Manulife Financial Corp (MFC) 2003 Q1 法說會逐字稿

Good morning and welcome to the John Hancock Investor Relations first quarter conference call. At this time, 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 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 host for today's conference, Ms. Jean Peters, Senior Vice President of Investor Relations.

Ms. Peters, you may begin. Thank you, Patty. Good morning everyone. Welcome to John Hancock's first quarter earnings conference call.

As you are aware, our press release and financial supplement were released last evening and are available on our website. This morning, Thomas Moloney, our Chief Financial Officer will take you through results of the quarter.

Also on hand are members of senior management including David D'Alessandro, Chairman and CEO, Mike Bell, Senior EVP for Retail, Jim Benson, Senior EVP for Retail Sales and Distribution, John DeCiccio, our Chief Investment Officer, Deb MacInney, Senior VP for Structured and Alternative Investments, Maureen Ford, President of John Hancock Funds, Bill Black, CEO of Maritime Life, and Jean Livermore, Head of G&SFP.

Before we begin, let me remind you of caveats 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 materially.

In this regard, we refer you to the cautionary statements contained in our press release and 10-K and 10-Qs and other filings with the SEC. In addition, comments made during this call will include certain non GAAP financial measures, such as operating income and return on equities.

A full reconciliation of income from operations to GAAP net income is provided in our press release and on our website.

With that, I will turn the call over to Tom Moloney.

Thank you, Jean. And thanks to everyone for joining us on this mornings call.

I am please to report that John Hancock's first quarter operating earnings per share increased 8.8% to 74 cents despite what was a very challenging business and personal environment for everyone.

This growth results from our long term strategy of maintaining diversified products and distribution that meets the changing needs and desires of our customers. And from our committment to operating a balanced portfolio of insurance, spread and fee-based businesses.

Operating earnings growth was driven by solid spread in our Retail Fixed Annuity business where total account balances grew 35% from last year's quarter to an average of $9.2 billion.

We benefited from solid growth in our institutional spread based businesses as well with average assets increasing more than 12% to $25.3 billion and spreads improved due to, in large part, to our successful investing, new funds, and strong yielding assets and placing liabilities at attractive points across the yield curve.

Growth was also driven by the continued by the success of Maritime Life, which we have, for the first time, broken out as a separate business segment in our quarterly financial filings. Maritime's diligent product repricing, successful integration of past acquisitions, and product innovation have enabled it ti rank among the top three or four Canadian players in each of its primary markets.

We expect Maritime's success to continue as it leverages its recent acquisition of Liberty Health which we expect to close around mid-year.

Meanwhile, pretax earnings in the non-traditional life businesses were up 10% from the prior year. Driven by improved mortality and a 41% increase in universal life account balances to about $4.1 billion.

That includes the universal life block we bought from Allmerica which was a relative small contributor in this quarter to the non-trad line operating income of $44.7 million pretax. Growth in the UL product line, more than offset higher DAC [IMMIZATION] and lower fee income in the variable life line as well as increased pension expenses in the product segments overall.

We expect the business growth underpinning these results will keep us on track to achieve the 7 to 11% operating earnings per share growth we expect for 2003, if the equity markets, consumer confidence, and the economy rise even a modest, favorable tailwind by the second half of the year.

Before recapping sales and other business activities, we all recognize that operating income is no longer the only measure that investors consider in evaluating results. And despite the significant level of credit impairments and other losses we saw in the first quarter, net income per share was 88 cents, up nearly 80% from last year's 49% per share.

We harvest a $560 million pretax gain on the sale of the John Hancock home office complex, of which $234 million was recorded this quarter and the balance to be amortized into earnings over the next 10 to 12 years. This transaction increased both GAAP and statutory capital even when we exclude the impact of higher unrealized appreciation on the bond portfolio,

GAAP book value excluding the FAS 115 adjustment was up 8.6% from the prior year and 5.3% from December 31st. Book value per share grew 11.2% to $20.97 excluding FAS 115 and was up 20% with the FAS 115 adjustment included.

Statutory capital increased to $4.75 billion and is up 5.5% from December. In fact, Hancock's ratio of stat to GAAP capital of 78% remains the highest among our publicly traded peers.

Our gross unrealized losses declined in the quarter to $1.2 billion from $1.5 billion at the end of the year. Excluding hedging adjustments, the unrealized losses dropped by $300 million to $868 million. The unrealized loss related to bonds traded at less than 80% of amortized costs for more than one year, is about $125 million.

As we have said previously, two-thirds of that amount is associated with structured receivables in Venezuela and Argentina which continue to perform as planned. Spreads generally improved across most of the industries in which we invest, but they tightened most in the overall power sector while the airline sectors remained very weak.

Now let's turn to our operating fundamentals which were solid in the first quarter.. In retail, sales of universal life, long-term care and fixed annuities were strong. Driven by our customer shift in preference towards protection product with guarantees and away from equity-based products.

