure contained in our filings, the 10-Qs and will be in our 10-K. I think we're a leader in this area of the industry. That was in response is to concerns the SEC had about disclosure. We feel that we are in top place. As a matter of fact, we've been very much congratulated by our friends in the rating agencies. I think all of these things, our process is very robust, I do not see that we are facing the ours that Unum has mentioned.

That's great. Thank you.

This is David D'Alessandro, just a couple of perspectives, one to John's comments, that is he moved pass the Ernst & Young and auditor piece, not only do we report to them, as part of that process, I can tell you there are days spent with Ernst & Young who are located in this building, and the riggers of that process are quite something to behold. They go through each of the credits with us on the impairment list to make certain that they're comfortable. This is not a general or gross process. It is a finite and microprocess that we've been going through over the last year and we have become much more comfortable with that process in not only presenting it to the investment community, but certainly to the rating agencies.

On the other topic that Mike commented on, I'd like to add a little perspective on the banks, while a great deal of what's happening in bank and fixed annuities has fundamental with product design, clearly consumers are moving towards secure companies and secure brands without question. That being said, there are two other aspects that are worthwhile. Let's remember that we have something most other companies don't have and that's call the Essex Company, which is our interface with banks both in terms of the marketing side as well as the servicing side and they are dedicated to the bank marketplace and fixed annuities. And in many of the bank deals we have today, that Mike Bell and Bruce Jones and Jim Morris put together, we have proprietary product. We have a couple of advantage that is much of our competition doesn't have today.

That's great. Thanks.

Our next question comes from Vanessa Wilson of Deutsche Banc.

Thank you, good morning. Could you talk a little bit about where you are with the rating agencies and appetite for share repurchase? And then John DeCiccio, if you could just drill down for us maybe with a specific example and talk about, you know, U.S. Air? You give us very good disclosure at your December meeting that you had 279 million of U.S. Air. Could you go through that as an example of that is an airline that declared ups, what have you written off, what do you expect to recover? How is that going with an airline in Chapter 11?

Let me kick it off first on the question about stock buy backs.

Thanks, Tom.

And where we are at this point in time is still where we were in December, is that it's a little early into the year to make any real decisions. As I talked in December we'll really wait probably until midyear to make any decisions on stock buy back. We really want to see how the projections unfold regarding capital gains and losses. We still have very strong earnings coming out of -- on the statutory side this year was about $735 million. So there's capital being generated but we really do not want to see how the capital markets really unfold here from a credit perspective.

But won't there be a point that you're generating so much capital that your ROE starts to come under pressure?

Well, we'll watch for it. I don't think we have to worry about it for the short-term. So that's why I say, midyear we'll take another hard look at it.

Thank you, Tom. And the rating agencies, Tom?

We continue to have constant dialogs with them. In fact, we reviewed all of our results with them prior to today's phone call and everything else.

Thank you.

Vanessa, I think you said U.S. airways, I think you might have men united.

I guess I was thinking about U.S. air, because didn't that negotiation maybe I have the wrong airline, I thought that went Chapter 11 first?

It did, but I think we discussed on united was about the impact of the bankruptcy, and I'd be willing to go through the amounts there.

I'm sorry, John, to interrupt. What I was thinking is we have an airline that's now been in Chapter 11 for an even longer period of time than United and are you recovering your money on that one, now that you've had some real time to season it?

Yes, in terms of where we are we stand on U.S. Airways today, we have 153 million on our booking of U.S. Airways, that was after we talk the losses on U.S. Airways. Now, on that arrangement, we have $80 million in double ETCs guaranteed by MBIA or other such guarantors. Those are absolutely fine. We have another $45 million of double ETC papers that performing fully and we're getting accruals on that. And we have very little left in the ETCs after write-down, about 4 million left there and a tax lease of about 23 million. They have reaffirmed that, that was on the air bus aircraft they are using for the shuttle. So we think all of our remaining exposure is well positioned with this company coming out of its bankruptcy.

