Manulife Financial Corp (MFC) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Manulife Financial Corporation's first quarter 2005 earnings conference call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session following the presentation. At that time if you have a question, please press star, one on your touch-tone phone. As a reminder, this conference call is being recorded, today, May 5, 2005. If you disagree with recording, please disconnect at this time. I would now like to turn the conference over to Mr. Craig Bromley, Senior Vice President Business Development and Investor Relations. Please go ahead, Mr. Bromley.

Thank you, operator, and good afternoon. I would like to welcome everyone to Manulife Financial's earnings conference call to discuss our first quarter 2005 financial and operating results. If anyone has not yet received our earning 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 would 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 US Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward looking statements involve risk and uncertainties and actual results may differ materially from those implied 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 40-F, John Hancock's most recent annual report on form 10-k and John Hancock's quarterly report on form 10-q. Each (Audio Difficulties). Investors are cautioned not to place undo 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 very much, Craig. And Good afternoon, ladies and gentlemen. Thank you for joining us on this call. It's been an exciting and interesting quarter. Earlier this morning we reported net income for the quarter of $801 million, $0.99 per share. Excluding integration costs EPS was $1.04. Churn on equity was very strong at 14.1%, an increase of 110 basis points in the quarter. We were generally please with the performance of each of our operating divisions. Performance was particularly strong across all the business units in Canada. It was strong, as well, in our variable annuity, pension, and mutual fund businesses in the United States and in Japan and in reinsurance and in most of Asia. In our U.S. protection business, sales of life insurance were soft in the quarter as conditions were very competitive.

In response, we refreshed our UL product and it appears to be finding favor in the market place. Sales are increasing on a month over month basis as a result of this new product introduction. Long-term care sales in the U.S. were very good in the group line and somewhat better than last quarter on the retail side. This unit has made a number of operational improvements in its claims management and other areas and we expect a higher level of earnings going forward. Some of the other notable events of the quarter were the very significant progress that we've made on the integration of John Hancock and Manulife. Increasingly, we are operating as one company and the distinction of Hancock as opposed to Manulife business is becoming less relevant. We are well on our way to deliver the synergies of $325 million U.S. that we had spoken about at our last meeting and we expect to complete the integration by the end of this year.

We were challenged during the quarter by the, of course, the tragic events in Indonesia where the tsunami caused the death of 15 Manulifers and destroyed our branch in Banda Ancha. Our response was fulsome. I'm very, very proud of how our people, led by John Harrison, our general meeting in Indonesia, responded. And we were back in business very quickly servicing our policyholder needs as soon as possible. In Canada we were, of course, faced with the poor disastrous management situation, which I believe has been properly dealt with. An offer has been mailed to the Portus investors who acquired their interest as a result of the Manulife referral and I expect that our offer will find favor with the overwhelming majority of the Portus investors. Finally, we did complete a $350 million perpetual preferred share issue at the very advantageous rate of 4.65%.

We are optimistic about our future and reflecting that, our board approved an increase in our dividend to $0.30 per common share from the previous level of $0.26 per share. Now I would like to ask Peter to take us through the numbers in more detail and following that we'll have our usual question and answers. Peter?

Thank you, Dominic. As indicated through the first quarter of '05, Manulife's shareholder earnings were $801 million, a solid increase over the strong results reported in the fourth quarter. Including the impact of integration cost, shareholders earnings reached $836 million or $1.04 a share. Factors contributing to the earning growth included revenue synergies, reduced operating costs, continued favorable credit and operating results. These were partially offset by the weaker U.S. equity market, somewhat lower investment gains versus the prior quarter. A slight note that our first quarter has been somewhat unusual in that there are a number of one-time items included in our financial results. I would like to take a brief moment to highlight the most significant of these and clarify the resulting impact on earnings.

The first item is an after tax impact of integration expenses, which reduced net income by $35 million in the first quarter. Our integration spend remains on plan. The second item relates to Portus, our decision to guarantee the investment made by our clients in Portus has been well documented in the press. We've set aside $60 million for this exposure and it reflected the after tax cost of $40 million in our first quarter results. This provision is an estimate of our expected cost, but will be subject to adjustment as this matter is definitively resolved. When we first entered into the agreement to acquire the Daihyaku block of policies in Japan, we negotiated the right to certain assets withheld by the administrator of the estate for potential pension liabilities and other obligations. Receipt of these assets was made upon -- was to be made upon -- contingent upon satisfactory resolution of these third party claims. These contingency have now been settled and following approval by Japan's Policy Protection Corporation, in Q1 we received the cash payment in the amount of $89 million.

This $57 million post tax receipt has been reflected in this quarter's results. The last item I would like to bring to your attention relates to a deferred tax asset within our Japan division. Due to the persist improved profitability of the division and the receipt of the liquidator claim proceeds, we are now more certain that a portion of this asset will be of value. As such, we are required to reflect this in our results and the net $20 million recorded in earnings this quarter reflects this increase in the value of their net tax asset. The net impact of these four items on consolidated earnings was an increase of $2 million in this quarter as a result. The first three of these items noted were recorded in the corporate segment as they are not directly related to the operational performance of the divisions and the Japan tax item is reflected in the Japan division results. On slide10 you will see that return on equity for the first quarter of '05 was 14.1%. We have made strong gains over a very short period.

Since our first full quarter of combined operations, our ROE has increased by 210 basis points, rising from 12.0% in the third quarter of '04 to 14.1% this quarter. Furthermore, the performance of the combined company remains well ahead of original expectations. As you may recall, when we announced the John Hancock transaction we projected an ROE of 12.7% for '04 and 13.2% for '05, based on the then prevailing consensus, EPS values and expected share buybacks of $3 billion. Despite the actual level of buybacks being well below initial expectations, this quarter we have already exceeded the 2005 ROE projection. Had we completed the full amount of the anticipated buybacks, our ROE would have been at 15.4% for the quarter. As you will see in slide 11, we continue to make progress on realigning our investment portfolio and again reduced our exposure to bonds rated BBB and below.