We keep investment spreads stable by closely managing crediting rates, avoiding interest rate debt, and by our ability to manage complex, highly quality, leveraged lease transactions and other structured investments that generate attractive yields. Of course, we continue to ficus on prudent expense and capital management.

However, the economy has not performed in line with our expectations and investment losses in the first quarter were higher than we expected, despite the report earlier this week of a surge in consumer confidence.

For the quarter, gross realized losses from impairments and disposals on total investments, bonds, and all other investments were $293 million pretax excluding FAS 113 hedging adjustments, DAC offsets and participating business pass throughs. That was down slightly from gross losses of $311 million in the fourth quarter.

After reviewing year end financial data from a number of distressed borrowers, it became clear that anticipated improvements in liquidity, cash flows and other economic factors impact these issuers were emerging more slowly than expected.

As a result of the bond by bond analysis, and in light of our view of a slower general economic recovery, as recently echoed by Fed Chairman Greenspan this week, we deemed it prudent to take impairments on these securities and increase our forecast for possible future losses. Looking ahead to the full year, we are now projecting total gross realized losses on investments from impairments and disposals of $650 million to $750 million, compared with actual losses of $877 million in 2002.

We expect net realized investment gains and losses to essentially breakeven for 2003 after factoring in gains on sales including the home office properties, potential recoveries from bankruptcy work-outs, and prepayments, we should receive throught the year. So book value excluding FAS 115 adjustments to continue to grow approximately in line with operating income.

It is worth pointing out that we report prepayment income through realized gains not net operating income. This reduces the volatility of our net investment income and our exposure to spread compression with changes in interest rates.

In the first quarter, prepayments were $22.8 million, compared with $20.5 million in the fourth quarter of 2002, and $7.6 million in the first quarter of last year.

Turning specifically to the performance of our bond portfolio in the first quarter. Impairments were $222 million of which about 25% were taken on bond restructuring to extend principal payments that are generating interest at or above the original coupon rate, or on bonds that are currently and are expected to make full interest payments.

We incurred about $36 million in write-downs in the airline sector, mainly on American Airlines and United BTCs, which were expected given the industry's ongoing troubles and efforts by both airlines to renegotiate some lease terms. The size of our airline portfolio is about $1.2 billion, with slightly over half in the senior traunches double ETCs.

We are looking at a potential transaction to significantly reduce our, the airlines' double ETC holdings. Our 2003 estimate for gross investment losses includes about $100 million for possible future deterioration in the airline industry.

Even though American avoided bankruptcy last week, the industry remains under intense pressure as we saw with the SARS scare, and further restructurings are possible as other carriers seek to match the new cost structure of American, United and U S Air, and they face continued revenue pressures.

With the power sector overall appears to be strengthening, we took additional writedowns of $55 million against several credits across our $8 billion power portfolio.

On the fourth quarter call, we indicated we expected gross impairments to improve from the $582 million in 2002 down to 300 to $450 million for all of 2003. However, based on the lask of improvement among many of our borrowers, as of the first quarter, we expect bond impairments might reach about the same level this year as in 2002.

These impairments will be somewhat offset by 40 to $60 million of anticipated realized gains on recoveries from previously impaired securities. As a number of companies emerge from bankruptcy and restrictions on trading for certain of these securities are removed. These restrictions stem from our participation on various creditor committees.

These gains and recoveries are indicators that our holding values are conservative and provide upside potential. This has been true in prior economic cycles.

Losses on disposed bonds this year are expected to be about $55 million, slightly lower than in 2002. So, the total of gross bond losses from impairments and disposals should drop modestly from the $702 million in 2002.

And as I said, gross losses from all investments, excluding hedging, will decline to between 650 to $750 million. A reduction of about 15 to 25% over 2002. And our net realized investment performance should be about breakeven.

This forecast includes losses on agricultural and commercial mortgages which we still expect to be in the range of 45 to $55 million for the year. While we've still not seen a significant deterioration in our commercial mortgage portfolio, we are being cautious in our outlook.

Looking at the first quarter, we believe the operating results demonstrate the effectiveness of our strategy of managing a range of businesses that offer an array of products through multiple distribution channels that can meet the varied and challenging financial needs of customers.

In a survey taken last month of 600 financial decision-makers, we found consumers are more risk adverse and more protection focused than they were just a few years ago. This growing financial conservativism driven by the dot-com bust and sequential three-year bear market, is clearly reflective in our product sales.

In the first quarter, we continue to see universal life sales which more than doubled to $15.8 million. The fast growth is off a small base, however, and did not offset a sharp decline in variable life sales which were hurt by weak equity markets, the war in Iraq and continued uncertainty surrounding a estate tax legislation and other exchanges proposed in the Bush administration's economic plan.

Since the economic and legislative outlook are uncertain, we are waiting until the end of the second quarter to decide whether to revise our 2003 target of 10 to 12% growth for core life sales which exclude corporate-owned and bank-owned life insurance. However, if the extreme weakness in variable life persists, it may be difficult to hit our goals even with expected continued strength in universal life.

