Manulife Financial Corp (MFC) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Manulife Financial Corporation's third-quarter, 2004 earnings conference call.

(OPERATOR INSTRUCTIONS.)

I would now like to turn the conference over to Edwina Stoate, Vice President of Investor Relations. Please go ahead, Edwina.

Thank you and good morning. I would like to welcome everyone to Manulife Financial's Earnings Conference Call to discuss our third-quarter 2004 financial and operating results. If anyone has not yet received our announcement, statistical package and the slides for this Conference Call and webcast, they are available on the Investor Relations section of our website.

As in prior quarters, our executives will be making some introductory comments and we will follow with the question-and-answer session. Before we begin, I'd like to remind everyone that during the course of this Conference Call, we may discuss forward-looking information as defined in the US Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties and actual results may differ materially for (technical difficulties) by such statements. Investors are directed to consider the risks and uncertainties in our business that may affect future performance that are discussed in Manulife's most recent annual report on Form 40-F. John Hancock's most recent annual report on Form 10-K and John Hancock's quarterly reports on Form 10-Q. Each file with the U.S. Securities and Exchange Commission.

Investors are cautioned not to place undue reliance on the Company's forward-looking statements. The Company does not undertake to update any forward-looking statements.

Now I'd like to turn the call over to Dominic D' Alessandro, our President and Chief Executive Officer.

Thank you, Edwina. Good morning, ladies and gentlemen. Thank you for joining us on this third-quarter Conference Call. As is our habit, I will make a few opening comments and then Peter will lead us through a discussion of our operating results for the quarter. We continued during the quarter to implement integration of Manulife and John Hancock and are pleased to -- that we have achieved a number of important successes. In the United States, with the addition of Signator and Essex to our distribution channels for variable annuities, Manulife's market share has grown very appreciatively. Also in the U.S., we are rationalizing our insurance product offerings to increase the profitability of the overall portfolio. All new life products will be issued under the John Hancock brand beginning in 2005.

In Canada, we completed the transfer of about 225 Maritime Life IS professionals to CGI's new information technology development center. This outsourcing contract will contribute to the reduced integration costs, increased IT expense savings and expanded flexibility in our IT capability. Integration work is essentially complete in Asia, where our staff has had considerable experience with tucking in small blocks of business; of particular note, to Singapore, where we have more than doubled the size of our business. We are beginning to see the delivery of integration synergies and remain on track to achieve the $350 million in cost synergies announced last fall. In fact, we now expect to both exceed our original target levels of savings and to achieve the savings faster than first indicated. In the third quarter, the earnings were a record $717 million or 88 cents per share compared to 396 million or 85 cents per share a year ago. Excluding the $235 million contributed from John Hancock, shareholder's net income increased a very strong 22%. This performance is achieved despite the more than 6% depreciation in the Canadian dollar.

Our earnings growth reflects continued good sales momentum and strong credit experience. Our sales performance continues to be stronger than industry averages and as a result, we have made gains in share in several key businesses, particularly U.S. annuities, Canadian group benefits and Canadian individual life insurance. Total premiums and deposits for the quarter were 13.6 billion, a year-over-year increase of 6.1 billion, of which John Hancock added 4.1 billion. In particular, sales in our Wealth Management businesses were very strong in Canada, to U.S., Japan and Hong Kong. Our return on shareholder's equity this quarter was 12%, reflecting three full months of merged results reported on our significantly larger capital base. We continue to look for ways to employ our excess capital efficiently, and in our press release yesterday announced our intention to expand our $3 billion normal course issuer bid for another 12-month period.

As mentioned in our road show presentation last September, we are committed to getting our ROE back to what we consider to be acceptable levels. All divisions are focused on growing ROE over the next two years through aggressive management of expenses, realignment of our product offerings and other measures. We also expect the value of the John Hancock brand will contribute to an above-average rate of growth in revenues. Our experience to date in this regard is very encouraging. Peter will discuss our results in more detail in a few minutes.

Looking at the results by major operating division, U.S. Wealth Management earnings rose driven by business growth in the Group Pensions and variable annuity businesses as a result of excellent net sales and strong in-force growth. Our College Savings business, while still relatively small, has also been successfully leveraging the John Hancock brand.

U.S. Protections earnings reflected the contribution of John Hancock in both insurance and long-term care; while Q3 insurance sales fell well below the exceptional 2003 levels, they performed strongly versus the industry. Long-term care sales were soft as a result of price increases, which have yet to be matched by many of our competitors. In Canada, earnings benefited from the contribution of Maritime Life, in addition to good claims experience. Manulife led the industry in market share as measured by sales in the life insurance, group benefits and Critical Illness businesses.

Earnings growth in Asia was strongest in our other territories as softer agency recruitment dampened growth somewhat in Hong Kong. However, revenues were strong in the rest of the region. It's noteworthy, for example, that sales outside of Hong Kong exceeded sales from within Hong Kong for the first time ever this quarter. We are also pleased by the continued growth of our operations in China, where we received a license to open a branch in Ming Bo (ph). Our earnings in Japan continued to grow strongly this quarter. Variable annuity sales exceeded $1 billion, almost 5 times the volumes of a year ago. Our very successful distribution alliance with the Bank of Tokyo-Mitsubishi will expand significantly when VOTM's intended merger partner UFJ banking group begins selling our premier variable annuity in December of this year.

Reinsurance operations had a very strong quarter, as well, driven by favorable mortality in our life retro session (ph) business. We do not expect any adverse impact on our P&C business from the multiple hurricanes in Florida this season.

With the current low spread environment, we continue to maintain a disciplined approach to writing new business in our Guaranteed and Structured Financial Products business. This quarter, G&SFP's funds under management declined a further 3.2 billion as we continued to show restraint in new business.

I'd like now to ask Peter to review the details of our financial results. Peter?

Thank you, Dominic. As Dominic just highlighted, Manulife had good results in our first full quarter of combined operations with John Hancock Financial Services. On slide 8, you can see that the shareholder's net income for the quarter was $717 million, up from the third quarter of 2003 by $321 million or 81%. Compared with the second quarter, third-quarter earnings were up $57 million with the addition of one month's earnings from John Hancock Financial being partially offset by the negative impact of the strength in Canadian dollar.

