Manulife Financial Corp (MFC) 2003 Q4 法說會逐字稿

Good morning and welcome to the John Hancock investor relations fourth 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.

Thank you, Elsa, and good morning, everyone and welcome to John Hancock's fourth quarter 2003 earnings conference call. As you know, our press release and financial supplement were released last evening and are available on our website.

This morning Tom Moloney, our Chief Financial Officer will take you through the results of the quarter and the year. Also on the call this morning is David D'Alessandro, our Chairman and Chief Executive Officer. From our retail operations we have both Senior EVPs, Michael Bell and Jim Benson. From Investments, both Chief Investment Officers, John DeCiccio and Deb McAneny, our EVP for Structured and Alternative Investments are available. Also present are Maureen Ford, President of John Hancock Funds and Jean Livermore, Senior VP of Guaranteed and Structured Financial Products.

Before we begin, let me remind you of caveats regarding forward-looking statements. Before joining this call, by either phone or web, all participants are required to read and acknowledge cautionary language regarding forward-looking statements, as well as the use of non-GAAP financial measures which might occur in this morning's discussion. If you did not review this cautionary language, do so now by referring to yesterday's earnings press release or our most recent 10K, 10Q, 8K or other SEC filings.

In general, forward-looking statements are subject to a variety of risks and uncertainties discussed in these filings that may cause actual results to differ materially. non-GAAP financial measures are presented by management to enhance investors' understanding of company performance, but they are not a substitute for GAAP. A full reconciliation of income from operations to GAAP net income is provided in our press release on our website and in our quarterly filings.

Please also note that this morning, due to the pending merger with Manulife Financial we will only discuss matters related to John Hancock's fourth quarter and full year 2003 results. Due to the pending merger, John Hancock has not provided any guidance in regard to future earnings or sales. And as we are in a period pending and expected shareholder vote in regard to this transaction, we will not comment on any information regarding the merger that is not already referenced in the perspectus that has been mailed to all shareholders of record. I thank you in advance for adhering to these limits during the question-and-answer period.

With that, I'm very pleased to turn the call over to Tom Moloney.

Thank you, Jean, and good morning, everyone. I am pleased to report that John Hancock has achieved record operating results for both the fourth quarter and full year 2003 along with a 61% increase in net income for the year to $806 million. John Hancock reported its strongest operating results ever with operating EPS of 94 cents reflecting nearly a 21% increase over last year's fourth quarter.

Many of you may recall that during our IPO road show in 2000 we talked a great deal about what we termed 15 by 15. Delivering 15% growth in earnings and a 15% return on equity. In 2003 we met that goal. Full year 2003 we achieved operating EPS of $3.29 a 16.7% increase over the prior year. At the same time, our operating ROEs for full year 2003 grew to 15.3% on an ex-FAS 115 basis. For the quarter, our operating ROE was 16.3%, our highest ROE since the company went public. Our ability to realize this goal is the testament to the hard work and commitment of our employees as the company displayed solid results across the board for all of our operating segments.

On a pretax basis, segment results were up as follows: Retail protection was up 11.7% for the quarter and 10% for the year driven by strong earnings in the nontraditional Life line. Retail asset gathering was up more than 45% for the quarter and 47% for the year, driven primarily by the significant improved equity market and higher spreads. Investment management results nearly doubled in the quarter and were up 42% for the year driven largely by increased securitization activities at better pricing and strong results from some of our asset management businesses. The guaranteed and stable value earnings grew 25% in the fourth quarter and were up 11% for the year as stronger spreads offset slower business growth.

Maritime Life with very strong fourth quarter results was due to the refinements in the introduction of new systems and procedures used to calculate the financial results, the growth in underlying business as well as the addition of Liberty Health business acquired earlier in the year. For the full year, Maritime Life results were up 48%. Corporate other results declined due to a combination of capital transferred to split business growth, higher pension related, and other operating expenses and lower portfolio rates on surplus.