Low investment grade bonds, BB and below, would have been further reduced were it not for the downgrade of the Republic of Philippines local currency bond exposures that shifted 205 million of investment grade bonds into the below investment grade category. Our local currency operations are currency matched and so Philippine sovereign bonds are the finest credit available to them locally. Currency movements also contributed to the decline in asset values over a period. As well, there has been increased scrutiny recently concerning the auto industry and I'd like to make a comment on that. First let me reassure you that our exposure to this sector is modest and well secured. To begin with our total exposure to the auto sector is well below industry benchmarks. Auto sector fixed income securities account for 1% of our total bond portfolio, whereas the benchmark weights are roughly 5%. In addition, the majority of our bond portfolio in this sector is either secured or advanced to finance or car leasing subsidiaries, with only $19 million representing unsecured exposure to the currently less in favor key of leading auto manufacturers, GM an Ford.

Slide 12 indicates that in the first quarter of '05 the U.S. protection division recorded earnings of $110 million. On a year-over-year basis this represent a more than doubling of earnings, but is a decline of 10% from the strong results reported in the fourth quarter. Within the individual insurance segment U.S. dollar earnings for the quarter were $84 million. This result is down from the previous quarter and somewhat below our expectations for the segment. A number of factors contributed to the quarter over quarter decline, with the most significant being weaker U.S. equity markets. In addition, first quarter investment results, while favorable, were well below the outstanding results achieved in the fourth quarter.

Within the long-term care segment, first quarter earnings were up sharply from the fourth quarter to $26 million. Contributing to the strong earnings was an improved review process to identify lapsed policies. It is estimated that roughly 9 million of this quarter's earnings are one time in nature. However, on going benefits are expected to emerge from this new process and from other long-term care initiatives. The individual insurance segment reported first quarter sales of $104 million U.S., below the strong sales recorded in the fourth quarter. In part, these results reflect normal seasonality of life sales. Looking back over the last three years of combined results, we have experienced similar declines in the first quarter, but the more important long-term trend has remained solidly positive.

In the first quarter of '05, the business implemented the last of the significant changes to the product lineup, including a streamlining of the product portfolio, the implementation of a new illustration system and the establishment of a common set of underwriting guidelines. We believe these changes will shortly have a beneficial impact on results. In fact, in January, we have seen -- since January we have seen a consistent improvement in sales each month. Within long-term care sales were up 16% over the previous quarter to $29 million. We have a number of significant new initiatives under way in that unit that should result in continued growth. The U.S. wealth management division delivered record earnings of $111 million. Slide 14 shows that earnings increased of 18% quarter over quarter and by 131% over a year ago. Making a significant contribution to the earnings growth was the variable annuity line, where higher asset values drove increased fee income.

Offsetting this growth slightly were the U.S. markets, which were weaker. Continued strength in U.S. wealth management sales drove premiums and deposits up to $5.4 billion. This represents an increase of 5% over the fourth quarter and a gain of 50% over a year ago. It also was a record for the division. Sales of variable annuity products remain strong driven by the Company's enhanced distribution platform. John Hancock Financial Network and Essex both contributed to the strong year-over-year increase in sales. While group pension sales were relatively flat compared to a year earlier, retention remains strong and net sales increased substantially over the fourth quarter. The mutual fund segment also had a strong quarter with the highly successful classic value in U.S. global leader growth funds contributing to the drive in strong sales growth. Sales of open-ended mutual funds increased by 48% over the first quarter of '04.

In addition to strong sales, good retention contributed to the strong net sales experienced by the division. On a U.S. dollar basis, net sales were 1.3 billion in group pension, 713 million within the segregated funds and 185 million in mutual funds. Within the annuities line, general fund net sales were negative $236 million, reflecting restraint on fixed annuity sales due to the challenging spread environment. Lower investment results as compared to the strong fourth quarter had a negative impact on our GSFP earnings. On a U.S. dollar basis, first quarter earnings were $56 million. As we indicated last quarter, this unit now reports to our wealth management operations, but will continue to provide segmented information.

During the quarter, benefits and withdrawals amounted to $1.9 billion and funds under management continue to decline, reflecting scheduled maturities and benefit payments as well as our decision to constrain new sales volumes due to the tight spread market environment. On slide 17 you can see that the Canadian division posted record results in the first quarter, with total shareholders earnings of $184 million. The division's solid growth of in force business and good expense contributed to this result. Individual insurance results were down slightly from the previous quarter, primarily due to seasonality. They also had a poor claims experience quarter and somewhat lower investment gains. Within the individual wealth management segment solid business growth helped drive first quarter earnings up to $60 million, representing a 13% gain over the fourth quarter. Earnings in a group business increased by 23% over the previous quarter, as a result of good claims experience, strong expense management and increased margins.

Individual life sales remained strong with new annualized premiums at $59 million. This was a modest decrease from the fourth quarter, but an increase of almost 60% over the previous year and represents good organic growth as well as the addition of Maritime Life and an improved position in the MGA distribution channel. Group benefits reported sales of 82 million up 74% over the fourth quarter, but down from the exceptional fourth quarter a year ago when they had some very, very large corporate cases sold. Sales were strong in wealth management with particularly solid gains coming from mutual fund segments which rose by 57% over a year ago. On slide 19 you will observe that the Asian earnings of U.S. $67 million was reported in the first quarter. It's roughly flat with a quarter ago and a 20% increase over the prior year. In Hong Kong earnings declined moderately as insurance sales remained somewhat sluggish. Other Asian territories had solid first quarter results up 78% over a year ago and 60% versus the prior quarter.

Sales results continue to be impacted by the shift in consumer preferences in Asia away from longer term protection product to shorter term investment and wealth management products, particularly in Hong Kong. Both Hong Kong and other Asia reported quite strong gains in wealth management sales. Hong Kong, success there was driven by strong performance in the China Value and emerging eastern European funds, as well as the successful launch of several new fund initiatives. In other Asia territories, wealth management sales remain very strong, up 6% against an exceptionally strong fourth quarter. The growth was due to success, among other things, in the banking distribution channel, generally improved markets and product competitiveness. Our Japan division had an exceptional first quarter, reporting earnings of $77 million, 20 million of which relates to the recognition of net tax assets that I just described and that is one-time in nature.