Return on shareholder's equity for the quarter was 12%, compared to 14% in the second quarter of this year. As expected, our return on equity has declined as this is the first quarter that reflects the full impact of our increased shareholder base due to our acquisition of John Hancock. On a year-to-date basis, our return on equity is 14%, which is stronger than our indications at the announcement of this deal back in September of last year. We have not yet executed the $3 billion of share buybacks contemplated at that time and have today renewed our $3 billion normal course issuer bid so that we may opportunistically employ some of our excess capital in share repurchases.

Slide No. 9 shows that this quarter's ROE is about 40 basis points lower due to integration costs and another 40 basis points due to foreign exchange. The ROE is also 140 basis points below the level that we would have reported had we executed our full targeted share buyback program at the close of the John Hancock Financial transaction. So, operationally we are already making progress on our ROE objectives. We do, however, remain committed to getting our ROE back up to levels more in line with our premerger targets.

EPS for the quarter was 93 cents per share, excluding the impact of integration-related costs and the impact of FX movements versus last quarter. As the value of the U.S. dollar weakened relative to the Canadian dollar, earnings for the quarter as reported on a C-dollar basis dropped by $21 million, compared to Q2 and were down $27 million relative to Q3 of 2003, an impact of about 3 cents a share year-over-year on an EPS basis. The proportion of our funds under management denominated in U.S. dollars since the merger has increased to 78% from 62% a year ago. Therefore, should the Canadian dollar maintain her strength and in value relative to the U.S. dollar, earnings as reported in Canadian dollars will continue to be adversely impacted. However, for the approximately 46% of shareholders that are domiciled in the U.S. and the rest of the world, the strengthening of the Canadian dollar is a positive relative to their U.S. dollar based view of Manulife, as the Canadian component of our earnings from their perspective becomes more valuable. The impact of foreign exchange has had a significant impact on shareholder's earnings,premiums and deposits and funds under management.

Slide No. 12 illustrates the impact of foreign exchange on each of these three metrics. As you can see, growth on a local currency basis has been muted by the FX impact of the weakening U.S. dollar, and the growth would have been 3 to 5% higher for each of these metrics respectively.

Operationally, Manulife had a good third quarter with good Insurance and Wealth Management sales, favorable claims lapse in [21:06] credit experience and continued good progress on integration projects and expense management. This was partially offset by the impact of the weakening U.S. dollar relative to the Canadian dollar and uneven equity markets, which were particularly soft in the U.S. and Japan.

With respect to credit, we ended the quarter with net provisions of $75 million due to credit-related provisions, largely in the airline sector. The chart on slide 14 shows credit provisions as a percentage of invested assets, which was at a modest 5 basis points level this quarter. This is a favorable result for our current asset mix, and it represents a relatively low level of credit losses compared to priced for and anticipated experience.

Funds under management ended the quarter at 346.5 billion, up over the second quarter after adjusting for the negative impact due to currency and excluding net redemptions in our Guaranteed and Structured Financial products business. Net third-quarter sales in our wealth management businesses continued to be strong with positive net sales of $3.7 billion across all our wealth businesses excluding the G&SFP line.

Now, I'd like to briefly turn to our divisional units and review their performance. On slide No. 16, you will see that third-quarter net income for the U.S. protection division was $112 million, an increase of $36 million over '03 as a result of the contribution from John Hancock's Life Insurance and Long-Term Care operations. Earnings, however, were down compared to the second quarter by $25 million due to business mix, weaker equity markets and the impact of the C dollar. Product and pricing changes now being implemented are expected to improve both insurance sales and earnings over the next few quarters. Long-term care sales of $31 million U.S. for the quarter are up from Q2 levels but below historic volumes as we wound down some of our less profitable product offerings and took a disciplined approach to price competition in the market. Good progress is being made by the LTC business on strategic initiatives that should pave the way for future sales success, including an expansion of the wholesaling capability focused on our warehouse and broker-dealer relationships.

Slide 18 shows the U.S. wealth management earnings of $119 million were up 21% or $21 million over the second quarter of this year. Strong business growth in Group Pensions and annuities as well as one additional month of earnings from John Hancock helped to boost the current quarter's earnings, despite the negative impact of foreign exchange rates. Mutual fund earnings are up versus the second quarter as tight management of expenses during the quarter more than compensated for lower new business sales levels.

Sales results in the U.S. wealth management businesses were generally strong on the quarter. Sales of larger average-size cases as well as contributions on a growing enforce block drove Group Pensions business. This quarter's very strong variable annuity sales was the result of continuing success of the guaranteed minimum withdrawal benefit rider. Our market share and ranking in this business continues to improve. Fixed annuity sales were, however, down as investors moved into equity-based products. The John Hancock distribution channels continue to generate solid sales of Manulife Variable Annuities. In September, our in-house sales force ranked number one in sales while Essex, our bank distribution channel, was also a top-ten distributor. Mutual fund sales of open-end funds showed good growth in the third quarter and recently reported second-quarter industry tables reflect an improved market share and ranking position.

Slide No. 20 depicts total shareholder's earnings of the Canadian division, which totaled $165 million. This is up from 144 million at the end of the second quarter and $131 million a year ago. Good claims experience was offset by mixed equity markets, somewhat impacting earnings on seg funds during the quarter. Should equity markets remain at around quarter-end levels, earnings related to segregated funds in this unit will decline as some stronger quarters drop off the four-quarter rolling average used to determine segregated fund-related reserves.

Group businesses had excellent earnings in the quarter of $67 million, up $41 million from the second quarter. Excellent claims experience, particularly in health and disability products, which rebounded from a weak claims quarter in Q2, as well an an additional month (inaudible) of Maritime Life earnings, resulted in the very strong growth quarter-over-quarter. Third-quarter group benefit sales increased significantly year-over-year. Year-to-date sales of 382 million already exceeds the industry record for full year LIMRA Group Benefit sales.

Earnings in the Individual Wealth Management business are down from the second quarter by $8 million as a result of weaker equity markets that reduced earnings from seg fund guarantees and caused lower levels of investment income. Individual Wealth Management new business sales, on the other hand, were strong in all product categories for the third quarter, and recently released market statistics as of Q2 show us to be in the top spot for both segregated fund and fixed income sales. Canadian individual insurance earnings were up slightly versus the second quarter as growth and in force earnings was offset on lower profit on Maritime products, which are now being updated or replaced as part of the product integration efforts now under way.