The significant improvement in net income was obscured somewhat by the adoption of required change in accounting principals in the fourth quarter. This change was $162.2 million after taxes for the accumulative affect of the October 1 adoption. We, like all companies that report under U.S. GAAP, were required to adopt the Financial Accounting Standards Board's new implementation standard DIG B36 under FAS 133 derivative accounting.

The derivative Implementation Group, Implementation Issue B36 required fair value of certain liabilities to be recorded through net income while corresponding assets are fair valued under FAS 115 through other comprehensive income, or in the case of mortgages, real estate, leases, et cetera, are held at amortized costs on the balance sheet. To try to put that in a bit more simple terms, this accounting approach can cause liabilities and their supporting assets to be valued under two different approaches, or recognized in different places in the income statement.

Our participating pension business within the guaranteed and stable product area, and to a much lesser extent, modified co-insurance contracts with the areas impacted the most by this change. DIG B36 requires that we reclassify this amount to net income and that we continue to account for any future changes in fair value through net income as well. This will add another component of volatility to net income. I would like to point out, because the change in the fair value of bonds that previously have been recorded in other comprehensive income, the impact of this adoption of shareholder equity was much less than on net income. Shareholder equity was decreased by $66.3 million as a result of the accounting change. And despite the DIG B36 adoption, net income for the full year of 2003 was still up 61.2% for the year. Excluding DIG B36, net income would have nearly doubled 2002's results when credit losses peaked due to overall economic weaknesses. The improvement in our 2003 net income was due both to our strong operating results, as well as to solid improvements in net realized investment gains and losses.

In the fourth quarter, impairments of $153 million, including $115 million related to the apparent fraud at Parmalat, which rapidly drove that investment grade company into bankruptcy. The Parmalat situation obscured what is otherwise a strongly improving credit picture in our portfolio. Excluding Parmalat losses, we had just $38 million in write-downs across all of our portfolio in the fourth quarter, and we saw nearly $27 million recoveries on previously impaired bonds.

The full-year recoveries were about $90 million on these previous write-downs. The sequential improvement in our credit fundamental has been very strong. Impairments over the past four quarters have declined from $250 million in Q1 to $103 million in Q2 to $73 million in Q3 and to just $38 million in Q4, excluding Parmalat.

Total gross losses for the year, including impairments and losses on disposals of securities were $777 million in 2003. This compares to a total gross loss of $876 million the prior year. Gross gains in 2003 were $954 million, including the $91 million in recoveries, $234 million from the sale of our home office complex, $112 million from prepayments, and $517 million from tax planning and portfolio repositioning and other sales of bonds and equities. In 2002, gross gains were just $489 million.

I would like to also turn to unrealized gains and losses for just a moment, as this is another area we have seen dramatic improvements. Gross unrealized gains in our portfolio improved to $3.5 billion from $2.6 billion at the end of 2002 as credit spreads improved vastly, offsetting the rise in interest rates over the year. On the other side of the equation, gross unrealized losses declined by 67% to $479 million versus $1.5 billion at the end of 2002. The improvement was due primarily to better credit spreads, which more than offset the modes interest rate creep that we had seen.

Now let's turn to our operating results. The 11.7% quarterly increase and 10% annual increase in protection segment pretax earnings were both driven by strong results in the non-traditional Life product line. Non-traditional Life results were up 19.6% in the quarter, and 25% for the year as a result of improvements in fee income. Earnings for the year benefited from about a $12 million pretax net effect of a release of reserves related to the adoption of new systems and procedures associated with the conversion of term policies to non-traditional Life business.

We saw solid improvements in sequential sales of Life products, although the annual results for total Life sales was still down about 19% for the year and within previous guidance. Sales of core Life products, excluding corporate-owned life insurance policies, was down 1% for the prior year, but improved 13% for the third quarter. This is the third quarterly improvement in Life sales this year.

