Manulife Financial Corp (MFC) 2004 Q4 法說會逐字稿

Welcome to the Manulife Financial Corporation fourth-quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. Craig Bronley, Senior Vice President of Business Development and Investor Relations. Please go ahead, Mr. Bronley.

Thank you and good afternoon. I would like to welcome everyone to Manulife Financial's earnings conference call to discuss our fourth-quarter 2004 financial and operating results. If anyone has not yet received our earnings announcement, statistical package and the slides for this conference call and webcast, these are available in the Investor Relations section of our website at www.manulife.com.

As in prior quarters, our executives will be making some introductory comments. We will then follow with a question-and-answer session. Before we begin, I would like to remind everyone that during the course of this conference call we may discuss forward-looking information as defined in the U.S. 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 from those described by such statements. Investors are directed to consider the risks and uncertainties in our business that may affect future performance and that are discussed in Manulife's most recent annual report on Form 48, John Hancock's most recent annual report on Form 10-K and John Hancock's quarterly reports on Form 10-Q each filed 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 would like to turn the call over to Dominic D'Alessandro, our President and Chief Executive Officer.

Thank you, Craig, and good afternoon, ladies and gentlemen. Thank you for joining us on this call. I hope you all have received a copy of the slides because that is what we will be speaking to. I have with me in the room in addition to Peter Rubenovitch, who will making some comments after my remarks, just about everybody in our North American senior management team. So we will be well prepared to answer any questions that you may have at the completion of our presentations.

As highlighted on slide four, 2004 has been a year of tremendous growth. Shareholders net income increased by 66 percent to a record $2,564,000,000. Premiums and deposits grew by 61 percent to almost $50 billion, and funds under management increased by an impressive 125 percent to reach 348 million as of December 31, 2004.

Making the largest contribution to these results, of course, is the impact of the John Hancock transaction. Our combined company is large, strong and growing.

Turning to slide five, on a per-share basis Manulife's results were equally impressive. Excluding the impact of integration costs, EPS was $3.78, up 14 percent over 2003. Book value per share increased by 49 percent to $28.42, and embedded value per share rose to $34.55, an increase of 4 percent year-over-year despite the impact of foreign exchange and the substantial issue of shares before the John Hancock financial transaction.

Slide six shows a brief report on integration milestones. In the eight months following the completion of the transaction, significant progress has been made. Notable successes include the rebranding of our U.S. operations under the well-recognized John Hancock name. In December we announced that we were increasing our expense synergies target by U.S. dollars 70 million to 325 million U.S..

Further, we expect to complete the integration by year-end 2005 ahead of our original schedule. Our full-year ROE was 13.7 percent. We are pleased with this result as it is well above the 12.7 percent projected at the announcement date. As Peter will explain in more detail later in this presentation, this was achieved despite the fact that we have not completed the $3 billion share buybacks that we had originally anticipated.

Slide seven shows a breakdown of our earnings based. Through organic growth and acquisitions, we have developed a first-class Life Insurance Company that has one of the best growth platforms in the industry.

In North American markets, we have leading marketshares in e-segments, and we continue to be frontrunners in product design and innovation. In the higher growth Asian markets, we have profitable operators in nine countries and territories with excellent growth prospects. In China we were recently granted two new licenses that had significant potential. In Japan our business is doing very well, and the outlook is an optimistic one.

Our Company is extremely well capitalized. We have more than $3 billion in excess capital, giving us significant financial flexibility. Finally, we have a very experienced management team and a strong culture of risk management that prevails all of our operations. It is the sum of these strengths that provides Manulife one of the best growth platforms in our industry.

I would like to conclude my remarks by thanking our employees for the significant financial and emotional support provided to the relief efforts in Asia. Together we have contributed almost $900,000 in donations and have mobilized to assist staff and service customers. Further, we have granted premium holidays to help customers in Indonesia as they work to rebuild their lives. I am especially proud of the dedication and resilience demonstrated by our employees in Banda Aceh. It's an incredible effort on all accounts.

And now I would like to ask Peter to review the details of our financial results. Peter?

Thank you, Dominic. As Dominic just highlighted, 2004 was a very successful year. Fourth-quarter highlights include record Wealth Management sales in Canada, the U.S. and Asia for the combined sales growth of roughly 20 percent over the previous quarter and up 60 percent over the same quarter last year.

As noted earlier, the integration of John Hancock is progressing very well. The Canadian division marked an important milestone this quarter, completing their legal entity restructuring so that the division now operates through a single merged key legal entity. This will simplify operations and reduce costs going forward.

As well in Japan, we announced a new VA distribution agreement with UFJ, the country's third-largest bank. Sales at UFJ commenced at the end of the fourth quarter, so we should begin to see the favorable impact from this arrangement throughout 2005.

Slide 10 highlights the growth in shareholders' earnings over the last five quarters. Consistently strong results from all operating divisions contributed to a solid fourth quarter. In addition to John Hancock contribution and synergies, we had very strong investment equity market and credit results, which boosted earnings over the levels reported in the third quarter. Excluding the impact of integration costs, shareholders net income for the fourth quarter reached $803 million, an increase of 9 percent over the third quarter and up 88 percent over the fourth quarter of last year.

As we have expressed in the past, we've begun to demonstrate this quarter we remain committed to increasing our ROE. In the fourth quarter, ROE improved to 13 percent, up from 12 percent in the third quarter. Adjusting for integration costs and excess capital would have increased fourth quarter ROE to 15.1 percent.

As you may recall when we announced the John Hancock transaction, we projected an ROE of 12.7 percent for 2004 based on consensus EPS and expected share buybacks of $3 billion. Despite actual buybacks being well below those initial expectations, we outperformed by a wide margin, finishing with a reported ROE of 13.7 percent. Adjusting for integration costs and buybacks, full-year 2004 ROE increased to 14.9 percent.