Otherwise, this quarter's earnings reflect solid growth of in force business, continued expense gains and strong investment results, somewhat offset by lower claims gains in the quarter. First quarter variable annuity sales of $1 billion were virtually equal with the record results in the third quarter of '04. New distribution agreements with UFJ contributed to sales for the first time, accounting for 12% of our variable annuity sales. This represents a good start and we feel the relationship has significant potential. The cyclicality evident in variable annuity sales results is driven by mid year and year-end sales initiatives, a trend we expect to see continue. Other initiatives under way in Japan included the launch of ManuPrime, a VA product designed for the agency force and new distribution agreements. Insurance sales, while flat in the quarter, are expected to benefit from a larger agency force as well as improved agency productivity initiatives. The reinsurance division reported the first quarter earnings of $36 million on U.S.A. dollar basis. The seasonality of the property business, poor claims experience and weaker equity markets contributed to the quarter over quarter decline. Sales remain strong in the first quarter.

On slide 24, we depict our source of earnings table. Core in force margins continued to grow with the $7 million reduction versus the fourth quarter and expected in force profit caused by normal seasonality. The $95 million loss from new business continues to reflect our conservative profit recognition policy on new business. Experience gains remain strong at $181 million, with a reduction from the fourth quarter caused by lower levels of claims and investment gains, the latter driven by the poor U.S. equity markets in the first quarter. The net $61 million pretax reduction from management actions and basis changes, is driven by the Portus accrual for $60 million pretax. Other items, which include integration expenses, the impact of improved processes and long-term care, and accounting evaluation changes are largely offsetting. The reduced gain from segregated fund guarantees of $27 million, reflects the weaker equity market of the first quarter.

Under our current methodology, which converges the reserve toward the CTE 70 level using the four quarter average approach, segregated fund guarantee reserves before basis changes were essentially flat. Despite this and with the net amount at risk remaining unchanged, the company-wide CTE level fell from CTE 76 to CTE 70. While a useful metric, current net amount at risk is not a perfect proxy for expected reserve movements. And when markets move materially differently in different territories, as they did this quarter, offsetting changes in net amount at risk do not necessarily produce equally offsetting changes to the level of reserves needed to maintain a constant CTE level. In this instance, despite the fact that net amount at risk impacts were offsetting, the impact of poor equity markets in the U.S. had a more significant negative impact on reserves than the positive equity markets had in Canada. The reduced level of earnings on surplus of $255 million reflects the non recurrence of special gains in the fourth quarter. And finally the 89 million of others, the receipt of the liquidator proceeds I previously described.

On slide 25 you will see the U.S. GAAP results for the period on a U.S. GAAP basis. Net income for the first quarter was $973 million, 172 million above the reported results on CGAAP basis. The higher income is attributable to the impact of realized gains. Under U.S. GAAP these gains are taken directly into income versus CGAAP for the -- or amortized or largely offset by a change in liabilities. Excluding this realized gain impact, net income levels were quite comparable on the two basis. In the first quarter we issued $350 million of attractively priced perpetual preferred shares. We've also remained quite active in the market. In the first quarter we purchased 6.7 million shares valued at $382 million. In April we also repurchased another 2.5 million shares for $141 million.

The current share repurchase program has remaining capacity of about $2 billion, leaving considerable room for additional share buyback. I would also note that despite the increase buyback activity, we continue to have more than $3 billion in excess capital. In conclusion, integration is progressing in a very satisfactory manner and we are on track for year-end completion. As expected, life insurance sales were down against a very strong fourth quarter. We are particularly pleased with the exceptional wealth management sales which outpaced the prior quarter by a significant margin. We are having good success in leveraging John Hancock's distribution platform in the United States and Canada and our bank of assurance relationships in Japan and Asia. Finally, Manulife reported an ROE of 14.1% in the first quarter, a substantial improvement over the previous quarter and a reflection of the success of our integration efforts and our operations and good business progress. Thank you very much. I'll turn that back over to you, Dominic,

Well, thank you, Peter, for that whirlwind tour. Operator, we're ready for the question and answer portion of our conference.

Thank you. [OPERATOR INSTRUCTIONS] Thank you. Our first question comes in from John Reucassel with BMO Nesbitt Burns. Please go ahead.

Thank you. Just, Peter, could you just tell us where on this cost savings continuum we are on a run-rate basis at the end of the quarter? Are we 60% done, 65% done? Where are we exactly?

We're better than two-thirds. And we would expect that that would wrap up fairly quickly.

Okay. Just trying to understand on slide number 11 of the package, the decline in BBB-rated bonds and below, if that was actually in U.S. dollars, how much would you have sold of those bonds in the quarter?

The quarter didn't have any fx consequence versus Q4, so the change would be due to ratings, repayments or net sales.

Okay. Okay. And just, Peter, on the reinsurance -- sorry, on the strain, I guess, on sales you mentioned here about less favorable reinsurance in the U.S. protection. I'm just trying to figure out, are you finding less attractive reinsurance out there? Is that why strains flat but sales -- even though sales are down and is that a North American phenomena? Is that something we should be -- happening for the foreseeable future? And then, I guess, Dominic, any views on why the U.S. protection business is coming in below expectations? I know we talked about equity markets, but is there anything else that Manulife should be doing?

Well, let me first comment that the reinsurance costs have risen. We are not surprised by that. We have been seeing that for a period of quarters as something that was developing. And we have responded with product design and, in some cases, pricing changes. Jim, you may want to add some additional detail on the rest of the question.