As you know, last quarter we launched a new line of life insurance products, including new universal life offerings, targeted to both small businesses and to a reemerging survivorship market. This was supported with a robust fall marketing campaign that included web based and face to face promotions, and training, and sales incentives. The fourth quarter was very strong from both core life and corporate-owned life insurance sales through the M Group, our premier third-party carrier.

We were the number one carrier with a 50% share of M Group life sales and we retained our number one position for 2003 as an M core carrier with a total of 43% of M Life's business. Total Life sales grew 46% from the third to the fourth quarter and were up 6% from the fourth quarter or 2002, and then grew several large corporate-owned life cases totaling nearly $30 million in the quarter.

Long-term care sales remain strong, up 45% for the full year, and 13% on a fourth quarter basis. Federal long-term care sales grew 58% for the year to $83 million. Long-term care earnings were a modest 2.5% due mostly to higher distribution expenses, the allocation of other expenses to a fast-growing business line and the ongoing problem of lower lapses.

Turning to asset gatherings, segment pretax earnings were up 46% for the quarter, and 47% for the full year. Driven by higher account balances in both variable annuities and mutual funds and by both business growth and improved spreads in fixed annuities. Despite a sharp decline in sales of variable annuities for the full year, the fourth quarter had an uptick in sales. Account balances grew nearly 8% to $5.7 billion, due to market improvements. Similarly, John Hancock fund's account balances were up more than 13.5% to $29.3 billion due to equity market appreciation.

Fixed annuity account balances were up 21.9%, to $10.7 billion, driven by more than $2.3 billion in total Life sales for the year. Fourth quarter, fixed annuity sales were down 43% from the prior year, reflecting our disciplined pricing and the current low interest rate environment, and our introduction of products with 1.5% or 2% minimum rate guarantees. For the full year, fixed annuity sales were down 13%, as a number of our key competitors kept their products at a 3% floor through at least the fourth quarter.

Our strategy did pay off in terms of maintaining spreads in this business, fixed annuity spreads in the quarter are 258 basis points, bringing full-year spreads to 225 basis points, the top of our pricing range. The sharp increase in spreads in the fourth quarter was the result of partnership income, that can fluctuate from period to period, but generally do very well in good economic environments. With 2003 showing strong overall results versus 2002.

The Maritime segment, which represents our Canadian operation, reported very strong results in the fourth quarter. Maritime's pretax earnings were $63.5 million in the quarter, about 2.5 times the $23.1 million earned in the prior year fourth quarter. For the full year, Maritime's pretax earnings were $162 million, up 48%.

Earnings growth was driven broadly by strong organic growth in both retail protection and asset gathering businesses due to the improved equity market performance and the acquisition of the Canadian individual life and health business from Liberty Mutual. Also refinements in Maritime's U.S. GAAP models resulted in about $19 million of pretax earnings in the quarter. This is compared to about $12 million of similar earnings impact that occurred in 2002 for Maritime.

Turning to our institutional businesses, we saw robust earnings growth due primarily to higher spreads. Growth in pretax earnings for the guaranteed and structured financial products business was driven by higher spreads, which increased to 170 basis points in the fourth quarter, as we saw very positive partnership income, reflected in the results. The fourth quarter spreads brought the full year spread-based margins to 153 basis points above our pricing spread range of 120 to 145 basis points. Spread-based sales in the quarter grew 56%, from the prior year, primarily due to the recent introduction of a new retail brokerage CD product and continued strong sales of our retail signature notes programs.

Sales of these two products totaled more than $700 million in the quarter, and over $1.5 million for the year, which more than offset slower GIC and funding agreement sales. We are very pleased with the success of these two retail market-focused products, which are helping to diversify our business model while adding stable, general account assets to our balance sheet. These new product sales have offset the decline in sales of funding agreements and GICs, as we continue to manage the growth of these businesses and look for attractive opportunities to issue in a competitive marketplace.