On slide 12 you can see that like many other Canadian companies Manulife continued to feel the pressure of the weakening U.S. dollar throughout 2004. Over the year, the U.S. dollar declined 7 percent against the Canadian dollar, eroding our earnings by roughly $116 million. As well you can see the growth in earnings after adjusting for the impact of currency and excluding integration costs. On this basis, fourth-quarter earnings growth was a strong 14 percent, while year-over-year the increase was 79 percent. As well on this basis, EPS would have been $3.95, an impressive increase of 19 percent over the results reported in 2003.

Our good fourth quarter featured very strong investment credit and equity market performances. As well good Wealth Management sales in Canada, the U.S. and Asia up 21 percent versus the third quarter and solid growth in U.S. individual life where sales rose by 23 percent. As well we benefited from improved profitability in new product restructuring.

These were partially offset by the impact of the weakening U.S. dollar relative to the Canadian dollar, tsunami provisions of 20 million pretax or 13 million post-tax, and integration expenses in the quarter of 68 million pretax or 45 million post-tax.

As you can see on slide 14, the investments division has made considerable progress in realigning our consolidated portfolio. We reduced our exposure to below investment-grade bonds by almost $800 million through prepayments, net upgrades, provisioning and selected sales, and we have also reduced BBB exposures. This was somewhat aided by foreign exchange contributions, but we have made meaningful progress.

I would now like to turn to divisional performance. As anticipated, results from U.S. Protection were up sharply from the soft third quarter of '04. On a U.S. dollar basis, fourth-quarter earnings reached $122 million, an increase of $36 million or 42 percent over the previous quarter.

A number of factors had a positive impact on these results, including good credit, equity and investment performance. We also saw significant improvement from individual insurance where our focus on product restructuring is beginning to result in improved profitability.

Within the long-term care line, earnings improved by $6 million driven by improved claims experience and investment gains. On a full-year basis, U.S. Protection reported earnings of $361 million, a substantial increase over 2003, of course, with the contribution of John Hancock.

Within U.S. Protection, individual life had a very solid quarter with new annualized premiums of $143 million, up 23 percent over Q3. The sales success is due to a number of factors, including the successful integration of Manulife and John Hancock's infrastructure and the delivery of industry-leading new business service levels.

In addition, we saw a rebound in sales as product changes made in Q3 were accepted by our distributors, and long-term care sales remained weak across the industry in the fourth quarter, but have shown some signs of growth early in the new year.

Our Wealth Management division had a solid quarter in an exceptional year. On a U.S. dollar basis, earnings in the fourth quarter were $94 million, up over the strong Q3 result with gains from good investment performance and improved separate account fund income.

Sales results in the Wealth Management segment remains strong in the fourth quarter, closing a record year for the division. Q4 sales and Group Pensions of U.S. 1.1 billion were consistent with the strong results of last year and contributed to the record full-year sales of 3.9 billion versus the 3.3 billion of '03.

As a result of good retention, pensions also reported an 8 percent increase in net sales over last year. Annuity sales increased across business lines. Variable annuity sales increased by 7 percent over the strong third-quarter result due to continued popularity of Principal Plus, our guaranteed minimum withdrawal benefit writer. Increased excess to distribution, particularly to the John Hancock Financial Network Captive Distribution Force and the S6 bank-related distribution group that has had a positive impact on VA sales and is beginning to impact 401(k) pension sales.

The combined distribution networks are now selling a broader and more profitable range of products. Mutual fund sales increased by 49 percent, driven by sales of the popular Classic Value and U.S. global leader growth funds, six product sales were soft, and this was by design due to low yields and spreads.

The Canadian division posted solid results this quarter. On slide 19 you can see that shareholders earnings were $175 million, up from 165 million in the third quarter of this year. During the quarter, strong performance in individual insurance and Wealth Management was partially offset by a decline in group business earnings due to expected seasonality of health claims. We continue to make considerable progress with the integration of Maritime business, and the legal entity restructuring is now producing an increased impact due to expense synergies in our results.

Looking briefly at the full year, Canadian division earnings of 614 million were up 24 percent over the prior year.

On slide 20, you can see full-year individual life sales were up 41 percent over '03. A notable benefit of the addition of Maritime is our improved position in the managing general agency channel. Sales in this channel grew to an impressive 41 percent of sales this quarter from 27 percent a year ago. Group benefit sales were down this quarter, but their sales are typically lumpy, and overall sales for the year are at record levels. Strong momentum continues into 2005.

On the Wealth Management side, we had strong sales in both Group Pensions and individual Wealth Management.

Fourth-quarter earnings from our Asian operations were down slightly at U.S. 66 million, primarily due to provisions taken in respect to the tsunami disaster in Asia. In Hong Kong Wealth Management earnings increased substantially due to strong business growth that increased the income. Offsetting this increase was less favorable results from the individual insurance business where growth remains somewhat sluggish and in group life and health where claims experience was poor relative to last quarter.

On a full-year basis, U.S. dollar earnings for the division increased by 9 percent compared to 2003, despite the additional provisions recorded in this quarter.

On slide 22, you can see that insurance sales in Hong Kong increased by 12 percent over the third quarter but were down slightly from the levels reported in Q4 last year. Wealth Management had a solid quarter, particularly in other Asia where sales were up 162 percent driven by strong mutual fund sales primarily through the Bank of Sharanst (ph) channel.

We continue to be pleased with the operational improvements and financial results in Japan. Full-year earnings totaled $165 million, up 56 percent over the '03 results.

Looking at the fourth quarter, earnings of 40 million were up by 43 percent over the fourth quarter of last year and in line with the previous quarter. A number of factors contributed to growth in earnings, including a more favorable business mix, exceptional growth in our variable annuity line, positive claims and lapse experience and a reduction in expenses due to restructuring initiatives.

For the full year of 2004, sales of our variable annuity product premiere in Japan climbed to a record $2.4 billion. This outstanding performance represents incremental sales increases of $1.7 billion over 2003.