We continue to hold the leading share in the insurance revenues generated through Canadian full service brokers as seen on slide No. 21. During the third quarter, the Canadian division initiated a reorganization of Maritime Life, whereby the business and assets of Maritime Life would be transferred to Manufacturers Life in the fourth quarter of this year. As part of that reorganization, the Company plans to integrate the Manulife and Maritime Life product offerings. Maritime Life's MGA network has and is expected continue to make strong contributions to the sales of the Canadian division.

Turning overseas, Asia's earnings in the third quarter were $89 million, up 9% over the second quarter of this year. The increase in the quarter was driven primarily by an increased contribution from the Asian territories outside of Hong Kong, reflecting a full quarter of the Hancock businesses in Singapore and Malaysia and increased earnings in Indonesia. This was offset by the strengthening of the Canadian dollar. Expansion plans continue in China and, as was just mentioned, received formal approval for our Ming Bo branch license in September.

Turning to slide No. 23, the contribution to Asian earnings and the Asian territories was up from 13% in the second quarter to 20% in the third quarter. The growth in Indonesia is due primarily to growth of in force business, in part from acquisitions of lines (ph) from ING in Zurich. Singapore also experienced good growth as a result of favorable claims experience and continued growth in business. All the other Asian territories continue to show positive earnings in the quarter.

On slide No. 24 is a chart showing regular insurance sales in Asia during the third quarter, which were U.S. $68 million, up 21% from the second quarter. The growth in sales reflects a modest increase in Hong Kong individual insurance. This has been a somewhat difficult time in the Hong Kong market and all companies have been struggling to grow sales of traditional long-term products. Fortunately, Manulife's earnings from these products are still continuing to grow as the in force business grows while expenses are being held flat. In other Asia, Indonesia continues to benefit from the addition of the former ING, Zurich and Hancock agents. In contrast, sales declined in Vietnam due to contraction in our agency force and reduced sales across that country's insurance industry.

Overall, the results indicate our long-standing dual strategy of gradually diversifying away from traditional life insurance in Hong Kong into wealth management products, while at the same time broadening our scope to a wider Asian focus. As a result, we're able to report a healthy 19% growth in year-to-date divisional earnings, despite a somewhat soft individual sales scenario in Hong Kong.

Earnings in Japan in the quarter of $39 million were up by 40% over last year and down slightly from the previous quarter. This decline in earnings for the second quarter was due primarily to the strengthening of the C dollar. The very strong year-over-year performance is a result of strong business growth due to a more profitable business mix, improved labs and claims experience and an improvement in expenses due to the extensive expense management initiatives, many of which were completed in late 2003.

Sales through the new alliance with Bank of Tokyo-Mitsubishi were impressive in the quarter, driving VA deposits for the quarter to a record $1 billion, as shown on slide No. 26. In addition, following the announced merger of the Bank of Tokyo-Mitsubishi with UFJ banking group, we announced an agreement to distribute our premier VA product in UFJ, Japan's third largest bank. We are very pleased with the progress that our Japan operations have made over the past year.

On slide No. 27, you will see the strong earnings of $66 million coming from our Reinsurance Division. Earnings are up 9% from the second quarter on a U.S. dollar basis and up 73% over a year ago. The strong earnings growth in the third quarter of 2003 was driven by a very favorable mortality experience in the life retro session business. The strong life retro session new business volumes continued into the third quarter, up 34% from Q2 to U.S. $4.3 billion of new business face value written. Property and casualty sales were also up from the previous quarter. The fall hurricanes are expected to have a very modest impact on our earnings of our P&C line. Although $3 million was provided for this risk in the third quarter, these reserves may, in fact, ultimately have no exposures related to them.

The Guaranteed and Structured Financial products, known as G&SFP, had earnings in the quarter of 73 million, as shown on slide No. 29. Sales for the quarter of 324 million U.S. were down almost 80% from the corresponding quarter in '03, because of historically low market spreads that made returns less attractive. In light of these lower spreads, we have cautiously eliminated the sales of funding agreements and focused sales efforts on the relatively more attractive retail line. The marketplace continues to be very competitive and sales levels are expected to remain at reduced levels until spreads rebound from current positions.

Third-quarter expenses were $935 million, up from 818 million in the second quarter. Integration-related expenses are consistent with the second quarter at $34 million. The increase in expenses for the second quarter is due to an increase in production-related expenses driven by strong overall sales growth, the inclusion of three months of costs for John Hancock Financial, as well.

Fixed expenses are down from the second quarter as we continue to achieve synergies with the merger of John Hancock with respect to full-time equivalents, premises systems and other related expenses. In addition, a further $16 million in expenses were charged against the restructuring accrual established as part of the original purchase equation.

Expense synergies realized to date are on track, and we now firmly expect to achieve the commitments made at the time of the deal announcement by year-end 2005. We are also confident that we will exceed our targeted run-rate synergies of US $255 million and that we will achieve these synergies by the end of '05, earlier than originally planned. These objectives will be achieved through reductions in the combined workforce, a rationalization of our systems requirements and a combination of facilities requirements so that we can operate as efficiently as possible in the new merged organization. In conclusion, we have been successful to date at achieving our synergy targets while maintaining sales and service levels. Integration activities have been going very well and we are committed to fully integrating both organizations quickly and efficiently so that we can bring our ROE back towards premerger target levels of 15% or better as quickly as possible. Thank you very much.

Thank you, Peter. Operator, we are ready now for the question-and-answer portion of our call.

(OPERATOR INSTRUCTIONS.)

Jamie Keating of RBC Capital Markets.

Seems to be a theme in the Hancock business, both Maritime and in the U.S. regarding the Protection business; and then the theme being that you're effectively repricing the product, refining it I suppose. I wondered if you could just talk around the timing and/or the influence of that restructuring on the product, both from sales, but also from margins, perhaps?