Funding agreement sales of $642 million in the fourth quarter were down both from the year ago period and sequentially by 5% and 13% respectively. GIC sales of $65 million in the quarter were less than half of the year-ago level, as weak market demand and continued competitive pricing have adversely impacted sales. We placed two large group annuity cases in the fourth quarter, accounting for $143 million in sales. Total annuity sales were $257 million in the quarter, 10 times the level of sales we saw in 2002, and more than double the third quarter of 2003. However, the 2003 sales are still very weak compared to prior years.

Overall, 2003 was a year of several major accomplishments. We reported record operating earnings of $3.29 per share, up nearly 17% from 2002 without any share buy backs. We achieved a full-year operating ROE of 15.3%, our highest ever and among the highest in our industry. Despite a difficult sales environment, we effectively transitioned our Life sales platform from variable to universal life products with a 35% increase in universal life sales offsetting much of the sharper decline in variable life over the year.

We have strengthened our marketing position in long-term care with a 45% increase in sales for the year, not including Federal long-term care program. We grew sales by 58% in the Federal long-term care book and generated $9.3 million of pretax profit, which is up appreciably over last year. We demonstrated the success of our asset liability management and our duration matching process.

As our investment spreads in both fixed annuities and the guaranteed and structured financial product business widened further above pricing in 2003 versus 2002. Fixed annuity spreads were 225 basis points in 2003 versus 203 in 2002. The guaranteed and stable value product spread has improved to 153 basis points in 2003 versus 148 in 2002. Notably, we weathered the intensely difficult credit environment of the past several years, achieving total net-realized investment gains in 2003 of $23.1 million, our first net-realized gain position in three years.

Credit performance improved dramatically as gross impairments moderated through the year and we saw recoveries on impaired assets of more than $90 million. It is also great to see the economic recovery and the strong returns appear in some of our VA [ph] assets investments, which have suffered over the past several years.

Finally, we are well underway with integration planning for the pending merger of John Hancock Financial with Manulife. This transaction, which at today's stock price would be valued at more than $12 billion, will create the second largest life insurer in North America and the fifth largest in the world. We expect to receive the shareholder vote on the transaction at our special meeting scheduled for February 24, and we remain on track to close the transaction in the second quarter. That means, this is likely our last earnings conference call as a stand-alone company.

On behalf of all the policy committee members, and all the John Hancock employees, we want to thank all of you who have followed us and have been investors over the years for your advice, attention and interest, and we look forward to continuing that dialogue and relationships with many of you as we move forward towards a partnership in an exciting new global insurer that is likely to derive some 60% of total earnings from the John Hancock brand and its strength in the United States market.

As Jean mentioned at the start of this call, we are not issuing guidance and we will take questions only related to 2003 results at this point. With that, we will open the call for questions.

Thank you. The floor is now open for questions. If you do have a question, please press the number 1, followed by 4 on your touch-tone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question to please utilize your handset to provide optimum sound quality. Once again that is 1 followed by 4 on your touch-tone telephone. Our first question is from Liz Warner of Sandler O'Neill. Please go ahead with your question.

Good morning. I just had a question on the strength of your core life sales and wanted to know a little bit more about how the market differentiates your universal life product, particularly within the Signator channel, and how your product is differentiated, and also, how you may or may not compensate the distribution differently relative to any of your peers?

Okay. This is Jim Benson regarding core life. With universal life, we had introduced a number of new products in the fourth quarter of this year, five of them, actually, four were universal life in nature. I would say they are differentiated because they were mostly toward the upper-end marketplace, and some of our competitors are more mid-market, two of them were second to die products, one of them was a new product COLI product for the mid-marketplace, which was a particularly good product, it was introduced late in the fourth quarter.

We think that with the legislation likely to come out in favor of deferred compensation, or the continuation of nonqualified benefit plans this year, there is a huge market, and we think this product will be very well differentiated in the marketplace, not only at Signator, our career agency system but also through direct brokerage which we are growing as time goes on.

In terms of the way we pay people, we are not at the top of the compensation schedule in terms of how independent producers are compensated, so we think we are growing in universal life sales based on the strength of the product, not necessarily based upon the attractiveness of the compensation. And, finally, we have attached long-term care riders to virtually all of our life products, so that we view that as a positive differentiator as well.