So on that specific example, your first swipe at the write-off, was it a good number or did you have to take additional cuts in subsequent quarters?

I think if anything, we might have taken a small three or four million dollars hit in third quarter but most of it we recognized in second quarter before the official bankruptcy even happened.

Thank you, John.

Our next question comes from Joan Zeif of Goldman Sachs.

Thank you. Good morning and just a little bit more on the investment opportunities for this year. Are you concerned that you're going to see some spreads, in the your business spreads but your investment spreads or the company spreads over treasury narrow as competitors who need to invest all their money as well, move into your type of investment style since interest rate risks may not be a great place to be right now? And are you concerned that it may just not be as attractive for new money going forward? What are the asset classes you're going to be putting most of your money in and where are the opportunities? That's my first question.

The other thing I wanted to ask you is just technically on the leveraged leases that you did, what is your total appetite for that type of asset class? And what are the underlying assets that are being leased?

And then my third question is just to make sure I understand this correct limit and it actually relates to the question about Unum. When you write down assets that are other than temporary impairments, is there a parallel movement in the write-down on GAAP and statutory? Or are in some instances it possible to adjust, you know, impairments on the GAAP value without doing it on the statutory?

Good morning, Joan, how are you doing?

I'm hanging in there.

Good, I'm not sure we got all your questions, but I'll start off with the last one you asked, is there a parallel between GAAP and statutory? And I can't talk for the industry as a whole.

Okay.

But for our practices, yes, there is.

Okay.

It's a lot easier keeping the books aligned if, in fact, you have both statutory and GAAP on the same pages.

But what you're saying is that may not be necessarily the law?

Excuse me?

What you're saying is that may not necessarily be the law?

All I'm saying is that there are always interpretations and that's what we've done.

Okay.

I think it's up to each company to decide what's the right way to handle it.

Hi, Joan. John DeCiccio on the spread question, we are seeing in the bond market some narrowing of spreads, I think some of that is related to the fact that people are feeling a little better about this year going forward. Nonetheless, spreads remain at very high historical levels and so we still see attractive opportunities in the way of spreads going forward. The kinds of deals we get involved in are what we've done in the past, things like asset sales, I think you know in a lot of these cases, the power industry is selling a lot of assets, attractive financings available there. I'm sure we'll take a good look at them with good assets behind them.

Also you're seeing opportunities in Europe and there's more appetite in Europe for maybe doing private placement deals. We're seeing opportunities that we will be pursuing there as well. And when you get into the issue of leveraged leases and the kinds of appetite we might have for this year going forward, our current plan would say maybe we'll do about $250 million of leveraged leases this is year. I think you know we did a significant amount last year. And we will look very carefully to be sure we have the appetite to use the advantages of these in our tax planning. In terms of the kinds of the transactions, they're typically infrastructure, high quality infrastructure transactions, they tend to be A, AA rated, very good quality transactions and very attractive after-tax spreads.

I'm just and it may be silly, and I won't ask another question after that, but in order to get the tax deductions, don't you need something that depreciates really quickly? So I mean, I was just, unless I don't understand leveraged leases, I was just wondering, what are the underlying assets? Are they box cars, are they personal, you know, personal types of consumption items?

Think of things like convention centers, think of things like transportation systems. Those kinds of things are what the typical collateral would be be. And they're definitely written down over a long period of time. However, what helps the leveraged lease holder is they're leveraged. So all of that depreciation goes to the leveraged lease holder who might have a relatively small piece of the exposure.

All right. And is the A or AA rating on these structures dictated by who is the counterparty here? Whose actually taking those instruments? Is that where this gets its ratings?

Very definitely. The credit counterparty. Very good.

Okay. Thank you.

Our next question comes from Andrew Klegerman of Bear Stearns.