Fourth-quarter sales remain strong at $696 million. These sales levels were down compared to the extraordinary level achieved in the third quarter as the initial Bank of Tokyo Mitsubishi related product launch promotion ended in October. Going forward we continue to have high expectations for our VA product in Japan.

As we noted earlier, we entered into new distribution agreements, including an important one with Japan's third largest banking group, UFJ. Sales efforts commenced at the end of the year, and we expect to see positive contribution starting in the first quarter as these sales efforts ramp up.

For the full-year '04, our reinsurance division recorded earnings of $179 million U.S., a solid 15 percent increase over '03. Contributing to the increase in earnings were the addition of John Hancock's IGP group and favorable mortality results in the life retrocession business.

Revenue results for the fourth quarter, earnings were $54 million, up slightly over the third quarter.

In our guaranteed and structured financial product line on a U.S. dollar basis, earnings were $67 million for the quarter and $165 million for '04, which includes eight months. Sales declined to 255 million in the fourth quarter as low interest rates continue to pressure spreads. Given the competitive environment, we remain focused on the retail market where margins are better. Starting in 2005 the Guaranteed & Structured Financial Products group will report to our U.S. Wealth Management operations. The new reporting structure reflects G&SFP's increased focus on retail product.

We continue to take a measured and opportunistic approach to our share buyback program. In the fourth quarter, we were more active in the market, repurchasing 5.7 million shares valued at roughly $307 million, bringing our 2004 repurchase total to 9.7 million shares or $.5 billion. January purchases amounted to $55 million.

With total program capacity of $3 billion, we still have considerable room to increase our activity in the market and will continue to do so on an appropriate opportunistic basis.

Slide number 27 highlights capital return to common shareholders in the form of dividends and buybacks. In the fourth quarter, this amounted to $519 million or 69 percent of common shareholders' earnings for the quarter.

As well today we announced the Canadian public offering of $350 million of 4.65 percent perpetual preferred shares. This transaction is being done on a bought deal basis and will count as Tier 1 capital for Canadian regulatory purposes.

Since the close of the John Hancock transaction in April, we have been working hard to bring our disclosure back up to our previous standards. In December we released quarterly consolidated U.S. GAAP results, and today we are adding to that expanded level of disclosure by providing source of earnings and embedded value information.

On slide 29 you will see our U.S. GAAP results. Let me make a few comments. First, the U.S. GAAP results this quarter and for the year were not materially different on a net income basis from the Canadian GAAP result. Fourth-quarter earnings on a U.S. GAAP basis were $822 million, slightly above the CGAAP net income of $764 million due primarily to accounting differences related to investment income.

For the full year, the variance was also quite modest with U.S. GAAP net income at 8 billion 625, marginally above that reported on a CGAAP basis. As we have mentioned in the past, we continue to manage our business on a Canadian GAAP basis as we believe it is the better economic measurement tool.

Prior to the close of the John Hancock transaction, we have been providing you with source of earnings disclosure on a quarterly basis. Today we are pleased to resume that disclosure with the addition of the John Hancock business for the first time. The presentation now isolates the impact of segregated fund guarantees on earnings. Otherwise it's the same as our prior presentation.

Our SOE continues to show strong experience gains reflecting the conservative level of our provisions and the good growth on expected profit due to the addition of the John Hancock businesses.

During the fourth quarter, we undertook our usual review of CGAAP valuation bases for policy liabilities. The net change in policy liabilities as a result of this comprehensive review is the reduction of $38 million with a positive impact on shareholders' net income after tax of $8 million.

Key aspects of the basis review include a net reduction of 246 million of cyclical credit loss reserves that followed on from recommendations made by our external actuarial reviewer. These were offset by net increases in reserves for recapture risk in our life retrocession business and refinements to the models and assumptions for our reserves for segregated fund guarantees, each increasing reserves by some amount slightly over $100 million.

The net impact of the basis review is as usual booked in corporate and other segment.

As you will see on slide 31, our embedded value has increased substantially this year, almost doubling in value to 27.9 billion. The acquisition of John Hancock accounted for 10.9 billion of this growth. It should be noted that this only reflects the value of enforce business and tangible shareholders equity. It does not include any value for future sales or merger-related expense synergies.

On a per-share basis, embedded value has increased from $33.32 per share at the beginning of the year to $34.55 per share as of year-end. In my view, it is quite a positive accomplishment to be able to complete a transaction of the size of the John Hancock acquisition on a 100 percent shared issue basis, suffer a 1.7 billion reduction in embedded value due to foreign exchange movements, and still grow embedded value on a per-share basis.

Looking now at new business embedded value, we have reported an increase of 23 percent over 2003. However, this increase includes the negative impact of currency movements and changes to discount rates. Adjusting the '03 new business embedded value to reflect current exchange in discount rates would decrease it to $741 million. Therefore, on a comparable basis and with only eight months of John Hancock results included, our growth in new business embedded value was almost 50 percent.

In conclusion, we are very pleased with the results we have achieved in the fourth quarter and throughout 2004. Sales remain strong, and earnings are robust. The John Hancock transaction makes this year a particularly memorable one, and we believe our success today speaks volumes for the strategic and financial merits of that deal.

As we have indicated, we expect to complete the integration process earlier than expected and with a higher level of expense synergies achieved. Further, ROE for the year was higher than expected and we believe remains on an upward trend. Growth in embedded value, embedded value per share and new business embedded value also demonstrate that we are continuing to grow our businesses in a profitable way. We believe we are well-positioned for a strong year in 2005.

Thank you very much.

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

(OPERATOR INSTRUCTIONS). John Reucassel.

Just to start it off here, Peter, where are we on the continuum of the cost synergies of 325? Are we a third of the way there? Are we 40 percent the way there? Where does that number stand?

I don't have it in front of me, and it depends, of course, on whether you measure accumulative or spot. But I would say we're more than halfway through, and we're looking at the first quarter and the second quarter of next year as making substantial progress. So we're feeling very good about moving to that new target.