While we could ramp up variable life sales if we were willing to increase compensation or lower underwriting standards, we've said repeatedly, we will not sacrifice profitability for top line growth. And that holds true in our other product lines, including fixed annuities and long-term care where we have enjoyed very good sales growth.

In the case of long-term care, where sales were up 47%, we are benefitting from growing consumer awareness, a great new product, growing distribution, and a superior brand that consumers have a great deal of confidence enduring all economic cycles. With fixed annuities where sales grew 28%, our success is being driven by a strong position in the regional bank market through our Essex third party marketing subsidiary.

Essex's superior wholesaling and platform services allow us to gain market share without giving away the store when it comes to compensation or crediting rates. Typically, our crediting rates are about in the middle of the pack compared with our peers in the bank channel.

Currently, the averaging crediting rate of our in-force stands at 3.88% compared with 3.95% at the end of the fourth quarter. We have introduced our new 2% based rate product in 44 out of 54 jurisdictions.

In the other jurisdictions, we are reducing the bonus and compensation. In other proprietary product deals which better align our interest with those of our distributor partners, add to persistency and the potential for increased profitability.

Finally, on the institutional spread-based product side of the business, we have significantly scaled back sales goals for GICs, funding agreements and group annuities in the face of what we believe is irrational pricing from some competitors. In these markets, we have been losing bids by 30 to 50 basis points.

Given this competitive situation, we are reviewing our previous guidance of 10 to 15% for total guaranteed and structured financial product sales. We now expect total GNSFP sales to be flat this year as reduced sales of traditional spread products are offset by sales of new products such as signature notes and structured settlements.

In conclusion, we are keenly aware of the obstacles we and frankly most of our peers face in a highly competitive marketplace and in the tough equity and credit environment. But we remain confident that we have the right products, the right distribution, and a great brand to serve the needs of our customers. We are confident we can deliver profitable growth and increasing value to our shareholders.

Thank you and now we'll open the call to questions. Operator?

Thank you. Ladies and gentlemen, 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. And if you're using a speakerphone, please lift the handset before posing your question. We'll pause for one moment. Our first question comes from Nigel Dally of Morgan Stanley.

Great, thank you. I've got a question for David. After your proxy came out, there's been a lot of investor questions about executive compensation packages. I'm hoping you can discuss the structure of your compensation, how the compensation committee works, and perhaps most importantly what we should expect going forward? Thanks.

Thank you, Nigel for that first question. Let me see if I can take on all that, let me know if I've answered it adequately.

There was of course, an expectation this might come up as a few people have asked this question. And I'll try and answer it in reflection of my own comp because I think it demonstrates how we deal independently as a group, and it's also reflective of how the rest of the company gets compensated. Our compensation committee has been, even before we were a public company, completely independent and so we didn't have to change people and we've had two independent board comp chairs since we became public. We also have independent specialist and independent lawyers that assist them.

Let me talk a little bit about how we view compensation, how they view compensation. We don't view it according to proxy statements in terms of we consider it broader than year-to-year performance. And I'll explain that in a minute.

It's certainly a factor and we do compensate partially on year-to-year performance. But unfortunately while one can understand the confusion on this subject, and there's been a lot written about the entire public company proxy statements. And I can't believe how much confusion there is but I can understand it. Because the proxy formulas are pretty restrictive and formulaic and it's difficult to make comparisons sometimes. They capture all of the cash distributions in a reporting year even if the results of the awards go back as far as 1997, which they did in our proxy.

Another fallacy, I think, is that we could not be rewarded for our IPO success and for year one valuation. That's simply not true. We could not be rewarded within that year, nor could we have a program within that year that rewarded it.

Going back, we could do, and indeed the comp committee felt it was important to look at the IPO success, and the last three years we've been in a program to give to the top three executives here that participated in the IPO compensation for that success. I will talk about that, too.

But I also want to mention that my compensation should be no surprise to anyone in the investment community. As I spelled it out very carefully and you can check the transcripts in Salt Lake City, at the Salt Lake City Investors Conference in February of 2002, everything that was in the proxy that was relevant was in my remarks. And 150 investors and analysts were there. I'd be glad to supply a copy of the transcript.

But let's take a minute to review some numbers and the process. The comp committee meets many times during the year, at least 10 or 12, and often independent from anyone from management. And I thought maybe the best way to answer this kind of question is to pose a few questions that are considered by the committee.

The first one I mentioned before, which is how are we going to compensate senior management for the IPO and subsequent value that was created? They felt it was important to award executives working in the best interest of our two owners, first our policyholders that owned us prior to the demutualization and we're very interested in the IPO results, and then of course the shareholders.

Now, I'll point out for many of the people that may not understand this, that the committee was very aware at the time of the IPO and afterwards that the executives actually had no incentive to maximize the IPO proceeds. And certainly no incentive to have a high stock price in year one.