Good morning. On the spreads, could you give us a expense of now new money spreads compare with the institutional spread of around 135 to 140 basis points, and the fixed annuity spreads on the portfolio of about 200? That's the first question.

Second, in terms of your reinvestment yield, what kind of pressure do you expect on reinvestment yield in '03? How much do you think it might come down due to prepays, et cetera? And third, under the new marketing genius of Jim Benson, how might your distribution change going forward, if at all all?

Andrew, it's John DeCiccio. On the issue of new money spreads or yields and how it might impact our portfolio, we're looking forward at the portfolio yield rate in the year 2003 moving from something on the order of -- this is a gross yield rate in the life companies, and it's not including floating rate exposures, which I'll mention later, but something on the order of 7.44%, down from 7.76% in 2002. So we are seeing some decline. Part of that is because of, obviously, the new business being written in 2002 is being written at much lower rates, so that will not hurt the product spreads, even though our current interest rate may decline in that period of time. We've had very big growth in the general account, about 14% growth during the year 2003 investment activity or 2002 investment activity.

So looking forward, we would expect that rate to move down, but we are not being hurt by prepayment to the extent that many people who had the mortgage backed exposures would have been hurt during this past year. So I would thinks that a relatively modest decline and will not cause a problem in 2003 in our projections. Now, if you looked at the numbers including the floating rate exposures, we have about $11 billion or so of floating rate exposures. That brings those numbers down from 744 in projected 2003 to 6.48. And from 776 in 2002, to 6.77. But that floating rate exposure is passed directly to the clients. They're getting LIBOR-based rates and primarily equity funding agreements and GICs they receive it directly, it's a pass through. It does not impact our product spreads.

Hi, this is David D'Alessandro. I'm going to answer some of the question on Jim Bendon and ask Jim to speak to himself. I'm sure everyone is EMIF athletic to the fact that Jim's been here a total of four weeks and three days. The fact is that I made a decision to strengthen and separate out our distribution systems because it is really the engine of the company and to seek the very best talent in the industry. And strategically, I can tell you that our goals are to continue to do more of the same with the emphasis on more and to do it even better this team has built a great machine and now it's time to take it to the next level which, as I said, means more. And I'll ask Jim to spend some time with his impressions of his time here and some of his plans.

Good, thank you, Dave and good morning everybody. I'm pleased to be here at John Hancock. Two people are responsible for this, David D'Alessandro and my wife. David asked me to come to work and my wife told me to go to work and so it's terrific to be here. We do have a very strong distribution system which has been inplace, or systems that far predate me. But as we look into the future on the life side, you think about life-based distributors, I think we can grow in the three channels where we are already really represented, there's been a major launch into the brokerage business under Jim Morris' direction and we plan to significantly deepen those relationships that we have and expand them in 2003 and going forward. We have a system that I think will attract for proven people to our agency system under Jim and Jerry Healey's leadership, an the M, the M group, which is probably the top producer group in the United States, I've had some experience with that organization and although we are currently the Number 1 carrier within M, I think we will grow faster than the overall M growth rate, deemed to be about 20% this year. And I would expect us to get greater share within M.

On the non-agent distribution channels which were where we're focusing primarily on fixed annuities, we've got terrific presence in the bank channel, particularly the community bank channel that David and Mike referred to through the Essex organization. I would think that we could expand distribution, particularly in the regional broker dealers and the independent financial planning channels. We're going to continue to steer away from wire houses and I think we should be able to expand in those channels as well, and the reason why we'll be able to do so is not so much due to my marketing genius or whatever you'd say, but I think we've got a terrific product team and we're going to continue to sharpen our product focus on universal life and related products on the life side and continue to sharpen our focus on fixed annuities on the annuity side, and also take advantage of our unique expertise in morbidity risk and longevity risk, linking tong term care options and payout annuity options to our product that is perhaps some of our other competitors don't have.

Thanks a lot.

Thank you.