That's a very good -- very good question that you've asked. The Hancock products, both in the United States obviously, but also in Maritime Life, were designed to be consistent with U.S. GAAP reporting. And therefore, they do give rise to, under Canadian GAAP accounting, to a much higher level of strain than we would experience on our own -- on Manulife's products. So, given that our base accounting methodology is Canadian GAAP, all of the products that are being sold in the United States and by Maritime Life here in Canada will be redesigned and are in the process of being redesigned so as to lessen the burden and cause an emergence of earnings more consistent with what Manulife has traditionally enjoyed.

Simon, do you want to add anything to explain what some of the technical --

Yeah, I think one of the differences between Canadian and U.S. GAAP is that under the U.S. GAAP you get your profits in -- really in relation to revenue. Whereas Canadian GAAP has a release from risk model. So depending on how you use reinsurance to back your products, and also some of the features in the products can impact earnings emergence. So, both the Canadian and U.S. operations are looking closely at the Hancock products and are fully confident that when we harmonize the two portfolios, the level of strain that we get on the new business will be consistent with the levels that Manulife has shown historically.

Just as a followup, Simon, or perhaps Dominic, does the move made by Sun Life to announce a restructuring and try and, I thought, isolate some of the issues to their respective regions or jurisdictions, does that work for you guys, as well?

Well, I don't -- you know, I think that we are already organized the way Sun is planning to organize themselves. And so there isn't as much prospect of improvement for us as there might be for them, but I'm not --

I think there's a number of things. I think there's some opportunities -- our focus at this juncture is really on making sure the products we offer have the right economics for us and for our customers. The Sun transaction may contemplate leverage, which is something one can do with or without a change and to a certain extent is trying to avoid two sets of capital rules applying to products so that you can design them to focus on optimizing your capital requirements in one versus the other. And there is some attraction potentially in some instances where the two regulatory regimes are quite differently, to picking one of them and running with the capital base that's appropriate on a single metric. And we have a number of instances where that may have some impact for us, but at this juncture, our first focus is on getting the economics of products offered to the customers where we want it.

Steve Cawley with TD Newcrest.

Question, firstly, on the provision for credit loss rate. Peter, you talked about a slide where 5% -- 5 basis points, excuse me, of your invested assets this quarter was your provision, and you called that a good credit quarter. Are you thus implying that that is basically what we should be using as a run rate because -- when you take a look at the various industries, whether it be banks or insurance in the U.S. or in Canada, you're the only one that really showed any sort of blip up from what I could see, and I would isolate that to airlines. Can you talk about that a little bit?

Yeah, I'm happy to. First of all, of course, our credit mix has changed quite dramatically and very suddenly. So, in term of looking at the continuity of our credit experience, it's really two quite different portfolios. Hancock has much more credit risk in their asset piece historically than Manulife had had. Now, as a combined company, we're sort of a hybrid between the two. I would describe this as a fairly good credit quarter. We did take significant provisions in the airline sector, but right across the rest of the portfolio, which includes a whole range of securities, there are fairly nominal credit losses. So, what I would focus on is the priced-for (ph) versus the experience; then this result was favorable against the priced-for.

The other point I'd make is we just purchased and fair valued, you know, a big portfolio. But if you buy, you know, a portfolio of credit exposures, as time passes, you will experience credit losses, even though you fair valued them at times zero; and so subsequent events are reflected in the accounts. And I believe that's appropriate. So, you wouldn't expect to not have a credit experience on a portfolio that was other than treasuries. And so argue is that that will grade in over time. This was not an unfavorable credit result and the difference quarter-over-quarter is because our portfolio is different.

I mean the losses that we recorded on the airline portfolios are because of events that happened in the airline industry post-closing. We could not attribute the diminution in value of those assets to a condition that existed at the date that we closed our deal. And that's why it's not in the fair-value equation. The other thing is, as Peter is saying, is we have a very large portfolio now, and the composition of the portfolio has changed; and it would be unreasonable to expect that you wouldn't have credit losses. So we're indicating to you that 5 basis points is a very good result.

Of the 75, what percent of it was airline?

About $58 million, Steve. And that was USAirways and Delta.

Okay. Just while I got you on the phone there, Dom, the asset yield on page 36 of the subpack, even if you add back the credit losses, you get 5.37% yield, which is down from 5.76 the quarter before and significantly down from a year ago. I can understand why, you know, year-over-year, we're seeing this sort of reduction. I'm just surprised by seeing, let's call it 30 basis points of reduction quarter-over-quarter.

It has to do with the fact that we've got a full quarter as opposed to a partial quarter. When you fair value the Hancock portfolio, you basically reduce it to current interest rates. Now, there is an offset, exact offset on the liability side, so, obviously the -- you know, works for us. But it shows us up as lower yield. And the difference between the second quarter and the first quarter is primarily having to do with additional month.

You guys are now targeting 2005, by the end of '05, to have this U.S. 255 expense synergies to be had. You did not give us a new number, though, right? I didn't miss that?

No, you didn't miss it.

And before, I believe the way it was split up was that 40% of the savings would come in 2004; 40% in '05; and 20 in '06. Should it just now be 40% by the end of this year and 60% by the -- the other 60% by the end of '05?

Yeah, I'm not sure that we've actually refined it quite that way, but that wouldn't be a bad -- you know, if we are telling you we are going to get it done by the end of '05, clearly we've got to get more done faster. I don't know, 50/50 I guess would be not a bad estimate for your purposes.

Thank you.

John Reucassel with Nesbitt Burns.

Just a question on the U.S. individual life business. Just help me understand or could you clarify the sequential reduction in U.S. dollar earnings? I guess 94 to 79 million. You know, I guess simplistically, you had Hancock for a month longer. I would have thought the earnings would have been, you know, flat to up. Maybe you could just give us a little better indication of what's going on in that business?

Well, I think we had much higher level of strain because the proportion of Hancock sales, of Hancock product, this quarter was higher than last quarter. And I don't know what -- I don't remember, but I think the strain this quarter on the U.S. individual -- 16 million U.S.? Yeah, so that was one of the reasons --

What did the number go to? Sorry, Dominic.

$16 million U.S. was the strain, which is -- what is that in Canadian dollars? About 21 --

21 Canadian.

Yeah. And there is some seasonality to this business, as well. So, you know, our sales were down somewhat. We're not disturbed, frankly, by the industry. We're holding our own in the industry, and we believe more than holding our own. And so we see this as a temporary lull.