We actually had disincentive as a matter of fact, since we could have no program in that year. But nonetheless, we aggressively maximized both.

Bucking the trend back in 2000, we came out at 1.1 times book creating for policyholders about $1.6 billion more than our competitors who came out in the same time frame, who came out at an average of .8 a book. We also in the first year drove 114% increase in stock price creating another $6.5 billion in additional value.

From the IPO to January '03 with the ups and downs, looking at the baseline of the IPO, Hancock was still up 58% and the S&P was down 37% in that period.

So what did we do? The comp committee's plan was to reward the executives for value created at the IPO, as I said, and value sustained for three years.

And what they wanted to do is make sure we had some sustained value and we weren't a flash in the pan over that $17 initial price. So unlike some of our competitors, we have eliminated LTIP so there's no cash on LTIP.

We eliminated retention bonuses. My base and the base of the top executives was frozen in 2000 and 2002 and so were our bonus targets.

They decided to use options primarily, not exclusively, but primarily to reflect year-to-year performance and I will speak to that in a moment. But we used restricted stock to award for that value of -- that I talked about.

And roughly speaking, a goal to pay me about 1% of the value created and sustained for this 2 1/2-year period, actually almost three-year period. At the end, in 2003, in January, with the ups and downs, I'll be glad to show you the data, about $5.3 billion was created for our two owners.

And I was given 728,000 restricted shares which represents not 1% of the value creation, but about .4% of that 5.3. That program is over and I will receive and executives here will receive no more.

Another question, of course, is what about year-to-year performance? If the stock performs badly, how are we, as investors, how do we know that it's reflected in your comp? Well, I have 2,050,000 options, my lowest option's at 35, and those options are currently well under water because of our drop in stock price.

I would say that our interests are pretty well aligned because in order for me to get $10 million in an annual -- out of my options, the stock price has to go to 42. I assume that if it goes to 42, no one's going to begrudge me $10 million.

A little bit about criteria. Our criteria for determining comp is wide ranging, not all by formula, but it's EPS growth, operating income, net income, sales, peer comparisons, expenses, stock price, strategic progress, management abilities, and the comp committee considers all of those issues.

A little bit about going forward, since you asked about it, it looks to me like what's probably going to happen is first, because I no longer have LTIP and no one here has LTIP, and the bonus, let's say we hit our plan this year, since we're still on our guidance, I'll get about $2 million in cash and the charge for the restricted stock I've been given will be somewhere between 3 and $4 million after tax.

If there's no LTIP, it will actually, my comp., will drop to somewhere in the single digit millions on a cash basis. And I think going forward, you can also see that the mix will be options and restricted shares, I imagine.

I don't speak for the comp committee, but without LTIP, I think you'll see, assuming we hit today's plan, somewhere between 30 and 40% less than you saw of the grants last year at a minimum. And I think that pretty much covers, I think, what you asked, Nigel. Is there something I left out?

No, I think that's about it. Very helpful. Thank you.

Thank you.

Our next question comes from Vanessa Wilson of Deutsche Bank.

Good morning. Can you talk a little bit about your spreads? You had reasonably stable to better than expected spreads particularly in the GICs this quarter. You've guided us to expect the GIC spreads to be lower as the year progresses. Could you talk a little bit about what's behind your outlook in your spreads, why you seem to have a little bit more stable spreads than others, other peer companies, and as well you have sizable losses in your hedges and you've given those to us as part of your unrealized loss. Is there any way you could lose the money in those hedges if that loss could actually be realized if you hold it to maturity?

Hi, Vanessa, it's Jean Livermore, I'll address the spread question. For the spread-based business, our standard range, as you know, is 120 to 145 basis points. Recently, we have been above that range and in Q1, as you know, we were well above that range.

I think it's instructive to look at the difference between the Q4 spread and the Q1 spread. In Q4, we actually had interest losses on Category 6 bonds and in Q1, we had some recoveries on those bonds. And that swing was actually worth about 20 basis points.

Also, there's a seasonal effect between the quarters because our GICs and our annuities are paid on a 365-day basis rather than the 30 over 360 basis that our assets and the rest of our liabilities are paid on. That seasonal factor was worth about 10 basis points.

We also made some structured investments late last year with very wide spreads. And they're helping to offset the narrowing investment spreads that we see in the marketplace.

Are those floating rates? The structures?

No, they are not.

Okay, thank you.

So if you look at the year, I'm thinking at looking at year-over-year might be instructive. Last year we had a spread of 148 basis points, which was slightly above our guidance. For this year, we're expecting spreads to be slightly higher still, I would think in the 150 to 160 range.

Okay. And on the fixed annuities? I'm sorry, Jean, one more thing on your GSF & P. You don't have any minimums or floors that will restrict you in reducing your cost of funds?

No. In the spread-based business, most of our business that we have already written is fixed rate or fixed spread. It's guaranteed, we're on the hook for those rates or those spreads. But there's nothing -- there are no floors on any of our products that we write going forward. So there's no, like, minimum. Also, I think it's important to know that on our portfolio now, about $11 billion of it is floating rate.