In the direct brokerage channel, was the long-term care rider something that, I guess, helped out with the strength in that segment of Signator?

Yes, to some degree. I think that long-term care riders, it's a new topic, I think that we are the only carrier that offers such a feature on our products. I think that over the next several years, long-term care or combination products are going to take off and be quite attractive. But I don't think it would be fair to say that that rider in the fourth quarter of '03 was significant in our growth.

Okay. Thank you very much.

Thank you. Our next question is coming from Michelle Giordano of J.P. Morgan. Please go ahead with your question.

Good morning. Yesterday on Manulife's call they intimated that Manulife and Hancock are starting to sell each other's products. Can you give us more details on that, which products we are talking about and how well that is going? Secondly, could you run through each of your different, sort of, producer groups or distribution channels and tell us where you are at in terms of the reaction of each of the different producer groups and how well you are doing so far where there are some overlaps. Thank you.

Michelle, this is Tom Maloney. Since that is really a Q1 2004 kind of initiative, we are not going to speak to that at this point in time. But you will hear more about it as we go forward once the merger takes place.

Okay. And then another question I have maybe for Jim Benson, obviously you are making a lot of headway on the universal life market, so these products seem to be taking off. The variable life sales didn't really pick up too much, and with some of the other companies that have reported earnings so far, we have seen a little bit of a pickup in variable life in addition to their initiatives on universal life. Do you think that the variable life is not picking up because some of these new products are really targeting the same clients that you had on the variable life side or is there something else going on on in the variable life market?

Well, I think the variable life market is coming back for all companies, and depending on the distribution channel, will pick up faster than others. In the fourth quarter, again, we were very much promoting our universal life products for them, that we think are very competitive, and so, if anything, within our career agency channel and direct brokerage, we were SKUing our efforts toward universal life, I think, to a positive effect.

Typically, when the equity markets return, it takes six to nine months for variable life, both buyers and sellers, to have the comfort and confidence of the sustainability of that market for variable life sales to significantly improve, and while I, just like others, have read about other companies that may have had some large sales in the fourth quarter, we weren't promoting variable life to the same degree as we were universal life.

Starting this year, I know we are not supposed to talk about the first quarter, but we are going to be introducing some additional products of a variable life nature, and I think you will see Hancock sales not necessarily lag behind others in that arena.

Thank you.

Thank you. Our next question is coming from Mario Mendonca of CIBC World Markets. Please go ahead with your question.

Good morning, everyone. First on the survivorship business, I have noticed it for other companies as well, that there is certainly, I think Tommy characterized it as a reemergence. If you could just talk about why that is occurring now? That's my first question.

Again, on survivorship, there are a couple of things that are going on. The first has been the enthusiasm for secondary no laps [ph] guarantee products, both of a single life and a joint life second to die nature. These products are ideal for legacy planning purposes including estate tax minimization.

I think there's an additional view that even though the estate tax exemptions will grow through the year 2010 and the estate tax will be repealed for a year in 2011, that there's a sense, a growing sense, certainly among the legal community, the people who are advising individuals in estate planning situations, that the likelihood of the estate tax actually being repealed fully and permanently is low.

And so, the advisors are coming back into the arena, helping large estate owners with their insurance advisors, take a fresh and new look at their estate tax liabilities and the new genre of products that really are very attractive are ideal for minimizing that liability. And it has taken a couple of years for the view of the estate tax probably not going away to take hold, and I think you will see this year for a variety of companies, including John Hancock, in emergence in the second to die sales.

And this, despite the President's most recent State of the Union address where he specifically referred to making the recent tax changes, or I guess a couple of years ago, making that permanent, this is happening despite his -- he seemed pretty convinced of it.

I wouldn't want to speak for the legal community and those people who are buying these types of products, but it appears that, at least over the last several months, they are not taking that particular claim in the State of the Union message seriously.