And the change here in the MCCSR in Manufacturers Life Insurance in Q4 versus Q3, what was going on? If you could just talk about what was going on there? And I assume is it all just still John Hancock under RBC, or is there still -- is there some old Manulife business under there under the RBC as well?

Why don't I ask Simon to speak to that if I could. Simon Curtis?

Yes. The reduction in the MCCSR and the MLI in the fourth quarter was actually just the result of the amalgamation of the Maritime Life subsidiary into Manulife. That was really what dropped the ratio from 231 to 213.

The Hancock U.S. businesses are still all stand-alone and reported on an RBC basis, and we're expecting that ratio to close well above its 300 target at the end of the year.

But none of Manulife's U.S. business prior to Hancock is under the RBC? It is all still in their MLI?

The Manulife business remains in the Manulife group at this point in time. So we would have it in our consolidated MCCSR ratio, and the Hancock businesses continue to report on an RBC basis.

Okay. And I guess with Simon I will try this question. At the current level of interest rates out there, you know the 10-year U.S. at 4 percent, let's call it, how long or what is the impact of this on Manulife if it stays here for three or four years? Are the reserves adequate, or what earnings growth -- you know Simon can talk about that? What actions may or may not have to be taken?

Well, it is hard to do earnings projections under a hypothetical interest scenario, but I guess all I could say is that certainly in Canada we have reserved our business using more conservative rates than the rates prescribed by the (inaudible). So we use a long-term interest assumption of 4.5 percent in our reserves. And on our U.S. business we use rates that go 4 to 5 percent long-term interest rates depending on the business. So we feel that our reserves are already quite strong relative to current levels of interest rates.

John, one other point regarding the expense synergies. You know we're aiming to have synergies as a result of the combination of $500 million. But I do not believe 500 million Canadian. I do believe that the portion of that 500 million that contributed to our earnings this year is 50 percent. I think Peter was talking about a run-rate (multiple speakers)

That is correct.

Steve Cawley, TD Newcrest.

I would like to start with the investment side of things. Peter, you said last quarter that the PCL run-rate looked fair to you, and in fact I was hoping that you would fall off a little bit. But there was not really anything that kind of popped up on my screen in terms of what would have created 79 million in credit losses. Can you talk a little bit about that?

The credit losses? Maybe Don could. Just a high-level comment and I will turn it over to Don. The credit losses this quarter and last quarter were not particularly dissimilar. Both quarters had very favorable credit environments.

Yes, Steve, you know on Investor Day and in other venues we have tried to pull people off the position that they should expect no credit loss at Manulife just because of the terrific couple of years we have enjoyed. We were pleased that they were actually better than planned and better than any long-term forecast of what they would be. There was nothing major there. It was a question of a couple of mortgages and some bond write-downs, but nothing overall significant. We were actually very pleased with the result.

And the selling of your noninvestment-grade portfolio, are you just taking advantage of spreads here?

Yes, sir. We think it is a day spread that makes sense to unload below investment-grade risk.

Okay. On page 37 of the sup pack, you had 100 million more this quarter of investment income. It was driven off of two areas. It was driven off of stocks and it was driven off of other.

So it looks like you had a great stock picking period here. I was wondering other -- we haven't seen 76 million of investment income from that before. Can you just talk maybe about those two groups and what happened?

Yes, we actually did a fantastic year for stock picking. And the other categories are basically equity kickers from mezzanine debt investments that Hancock had. (multiple speakers)

We liquidated an investment in Golf Town for, you know, a noticeable demand. I think as well I mean the markets were up very strongly in the quarter where they not, and that would have contributed somewhat to the growth in investment income.

But you are quite right, Steve. These were very strong results in that category.

Okay. One last point. You mentioned cyclical reserves, and you said that you had released about 246 million of them last year. Is that what I heard?

This quarter.

This quarter. Can you talk about having done that why that should not worry me a little bit about quality of earnings? And what sort of cyclical reserve balance would you still have holding?

Let me make a brief comment, and then I will ask Simon to add to it. We have cyclical and other bulk reserves in the organization that are at the conservative end of the spectrum.

I have been talking -- it is probably about six quarters now, perhaps longer -- about how our provisions and patterns in particular related to credit. We are looking rich versus the risks that we had. And in our year-end review, we addressed a portion of that. So it should not be surprising.

With respect to the quality of earnings, one should not forget that those reserves were established by charges to the income statement, and as we look at the risks that we have and determined that they are not required, then I think there is absolutely nothing inappropriate about adjusting them.

So that's what we have done. It is not that big an item, and it has not hit the income statement because other reserves have offset that movement.

In future periods, Manulife want have to rely on that sort of level of reserve releases to get back to, let's say, the 99 cents of operating earnings that you had this period?

Steve, maybe I can clarify it in layman's terms. What we did is redesignated the bulk reserve that we were holding, a piece of the bulk reserve we were holding for credit and call it something else now. We call it a recapture reserve in our reinsurance business where we have these huge blocks of life risk that because of mortality improvement and other things they do have -- the cedent has the opportunity to recapture them on maturity, and if they do, then we would lose some future profit, so we have provided for that.

And the other thing is we use it to strengthen, I believe, our Seg fund reserves, but moving the CTE level up to 70 -- what is it, CTE level 70 or something?

Yes, it is Simon Curtis. I just had a couple of more comments, which you know under Canadian GAAP as I think you all know, we have to review all our reserves every year. We have a peer review that we go through. Our peer review, or when they were looking at our reserves, identified that credit reserve as one that was quite high. So in the reserve review that is here, we just chose to reduce that to a level that everyone felt was more appropriate and at the same time looked where else on the balance sheet we might put that reserve rather then release it to income.

So I guess the key point is the net release income out of this whole basis review was only $8 million. So the earnings this quarter have not been boosted by reserving actions.

Michael Goldberg, Desjardins Securities.

Not surprisingly maybe my questions about the 49 percent increase in your VNB excluding currency and discount rate change. Can you give us some idea what portion of this was organic, and what would have been contributed by Hancock?