And just back to the question on the pricing and U.S. and Canadian GAAP. Does that mean you're actually -- are you increasing prices in the U.S.? Or is it not that simple that you can -- well, on Hancock products.

Well, maybe I will ask Simon to answer the question. What do we do? Do we change the pricing? I mean we use reinsurance to help us out with some of the strain issues.

Yeah, when they look at the portfolios, there will be some repricing, some pricing changes; but a lot of it is to do with, if you use reinsurance for engineering, you change your risk profile and that will reduce the potentially the level of packs (ph) you need to set up so that you get a more balanced recognition when you issue the contracts between earnings and reserve margins.

And two other questions. First, if you could tell us how sales of the individual life are doing through the M-group and Signator. And then maybe -- I don't know if John DesPrez's around, but maybe some views on, you know, the new -- there is a political election down there and looks like they're going to try and get rid of the estate taxes and simplify the tax code. Marginally I've always thought those things would be, at the margin, bad for the insurance industry. Maybe you guys could make some comments on that?

Well, I'll ask Jim to talk about the M-group, the first part of your question. And then, John, you can explain why we ought not to worry about re-election of a republican president, Senate and House.

Okay, well, M-group, M did not have is a strong quarter in the third quarter for any of its carriers. In our company, we retained 40% market share, which was number one within their system, and is where we have been for much of the last seven or eight years. And so a bad quarter for M overall and a similar result for us. Signator life sales are actually up about 5% over last year and that's just as it was being reinvigorated to not only be good in life insurance, but also continue to be strong in long-term care and is currently the number one -- I think it was mentioned on this call -- account for the Manulife variable annuity contract. The Signator system is doing well. And so this is a so-so quarter in terms of sales. We are, as been mentioned, repricing the products and changing the trajectory of earnings to conform more appropriately with Canadian accounting than what was the case under John Hancock U.S. GAAP accounting. So overall, I think our sales are going to be good. The fourth quarter will be, we hope to be pretty strong; and with the new portfolio all branded under Hancock going into 2005, I think it will be very good.

Just one comment on estate taxes, that's something that I think about many hours of the day. There is a general belief among the legal profession in the United States that getting rid of irrevocable life insurance trusts in anticipation of the elimination of estate taxes would be something that would bring lawsuits against the legal community; and therefore, the people who set up these trusts that eventually get funded with life insurance are not getting rid of them, despite the likelihood, or at least in some people's minds, the likelihood of George Bush's initiative and a Republican Congress, both House and Senate, pushing this through. So, we are going to continue to have second-to-die products, and we think we're going continue to sell those. Even though the Senate has increased a couple of seats, it still is not a super majority subject to end a filibuster related to the estate tax.

John, do you want to add --

Well I guess I would just comment. The outcome of the elections generally has to be seen as a favorable development for the business environment of the United States, generally. As it relates to the tax issues that affect us, Jim -- some of the aspects of the estate tax, realities that while philosophically the Republicans would like to repeal the estate tax, given the state of the U.S. budget deficit, it's exceedingly unlikely that they will be able to repeal it without replacing it with something else, whether that would be capital gains triggering on death or some other replacement sources of funds, that would give an insurable opportunity on death (ph). So, as a general proposition, I don't think it really changes the equation very much on where we are on the estate (indiscernible picture.

I think it's interesting, too, that -- I think I've got this right -- that the sales of survivorship insurance actually grew after the announcement of the intent to abolish estate taxes. That's significant in that it points to the fact that other uses are being found for this insurance. It's not just for the tax on -- the death taxes, as it's referred to by the Republicans. There is a number of business uses that are being found where this insurance application is particularly appropriate.

Brad Smith with Merrill Lynch Canada.

I just had a question with respect to the premium and deposits. In the quarter, I believe you indicated that excluding Hancock, the core P&D grew by $2 billion, which would put it, I guess, based on last year's 7.5, at 9.5 billion, which was exactly equivalent to the second quarter. So, I'm seeing sequentially flat core P&D. I was just wondering with respect to the Hancock itself, I believe, using your numbers from the second quarter, they delivered about a $3.5 billion contribution and only went up to 4.1 billion in the third quarter sequentially. And given the fact that we had an extra month on a three-month quarter in there, I guess I would have expected it to go up significantly more.

Yeah, Brad, I think that one thing you'll have to factor into your thinking is there is seasonality to the wealth product sales. A lot of them flow with the tax and RSP seasons. And so we're very, very pleased with the performance of our bathings (ph) units in Canada and the United States, in Japan, we had very sharp growth. Overall, you know, we are very pleased with the performance on the P&D side as a company. We've got many, many different business in the organization now; and there are some pieces that are not as robust as we would like. But there are many and most of the majority of our operations are doing very, very well. There are some businesses where we choose not to participate aggressively. For example, we mentioned quite clearly the G&SFP business and the fixed annuity business are two businesses that it's intentional not to have a high level of sales.

Dominic, I'm just curious. You have mentioned before that the Hancock acquisition is a revenue synergy story. What aspect of Hancock do you expect in the next several quarters to accelerate on the revenue side?

Just take for example -- well, I will let John answer that question, John DesPrez, because he's at the moment benefiting from some of the revenue synergy.

Yeah, we, Brad, have been able to capture on the variable annuity side some very immediate and very substantial synergies. One of the things we told you with the announcement was we wanted to sell variable annuities through the two new distribution channels, namely the Signator and John Hancock Financial Network, the captive sales (inaudible) and the bank wholesaling operation at Essex. If you look at the sales in the month of September, in the last month of the third quarter, we had gotten to a $900 million run rate through the two channels on an annualized run-rate basis, starting from zero six months before. So, it's a very meaningful incremental addition to our sales capacity, and we expect that to continue to grow here over the next couple of quarters.

And one last follow-up question for Peter Rubenovitch. I was just wondering, in your corporate segment, Peter, you have 129 million of other revenue. Could you describe for us what that was in the quarter?

Yeah, we now consolidate and we do it now for three months signature fruits; and it's net neutral to income, but it comes in on a gross basis through corporate.

What was it that accounted for the 50% increase in the contribution from corporate to net shareholder earnings, then?