Well, we have raised prices and we did a number of things that began in the first quarter of this year, including rebranding all of the Manulife products, too, John Hancock. We introduced the new illustration system. We have a single underwriting protocol. We did a bunch of things that we knew would probably not have as robust sales as we would have liked. But it was the things that we have to do. The reinsurance market is causing some issues, not only for us, but I think for the entire industry and prices are not going to come down in certain products as a result of that. But I don't there's anything substantive that is wrong in sales or in our levels of profitability.

Thank you.

Thank you. Our next question comes in from Eric Berg with Lehman Brothers. Please go ahead.

Thank you very much, good afternoon. Thanks, Peter for that whirlwind tour. I have two questions, one regarding the U.S. and the other regarding Hong Kong. I'm hoping you can -- maybe Peter can elaborate on sort of what is going on in the long-term care area. You mentioned that there was a either a change in policy or a review that produced some nonrecurring earnings. What exactly is going on there?

They have changed their process so that they become aware of active cases that are no longer active more quickly than was previously the instance.

Active cases that are no longer active?

Jim, you want to elaborate?

Sure. Eric, we have adopted a new claims management procedure that is just much, much tighter than what might have been in place or was in place before. We've put it into affect in the fourth quarter of last year and the good news is it's resulting in increased earnings in the first quarter of '05. We also went back and we looked at people who might have died and therefore not paid their premiums and we've picked that up six months late and we went back and we cleaned all of that up. It resulted in about a $9 million increase in earnings for the, as Peter mentioned in his opening comments, for the quarter. So, for 26 million after tax of earnings, 9 million associated with essentially a one-time pickup or about a $17 million run-rate. And we think that that's up from where we were at the end of the fourth quarter, which was 12 million and we think the business is much tighter managed from a claim standpoint than we had before.

That's helpful. My second and final question relates to Hong Kong. Peter, you indicated in your comments, I think, consistent with what Victor Apps has been saying, that the Hong Kong market and the Asia market in general is moving more towards shorter duration contracts, away from insurance and a greater preference by the public on wealth management products, if I understand you correctly. Yet, wealth management sales were down in the Hong Kong market. Any thoughts on what might be driving that?

Well, we have Victor with us here and maybe we'll ask him to comment. My impressions seem to be that actually wealth management sales were up year-over-year.

I think he is actually looking -- he's looking specifically to compare with the first quarter of 2004, they are. But there was somewhat of a special event in the first quarter of 2004 where we -- where we were -- a product was withdrawn and there was quite a high degree of sales at that time when we changed the structure of our worth from the sales. So the first quarter of 2004 both management sales were anomaly. In fact we're very pleased indeed with the sales of both management in the first quarter of 2005. We launched a new product called MISO, the Manulife Investment Solutions and it has gone very well. That means selling very nicely. But you are right, Eric, when you say that the first quarter -- the insurance sales are disappointing in the first quarter. First quarter's always low because of the way our agency systems work, we tend to get a bump up in the last quarter because everyone's trying to meet their quotas. So the first quarter is always low. But, nevertheless, it is still a bit lower than we would have liked. And then we've -- but we are pleased with the wealth management result which is sort of counteracts that to a degree.

Thank you.

Thank you. Our next question comes in from Steve Cawley with TD Newcrest. Please go ahead.

Hi, there. I know the other Asian divisions are susceptible to a periodic purging of nonperforming agents. There was a pretty big falloff in this quarter, I think it was about 2,000 agents less than other Asia. Can you talk about that a little bit?

Well, we'll turn that over to the experts on Asian agency here. Vic, can you explain to Steve the movement in the reported number of agents?

Yes, I can. There was a number of factors at play. If you look at the numbers last year, the number of agents bumped up quite a bit in the second quarter. That was the influx of a lot of the John Hancock agents. What happened during the year, what we did, basically, when we took those agents on, they were all given a certain amount of time to meet Manulife standards. And the results was that we did -- the one factor was we did clear a number of those agents out at the end of the year because they didn't meet our standards. In particular in places like Philippines and Indonesia in particular. That was one factor. There is always another factor.

The year-end in general is when we do do our -- clear out the Asians who have failed to meet quota for the year. One top of that there are two other factors at play. One is that we are -- our recruiting is a little bit disappointing. We haven't been getting quite the recruiting numbers we'd liked in the first quarter. That's also an impact. And the biggest thing that impacted, of all of that number, is in Vietnam where we have been going through a repositioning of our business there involving trying to improve the proficiency of the business, trying to improve the agent productivity and quality. In that process we are definitely reducing the size of the agency, hopefully improving the quality a lot.

Is the recruiting any tougher China?

It isn't easy. It is a very -- in the major markets like, in particular in Shanghai, Beijing, Onto(ph), which is where our three oppressions are start of the year, all of those markets, the total number of agents has been declining over the last two years and it is getting quite difficult to get good agents. There is also a pretty wild west environment in terms of a lot of companies throwing a lot of money at these markets and very aggressively recruiting and even trying to steal agents from each other. It is not an easy market. And it is a -- and our policy is to try and just to do it right and not get too excited about not getting sudden and fast dramatic growth, but we are trying to do it sure and steady.

So let's say in your budgeting process, is this something that you would have factored in? It looks like it is a market with tremendous potential. But tapping into it may be not as easy as say sitting in Toronto makes you think it might be. But for yourself, is it -- is that going to be, let's say, one of the bigger hurdles to get the kind of growth that maybe you can really generate from there? I'm talking China specifically.

There is still lots happening. We got a very rapid expansion program under way. We opened a new branch Ningbo just a few weeks ago. We have got one coming up and we are going to open a branch and two more in Guangdong Province, Foshan and Donquan(ph). We have got applications for three other cities over the next period. We have got approval now to enter the group life and health market. So we've got a lot of things to come. But I just want to be -- but I think we are not trying to give the impression that this is going to have a dramatic impact on the bottom-line of Manulife for a while. I think we will start to get the top-line growth, particularly in 2006 from a lot of of the things we are doing in 2005. But it will be quite awhile before it has an impact on the bottom-line of the company.