Okay.

Hi Vanessa, this is Michelle Van Leer to talk about the fixed annuity spreads.

Our story here is pretty similar to what we've talked about in prior quarters, we're carefully managing both the spreads on our new business and renewal business to follow changes either in new money rates or in portfolio rates and to bring those down. I think Tom mentioned in his opening remarks that on our in-force at this point the average is close to 4%, a little bit below 4%. So we certainly feel like going forward we'll be able to maintain the 200 basis point spread target by, you know, as portfolio rates come down, move that rate down.

On the new business, the strength of our Essex relationship, our bank relationship, our proprietary deals, really allow us not to price to be the top of the pack, but the middle of the pack, maybe even a little below, but the strength of the support, the private label product, we've been able to maintain our pricing targets on our new business and we recently introduced, I think as Tom also mentioned, a product in most states where the minimum is now 2%.

And I think some of the things also driving on the earn side in terms of the some of the investments purchased are helping in the fixed annuity business as well.

So the credit losses are not deteriorating the spreads in either the GICs or fixed annuities?

No.

And then, Tom, on the hedges?

Vanessa, it's John.

Hi, John.

I understand your question correctly, the hedges, as you know, are mark-to-market and when we take a loss on a bond, we take the basis adjustment through our losses in hedging. So that is already taken in.

However, the hedge that has been basically has generated the loss on which the asset had generated a gain because of the hedging relationship, what happens there is that the asset amortization of the gain is taken out of future income, but the hedging on the bond, on the derivative will appreciate over time as that derivative matures. So you actually should have some positive impact on gains.

So, John, when I look at your balance sheet and you have $1.2 billion unrealized loss, and without the hedging it's $900 million, the $300 million swing, how much risk is there that that will be realized?

Again, if those securities moved into realized losses, we would take the hedging adjustment with the loss as we do on anything that moves into an impairment. We take that hedging adjustment at that time.

Okay, thank you.

Our next question comes from Colin Devine of Salomon Smith Barney.

Colin Devine, CFA: Good morning. David, I wonder if could talk a little bit about your company's investment strategy with respect to the credit losses, because you talk about the spreads and how they're being maintained in certain business lines. And I think perhaps particularly the GSFP, but I think the fact of the matter is, if we market in the credit losses which go below the line, you get a much different picture. And if you bring that in and allow for the extra losses here, the ROE your company is generating, I think, is substantially below what's being reported on an operating basis if we try to get to it on an economic basis. I was wondering if you could bring us up to date on where your thinking is on the investment strategy, particularly as in 90 days Tom's loss forecast for the year has gone up about, what, 60% from where it was when we did fourth quarter.

Hi Colin, it's David, and I think John and Tom may want to drop in on this discussion, but I think anyone that considers that we are not well aware of the risk we've taken in credit needs to be -- have their mind changed. We are well-aware of the problems we have had in credit and in the risk profile column that we've had for some time. But I think it's worth noting how dramatic we are shifting it.

Now, that doesn't mean we don't have a portfolio to deal with because we indeed do have a portfolio to deal with. And we are currently working in a number of ways to try and minimize the issues in that portfolio. But to some extent, it is what it is and we're trying to be forthright in dealing with it.

But there's no question that the risk profile does not work as a public company, as well as we would like, and particularly with a sustained economic trough that we have seen. And to that extent, let me reiterate that, you know, we are determined and I've told the rating agencies in the recent discussions that we are going to be pushing our below-investment grade bonds down to 8% by year-end 2005 on a progressive basis. We have significant new formal limits in place on single credits as well as on [BIGs] and foreign securities.

We also have, and particularly in some sectors, we'd be glad to share that with you in detail, if anyone would like to see it, but clearly we have changed that profile and we've also decided that over the next couple of years, we are going to be starting now, we're now changing our single-issuer limits and the ratings of those bonds whereas a triple B's we're now moving to operational limits of $175 million, double B's at 100, B's at 50 so so there is a market change happening in the portfolio. It does take time to change it but we are hardly frozen in cement as some people have written or commented.

I think there's little question that we are going to have to move more toward, not entirely toward, but more toward some of the investment portfolios that some of our major competitors, which may in effect drop the ROEs to your earlier points somewhat. But we expect to be someplace between where we are and the average of the ACLI in the coming couple of years.

Unfortunately, it is a bit like turning a ship in the middle of the Atlantic and one doesn't want to move it too quickly either. We have a new risk officer in place to help us through all that, but I think what will be helpful, perhaps if John could take you through it, but you may have a follow-up to me first.

Colin Devine, CFA: Uhm, yeah. Two follow ups. First, do you expect you're going to need to raise capital in response to the rating agencies? And then since you're speaking, why don't we just do a quick follow-up on the compensation question? I think by my tally last year, three of the five highest paid of the top five paid executives in this industry work for Hancock. And I take your point on the value creation perhaps from the IPO. The point that I cannot reconcile, then, is the fifth highest paid officer in the industry, [INAUDIBLE] there are only two CEO's that got paid higher than him, was Michael Bell, and I'm having a difficult time understanding because he wasn't on staff when you took the company public.