Three months of return on the capital would be the biggest item. (Indiscernible) excess capital sitting in the corporate unit.

Timothy Lazaris with GMP Securities.

I have got two questions. One is a clarification; one is a more broader question. The clarification question has to do with, I think what Peter mentioned about segregated funds. I think what you said was that if the equity markets remain where they were that you'd have some drop-off in your rolling 12-month seg fund reserves. Does that mean that we would have seg fund reserve increases in Q4, and would there be an impact on earnings? And if you could quantify that? And then the broader question is, I was under the impression or at least I noted last quarter that the target ROE was 16% and now I'm wondering if you've actually lowered that target ROE to 15%?

Let me start with the second one first, and then I'll ask Simon to comment on your first question. We'd very much like to get back to a 16% ROE, but almost half our balance sheet is fair value. So that will take a little bit of time and we're certainly not abandoning that objective, but I think for the next few years, moving it up at some pace is really what we want to be doing.

I think in to our pricing we use 16%. That's the target, there is no change in the target. I think Peter was indicating earlier the 15%, if we can get back up there in two years time, we will be very happy.

Simon here, Simon Curtis. Just to answer your question on segregated fund reserves. At the end of September, the reserve we held was about very close to the CC (ph) 70 level that we target through our -- our moving average formula, which basically means, if markets just perform in line with our long-term assumptions of sort of modest 1 to 2% growth in the fourth quarter, we'd expect to see that reserve stay fairly flat or any increase would be very modest, under 10 million. But we have been seeing releases this year and we're just signaling that, if the market is going forward, perform moderately, we won't see those same significant releases.

But you won't be seeing any segregated fund reserve strengthening? At current levels.

No, not -- if market's going forward, just performed consistent with long-term averages and very modest yield appreciation, we should see the reserves staying relatively flat.

Mario Mendonca with CIBC World Markets.

I'd like to actually just ask several follow-up questions to questions other people have already asked. First in the U.S., changes in pricing and product design, do you anticipate, John, perhaps that this could have a negative short-term impact on sales growth?

I think we should ask Jim to answer that question. Most of the changes would happen in the Protection products, the life insurance products. So, Jim, do you expect that as a result of the homogenization

Our homogenization and harmonization of the insurance portfolio, actually, much of it has to do with the trajectory of earnings emergence under Canadian accounting. And the actual price to the end-user may not look a lot different. And so I would expect that our sales would not be negatively impacted by the repricing of the Hancock portfolio into the new model. Actually, I don't think it will impact it much at all.

Wasn't that one of the explanations offered on this call, as to why sales might have been down? Or maybe I just read it that way.

No, actually not.

I'm sorry, Mario, the explanation was that was one of the reasons why the earnings in the third quarter were lower than for the second quarter, was that the proportion of Hancock sales, which attract a high level of strain, was higher.

That leads into my second follow-up question. With sales down, you know, fairly noticeably, and you highlighted that for us, how -- it's kind of surprising that the strain would be up.

Yeah, I must admit I was surprised, too.

We sold a lot of Hancock product of what's called protection -- Survivorship UL was a big seller in the third quarter and that particular product, which has been pulled because it doesn't conform with our profitability targets, generated a great deal of strain and it was sold through the end of the third quarter.

I think another factor that affected our results in the third quarter, and Simon is pointing out, is the poor performance of the equity markets; and given the nature of some of the products that are sold, that that also dampened earnings.

Did the credit charge go through that the division as well, individual life in the U.S.?

To a certain extent, yes.

Another follow-up question. I'm sorry?

Sorry, I just was saying that they do have credit charges on the portion of portfolio that's credit-related.

Another follow-up question, more along the nature of what Brad was getting at. I understand that, you know, the variable annuity market, perhaps this quarter, wasn't great, but it wasn't horrible, either. And John explained that with Signator and Essex now at a run rate of say $900 million a year in sales of variable annuities, and really ramping that up, really this quarter, versus last; and again, the fact that they were really around for three months versus two months, it just seems awfully surprising to me that the variable annuity sales would have declined sequentially because what it suggests to me is that Manulife's existing distribution channels were awfully soft in the quarter.

Mario, let me make a couple of observations. First of all, sales in the third quarter were almost identical to sales in the first quarter. We had a very strong second quarter because of the phaseout of our living benefit product, and we sold a bunch right at the end. So, you should probably look at the Q2 result as being the outlier in that progression. Second of all, the industry figures that I've seen for the third quarter show most of the major players off about 20%, Q3 from Q2 in the A market. We're right in line with that, in fact, a little lower than that.

Yeah, I -- see, Lincoln's were pretty good, though, right?

I don't have Lincoln's number.

They're the ones that I kind of -- I like to match up with you because you both have the GMW product. But, yeah, I acknowledge that the variable annuity market wasn't great this quarter; but again, in the context of what's happened, it would seem to me that your existing distribution channels were soft. And I guess the follow-up question of that is: Has the company changed anything with respect to agent compensation in the quarter?

We did not run any commission specials in the third quarter.

I guess what I'm getting at is, anything change insofar as how agents or distribution channels are rewarded? Perhaps in the context of revenue sharing?

I'm not aware that we made any significant changes in that in the third quarter at all.

So, nothing there.

No.

And then just one final thing. Dominic, you provided a good explanation of why -- it was either Dominic or Peter, I am not sure -- but you provided a good explanation of why it was that the credit charge really shouldn't have gone through goodwill, because it was an event that, you know, was post the close, and I completely understand that. What I would like to understand is what was that event?

Well, Mario, we can get into a long debate with accountants as to whether or not the weakness in those airlines existed at the date we closed; and some would say that it did and, therefore, it should go against the acquisition equation. Others would say no, it was the specific event as one of them filing for bankruptcy that then weakened all the credits in the sector. We took the conservative approach, which is take it through earnings.

Yeah, it's remarkable. Everybody knows that the airline sector was built well before you.

I guess maybe we should have you come and ought to --

(Multiple speakers) that to our accountants.

-- (Multiple speakers) that to our accountants and we will make a note of this and relay it -- (Multiple speakers.)

You started (ph) it, you guys. You may remember that. [Laughter].