Okay. Maybe one other geography --

Steve, just on that last point. One of the things that I would emphasize, completing some of Vic's comments, is the fact that when one looks at in force business, notwithstanding the competitiveness that we have talked to, our market shares in each of those of those locations where we do business is actually going up. Which under scores the fact that the business that the business that we put on the books following our approach is much more persistent than a quick start that might be obtained in selling sub standard business. You end up with huge sales volumes, but then you look a year or two or three later, you find that sale -- the in force block is in fact contracted very significantly. Those are not statements that we make because we have done the calculations. There are statistics that the industry out in each of those areas in China. And I was very pleased to note that we're more than holding our own. So I think that that ought to be mentioned.

Okay. One last one. On Japan, the VA sales, and listening to the Hartford call, they were referring to -- they also had a very good sales period in Japan, but they were talking a lot about competition and how it was increasing. And they also mentioned that they were anticipating ROE's in the VA business of only 13-15%, which seemed low to me. I hadn't call them to confirm that, but it just seemed awfully low. Can you talk about competition on the VA side? I know you've got -- .

Well, I will invite my colleagues here to pipe in after I'm finished. But as I understand it, of course, Hartford is the market leader and has been in the VA business in Japan for a period of time ahead of us. And their sales last quarter I think exceeded $3 billion. And I'm not quite sure how big their book is, but it would be a lot bigger than ours. Ours is -- just started awhile ago and it is about CAN$4 billion today. One would expect logically, given that as the books of the scale involved in this business and so on, as your book gets bigger your ROE would go up. Now it depends what risks and how the -- what type of funds they are selling and what volatility there is in those funds and what reserves they feel they need. The reserving practices are different between the United States and Canada. So I can't answer your question as to is 13% ROE that they're telling you a reasonable figure or not.

What's reasonable for Manulife, Dominic?

Well, we're aiming to earn our 16% around the world. In all of our savings businesses we do quite a bit better than that as the size of these businesses increases. You know the wealth management business is returns of 30, 40, up to 50% in some cases are not unheard of. Just look at what our Canadian banks are able to earn on their wealth management businesses.

Okay, thanks.

Thank you. Next question comes in from Mario Mendonca with Genuity. Please go ahead.

Good afternoon, everyone. I wanted to just circle back to the U.S. individual life business. It is obviously a pretty important division. Reinsurance and the more costly reinsurance, that's something that, and correct me if I'm wrong here, it is not something that you price every quarter. If the reinsurance is more costly and you enter into a reinsurance agreement, it is going to stay more costly for some time. First, is that an appropriate characterization?

I'll ask others to, again, amplify the answer, but the reinsurance agreements that you enter into cover a period of time and they cover a block of business as it is originated so you might have had very favorable reinsurance terms that covered all of your business up to a certain date. And then thereafter you have new reinsurance rates that come into affect and you have to reflect those in your pricing. I don't know, is that a --.

That's exactly right.

I'm getting a nod here from our reinsurance expert, Steve Mannik, at the end of the table.

So the challenges -- not the challenges, but the, say, softer earnings growth, at least softer than I was expecting earnings in the U.S. individual life business, that doesn't change right away, does it?

No. Do you have anything you would like to add to this?

No, I think the softer earnings growth in the first quarter was largely driven by the equity markets because there is a fairly big variable universal life block there. It was not driven by the reinsurance terms on the new business.

In the press release, that was sort of the impression I got. That seems to be the explanation on the press release. So, Simon, you would suggest it is something else entirely some.

Yes, it's not the reinsurance.

The substantial item would be the equity market impact on the returns. No, I'm sorry if I misled you, the reinsurance would affect prospective business, not the past. Sorry about that.

It's just in the press release it actually indicates that more costly reinsurance as an explanation for why earnings were a little softer.

It could have added to the strain on the business written in the period. Because you wouldn't have as much future profit in that business if you aren't able to pass on 100%.

It is not untrue, but it is not a huge item.

Maybe I'll just ask sort of generally, Dominic, how do you feel about the U.S. individual life business? There is so much going on there from a regulatory perspective.

I know there is a lot going on. There is a whole issue, the debate around the triple-x business and then there is also the concern around the permanent elimination of the the inheritance taxes. There is a lot of noise around the business and our people are looking at -- we've got an important franchise there with the merger with John Hancock. Of course we sell now a much larger, a broader array of product responding to more market segments. We continue to focus on the basics of having very competitive product, expanding our distribution, expanding our reach, growing John Hancock financial network. I guess that me personally, I mean the reason I highlighted the U.S. insurance sales in my opening remarks is that overall in the companies, it is the area where we're watching the most closely and that the performance needs to be improved. It is a big, big market. It is not about to go away. I'm very, very confident that we have the wit and the resources to keep our share and grow our share of that market.

You would agree that maybe in the near term that's a tough one.

Well, I wouldn't be so quick. Lulls in sales we have had often. I mean, so many times over the last number of years where quarter to quarter swings are quite dramatic. As Peter said in his remarks, the sales sequentially for the last number of months have been increasing and my understanding is they have increased very sharply in the month of April.

Right. Well the sales are up throughout the first four months of this year, each month doing better than it did against the prior period. fourth quarter is always the number one sales quarter for virtually any company. And the first quarter is usually quite a bit lighter. Looking sequentially quarter over quarter is a little misleading. We've achieved incredible sales growth, we would have combined the two companies going back to 2002 and looked at '03 and '04. We were up about 25% which is far greater than the industry. So when we have put all these new products out and new protocols and rebrand over 50% of the products to Hancock from Manulife and just the confusion, albeit, short lived. In the market place it takes a little time to get attraction on these new products. So I don't think we have any reason to be in doubt over the future of this business.

Yes, so, I guess, Mario, stay tuned.

Okay.

We wouldn't want to you make any permanent conclusions based on one quarter's observation.

No, certainly worth while being patient. Just one thing, any sales of either GM or Ford paper in the quarter?

Donald, did the -- ?