Colin, I actually think we should take that off-line, I don't have the data in front of me. I don't believe that's right, but now's not the time to go through it. I also think certainly Michael did not get any advantages out of the IPO. But as we have looked at the proxies of others as well as the Form 4's we do see more comp than has been produced by others.

But I do think it's probably worth Colin, taking that one off-line for a second and that includes the top three officers. But when you did subtract out what we got paid for the earlier portion of the IPO and the value creation, I do think you would not see the top three officers in that level. And I certainly don't think, Colin, you're going to see it as with the elimination, as I said of LTIP, and retention bonuses and such you're going to see our comp drop back down into much more of the industry levels. I think that's the way to compare it. I'd be glad to do those comparisons with you off-line, I think it's more appropriate. I'm sorry, I forgot the first question.

Colin Devine, CFA: In terms of when you expect John Hancock is going to need to raise capital this year.

We're reviewing that now. We recently met with S&P and recently talked to Moody's, and we're in the middle of reviewing that as we always are. I think we will know in the coming few weeks whether we feel we have to create capital just as a safeguard. Because the RBC's still are pretty solid within the ranges but as a safeguard, I think it might, it will certainly be something we'll be considering. You'll know it as soon as we know it.

Colin Devine, CFA: Okay, thanks. I'll let you get on to the next question. I know there's a lot of people waiting.

Thank you, Colin.

Our next question comes from Ed Spehar of Merrill Lynch.

Ed Spehar, CFA: Thank you. Two questions. I was wondering on the airlines, I think you had a $36 million loss in the quarter, and it's a $1.2 billion portfolio. Another player has a portfolio that's about 25% of the size of yours. I understand all the issues about composition and everything else.

But with a portfolio that's 25% the size of yours, took a loss of $54 million in the quarter, and I'm just wondering, given your comments about the fact that your gross loss estimate assumes another $100 million of losses from airlines, and given the difference between how you've booked it and another company, why not sort of take that today or have taken it in the first quarter? And then the second question is, could you just tell us who the top three insurer relationships are for Essex in the fixed annuity business? Thank you.

Ed, it's John DeCiccio on your question on the airlines. You know, a lot here, not only depends on the collateral, but it also depends on which carriers that you're exposed to in your portfolio. And currently in our ETC holdings, as I look at them at the end of the first quarter, we have a fair amount with what I would call the strongest carriers in the industry of those left standing here.

In addition to that, when we take a look at the ETCs for those carriers that are either in bankruptcy or in an immediate threat of bankruptcy we look at the underlying collateral. And it's not a one-size fits all kind of thing. You really do have to drill down into the planes that are the collateral and we very aggressively mark those to a market-based and we take our hits on the basis of that appraisal value. So, again, you need to look at the distribution by carrier and you need to also look at the underlying collateral within that for the troubled carriers.

Ed, it's D'Alessandro. I think you also have to go back to last quarter, to see what we took last quarter compared to competitors. I think that's starting to show the overall mix. But I think your point is well taken in this sense: a $1.2 billion exposure, and we all read the newspapers and all look very carefully at this, you have to remember how much of that is in doubt ETCs at the moment and the fact that we expect to get paid off of that which is about half of the portfolio.

I think the other thing to take into consideration is the fact at that we're looking pretty aggressively at reducing our overall exposure on even some of the double ETCs as there is a market for them. So it will help I think in the percentages to your point going on. But you really do have to look carefully at these airlines because you cannot compare an airline that has a lot of unsecured planes to an airline that is teetering.

So if we could take more because we knew there was more, we would. But frankly, this is -- we read the papers as you do and we have sincere negotiations with these people all the time. And we take exactly what we believe, after review with our accountants, is the appropriate amount to take.

Ed Spehar, CFA: Okay. And thank you. And then the question on the top three insurer relationships with Essex, for Essex?.

Thank you, Ed. This is Jim Benson. The top relationship with Essex is fortunately the Hancock, by far, and then the next in order are AIG, this is through the first quarter, Glenbrook, which is a unit of Allstate, and General Electric. And then the next two beyond that are New York Life and American General.

Ed Spehar, CFA: Thank you. Okay.

Our next question comes from Jeff Schuman of KBW.

Good morning. I was wondering if you could talk a little bit more about life insurance sales? You talked about the challenges associated with the preference for the UL product, but I mean that issue's been out there for a while. And in some quarters you've had good sales momentum. I'm wondering, sort of, what other issues are frustrating the sales growth at this point, and I wonder, for example, in the M Group if you're losing share and what might be causing that?