Our next question comes from Michelle Giordano from JP Morgan.

Good morning. First for John DeCiccio. I was wondering if you can assess some of the deterioration you're seeing in the mortgage markets?

Can you speak up?

Can you hear me better now? Okay. John, I was wondering if you can address some of the deterioration you're seeing in the mortgage environment, and then secondly, if you could update us on your exposure on the power portfolio and where you think it's at most risk this year. Third, on the GIC environment, I understand there's a lot of moving parts in terms of the competition and environment and maybe some customers shifting to the separate account choice. But I was wondering whether this is short of a short-term slowdown you would expect in the GIC environment or a long-term trend and signature notes and funding agreements become even more important going forward?

Michelle, John DeCiccio. On the power portfolio, first of all, the total amount of the power portfolio in the bond area is $7.7 billion as of the end of the year. Now, within that, of course, we have a lot of regulated utilities and independent power producers selling fully regulated power with fixed rates and no problems in those areas. The part of the portfolio that we have concerns going forward is primarily those that have any exposure to the merchant energy or the spot market in terms of power prices where most of the weakness has been seen. And in particular, where a lot of companies have had to pull out of trading operations. We have about 1.9 billion total exposure in that category and within that category, we would say there's about $600 million of exposure where we would say that there is some stress. Because within that category, you can have just a small touch of merchant exposure and others that have more of a touch and more issues in terms of liquidity. So that's the area that we have most of our problem area looking forward in terms of the power portfolio.

In terms of your comment about the deteriorating real estate fundamentals, obviously vacancy rates are well up. We've seen, for example, apartment vacancy rates in the fourth quarter at 6.2%, well up of from where they have been. In addition, industrial at 11.2% vacancies, and office at about 16 and a half % vacancies. Now, one thing that you have to consider in the office market, one of the reasons we think some of this vacancy is not having as much of a negative impact as one might expect, in the office area particularly, a lot of this vacancy is under sublease, basically available for sublease, so you have -- the lessor is paying, but they're basically trying to sublease the space so it doesn't hurt the basic owner of the building who's still getting paid on these things. So that has, I think, helped keep the activity or the default activity low to date. And even through the end of January, we do not see any looming problems coming at us at this point. But certainly the fundamentals are much weaker and we have our eye on that.

Michelle, it's Jeanne Livermore.

Hi.

Hi, on your question about the GIC market, what we saw in 2002 is inflows into the stable option of 40 1 K plans was actually up in the year but the demand for traditional GICs was down and a lot of the increased demand went to either the synthetic GIC or the separate account product that you referred to. But that's really a niche product. Our volume for traditional GICs were down 20 to 25% in the year. And I do believe that the decline in the traditional GIC market is a long-term trend. And that is part of the reason why the focus of our business unit is on product development, especially product development of C base products. I think going forward we would stay in the traditional GIC market, and be a strong player there, but it does mean that product such as signature notes and funding agreements will be more important as we go forward.

Okay. You had pointed out at the December meeting this increased focus on fee-based products. Can you give us any more details now as to what specifically you're looking at and when we could hear more about some of the developments there?

Michelle, I think we're in the early stages yet so I would be uncomfortable talking about that too much. But we are looking at products that use the skill sets that we have in the company, particularly risk management, and our investment skills in order to make products that we can earn a fee on, and take less of the risk on.

Thank you.

Our next question comes from Tom Gallagher of Legg Mason.

Good morning, two for Tom and one for John DeCiccio. For Tom, first quarter is, in terms of the tax rate, it was 26%. I know, I think 28%, can you give us an idea of where you expect to it trend in '03?

Tom, can you pick up your headset, you're breaking up?

Is that better?

Yes.

Okay. First question is on tax rate, can you give us guidance for '03? It had gone down to 26%, and I believe pass guidance was 28%. Second question is on RBC, I know that went down from 340 to 308 in 4 Q. Can you comment on what the outlook is there? Particularly if you do so or when you sell the office property, what do you think the RBC pickup there might be just in terms of a broad range?