Yes, we did sell some and we had at least some maturities and amortization. Just to echo what Peter said, our total exposure for GM and Ford is 450 million. Of that 270 million is to the Captive Finance companies and the Hertz Rent-a-car subsidiary of Ford. Remind you that the Captive Finance companies trade a hundred basis points narrower than the car companies themselves. So that would be equivalent to one rating step up. We have 113 million of secured loans secured by plant and equipment, so I don't worry about that. Leaving 19 million of unsecured debt to the two car companies.

Don, what was it before at the beginning of the quarter, that 450?

It was about 550.

So immaterial.

Yes. Mario, we've had a very conservative view on car companies for the last year which leaves us in that position. If we had -- the Lehman weight, benchmark weight we would have something in the order of $2.5 billion worth of exposure to the car companies.

Just wanted to make sure it was not something like 1 billion down to 450. Thank you.

Thank you, Mario.

Thank you. Our next question is from Michael Goldberg from Desjardins Securities. Please go ahead.

Let me guess your subject, Michael.

We'll get to that in a minute. I was just a little bit -- segregated funds.

We missed you, you broke up. Can you start your question over again, Mike, please.

I was just a little bit confused about Peter's comments on segregated funds guarantees in his quick comments. Were they actually strengthened during the quarter or what?

We can ask Simon to help with you that.

In the Zip package on page 39 you can see that our segregated fund reserves increased from 600 million to 621 million. The increase was -- the 20 million increase was part of the evaluation basis change number. Apart from that, the reserves were essentially flat which was why Peter was referring to the reserves being flat. But the absolute number did increase 21 million, but it was a non-operational increase.

So that 21 million wouldn't have gone through earnings?

Yes, no, everything goes through earnings. There is no distinction in Canadian GAAP. It just wasn't driven by market performance in the quarter.

Okay, and as a result of the market performance, I think Peter had said that on a global basis it had dropped from 76% to 70%, is that correct?

It is.

Now I guess I will turn to the question you would have expected. Give us some feel for the trend in VNB in the quarter and whether it would have been in protection, wealth and are there any plans to start reporting this more frequently than once a year?

Well, just as a general comment, Michael, we're just overwhelmed with the amount of detail that we have to compile as a result of doing U.S. GAAP. We want you to be sympathetic to the burden that we're subjected to a little bit because of the unusual event of having to prepare two sets of accounts and because of the merger and because of our ongoing requirement to file 10 q's and 10 k's and so I've been reluctant as a general rule to add to that burden of what I think are already over stretched resources. Now we're constantly looking at how we can improve the transparency and understandability of our numbers. We'll assess that question if there is a huge demand for something. We may give a source of earnings on a more frequent basis than once a year.

I'd echo that and comment that because the infrastructure for the Hancock portion of the business for new business embedded value has not been long established, it's a more manual process to do it and that's why the annual public disclosure is what we're comfortable with right now. We do track it, but not with the absolute same degree of rigor as our published other disclosures. And Simon can give you a little bit of color commentary, but we're not likely in the next few quarters to be going to a quarterly basis because of that consideration.

Yes, Michael just to give you sort of a non quantitative comment, you had seen a very strong new business and better value last year, which was based on some very strong sequential growth. And in the first quarter this year we are seeing continuation of strong new business and better value numbers consistent with the fourth quarter last year. But there has clearly been a shift in that towards the wealth management businesses from the protection side because of the relatively stronger wealth management sales in the first quarter.

Okay. Thanks very much. That's helpful.

Thank you. Our next question comes in from Jim Bantis from Credit Suisse First Boston. Please go ahead.

Hi, Good afternoon. A couple of quick questions. One with respect to the expenses. Peter, you had indicated you are roughly two-thirds through the integration and I know it is reasonable to expect some sort of lag with respect to the decline in operating expenses, but when would be a reasonable time period to see some sort of downward shift with respect to the aggregate expenses?

Well, I think, to a certain extent, it is already starting to happen. This quarter's expenses includes the Portus charge. So one should look at the results adjusted for that. That's not a normal operating cost to the company. And we're pretty comfortable that hitting our full objective by year-end would mean that we would be grading in in terms of enjoying the advantage quarter by quarter. And the progress is faster than was initially contemplated and we are very happy with it.

Thank you. And next question, just going back to the reinsurance rates back in the U.S., and specifically I just want to understand, is it a mortality issue that is driving rates up, or is it a capacity issue? Should we be perhaps factoring weaker mortality experience going forward?

No, I don't think it is -- I think it is an absolute return required by the reinsurers. As you know they have been buffeted by a few and they have shareholders too and they need a return on capital. I think that's the major driver. Reinsurance rates and mortality life reinsurance rates in the market had been driven so low. You might recall that when we demutualized -- I mean, we are in the business of taking life risk ourselves, but we made the decision to go forward and actually buy reinsurance because people were selling it in the market place at what we thought was less than we could manufacture that cover for ourselves. They were selling it for less for a whole host of reasons.

It might be because they had tax advantages or capital advantages or other return on equity expectations were lower or they had huge other sources of income. Who knows? But all of that has shifted and so now you have a phenomena where these reinsurers for their own reasons are saying, I'm not prepared to take those risks for an 8% return or whatever it is. I need more. They are doing the same thing, it is the market place at work.

Great, thanks very much, Dominic.

Thank you, our next question comes in from Tom MacKinnon with Scotia Capital Markets. Please go ahead.

Thank you very much. Good afternoon, everyone. Question about the -- I guess the spreads are getting on the fixed annuity business in the GNSFP business. You've got 15 billion in fixed annuity assets and 28 billion in GNSFP Just if you a -- if you can share us with if you have calculated it the in force spreads on these businesses and what they need to be in order to hit your target at 16% ROE? I've got a follow-up question as well.

That's a great question. Does anybody have that handy?

Yes, probably double where they are right now.

The spreads need to be double. No, but the question that's being asked is on or in force, what ROE are we earning now? We must have that somewhere. We could get back to you. Does Simon have something handy?