It is a difficult segmentation to make. I'm going to allow Simon to collect his thoughts. But these companies are rapidly being blended, Michael, and you know we have withdrawn a whole bunch of products that were previously sold under Maritime or Hancock and have substituted now products, Manulife products so you know you can get into a debate, would you have had the same level of Manulife sales had you not discontinued the Maritime or John Hancock sales? So I don't know that we can answer that question.

No, it's a hard question to answer, and we certainly anticipated that it might get asked. The best metric I could give you would be to say you know the run-rate of that, the new business embedded value in the fourth quarter was about $315 million. So if we have the 1.107 over the whole year, which had the Hancock in for eight months, then by the end of the year, the run-rate in the fourth quarter was at 315.

Do you expect to release that number on a quarterly basis?

No, one of the things is we don't actually do the embedded value full analysis in each quarter. We do track it internally, but it is not at a level that we have the scrubbing for external disclosure. So at the moment, we're not anticipating releasing it quarterly.

Okay. Can you also give us some color on -- some better color on the actual impact of the John Hancock brand? How this is helping you in the United States?

Well, we have got the two heads of our U.S. businesses here, and so maybe I will ask them to address that question, Michael. So who wants to start? Jim? Jim, you have always had the Hancock brand I guess.

So it is nothing new. I think one area where we have been enjoyed some expense or, excuse me, revenue synergies is in the sale of variable annuities through the John Hancock Financial Network. Now this is not so much attributable to the brand because, John, I think the brand was still Manulife through the end of the year. But it was a brand-new revenue source.

Now going forward all the products will be labeled John Hancock, and we expect the sales to be doubled through that channel in this coming year over what they were in 2004. John (multiple speakers) for you, though, so maybe you would like to say --

In terms of the businesses that were really rebranded where the -- the college savings business was rebranded in June of 2004, and its sales were up last year 28 percent. How much that is attributable to the brand and how much to other factors, I could not tell you.

But it is certainly has received a very favorable reception. It removes the objection around sales that we have always had, around the Manulife name simply being unfamiliar to the end customer. It's really too early to say how it will affect the variable annuity and 401(k) businesses which were rebranded as of January 1st of this year. The sales there remain very strong, but it is too early to make any kind of attribution. You know all the research and what not that we have done suggests that it's a very favorable development, but I cannot quantify it in that short a period of time.

The sales increased in the U.S. -- you have seen the numbers -- are quite robust. And I guess we would attribute most of the growth to the expansion in the distribution channels. As we said, the Essex is a new channel for us. The John Hancock Financial Network is a new channel, and we will see if the brand separately adds on top of that as we go forward. It should. Logically the Hancock name is a much more familiar name to the U.S. public, and so, therefore, it should be helpful.

Okay. I have one more question. From the source of earnings statement, maybe I'm misinterpreting this, but it looks -- the number per Seg fund guarantees is a positive number each quarter, which would suggest that you have been releasing Seg fund guarantee reserves, but yet you said something about (inaudible) reserves. Can you just clarify?

I think that the releases are the portion that go through the income statement and the strengthening on the redesignation of the review of the actuarial liabilities.

I guess I would like to say one other thing. You know our actual actuarial liabilities today are about 130 billion, so you figure out how many basis points it takes to make 100 million. Not very much.

These things are reviewed very carefully line by line and judgments are made. We pride ourselves on having, we believe the most robust level of reserves as evidenced by the source of earnings that shows you the experience gains every year remembering what those are. Those are the difference between our actual incurred experience against what we have in our expected liabilities for those items, our expected reserves. It does not count the pads.

So I guess, Michael, I would say that you should take a lot of comfort from the fact these are high-quality earnings, not influenced by actuarial assumptions.

I just had one thing because in putting together the source of earnings now we do have some guidelines we have to follow, and it gets quite complicated with all the disclosure we do.

The 100 million of strengthening that we did on the Seg fund guarantee reserves in the fourth quarter that was included with our base exchange that led to that net 8 release. So that has actually shown up in the management actions and change in assumptions line. So that 100 million is not showing up in that source of earnings where you are seeing the sort of 40 to 50 million release each quarter.

Just to clarify one other thing. The amounts we book each quarter are based on a formulaic approach we have through reviewing the recognition of income. The basis review is something that would look at standards policies and key assumptions, and that is why there is some distinction between them.

And at the end of the year, I think that what, our Seg fund reserves are still $600 million in the aggregate?

That is right. They are $600 million.

And what did you say the CTE level was that that equates to?

It is 77 at the end of the year overall.

Okay. Thank you very much.

Mario Mendonca, Genuity.

I wanted to ask a much more sort of general question. I understand from listening to the questions and answers here on this conference call that a significant amount of reserves, the credit reserves, the C1 risk reserves were moved into the segregated fund reserves, which, Peter, you described as being released on a more formulaic basis.

It seems to me that there are some implications moving from a more discretionary reserve to a reserve that is released on a very formulaic basis. Would it be fair to say that the historical earnings stability we have seen from the Company may be questioned somewhat going forward?

I don't think so. I think we have had a trend over time of favoring formulaic reserves over bulk and general reserves, and that has just reflected what has happened in the marketplace. There is a reluctance to have discretionary reserves, and this is consistent with that trend.

We have not gone and helter skelter made all kinds of adjustments that have impacted income historically. You can see in the SOE that has just not been been the case. So we would not expect it to be the case going forward either.

So maybe it's fair to say that if there were a slight uptick in voluntary earnings, at the most it would be at the margin. It's not something we should become really sensitive to? Is that a fair statement?

Whatever changes there are, we would share with you, and you know, I am not anticipating a tidal swell of change. Except to the extent the reserves are too conservative, they have to be recognized as income if the risk is gone. You know, we actually are delighted to have that payroll.

Okay. Something a little more specific then. When I look at the -- again, going back to this segregated fund reserve issue -- going from Q3 to Q4, you have a line item that you refer to as constant CTE. Can I take that to mean that is the amount you could have released in earnings had you not -- if you had not changed your CTE level? Maybe I did not describe that correctly.