And then one question for John DeCiccio. In terms of I guess recent news that UAL is threatening to put planes back to ETCs, does this, I don't know, this may be negotiated tactics, but does it change your view of the risk profile that planes backing most ETC bond for both UAL and other carriers will further erode in value and is any of that baked into your expectation for credit losses for '03?

Tom, John DeCiccio speaking. In terms of the question on UAL, as you know, the negotiations are still underway. They're very, as you might guess, intense and I would say there's a lot of positioning going on at this point on number of sides. So I think we're early on to see exactly what happens in terms of how many planes go back. United has said they still want to to fly, I don't know what they will fly if they don't fly aircraft. In any case, I think the issue is unresolved at this point. We went through a similar experience back in the late nights, early '90s, I don't know if you remember TWA and Braniff. There were a number of posturings that went around. And companies went to repossess aircraft and money got found. I think the issue will be, as you work through the negotiations, how much is going to mean a contraction of the size of the airline and how much they'd be willing to give up in the way of aircraft. I will point out, by the way, that internationally, there are a number of buyers of aircraft these days and some of the foreign airlines are doing very well and actually expanding.

Tom, this is Thomas Moloney, how are you doing?

Good.

In reference to your questions on the tax rate, the 26% was essentially kind of catchup of our estimates between taxable income and I should say, our GAAP income and our permit differences. But the overall tax rate for the year, I think, was just about 27 and a half%. And we're still looking at an overall tax rate or effective tax rate for 2003 of 28%. And in sort of your back-doorway of asking about the home office building sale RBC, as we said at the last conference phone call, at this point in time, it would not be in the best interest of our stockholders at all to talk about any possible results of this sale.

And Tom, I can appreciate that. Just a follow-up on it: Are there, in addition to that possibility, are there any other possible levers, aside from stat earnings generation that you would have to enhance your RBC?

Sure. We've talked about a number of them in the past. You know, we've still got the availability of the closed block securitization. We still have room for some additional debt or hybrid types of securities like preferred and all. We constantly look at that. That's one of our capital focuses that we have going. Greg Winn, our treasurer, spends as fair amount of time monitoring those things across the board. So we're constantly looking at every option that we have.

Okay, thanks.

You're welcome.

Our next question comes from Eric Byrd of Lehman Brothers.

Thanks very much and good morning. The first thing I need to do is say thank you to you personally by not just basically going over the results but sort of talking to us about the state of and outlook for the business. I think you saved everyone a lot of time and give us a lot more value so thanks very much for doing that.

I have a question regarding the fee outlook, actually two quick questions. With respect to the fee outlook, I would think that given the decline, the steepness of the decline in the stock market last year, that if you have a normal stock market this year, two percentage point increases per quarter, that the average assets would be lower this year than last, and, therefore, that fees will nonetheless, even in a strong stock market be lower this year, not higher than I think you said. I'm hoping you can clarify that. My second question is: I think you said in the prepared remarks that there were losses in January that you booked in the December quarter. Is the idea here that even though they did take place in calendar 2003, you recorded them in 2002 because they occurred before you reported your 2002 results?

Eric, Thomas Moloney. Thank you very much for your comments, everyone around the table is pleased with you, they all wanted me to go on for about 20 more minutes actually.

I didn't say that, Tom.

In reference to the fees and comment in the script and everything else, your description is correct. What we're referring to is relative to a flat market and all. So that's the commentary we're trying to make here. And on your question about booking those losses of 58 million, I think they were that showed up in January, we had not closed the books at that time and that's the reason why we took them into our 2002 results.

Thanks very much.

You're welcome.

Our next question comes from Caitlyn Long of Credit Suisse First Boston.