I could just offer a comment on the GNSFP business which -- because that's mostly a matched spread book. So there really is not a sensitivity to sort of reinvestment or risk on that book. It is really a matched book with sort of a locked in spread based on the current matching position. It's the fixed annuity book which would be more spread sensitive to the on going market.

What's GNSFP locked in at now and does it hit the targeted ROE?

Well, we'll have to get back to you, I'm sorry, Tom. We're not trying to avoid your question. We just simply don't have that answer at hand.

Would it be safe to say they are not hitting the target ROE?

No, I wouldn't say that.

No, it would be double-digits.

The reason for that, Tom, is that when we acquired this business, remember, we fair valued it. I think they are making an acceptable return. What we look at very closely, of course, is at the margin, any new business that we might want to put on our books. What can we earn on it in terms of return on capital and that's why there has been such a paucity of issuance or at least business volumes for us because we just haven't been happy with the profitability achievable on that business. And you can't put it on your books for just six months or a year or two. This is long-lived business. If you made a decision that you wanted to live with a 10 or 9 or 8%, 6%, whatever the return is, you'd be really locking in your capital to support that business for quite some period of time. We just don't want to do that. We think maybe it that's the only choice we have for our capital we would rather buy our shares back.

Understood. So if you can get back to me with that. The second is about -- were there any COLI sales at all in this quarter or in any kind of previous quarters? Just trying to get the impact. It does talk about a decline in COLI business, but I don't know in U.S. protection and individual insurance if there are any COLI sales there?

COLI sales, Tom, have been down I think for the entire industry. We certainly have not been pushing COLI business. We are backed out of the BOLI business entirely. We are not going to put any of our general account assets behind the new BOLI sales, currently, at least in the current rate environment. COLI sales have never been huge on the Manulife side and while they have been large through M at Hancock, those have been down substantially in the -- through the year 2004. And we have virtually no COLI sales in the first quarter of 2005. The legislation that was passed in late 2004, in some people's mind, thought that that would clarify deferred compensation elections et all, and would actually be a boon to COLI sales, but that has not taken hold yet.

And I guess none of the investor owned life insurance lilacs or whatever they want to call them, you are not selling any of those?

As it relates to that, that's different type of issue. Investor owned life insurance, stranger-owned life insurance, we are not involved in any of that at all. There is another type of insurance called nonrecourse premium finance insurance, which is a little bit different. It is a form of often times life settlement. or immediate biadication(ph). We are not involved in that at all either. None of our competitors are. When we make the statement that it is a very tough and aggressive sales environment, what we are saying euphemistically is some companies are doing that and we are not.

Understood. And the final question then is with respect to the variable annuity business in Japan, wonder if you could give us an update as to the regulatory and capital requirements for variable annuities, where we sit with the regulator there's and if anything -- see what that looks like going forward.

The last time, and Simon you were just there a few weeks ago. What is the status with capital requirements that the FSA in Japan may impose?

The regulator is putting in new capital requirements. They haven't changed their course on that. We are looking at reinsurance solutions to help alleviate those capital requirements. We still think that we can hit a reasonable return on that business and these capital requirements don't change that.

And the reinsurance solutions that we're looking at are internal ones.

That's right. Yes. Which would be in full knowledge with the regulator and such.

Are we in a position where any capital can be extracted from Japan? Or when would that -- ?

Well, I think we could. I think, I don't know, what is our solvency ratio there?

It is just under a thousand.

Which is a very comfortable, but we have no appetite to remove capital from Japan at the moment given the prospects of growing the business. You saw the balance sheet grew by$1 billion in the quarter and we expect to be having robust growth going forward. It would not make a lot of sense to pull out capital now to have to reinject it later. But who knows, maybe the earnings are going to be so fantastic that we'll want to redeploy them to, I don't know -- ?

China.

Not going to tell us?

The reality is that the way the company is now with our geographics presence and the span of businesses that we have, we have so many opportunities, Tom. There are just so many opportunities and so you are constantly trading off. Our opportunities for growth are not limited by financial resources. The reality is that these businesses take a lot of management talent and a lot of management skills and we want to grow at a pace that is consistent with our ability to manage these businesses. There is no point in expanding and rolling up your assets and then find you can't properly administer or manage the business that you have put on your books. So we're very mindful of that.

Thanks.

Thank you. Our next question comes from Jukka Lipponen with Keefe, Bruyette & Woods. Please go ahead.

Thank you. First of all in terms of the integration expenses, how should we think about those for the remainder of this year?

They are probably going to be not dissimilar to the current quarter or last quarter. It will vary quarter to quarter depending on expenditure on projects. And we would expect to be approaching the disclosed total number towards the end of the year. So frankly, there's been no really interesting developments in that category.

And then secondly in terms of acquisitions, are you ready to look at new things and do you any preferences what you would like to buy?

We had our annual meeting today and I made some comments about the fact that again I repeat what I just said a moment ago, that the company's extraordinarily well positioned. Our preferred way of growth is through organic growth. But as we have always done in the past, we have been alert to opportunities that present themselves in the market place and we believe there're going to be such opportunities. And again as we have said many times in the past, we like all the businesses in all the markets where we do business. Otherwise we wouldn't be there. Manulife went through an enormous cleansing process some years ago and the businesses that we have chosen to participate in are ones that we want to be in for long-term. Something comes up in Asia or in Japan or in the United States or even Canada here, we would certainly look at it.

And last question, looking at the Japan and when you look at the premium line over the last few quarters, it's been sort of flattish. But the policy benefit expense is sort of steadily declined.

Well, I think that's a function of the run off of the old in force. We acquired a pretty substantial book of business as our starting point of a failed company. And that business with the normal attrition that you would expect has been gradually running off. The run offs are getting to be at a slower pace than they was initially. That's the reason I think for the reserve movement that you see there, the surrender benefits or whatever it is called.

Thank you.

Thank you.