This is David D'Alessandro, Mario, regardless of the President's claim, he has to get it through the Senate.

Sure.

The Senate has a problem called a deficit, and that deficit, because of the Iraqi war, you want to know why survivorship is fashionable, regardless of the President's promises, you may recall the President also promised that we were going to be on Mars and a $1 billion budget.

So I think right now what is really happening, is people, advisors are saying, look, it's going to be very hard with this huge deficit that's growing to get this through the Senate. In my talking to a number of Senators and Congressman, they are turning away from it, so that's how we look at it and I think that's how the market is looking at it.

Makes a lot of sense. A follow-up question, and then not a related question. Also, this might be more appropriate for Tom, just to sort of understand the Canadian GAAP issue a little better. I don't think this is forward-looking at all, just to understand how it might play out. Under Canadian GAAP, there are a number of circumstances, and this is routine amongst Canadian life insurance companies to unlock assumptions positively and negatively, very routinely, and it is entirely appropriate under Canadian GAAP.

Where I am getting, where I am going with this, because the combined company will likely report Canadian and some form of U.S. GAAP, is there some possibility that to the extent that the Canadian life insurance company can offset negative unlocking or strengthening of reserves or positive unlocking, the impact on the Canadian GAAP results wouldn't be fairly material but would on a U.S. GAAP basis because the positive unlocking probably wouldn't occur. Is that something you can speak to or is that sort of off limits?

Hi, Mario. At this point, I think there are too many moving parts to really figure out. Because we haven't really finished off all of the key GAAP work and everything else, so it would be really inappropriate to talk about where that would come out and be going forward and everything else. I think, clearly once the merge companies come out in Q2, it would be our intent to really kind of get into a lot of that stuff. But we really do have to do a lot more work on kind of doing the analysis and working through all the detailed numbers.

So for now it is just sort of a conceptual curiosity, but we don't have enough practical information.

I understand.

Thank you.

Thank.

Thank you. Our next question is coming from Vanessa Wilson of Deutsche Bank. Please go ahead with your question.

Thank you, good morning, I have two questions. One is for Jim, on the universal life market, given the AXXX reserving requirements, do you feel that the competitors out offering the secondary guarantees have all moved to products that are compliant with that? Or do you feel it's still sort of an uneven market where the competitive trends may change over the next year or so?

And, second, could you give us a sense, you noted in your press release that you had higher partnership income, and annuities and the GSF& P, could you give us a sense of the magnitude in terms of a corporate number on that, sort of an overall number, and also just any kind of sense on prepayment income in the quarter?

Okay. Vanessa, regarding the AXXX issue, we think that all the companies really have gone to that. There are a few outliers, but nobody that's significant in the marketplace. So we think that today it is not really a very uneven playing field.

Your products are compliant?

And our products are definitely compliant.

Okay.

Vanessa, this is John DiCiccio.

Hi, John.

In terms of the partnership income on a corporate basis, it's about a $30 million one timer that we had in the quarter. In terms of your question about the prepayment, those, as you know, for us, do not go through operating income, they are in the net income number as a capital gain, and for the quarter, it was about $21 million in total.

Thank you.

Thank you. Our next next question is coming from Steven Schwartz of Raymond James & Associates. Please go ahead with your questions.

Good morning, everybody. A couple of questions, I think for Tom. Tom, I am kind of interested from kind of the educational standpoint, I am looking at Conseco's S-1. And in the S-1, the note that, because they were able to take a fresh start adjustment due to the bankruptcy, that they lowered the ultimate lapse ratios on their long-term care policies from a range of 3% to 5.55%, to a range of 2% to 3.5%, so probably not that far above mortality, I would guess at those age groups. I was wondering if maybe you could kind of give us a sense of where your block is and maybe kind of what is going into Your assumptions on new business that you write?