Good morning. Just a quick question on the investment portfolio. It looks like the amount of bonds rated CCC and lower jumped sequentially by 350 million. Was there any sort of downward creep in the ratings or was that a function of the rebound in the price of bonds already in that category as of September 30th?

Caitlyn, John DeCiccio. In terms of the increase in, if you look at category 6 bonds in particular, we had a 150 million increase in that category. And in terms of that, about 120 million of that was in issues where the SVO, our rating group, basically looked at a November bonds while they were current and accruing, put them into category 6 because there was a restructuring involved where maybe there was a change in the payment of a principal payment date due, and all of that sort of thing. So 120 million of those we will be visiting with them on very soon. To basically show them that these bonds are performing on the restructured basis and hopefully those will move out of category 6, et cetera, going forward. And in terms of the increase in the category five, that accounts for about the other 200 million of the 350 you're talking about, and that did reflect some basic downgrades that were going on in the power industry in particular over this period of time, in the fourth quarter, as you know, a lot of activity and downgrade activity. And it also reflected the fact that there were about $60 million of deals that we had in a similar vein that were made by the SVO, a category 5, even though we think there's a very good case to be made, they're actually in a category 2. And we will be visiting with them on those in the near future.

Okay. Thanks. And then just a quick follow-up: You gave a good description of the process that you use for determining when to impair securities, but my understanding is also that the SEC is looking into the amount of 's Unum's impairment. Can you give a picture of the process, the involvement of the auditors and checking it, details on how you do it?

Well, I guess the whole process that we go through, as we indicated each quarter, is that the analysts will go in, they will write up the particular deals that are under question, they will give the reasons why they believe that the values are sustainable, and that, in fact, there is not a permanent impairment here that we feel that the bond will recover, and we intend to hold the bond for that period of time. And they will use sometimes, by the way, inside information that is available as a private placement investor and that will be part of the documentation. That would be the process that we would go through and those records are available for our auditors to review and they do review them very carefully.

Sure, I guess my question is, when you actually decide to take an impairment, settling on the amount of the impairment, do you ever use anything other than publicly quoted prices and for the private placements, what process do you use?

On the private placements, when we decide on what value to use, we'll be looking at what the recovery value will be. Again, that's part of what the analysts will do with all the information they have available to them. And they will make a recovery value estimate based on the financials available from the company and they will share that opinion with the auditors and why they think that is the value that they should write the securities down to.

And on the public bonds?

Public bonds typically would write them down to their market value.

Okay. Then finally, how involved are the auditors in reviewing those impairments?

Very involved.

Every quarter?

Every quarter, yes.

Okay.

Caitlyn, let me add, if you look in the 10-K and 10-Q, we go through a very lab receipt process of spelling out the stepping we take. And in addition to the auditors spending a lot of time with John, they're getting to know him very well, and Scott and all, Earl from my staff and his people spend a lot of time before going to the auditors reviewing the materials. So we have a well-honed process, there's a lot of people involved in it. And in addition to that, we actually take it to the committee of finance which John reviews prior to each of our quarterly reporting.

Great, that's helpful.

Hey, David D'Alessandro. Your questioning as well as your comments that you wrote yesterday, I think you're being very polite. I think what you're asking is as we expect surprises in more in impairments as we review and how great is your process? And the answer is: There is nothing more we could do than we're doing today because the process is not only rigorous, we are the last people that want to see a surprise here. In any of these credits. So the process in the last 18 months has become, I think, as Tom says, very, very specific, very detailed, and to a point where people are virtually dedicated to the process so we can watch it carefully. That doesn't mean that everything will always be caught, because in this economy, there's a certain vagueness to it all. But I will tell you, there is probably no process in the company right now that is more rigorous incrementally than this one.

That's helpful. Thanks a lot.

Our next question comes from Mario Mendaca of CIBC World Markets.

Two quick questions. One you referred to the securitization of the closed block. Is that somewhat of a pan init'll hard to imagine that it would be. Are there any sort of downsides in terms of earnings or anything else involved in the securitization of the closed block? That's my first question.