That is correct.

That is the right amount? And then when you say the change in the CTE level, that is to get you back to a 77 percent?

To the extent the CTE level is at all different this quarter from last quarter, you have to separate what the amount would be to be at the same CTE level versus what the amount is for the difference. And I'm not going to -- it is awfully helpful to the reader, but it is required disclosure so we make it.

Right. It seems to me that by looking at this it seems like Manulife is systematically -- because irrespective of whether the market went up or down, there was still a release of the Seg fund reserve every quarter. Should I take that to mean Manulife, this is a systematic release of the reserves related to segregated fund guarantees?

No, we take a fourth-quarter perspective on it, and that is the reason it is relatively smooth and the markets have been generally good. If the markets were the other way around, as you have seen in the past, we would add to reserves. Did you want to add something to that?

I would like to just add one comment, which is you know over the whole year our CTE level, if you look at a point in time, it started the year at CTE 80. It ended the year at CTE 77. It hardly changed. And there was, if you look at that change in the CTE level number, it was a net release of $26 million to income over the year. So the earnings release you are seeing from segregated funds is just the normal impact of the market movement during the year.

That makes sense then. One final question, this is more on the U.S. side. Three large small case 401(k) providers reported this quarter, and in each case the withdrawals or the surrenders in the 401(k) business was really spiked. I'm referring to well, Lincoln -- sorry -- Nationwide, Principal and now Manulife. Management has generally said that there was not anything special going on. But now that I have seen it across three companies, could someone speak to that?

Yes. I will ask John to speak to that, but I'm not sure you're right in your conclusion that our withdrawals spiked.

Well, our withdrawals have not spiked at all. And, in fact, we track in the 401(k) business two types of withdrawal. Plan level withdrawals, which generally run about 5 percent, and individual withdrawals, which generally run about 10 percent. Those are the provisions we expect. In both cases in 2004, and including the fourth quarter of 2004, our actual numbers were below those targets.

We are very proud of the fact that our U.S. savings business have quite large net flows every quarter. If you look at the movements from the asset levels and the new deposits, less the withdrawals, the net sales are quite robust and very very healthy.

I guess what I was referring to is on page 16 of the supplement where it shows that premium deposits in the Group Pensions business were up 12 percent, but withdrawals were up 27 percent. I saw -- it appears to me that the withdrawals were up a fair bit.

Well, I'm looking for that data. But you know the fourth quarter is (multiple speakers) there is a certain amount of seasonality in the 401(k) business. The planned terminations are expected to be considerably higher in the fourth quarter than any other time during the year.

But I'm looking at it year-over-year, so I have accounted for seasonality in that description.

Have you also accounted for the growth in the business? We are just scrambling here to calculate your numbers.

Yes, I did and that is why i referred to the premium deposits being up 12 percent and the withdrawals being up 27. I thought I covered --

We will have to take it off-line and get back to you. (multiple speakers). We're not noting any problem I guess is the high-level comment.

Yes, and that is consistent with what the other two small case 401(k) providers said. Thank you very much for your help. I appreciate it.

Eric Berg, Lehman Brothers.

I, too, was kind of stumbling a little bit over the discussion of the reserve movement. Peter, in as much as I do not think that you covered a lot of ground very very quickly and I was able to virtually all of it, but I do not think you had a separate slide in the presentation regarding the reserve movements. Would you mind going over it slowly the numbers that you referenced in that regard?

I would be happy to. Let me just find the spot I spoke to was in.

It was around I think around slide 30.

Around slide 30? Thank you. Okay so the net change we had as I described to you was 8 million post-tax, and we consistently -- it was 38 million post-tax and pretax. The key items were the 246 million reduction of cyclical credit loss reserves. And as I commented on, we had received recommendations from our external actuarial reviewer in support of that initiative. And then we set up additional reserves for the recapture risks in life retrocession business and refinements to models and assumptions for segregated fund guarantees. I indicated each of those editions, which are largely offset, were about -- we are just over $100 million.

So the net impact of essentially the renaming of some reserves to other reserves was a move of 8 million post-tax income recognized across the entire year because of basis changes in our income statement for shareholders.

Terrific. Just to go over how this appears in the SOE on slide 30, which role would -- would that be did you say -- I apologize that you have gone over this -- but would that be part of the management actions?

Yes. It is Simon here. It is in that $71 million release of management -- excuse me, the 71 million negative management actions and change in assumptions includes this 19 million or the release of the basis change -- 19 million pretax, which was the 8 million after-tax.

Very good. Thank you very much.

Tom MacKinnon, Scotia Capital.

Just a question on some of the exceptional experience gains you're getting in the quarter. If we look in the U.S. Protection segment, I think we're talking about 57 million. It seems to be significantly higher than we have seen in other quarters. U.S. Wealth Management 35, Canadian 47.

I mean what is contributing to the exceptional experience gains in the quarter, and to what extent is this sustainable? And I've just got a couple of follow-up questions.

Simon, could you answer that question?

Yes, both the numbers I think you are looking at are the 9 million, the 32 million second quarter, 9 millions third quarter jumping to 57 in the fourth quarter. (multiple speakers)

Yes, and the fourth-quarter numbers for, not only for U.S. Protection but U.S. Wealth Management and the Canadian operations were significantly higher in --

Well, all three of them really do reflect the strong investment market in the fourth quarter. That was the big driver. We do have experience gained from our other sources, but the big movement from quarter to quarter is the investment experience.

Okay. And as a follow-up then, just to sit around and beat this reserve change to death here, now on page 38 we've got a $50 million release in actuarial liability. So how does that all tie into everything again?

Excuse me?

Page 38 of the supplement has got a 50 million change in assumption.

Well, if you want the gory details, Tom (multiple speakers)

So, is this supposed to mean --

There is an actuarial reserve is 50 million. There is an increase in the reserve for other policy benefits of 12 million, so there is a net release of 38 million of reserves, of which 19 million comes to the shareholder account and then there is 19 million on the par. Then the 19 million on the shareholder account translates into 8 million after-tax.