Steven, this is Michelle VanLear. I haven't looked at Conseco's S-1, but I can talk to a little bit about our persistency, our experience here on our long-term care block. As you know, and Tom referred to in his comments, we have had persistency, fairly consistent, better than priced for, although each subsequent repricing we have reflected current experience, and I would say with the products we just come out with in November and even prior to that, our ultimate lapse rate, not excluding mortality is down below 1%.

On the in-force blocks, again, we are having persistency that's lower than we priced for, it is a meld evolve [ph] duration, so I couldn't really kind of give you an ultimate lapse there there. But we've also, unlike some other companies, had very good morbidity experience, our actual to expected ratios are still running in the 70 to 75% range, and that ultimately, while it may not fully offset the better persistency, it will go a long way. But you have to set up the active life reserves now for the lower persistency that we are seeing.

That's also had a positive in that our unit costs have been better, we have a larger in-force block of business to spread expenses over. We still think that there's others out there that are pricing with ultimate lapse rates, with current product well above 2%, 3%. There are some regulatory activity to kind of put a cap of 2% on the fourth year and on for the persistency assumption and we think that will kind of affect the market going forward.

I guess the point I am coming to, Michelle, it sounds to me at least for you, maybe not for some, but at least for maybe some of the other few players still remaining in this business, that there's not much room to keep on missing on lapsation, at least on a new product, would that be correct?

There is not much distance between where we are right now and zero, so I think you are right.

Okay, that was my understanding. And then, just another question on the secondary guarantees on universal life. At least one company has mentioned their uncomfortableness with the product and current pricing. They have claimed, I have no idea if this is true or not, but they have claimed that most of the people in the industry that are providing secondary guarantees are doing so by reinsuring these secondary guarantees offshore, that these guarantees, which could run 30 years or longer, are backed by the actual reinsurance, of course, to be effective and to get the risk-based capital effects that you want, needs to be backed by LOCs, these LOCs typically last about one year and the price of these LOCs has been going up, and the argument is that you are backing a liability, if you will, with an LOC asset, where there is a severe duration mismatch. I was wondering if you can comment whether that is true or not or what your thoughts are on that.

Hi, Steven, this is Michelle again. Kind of to what you were just talking about, there's certainly been a lot of discussion about XXX and AXXX reserves by many companies, by Moody's and looking at the various ways that companies are dealing with those reserves. I think, to give you the short sweet answer to that question, on the UL products that Jim has been discussing, that we've launched, that we're currently selling, that is our protection series of UL products, we don't depend on reinsurance, the fact of reserve requirements, only for mortality risk transfer, and our products have been designed to be self-supporting, generating the cash flows that we need to provide for the expenses and benefits in the future, including the AXXX reserves. Others may be doing different things but that is not how we set up our secondary no lapse UL products that we are selling.

Does that make you maybe a little bit less competitive than you would have been?

I think if you take a look at our products, where we are positioned, we look relatively competitive. I think, though, the combination also of our brand name, the long-term care rider on the single life products that Jim talked about, and just the support around the products, and people looking for a good company like John Hancock has positioned us well. And where we have not been able to compete, we have interestingly seen some people who look too good to be true, slowly withdrawing from the market.

All right. Thanks.

Thank you. Our last question is coming from Michael Goldberg of Desjardins Securities. Please go ahead with your question.

Thanks. I hope I haven't missed the information, but if I haven't, could you give me a breakdown of that net unrealized gains, as between bonds, mortgages, equities and real estate at the year end? And also, and I hope this isn't premature as well, if you were to look at your reserves, could you give us an idea of what type of CTE level you would have been at year end? Thanks.

This is Tom Maloney. In reference to the unrealized number there for the unrealized gain, that's all bonds, that is FAS 115, mark to market. That really comes to play with the discussion we had with the DIG B36 and why there are some disconnects in the net income area.

As far as the reserve levels and everything else, we have not really run all of that data, so I would have a hard time telling you how it would rank up in kind of the overall ranking on the Canadian reserving methodologies and all.

Okay, thanks.

Thank you. I think that concludes our conference call for this morning, and on behalf of everyone, I thank you all for following us over the years.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day