Dominic, I'm reflecting back on Mario's comment where he mentioned the $1 billion and I just want to make sure that he understands that Peter and I were talking about GM and Ford, we do have a portfolio of other car credits, international ones, including Daimler, Honda, BMW, Volkswagen, Nissan, Toyota rental that would add up to $1 billon, but obviously they are in a different situation. What people worry about is Ford and GM. I would also like to clarify, because I think I know how his mind works, that any material sales that we have made of Ford and GM were made prior to the most recent spread widening at the end of March. That is we didn't wait for spreads to widen. So I want to make that clear. The third is our exposure to Ford and GM, half of it matures by the end of 2006. So again, that would give you a lot of comfort.

Thank you. Our next question comes in from Timothy Lazaris with GMP Securities. Please go ahead.

Thanks. Two quick ones, hopefully. In terms of credit quality, I was just noticing, and I'm sure you can see it yourself, that the net impaired are up to 0.035, up from about 0.014% a year ago. Can you comment on your comfort with that in terms of net impairds? We're very used to Manulife having extremely good impaireds.

I think I know the answer to this one. When we acquired -- when we merged with John Hancock, of course all of their assets, their entire portfolio came on to the consolidated balance sheet with zero impairds because everything was fair value as of the date of the transaction. So it is unrealistic to expect that, I don't know what the at risk assets are in Hancock, but, I don't know, let's say 75 billion or something. But that entire portfolio would continue with zero impairds indefinitely. What you're seeing is a migration of that ratio to levels that are more reflective of the business.

Yes. That's exactly right. When you start with zero on the Hancock credits as represented on Manulife's balance sheet, you are actually going to see an increase every quarter. Naturally it starts from zero and it is led up to what it is. The fact is if you look at the current situation relative to what the Hancock and Manulife had if you were to add them together on a pro forma basis historically, the amount of net impaired is actually down by 50%, the net impaired ratio, and that's a result of the resolution of credit, that's a result of the sales, and most significantly, the result of additional provisions that we have taken on gross im -- .

I think it is fair to say that we are quite please with the quality of the portfolio and the value at which it is carried on our books.

Okay. Thank you. And just a follow-up. In terms of, I think there was a commentary throughout the beginning about weak U.S. equity markets. I think that is been consistent theme and yet your U.S. VA sales and mutual fund sales were strong in the quarter. Can you comment on that?

I'm so glad you asked that question. John has been -- I was going say, we were just about out of time and we told him what strong performance we have had in both our Canadian division, where we had record, and in our U.S. wealth management division there hasn't been a one question on those.

We welcome that. Must be going pretty well.

John, over to you. Why do you have such good sales?

Sales are -- were very good in both of those segments as you identified. Obviously though they are affected by equity markets and which have further weakened since then. So weak equity markets are, as a general proposition, and will always be negatives for those businesses and are of concern going forward. But all the initiatives that we have talked to you about in the past on the mutual funds side, frankly, we have had some very good performance in several funds that are now attracting significant flows into those categories. Fund Company is now back into positive cash flow, it is out of net redemptions, which, frankly, was in for about four years. On the variable annuity side we continue to be very competitively positioned. We have a new product introduction coming in mid-May, which we're very excited about. We have certainly leveraged the two new distribution systems that have added to -- that were added in the transaction. I believe in the first quarter that the John Hancock Financial Network, the Captive sales force contributed 10% of variable annuity sales. And that the Essex Bank distribution channel contributed 9% of variable annuity sales. So it is a very significant leverage coming from the new distribution capabilities.

Okay, thanks for that.

So I set it up for to you to ask a question about our Canadian business.

Well, we already know that the Canadian equity markets were better than the U.S..

Anyway. Bruce's team has turned in a fantastic performance. I just want you all to be aware of that. One last question operator.

Thank you. Our next question comes from Brad Smith from Merrill Lynch Canada. Please go ahead.

Thanks very much. Dominic, just looking in terms of total revenues in your expectations, by my calculation your revenues in this quarter of $7.6 billion are roughly flat or equivalent to what they would have been last year if you combined with Hancock in the quarter. Where would you like to be a year from now in terms of revenue growth consolidated?

Well, the year-over-year, don't forget is, Brad, is skewed a little bit by some of the shifts that have occurred. We are not selling any GNSFP business to speak of. And I think if you look in the first quarter of last year there might have been some amounts there for that business by John Hancock on their own. I'm not sure it is an entirely valid comparison. As to where do we want to be a year from now, I don't have that answer today. I mean, obviously we want our revenue levels to be as high as they possibly can be, but I haven't -- we haven't turned our attention to the -- in fact, we have a 2006 plan that's in the nacien(ph) stage but not refined to the level that we can be talking about revenue level growth.

To remain as convinced, Dominic, that the value proposition of the Hancock acquisition will come from a revenue synergy?

Well, I think a combination of both. We are talking about what did we say, 300 and -- what is the number on the cost side? 325 U.S. so I don't know what that is in Canadian dollars, depending on the exchange rate. That is a big chunk of money. If you annuitize that or give it some value, I mean, that's a significant amount of the goodwill that we paid. And then we expect that because of the enlargement and the scale, I mean, there are significant benefits that are going to come out or our -- just our maintenance reserves on the in forced business which we haven't touched at all. And then there is the revenue side. As John just finished saying here, the most demonstrable area where you will see it is in VAs, but it is all over the place.

This John Hancock Financial Network, we are feeding it with, I think, some pretty competitive, pretty terrific products and the same thing with Essex and they are responding. The question is are we happy with our merger with John Hancock and the answer I would give you is a resoundingly yes. I mean, if we can't make this work financially, I don't think that there is any acquisition of two financial institution that's can be made to work. That's my feeling.

Great. Thanks so much.

Okay, thank you very much, operator. Thank you, ladies and gentlemen, for joining us and we'll talk to you soon. Goodbye.

Ladies and gentlemen, this concludes the Manulife Financial first quarter 2005 results conference call. The recording of this conference call will be available after 5 p.m. today by calling 416-695-6244. It will be available until the close of business on May 12, 2005. An archive of the webcast will be available on www.Manulife.com beginning after 5 p.m. eastern daylight time today. You may now disconnect and thank you for your participation.