I'll finish up, then, with this question: In Q2 '02, you had the WorldCom charge, and you offset it with some reserve releases and a variety of other things. [ Laughter ] And the market didn't like that.

No, (indiscernible) didn't like.

Right. And then this quarter, you don't.

No.

And Peter, last quarter -- I was just reading the transcripts from the last quarter -- you characterized your reserves as being as conservative, maybe not as conservative as they were back then, but certainly very, very conservative, and as conservative as any other insurance company. I just found it very odd that a company with $5 billion in credit provisions, a company that's booked 2.9 billion in the acquisition of Hancock, a company that historically always has something to offset a credit loss, didn't do it this quarter.

Yeah. I'll -- Mario, those were very, very good points. I mean, you know, our experience when we did modestly use existing reserves to absorb what we thought was an unusual event was not a pleasant one. You remember all -- everybody, you know, even with full disclosure and so on.

Me, too.

So, it will be a very rainy day before we dip into those reserves. It will have to take, you know, quite an exceptional event. Now, you know, the fact that those reserves exist, benefits us because they do get released into income over time. And so, you know, rather than take them lumpy -- which I gather you don't like, or "you" being a euphemism for the collective analyst community, we're dealing with it in this way. We have a very, very solid and conservatively stated balance sheet, and we take charges that occur during accounting periods through the P&L. This is what you, as a representative of our owners, told us you want us to do.

And then just a final thing, maybe more for, Peter. Peter, should I start building on a little bit of credit charges into my models, my model going forward?

Yeah, I would think so. We do have credit exposure. I can't imagine that we could continue to have that without eventual credit losses.

We do for business planning purposes, Mario.

How much? How much?

I'm not going to walk through that --

I didn't think you would.

-- at this point, but we will probably in the investor day be in a position to give you a lot of detail to help you draw your own conclusions.

That would be handy.

Tom MacKinnon from Scotia Capital Markets.

Question with respect to the repricing of the John Hancock and Maritime Life individual insurance portfolios. How long before you would envision that the current strain that you're seeing, that's hitting the bottom line with respect to the existing products, would actually disappear as the new products sort of get put into place? And I have got a couple of follow-up questions, as well.

Okay, Jim?

Well, actually it should be mostly done through the end of the first quarter of '05 and completely priced by the end of the second quarter

And in Canada there's --

Tom, it's Bruce. The Maritime products as they now exist, all but two of the life products will be gone at the end of the year. The other two are going to be retained but put through repricing; and as Jim explained earlier, it isn't (ph) increasing the price of the consumer. It's how we -- the mechanics of how we price that product.

Yeah, Bruce, you talk about all but two of the Maritime products will be gone. Are you limiting then your product array? And would that -- would you anticipate that that would result in lower sales?

No, all the ones that are being withdrawn, Manulife had an equivalent product.

And a follow-up -- or one of the follow-ups would be as we -- interest rates -- I mean we've got a little bit a bump today, but generally I would anticipate that they might be a little bit lower than when you mark-to-market the Hancock book, when you brought it on. In any event, the press release does refer to lower investment income negatively impacting your earnings. Maybe you can comment as to the impact going forward, especially as we head into year-end reserve review?

Maybe I will ask Don to say a few words about that; but when we reprice the assets, we also reprice the liabilities so that -- there was a matching there that took place. Don?

Yes, that's the most important fact. I mean I think we would benefit marginally if interest rates went up. But we have a very, very matched book and we're writing less liabilities at today's lower interest rates, but those liabilities that we are are largely matched in terms of the crediting (ph) rates to the consumer.

So, I mean, maybe the better way of looking at it is if your match is completely well, how low do interest rates have to go before we're going to see some --

Well, that's a good question. It comes up all the time in the context of this low interest rate environment. And, Simon, explain why we do not have to be worried about interest rates?

Well, certainly -- [ laughter ] That's an easy question. Certainly on the John Hancock business, when we purchased GAAP at April 30, we started with the then market interest rates. Which means that the reserves that we have set up on that business are more than adequate to sort of produce an unwinding of future income and reserve releases, consistent with that low interest rate environment continuing. And any falloff in U.S. in interest rates since April has been very marginal. So, we wouldn't see -- that has not changed materially overall. On our own businesses, because of the Canadian model, which penalizes you heavily for not being matched, we have very, very close investment matching. So, on all our spread products, we're very closely matched and don't really see compression as rates come down because they're all matched books. And on the light businesses, the reserve (indiscernible) is factoring in interest rates down at current levels. So, I would -- I can't give you doom's day scenarios, but obviously if rates had dropped to 2 or 3% and stayed there for a long time, we'd all see pressure from guarantees and such and then guarantees kicking in. But certainly at current levels, we're more than comfortable with where our reserves are and wouldn't expect to see material strengthening, even if rates went down, marginally, from where they are today.

Okay, thanks for that. Now, the tax rate in the quarter was 28%, just up from 25% in the second quarter. I guess that's up because we got the full impact of Hancock. Is it this kind of a sustainable rate we should be looking at going forward?

I think it's a fairly good indication. I've mentioned in the past that quarter-to-quarter as an effective tax rate will dance around a bit, but you're quite right, with three months of Hancock, this is a fairly decent indication.

And then finally, you said that given past experiences, you don't really like to, obviously, dip into your credit reserves. But on a page 35 of the sub (ph), the provisions for future credit losses and actuary reserves actually declined quarter-over-quarter, fell by 108 million. I'm just wondering what might be driving that. I don't know if -- (Multiple speakers.)

I think that's exchange, Tom.

That's strictly FX, then?

Yes.

Saul Martinez with Bear Stearns. My questions have been asked. Thank you.

We like those questions. [ Laughter ]

Elaina Metropolski (ph) with Desjardins Securities.

My first question: Could you give us some color on growth trend in you value of new business? And ideally explain (ph) between Wealth Management and Protection? And secondly, are you planning to provide SOEs (indiscernible) earnings disclosure in Q4 this year?

I think we are planning to -- in fact, I know we are planning to have an SOE available to everybody in the fourth quarter. We have one, of course, internally right now; but, again, working out the details in harmonizing between the two companies. The other question, I think, was about embedded value and how does that look? Simon, can you answer Elaina's question?