Mario, thanks a lot. On the securitization of a closed block, I don't think there's any panacea to anything in the world, but this is pretty straightforward from a securitization process and we don't see any real deterioration on earnings or anything else.

And you've estimated in the past how much that could bring up in terms of excess capital or available capital?

Yeah, we've been talking in terms of 500 to 750, probably closer to the $500 million level.

And you don't see it having any negative impact elsewhere?

Excuse me, I didn't --

So you don't see that having a negative impact elsewhere in the company in terms of earnings?

Not that we have seen so far with our modeling.

And a question for John DeCiccio. You talked about the category 6 and 5 bonds and the increase there. I suspected that something -- presumably that was part of the reason why the company the RBC went from 340 to 307. Once you've gone through the process with the SVO, is it safe to assume that would have a impact on the RBC on the way up?

Clearly, Mario, assuming some of these are categorized from a below investment or a five or six level up to a two, that would help the RBC. I don't know, I don't calculate the RBC ratio, so I couldn't tell you exactly what level. But that would be very helpful. To the extent they go to a 3 or a 4, it's less so, but it's helpful.

Perhaps I could ask it this way: The the change in how the bond are categorized have an impact or how much of an impact did it have going from 340 to 307.

I'm looking around, I don't see anyone with the number, probably something we could get back to you with.

Thank you.

Our next question comes from Joanne Smith of UBS Warburg.

Good morning. I have a couple of questions. One is for Tom Moloney if I'm looking at the earnings in the fourth quarter and the earnings for the full year on a pretax basis, they were flat year-over-year for the quarter, and they were down slightly, about 1% for the year. I know there are some one off things, DAC adjustments et cetera, but I'm wondering what you sees that different in 2003 that would suggest that we're going to get an uplift in that type of comparison, especially if you've kind of pulled back from share repurchase and if we're expecting a flat tax rate? So if the pretax earnings around growing, I guess my question is, how do we get to gross there so we can get some gross on the after tax numbers?

The second question I have is, can you review again with us, I missed some of that, on the expectations for credit losses, and if you could give us any parallels that you might see in the experience currently versus what is you saw in the late '80s and early '90s. And then I guess the other question is on distribution expansion and Jim had mentioned that there were some opportunities in the independent financial planner channel, and I just wanted to see what really the thought process is there. Because I'm thinking with all due respect to Jim, I'm looking at a very, very tough competitor who has entered that market in the last couple of years and has been extremely successful, I'm referring to Hartford. I'm wondering why John Hancock thinks that this late stage in the game where it's an extremely competitive channel and there's a formidable player, not just one, but a few, why you think you can compete in that channel.

I'm not sure we'll complete all those questions before 11:00 is over, but I'll start off and ask John to take over. But if you step back and look at the earnings on a pretax basis year-over-year, I think you can start off with kind of listing off a few things that have an impact, some small, 49 or $50 million of DAC write-off that took place during 2002 which on an after tax basis, about 9 cents. We've talked in the past about the lease residual management strategies we use and those have a fairly significant pretax earnings impact, but pick up on an after Texas basis. And then I went through a fairly long list of items that really will continue to cause growth in the earnings for 2003. They're including the federal long-term care case, which you know, is really just starting up in 2003. Plus, the strong sales at that we had last year, and plus what we're expecting to continue into this year. We talked about the fact that there are stable spreads, we still are growing the assets under management. We continue to focus on expenses, and so it's really all of the levers that we have talked about over and over again that we see here really pushing earnings up.

Tom, just can I interrupt for a second? If I'm looking at the long-term care, the growth has been extremely attractive, but one of the problems with the business is the lapse rates have been so low so the reserves have had to, you know, been held pretty strong levels so that's subduing some of the growth and earnings. If, in fact, lapse rates continue to trend downward, despite the fact at that we're getting very good sales growth, do you think that we're going to see complementary type earnings growth rate if we have to keep reserve levels so high?