Perfect. Then a question about Asia. On a U.S. dollar basis, the fourth quarter was down significantly from probably a pretty strong fourth quarter last year. But if I look at the expected profit on the in force, it has been fairly flat over the last several quarters, and I'm wondering what is contributing to that. I think that is page 23 of the sup.

Well, I think again, Tom, you're looking at, I believe, the 50 million that has been quite flat for three quarters. That is just the business result we have been having relatively flat in force earnings in the Hong Kong business over the last couple of quarters, which has led to that result that you're seeing there.

Wouldn't we expect to see this number go up based on a substantial amount of business you're putting on in some territories outside of Hong Kong?

Yes, you would. To what extent would exchange rate impact these numbers, Simon?

These numbers are in U.S. dollars. You get some impact to the extent that some of the territories don't do their business in U.S. dollars, but --

There is no question in '04 that the rate of growth in Hong Kong in particularly was softer and one or two other territories as well. So it is quite a fair comment to say that the growth quarter-over-quarter was not as fast as it has typically been, and we are working on addressing that.

Okay, thanks.

Just to follow-up on Mario Mendonca's question on the 401(k) withdrawals, the assets under management are really the driver of the withdrawal rate. The assets under management in the 401(k) business went up 29 percent in the 12 months in question here, and therefore, the flat withdrawal rate you would assume that the dollar amount of withdrawals would also go up 29 percent. In fact, they went up 27 percent, which means the withdrawal rate itself fell marginally during the period.

Timothy Lazaris, JMP Securities.

I was going to ask a question about reserves, but I think I will leave that one alone. If I could, I just want to talk about in your actual slides on page 11 you talk about I guess there is a sort of a forecaster adjusted ROE if you had done some certain things, and one of them being the inclusion of a $3 billion buyback. It looks to me like you can pretty aggressively increase the Company's ROE by doing this. I'm trying to understand, considering the surplus you have and considering that I think the consensus is that your stock is not grossly over-valued and not grossly under-valued, why is it that you're not buying your stock back more aggressively?

Well, I think we are buying it at a reasonable pace. As Peter said, we're doing this opportunistically. You know how we reserve that capital for the merger in the event of flowback, etc., etc., none of which transpired.

We take some comfort -- obviously we could engineer the higher ROE by just stepping into the market. But we like our approach of judiciously using -- how much have we bought back so far? About 10 million shares, about $100 million?

Yes, and you know the fact is that choice remains, but having capital gives us other choices we consider as well.

So that being said, the 3 billion is really just a number that you could put potentially do? It is not your intention to spend 3 billion?

No, that is not correct. We have an actual authority to do 3 billion, and the issue is pace and timeframe. But in point of fact a significant portion of that may well result in buybacks in a reasonable timeframe.

Okay, Peter, just last, because I'm not illegal expert, but in terms of the rules of a buyback, how much can you actually buy under the normal course issuer bid in any given month or any given quarter?

We can do a significant amount. It is a function of the number of shares we have issued. I think we can do you know $300 or $400 million. I don't recall. I have got a nice little chart on my desk. But it is quite a significant volume that we can trade in a given month.

You can do 400 million in a month you think?

Yes, something like that. In fact, if we wanted to, there are other forms to do larger amounts at a single point in time.

So you have choices. If you desire some dealing in the market, you heard a lot of discussion about this prior to the transaction when we had even more flexibility. But there are certainly a range of choices.

Jim Bantis, Credit Suisse First Boston.

Two questions, please. One with respect to reinsurance in VA product. To what extent is the Company using reinsurance with respect to the ramp up in new sales in the VA market in the U.S., and as well with respect to Japan?

Hartford had talked about on their conference call that they are negotiating with the regulators with respect to leveraging reinsurance in that marketplace for VA sales. And I have got a follow-up question as well.

I think the reference there might have been to using internal reinsurance to remove the risk from the Japanese regulatory regime. We have redesigned systematically our products to significantly reduce the risk embedded in them. If you will look at the design of the products over the last few years in essence the reinsurance, the risk has been dialed back, and therefore, we are very comfortable that our approach is an appropriate one.

The reinsurance we had for U.S. variable annuities I think ran out sometime this year, and it was concurrent with the introduction of these lower risk products. We have been delighted by the response in the marketplace to those products. We feel that the way we reserve for the risks now is very appropriate given the risk that is embedded in those products now. John?

Well, the guaranteed withdrawal benefit product is not reinsured at all, and that product in the fourth quarter accounted for roughly 77 percent of our sales. So while we continue to reinsure certain death benefits under the annuity block, and if you look at our historic block, there's a lot a reinsurance in place on the income benefit that we sold for a number of years, I believe in the 90 percent (inaudible) reinsured, about 85 percent of our overall death benefits are reinsured. But the new product that is the bulk of sales today does not involve reinsurance because as Dominic described the risk characteristics have been reduced very substantially in large measure by restricting the underlying investment options that are eligible to be used in those packs and by eliminating some of the optionality and by extending the guarantees for longer periods of time.

I take a lot of comfort I think and perhaps you should do, by the existence of that $600 million CTE reserve and the movement of that in relation to the amounts at risk. We test every reporting period the recoverability and what the probability and so on, and there is a chart in the (inaudible) that shows that we in all cases I believe -- it is our best modeling suggests that the reserves are going to prove to be redundant.

Thanks, Dominic. I just wanted to get a sense of the level of strain that is being captured in the earnings and the earnings quality in that respect.

The second question I wanted to ask was with respect to the Met Travelers deal. With respect to any implications it may have in the U.S. operations, obviously looking back at completing the Hancock transaction prior to this makes you feel comfortable with respect to your scale and brand. But are there any issues with respect to where you would becoming across them? Will this create anymore M&A activity in the sector in 2005?