Yeah. I mean on a year-to-date basis, looking at this year versus last year, on a sort of currency and interest rate neutral basis, we're seeing very strong growth in embedded value, you know, well over -- well over 30%. And even when you factor in the exchange movements in the U.S. dollar, we're seeing growth in embedded value that are 10 to 15% across the Company. (Indiscernible.) While I don't have an exact rate down, most of that growth year-over-year has been -- more of the growth has probably been on the savings side than the life side, but I don't actually have a detailed breakdown in front of me.

Jim Bantis with Credit Suisse First Boston. Two questions. Could you give us a little bit of guidance in terms of an understanding why the sales have been sluggish in Hong Kong?

I know, Peter, you alluded to that they were, but what conditions are, why -- perhaps is it pricing? Or is it an overall industry issue as opposed to company issue? And then perhaps a question for Dominic regarding the Spitzer (ph) investigation and perhaps the economic risk as opposed to the headline risk that mainly faces in this regards and contingent commissions, et cetera.

Okay, I will let Peter have the Hong Kong -- I think we talked about that at quite some length the last --

Sure, I'd be happy just to go over the highlights. Essentially, for the most attractive type of products, the sales growth rate in Hong Kong is softer. The number of agents licensed in the country is lighter, and many of our competitors that show sales that aren't moving as much have shifted their mix much more to savings-type products from protection-type products, still insurance in form. And we're looking at doing much the same sort of thing. So, it is something that's happening in that marketplace and is a feature of what's happening in the economy. Dominic, you want to -- (Multiple speakers.)

On the Spitzer, I am -- I guess in a general way, I would say that, of course, we're aware of all of the developments that have been occurring for quite some time in our industry, whether it's in the mutual fund business or now in the latest issues. And we've been examining our practices and looking at our situation here at Manulife, and I can tell you with some comfort that there's nothing that I'm aware of that causes me anxiety or worry. The question that you asked about the economic impact, though, of these investigations and these findings is a little bit more difficult to answer; but it will have economic impact, not just for the insurance industry, but frankly for business overall. I mean we're just looking internally here with all of the new procedures we've had to put in place to comply with Sarbanes Oxley, for example. I don't know what this burden is on the economy, but it's going to be very, very substantial, I think that will lead to a very, very high cost that's a burden that, luckily, everybody in business will have to bear, so, we won't disadvantage one particular group, but there is no -- we shouldn't be under any illusion; the competitiveness of industry overall is going to be affected. Not the insurance industry. All public companies are going to be affected by the response to the abuses that have prevailed as it seems for the last number of years. I don't know that I can give you a better particular answer about quantifying it. It will not be positive.

Just maybe a quick last question for Peter. Peter, I guess the Company has always maintained that hedging is not a policy or a program that it would implement; and with the Canadian currency continuing to advance, there's no change in terms of the hedging costs?

You know, I think we're almost half and half in terms of U.S. and foreign versus Canadian owners. And I don't imagine Americans would want me producing a C-dollar income strain. So we continue to view the transparency on the distribution of our income and our balance sheet as being the appropriate strategy. Obviously in hindsight, if I could pick timing with retroactive ability, I would have preferred to hedge. But over the long-term, it's our view that investors will make their decisions appropriately and we don't add much value to that choice.

Operator, we have time for one more question, if there is one, one or two. Two.

Jamie Keating with RBC Capital markets.

Two quick ones. One is the share buyback. Peter, can you just educate us when you're allowed to become active? And the second question relates to whether you missed the street or maybe the street actually missed you. Do you have an opinion as to whether -- what the drivers were in terms of where the estimates were relative to where you reported as a rule? Did you notice when you were watching the quarter what created the miss?

Yeah. Those are two good questions. The first one is quite simple. The buyback becomes effective next Tuesday morning, next Tuesday. There's a 48-hour seasoning from the filing and that will take place today and Monday.

With respect to missed the street. The street, in our case, the southside (indiscernible) analysts are some 20 people. The consensus numbers are subsets of those, and they're all quite different. But I think the ROE item, I'm not sure if the calculation had the detail in all analyst's perspectives of the three months versus two months of shares outstanding. And with respect to the impact of savings and integration, I don't know if the grade in really if it's possible to model it given how the two companies had different prior codes (ph) of accounts to look at the emergence of the stronger company in the first few quarters of combination. So, I'm sympathetic. I know how hard it is with the detailed information to see where things are going. I guess the two key messages here today is we're pretty happy with the integration progress, and also we're also pretty happy with the operational results. And so it would have been nice if the street had been a little closer in anticipation and, therefore, a little more receptive to the results; but we think they're pretty good.

John Reucassel with BMO Nesbitt Burns.

Instead of looking at a hedge, Peter, would you ever look at reporting just in U.S. dollars since you've got a good chunk of your earnings in U.S. dollars, or U.S. dollar-pegged currencies?

We are looking at that. That is, in fact, how we run our business. The bulk of our lines do report internally on U.S. dollars. We've traditionally reported in C dollars. But one of the things I'm going to do is call, in view of the southside analysts and institutional accounts in particular, to get some feedback as to whether it would be more helpful to take what's turning out to be a fair amount of volatility in the earnings that's unrelated to operating items to the exchange rates, by reporting in U.S. dollars or perhaps reporting dually. I think reporting dually given all the ways we already report would be complicated. So there is a choice to be made, and it's certainly an interesting issue, one I have some potential enthusiasm for.

Okay. Well, operator, that completes our call. Thank you to all the attendees. We've enjoyed the discussion today. I would conclude by just reminding everybody that this is a very large company that we've put together. Our revenue levels were, I don't know, $13, $14 billion. We remain committed to getting our earnings up. The fact that we may have disappointed, or not lived up to some of the estimates that are out there, I don't think you ought to bake those in stone as somehow the Company's operations won't deliver the level of expected profitability. We think it will, and we look forward to reporting to you on our progress next quarter. Thank you all very much.

Ladies and gentlemen, this concludes the Manulife Financial third-quarter 2004 Results Conference Call. The recording of this conference call will be available after 6:00 p.m. today by calling 416-695-9677. It will be available until the close of business on November 12, 2004. An archive of the webcast will be available on www.Manulife.com beginning after 6:00 p.m. Eastern Standard Time today. You may now disconnect and thank you for participating.