I'll try to answer that, if the actuaries to correct me they can. I think what we're seeing here is that clearly the lapse rates probably can't trend down too much more overall, plus our new products that we've been selling over the last couple of years have been price with lower lapse rates embedded in them so they're becoming a larger and larger proportion of the sales of the book of business. In addition, yeah, they're holding down earnings, but you're getting offset with better unit cost on expenses because you have higher -- lower charges, if you will, per policy and we were -- had price for higher ones. Plus DAC is slowing down. So there is a number of things taking place that are kind of netting out and creating still a fairly substantial room for movement upward.

Okay. Thank you.

This is David D'Alessandro I'm going to ask Jim Benson to follow-up, but a year ago this week at our investor's conference, most of the questions were we find it hard to believe you can grow in retail. You have formidable competitors and we certainly recognize that. Our core life grew 17% in sales, our LTC grew 25% and our annuities grew 62% during that period of time. I hope I have not listened to your call with Hartford, but I hope you talked to them about the formidable Hancock when you ask the same questions.

Of course.

Thank you. I'll ask Jim Benson to follow.

Thank you, David and Joanne, good morning. There are formidable competitors in all the channels, the nonagent channels, whether it be water house, or bank, large and small, independent financial planners, regional broker/dealers. We think here at Hancock we have a terrific brand, there's a lot of infrastructure, while Hartford I'm sure about continue to do well, maybe some of the other individuals who are in those channels may not do so well. I've had some experience that you're aware of in two other situations where we developed tailored product with tailored compensation and product design for the independent financial channel, and a coupled with the brand in two other cases, actually did make headway against formidable competition and we plan to do the same here. We're not going to talk on specifics this morning, maybe next quarter. I do believe we can make headway in those channels or in that particular channel going forward.

Thank you, Jim.

Thank you. John DeCiccio, I'll review with you Tom's comments about the outlook on credit. We expect the decline in gross bond losses to range from 20 to 25% in a weak growth scenario, to as much as 50% in a strong growth scenario. They said on the bond side. On the commercial mortgage side, we will expect the losses that we have this year, about $16 million of principal writeoffs, to maybe go as high as three times that in the coming year.

Okay. And can you talk about any parallels that you see this time, John?

Well, I did hear that question. And I'll tell you, at least in my 30 years at John Hancock, I haven't seen any parallels to this economic downturn. I think you'd really have to look back into the depression years to find four years of the kind of losses we're looking at between 2000 and 2003.

So does that, I mean, I'm wondering if that changes your -- I mean, I'm trying to think of where we should be in that range. Even if we have a weak economic situation, I'm looking at, you know, you had over $500 million of credit losses this year and it doesn't appear in a weak type of an environment that we would see a dramatic improvement in that. Should we kind of be thinking about maybe at the higher end of your expectation versus the lower end?

Again, I think the whole issue will depend on the economy and how it performs. We're seeing some contraction of bond spread in the first month or so of the year as I think the bond market is starting to basically firm up. That's a decent sign but our outlook will depend on the economic growth. You've got a lot of inponderables out there with the war in Iraq and terrorist activities and those are things that none of us here have any control over or information about. They remain contrains --

One last follow-up on the investment portfolio: Do you feel any constraints in terms of what your options are in investing new money? Because as I look at the portfolio, I see 44% sitting in BBs, 11% in below investment grade. So what types of investments are you having to resort to? Or are you not having to resort? Are you still finding attractive opportunities out there and maybe higher quality securities because of corporate bond spreads?

This is Jean Peters, since that's been answered at least three times on this call, we can just send you the transcript.

Well, I don't think that specific was question was answered, Jean, but thank you.

This concludes the question-and-answer session please continue with any closing remarks.

No, there are no closing remarks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may now disconnect. Thank you and have a great day.