Okay, thank you. Jeff, this is Jim Benson again. As you undoubtedly know, we've been a leader in variable life and particularly variable survivorship life over a number of years, and there has been a dramatic shift away from variable products, equity-based products to guarantees through universal life. And while our universal life sales are up and Tom reported that up rather robustly, 130%, this was not a good quarter for us, first quarter of this year. Total sales were down and actually they were down in all three of our channels. And so our shift from variable to universal while being good is not good enough.

I'm going to comment on all three of our channels briefly. We have two products in universal life and we think that they are going to be the core products that we're going to be selling this year in addition to a competitive term product. I'm leaving (INAUDIBLE] aside. These are our core sales. We have a performance UL which is an accumulation universal life product that's been out for well over a year. It's a good product, and we have good sales there. We have just introduced a new product called Protection UL, which is, as it's name implies, more protection oriented, it's like a term to 100, it has guarantees in it. We believe it will be a very competitive product but not necessarily a price leader.

Some of our competitors are, we think, very aggressive in pricing and in underwriting concessions, and we're not going to necessarily be following that. We think the two-pronged approach of both an accumulation and a protection product in UL, as well as our very strong variable life that continues and if the market turns around, I'm sure we will regain sales in that line as well.

Our three channels are M Direct Brokerage and our Signator Agency system. Over the last several years, we have a very long relationship with M. I personally have a very long relationship with M. Hancock has been number one, four out of the last five years with M.

The business in M is a little bit clumpy as I think they would acknowledge. It comes in in spurts. The first quarter was not good for us, but our relationship with them is terrific. We had 15 of their top case design and service people, the people that oftentimes drive where business goes, they were here this week.

Under Michelle's leadership, we have tripled the number of touches, agency visits, firm visits this year. Primarily to help them understand and see the power of our universal life product, vis-a-vis what they've been so comfortable with over the last several years which was our variable life product. And while the first quarter was not good by any means, I don't think, we see that the subsequent quarters and frankly the relationship continuing to be very, very strong. By the way, we were number two out of six core carriers with M in the first quarter of this year.

In Direct Brokerage, this is a business that we started in 1999 primarily on the strength of our variable life and variable survivorship life. We are shifting here as well to universal life. It's a very competitive market. Again, not being a price leader, we're not going to steal business from other companies but we are pretty dramatically expanding our reach in the direct brokerage business.

Where in addition to M, which is a stand-alone channel for us, we have relationships with all of the top producer groups, virtually all of the major MGA's and BGA's and within the next two weeks we will have secured direct selling agreements with two top career agency systems that have decided not to be manufacturers, either entirely or primarily in the products that we're good at.

And so while the shift from variable to universal has been a struggle for us in this channel, we think between now and the end of the year that will be rebound sufficiently.

Our last channel is our own channel, it's our Signator System, our core agency system. In terms of life sales there, we're the victims of our own success as it relates to the long-term care business.

We have a new agent business, new agent training system called the Fast Start System that brings people into the business selling long-term care. They are terrific at that, in fact, some of the strength of our long-term care sales comes from how strong they are coming into the business.

This year, we have reemphasized broader planning, a broader palate of products. Life, annuities for retirement planning, as well as long-term care. Just anecdotally, this coming Monday, 425 agents will go to a place in Connecticut for an off-site meeting on life insurance training, understanding our tools and techniques better at their own expense.

We brought in new reinforcements people who are frankly, life insurance zelots to help our field force understand the power of life insurance in addition to long-term care. And so we think between now and the end of the year, our signator system will rebound.

Finally, there seems to be a great deal of interest on the part of experienced agents and proven agency managers and general agents to join our company. And on a selective and prudent basis we're going to be adding to our system through people who want to join our system.

So I would say, Jeff, through M, we're going to be strong, Direct Brokerage, a little tougher. We'll be much better in the subsequent quarters. And I think our agency system will rebound as well in life sales by the end of the year. While we don't want to change our guidance at this point, I might say that it would be at the low end of guidance without necessarily making a modification at this time.

Thank you, Jim.

Jeff, this is David D'Alessandro I want to add a couple things.

One is, I think one of the things you want to look at is, you know, Jim Benson's done a terrific job of talking and being around the M as well as the partners network. I think what you'll see in the Direct Brokerage business is, the high end businesses which we specialize in, that virtually everybody is down from last year. Our share hasn't changed but people are down 30%. And the M is down certainly in the first quarter. I will tell you, I expect it to be down in the high end for a while.

I think what's going on, if you look at the consumer statistics as well, is that people are much more worried about outliving their money at the moment, versus leaving it to their heirs. I do think that the economic trough we've been seeing is playing a terrific effect on the life business.

Further, I would tell you this: I've been around this business 20 years. And I don't pay attention much to quarter-to-quarter, even half year to half year, but I do pay attention to the kinds of cases we see coming by, and the products, and I will tell you that in a review of the cases coming by, there are cases that we saw this past quarter that were around, when I was running retail, which is six years ago, and the guy still hasn't died but he still doesn't qualify to be underwritten. And these are big cases.