Well, it's my personal view that there will be more M&A activity going forward. Again, the U.S. market is highly fragmented, and there is a number of participants who are under pressure to deliver earnings to their owners, and I think well capitalized, strong. That is the basis on which we are proceeding, and that is why we are so diligent getting our merger behind us as quickly as possible, because we believe there are going to be opportunities that the industry in the U.S. is going to restructure and consolidate some more.

In terms of operationally whether the Met Travelers combination will cause us -- cause us some difficulties -- I have certainly not heard any of that, but I would ask Jim and John to comment if they have any comments. Do you feel --

It might actually provide an opportunity to travelers life and annuities. Travelers had done a great deal of their life business through Citigroup and Smith Barney sources, and there might be some period of time in which they would be holding to keep those relationships, but going forward maybe they don't. We have been very active in the warehouses and through the private banking sources selling Manulife brand and life insurance selling Hancock. It might actually provide a better opportunity for us.

I expect the same thing on the Wealth Management side. There will be distribution opportunities once you delink in effect the proprietary Citigroup manufacturing plant from the group.

James Keating, RBC Capital Markets.

I wonder if I could ask a little bit about the progress on the U.S. insurance sales. Clearly it looks like you've got some of the worse behind you in terms of integration. Could you just update us specifically on what product launches occurred and how the reinsurance contracts -- just give a little color around how that has all progressed in the quarter?

Well, we're in the process of almost finalizing our withdrawal of all of the Hancock products. It will be done by the end of the first quarter of this year, and by the second quarter, all of our products will be sold on a Manulife-style CEF-oriented basis.

The reinsurance markets are a little tighter today than they were three or four years ago. So the rates in which we are negotiating our new treaties are not quite as attractive as they were before, but they are still attractive enough to complete. So we were in good shape for the balance of the year.

We also had quite a bit less strain on a per dollar basis in the fourth quarter than we had in the third. The number in the SIP is about the same as before, but that is due to the fact that we had 23 percent more sales in the fourth quarter versus the third quarter.

That stream is not lower because of new reinsurance contracts yet, or is that on --

It is a combination.

Okay. One other quick question if I may, just on the Japanese VA business, can we get a heads up as to when campaigns are on or off perhaps? I'm just curious about the volatility there, and if you could describe on the next launch in the UK --

Well, we're learning a bit about the savings patterns of the Japanese market ourselves. I gather there is some cyclicality in Japan because most institutions have a March year-end, and they pay bonuses twice a year. Therefore, you can expect some quarters to be more active than others.

As well the Bank of Mitsubishi Tokyo arrangements came into effect when they did, and the bank put enormous, enormous proportional efforts behind the launch, and that, too, may have given rise to -- there was some pent-up expectation and so on. We think that the two combined banks themselves will generate on a sustained basis a very attractive level of VA sales.

Dominic, one other quick question just on the Manulife-Sinochem. Can I get a heads up as to where we stand there in terms of -- I guess license is open. What about timing on the ground production?

Well, you know our licenses were expanded. I think the license in (inaudible) was expanded to allow us to sell group products as well. And I think we have got a new license as we mentioned for Ningbo. So we've got four operating units within China.

They have according to their WTO commitments thrown open apparently the country to facilitating the licensing of additional offices. But you know our approach is very much that we've got terrific opportunities. We want to get the existing offices up and running, and you know we don't want to necessarily paper the country. Our style has never been to go and plant flags, and then watch these things wave in the wind.

So we are beefing up the management in China. We have enormous hopes that we have fundamental belief that the Chinese market is going to be a very robust one in the years to come.

2004 it was a difficult year in China I guess for the insurance markets and the same for the insurance providers on a same-store basis if I can use that. I think that sales overall in places like Shanghai for the industry were not up. They were down. I think the number of -- not for Manulife. I'm talking about for the industry. I think the number of agents selling in some of these locations has sort of peaked, and there is more competition emerging.

But overall when you think of the expansion and the size of the market, we think there's going to be terrific, terrific growth there.

So, operator, we have time for one more question.

Brad Smith, Merrill Lynch.

Brad, we were waiting for you. It would not have been complete if we had not heard from you.

I appreciate that, Dominic, very much. Listen I just wanted to get a little bit more information about the integration charge in the quarter. And just curious, I don't recall I don't believe you booked an additional integration last quarter. What did it relate to, and where in the accounts is it booked in? You know is in the corporate, or has it been allocated out to the divisional results, etc.?

Brad, it is booked in corporate, and we have done it each quarter since the merger. I don't have the amounts at my fingertips. I think it was 34 million in the prior quarter and 68 this quarter.

But the earnings don't change in corporate as a result of booking it. There was something (multiple speakers) --

It was booked in corporate as an expense, and that is why I note the results after backing it out so that you have something that is as reported, as well as consistent excluding integration-related costs.

Perfect. Thank you. And the other question that I had was with respect to the share buyback. 5.7 I think was the shares that you said you bought back in the fourth quarter, but the average outstanding only goes down by about a million. Is there a lag effect there? Did you buy late in the quarter, or were there options or some other increase going on at the same time you were buying back?

I think Brad both things.

We, of course, had some option exercises related particularly to the Hancock side, and of course, the timing will affect the weighted average. So it's actually calculated.

So on a net basis, can you sort of give us some sense for where you're targeted buyback would be then going forward?

Well, I don't think that would be awfully healthy for me trading in the marketplace. But thank you for the opportunity. No, we said as much as we are prepared to on that point at this juncture.

Okay. Thank you everyone for your participation today. As you can tell by our report, we are very enthusiastic about our prospects, and we look forward to our future calls when we can tell you about all our progress. Thank you all very much.

Ladies and gentlemen, this does conclude the Manulife Financial fourth-quarter 2004 results conference call. The recording of this conference call will be available after 5:00 PM today by calling 416-695-6230. It will be available until the close of business on February 17, 2005. An archive of the webcast will be available on www.Manulife.com beginning after 5:00 PM Eastern time today. You will now disconnect the line. Thank you for your participation.