You may remember a year ago, there was a great falderol and people were holding conferences on mortality. Well, they should be holding conferences on mortality at the moment because we're seeing cases that we won't underwrite being underwritten. We're not talking about $50,000 face policies, we're talking about $10 million cases. And cases that are not being reinsuranced.

And I think that if you examine behind the cases being high end cases that a number of companies are writing, particularly a few companies are writing these days, you find out they're not being reinsured, and they're taking the retention. Now there's a reason to have a mortality issue. I just don't think you can pay attention to quarter-to-quarter.

I think you look at trend lines particularly on a product like universal and say okay, this product's coming but tell us about, and I wish we had a way, all of us had a way to take a harder look at underwriting. All I know is that the cases we're seeing, we won't underwrite many of them.

Okay, thank you.

Our next question comes from Eric Berg of Lehman Brothers.

Eric Berg, CFA: Good morning. I actually have two questions. One for Tom. You reported gross losses on your investments of, I think you said, $293 million in the quarter. And you're now projecting total losses for the year of $700 million. I realize that there are many, many moving parts to all this, hedge adjustments, DAC, taxes, gains and offsets, but as we think about just the gross-gross realized loss number, would these two numbers, $700 million on the one hand for the full year, $293 million for the quarter, wouldn't that mean that you expect for the next three-quarters a dramatic reduction in gross realized losses or am I not thinking about this correctly?

Eric, John DeCiccio. I'll take that question. In terms of what we expect going forward, we figure about $125 million per quarter losses in the bond portfolio. Or 375 for the balance of the year. Now, some of that may be front-ended depending on the recovery and whether things pick up faster or slower during the year. But that would be the number that we would be looking at in terms of our balance of the year number.

Eric Berg, CFA: Okay. And -- I'm sorry.

I would -- this is Thomas Moloney. I would just add one thing, to to make it clear on this, in those projections, we do not include hedging adjustments at all. It's just so that's clear.

Eric Berg, CFA: By hedging adjustments, you mean the change in the market value of hedges associated with your investments?

That are written off, yes.

Eric Berg, CFA: Okay. I have a follow-up question for Jean Livermore and it is, that what is the outlook for cash flow in your spread-based businesses? I mean, I know that one quarter certainly doesn't make a trend, but you're talking about sort of sales equalling redemptions. When do you -- my question is: When do you expect cash flow, money in less money out, to turn solidly positive in your business?

Eric?

Eric Berg, CFA: Yes.

Hi, Jean Livermore. In the first quarter, it was barely positive. Certainly negative in the GICs but positive for the funding agreements and annuities and obviously signature notes.

I think that as we go forward, we're thinking of constraining sales of GICs and funding agreements in particular. The GICs as you know, have an average life of around three to five years so they will be rolling off our books. But the funding agreements generally are longer term, so that there aren't as many maturities there.

And certainly in our annuity block, the maturities are very long so that there will not be very much of a runoff in that block. And as well, the signature notes that we put on the books, tend to be longer and they're, as you know, a new product so that there won't be runoff there as well.

What we're thinking is, that the constrained growth of GICs and funding agreements in particular, will mean that we're that our sales are about flat for the year. So you've got GICs running off but not very much runoff in the funding agreements, annuities or sig notes, so we do expect the growth for the year to be positive.

Eric Berg, CFA: Thank you.

Our final question comes from Michelle Giordano of J.P. Morgan.

Thank you, good morning. Tom, I was wondering if you could address, what's the overall impact you would expect these investment losses and sort of offsetting gains will have on your year-end RBC ratio? And are the rating agencies still saying the 300 to 325% RBC is still the targeted level to maintain the ratings? And then I'll have a follow-up question for John DeCiccio.

All right, thank you very much for your question. Actually where we are right now, looking at the year-end ratio, as we indicated earlier is probably around 305 to 310. Down slightly from where we are at the end of the third quarter where we estimated we'd be about 315.

That's because the gain that we took on the home office building showing up in the first quarter. So I think that overall it's clear that those losses will continue to have downward pressure on the RBC.

I have not seen an exact quote from the rating agencies about the 300 to 325. We actually use and have used the 300 to 325 as our own internal management range with anything above 325 is what we calculate excess capital over. Okay, thank you. And then for John DeCiccio, could you give us a little color on the leveraged leases? What's the dollar amount of how much you have invested in leveraged leases and is all of this in the GSFP segment and what kind of yields are you generally on these leases?

Michelle, John DeCiccio speaking. In terms of these leveraged leases we've done a little over a billion dollars of leverage lease investments. And they are certainly not all in the GSFP group. Jean Livermore might like that, but that's not the way they get allocated. They're well-spread around throughout the company. And how they basically are at very high after-tax yields given the tax benefits in these leases. So that the after-tax -- before-tax equivalent kind of yields can be in excess of 10%.

Great. Thank you.

If there are no other questions, we thank you all for joining us today and look forward to talking to you talking to you during the quarter. Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.