Manulife Financial Corp (MFC) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Manulife Financial Corporation third quarter 2005 results conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and- answer session. At that time, if you have a question you will need to press the star followed by the one on your push button telephone.

As a reminder this conference call is being recorded today, November 3, 2005. If you disagree with the recording please disconnect at this time.

I would now like to turn the conference over to Patricia Kelly, Assistant Vice President, Investor Relations. Please go ahead Patricia.

Thank you and good afternoon.

I'd like to welcome everyone to Manulife Financial's earning conference call to discuss our third quarter 2005 financial and operating results.

If anyone has not yet received our earning announcements [inaudible] package and the slides for this conference call and Webcast, these are available in the Investor Relations section of our Web site at www.manulife.com.

As in prior quarters our executives will be making some introductory comments. We will then follow with a Q&A session.

Before we begin I would like to remind everyone that during the course of this call we may discuss forward-looking information within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, our National Policy Statement 48. Investors are cautioned that all forward-looking statements may involve risk and uncertainties and actual results may differ materially from those implied by such statements.

Investors are directed the risks and uncertainties in our business that may affect future performance and are discussed in Manulife's most recent annual report as filed with the Canadian Securities regulators and with the U.S. Securities and Exchange Commission on Form 40F.

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 except as required bylaw.

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

Thank you, Patricia, and good afternoon, ladies and gentlemen. Thank you for joining us on this call.

Earlier this morning we reported third quarter shareholders earning of $746 million, or $0.96 per share, representing a return on equity of 12.7%. As you will have noted, these results include two unusual items.

The first is a charge associated with Hurricane Katrina, and the second is a tax benefit and Manulife's [inaudible]. Combined these two items reduced third quarter earnings by $133 million.

However, the diversity and scale of our operations allowed us to absorb this charge and I am pleased to report that both net income and return on equity improved over the year earlier levels. Excluding these two unusual items the improvement would have been much more pronounced with earnings per share up 25% over last year to $1.10 per share.

This strong year-over-year increase is driven by the organic growth experienced throughout our organization and serves to underscore the success of our merger with John Hancock. Further, these results have been achieved despite the currency headwinds that we have been facing.

Certainly one of the highlights again this quarter is the very robust level of new business activity. Sales in our U.S. variable annuity business, for example, reached $2.2 billion in the third quarter, up very substantially over prior periods.

Our other wealth management businesses in Canada, Japan and Hong Kong, are also enjoying success with strong net flows leading to increased asset levels and higher earnings.

Our U.S. individual insurance operations also enjoyed a good quarter as sales grew across all distribution channels.

In Asia, our major businesses in Hong Kong and Japan are performing well and we continue to make good progress on expanding our operation in China.

During the third quarter we received approvals for four new licenses bringing our total to 11. This makes Manulife the leader amongst the foreign life insurance companies by this measure.

And also in China we launched our group life and health operations, adding again to the diversity and growth prospects in that important market.

Earlier today we also announced the extension of our normal course issuer bid.

The new program will provide capacity to buy back up to 50 million shares. Over the last year we've repurchased some 25 million shares at a cost of more than $1.4 billion.

Finally, I am pleased to tell you that all aspects of the John Hancock integration have now been completed. Our integrated management team is in place and operating effectively.

Expense synergies are becoming more evident in our results and we expect further benefits as remaining projects are finalized this quarter.

In summary then, I'm very pleased with our performance and optimistic that all of our businesses around the world are well-positioned to continue to prosper.

With that, I'd like to ask Peter to take us through the numbers in more detail and following that we'll have our usual question-and-answer session. Peter?

Thank you, Dominic.

As Dominic noted and as is reflected on Slide 7, reported shareholders earnings of 746 million included two unusual items in the quarter. I'd like to take a moment to discuss these items before beginning the operational review.

The first item you are already well familiar with. During the third quarter we announced the post tax charge of U.S. dollars 165 million [in our] property reinsurance line related to Hurricane Katrina.

On a Canadian dollar basis the charges related this event reduced third quarter earnings by $198 million.

The second item relates to tax assets within our Japan segment as the dates had not been accorded value in our accounts. Many of you will remember that we recognized a portion of this assets value in the first quarter in part due to receipt of a final payment on the windup of the [inaudible].

As the profitability of our Japan business has improved we are reasonably assured that the remaining tax losses in Japan will be utilized in upcoming periods. As such we are required to recognize the value of this asset and have reflected a value of $65 million in this quarter's accounts.

Excluding these two unusual items shareholders earnings would have been 879 million for the quarter, and EPS would have been $1.10.

As Slide 8 illustrates the trend in shareholders earnings over the last five quarters is quite positive. We're happy with the growth we've achieved since completing the John Hancock transaction.

Excluding the impact of this quarter's unusual items the year-over-year growth in earnings was 23% driven by strong new sales, good growth from in force business, favorable investment results, including the impact of favorable equity and credit markets and the emergence of expense synergies.

Offsetting these positive factors was the continued strength in the Canadian dollar which had a negative impact on earnings. On a constant currency basis earnings would have been $51 million versus the rate that was in existence a year ago.

Earnings for the quarter were also reduced somewhat by less favorable claims in [inaudible] experience compared to the very favorable results of a year ago.

Return on equity for the third quarter was 12.7%, a year-over-year increase of 70 basis points despite the unusual items recorded in the quarter. On an adjusted basis ROE would have been 14.9%, an impressive 290 basis points above last year.

Both our strong earnings momentum and continued commitment to returning capital to shareholders have contributed to this improvement.

Continuing this trend as Dominic has noted, we have announced that we're renewing our normal course issuer bid authorizing the purchase of up to 50 million additional shares over the next year.

Total Company funds under management on Slide 10 were $360 billion at the end of the third quarter. Premiums and deposits and net investment income made significant contributions to growth as you can see from that chart.

Net policyholders flows were a strong 12.1 billion would have been over 17 billion excluding 5 billion in scheduled maturities within the GS&FP segment.

The negative impact of currency movements eroded almost 26 billion from reported asset levels. On a constant currency basis funds under management would have increased by 11% over the third quarter of last year.

As you were aware investment income is an important contributor to our results. Slide 11 shows the composition by asset class of total investment income this quarter.

I would note that the John Hancock transaction has extended our investment expertise in a variety of asset classes enabling us to both enhance return and diversify risk.

This quarter we continued to reduce our exposure to bonds rated BBB and below and to improve the overall credit quality of our portfolio. As of September 30th bonds in this category totaled $33.7 billion, a reduction of 19% from a year ago.

Our quarter ends exposure to the auto industry was only $973 million of which there 32% is support in GM. These exposures were either to finance company subsidiaries or were specifically secured except for $11 million. So we're quite pleased with our exposure in this sector.

We hold no exposure to Delphi.

In addition we are pleased to report that the recent filings by Northwest and Delta had little impact on our results as these announcements were substantially anticipated previously and reflected in our aircraft valuations.

I'd like to now turn to our divisional performance.

U.S. protection earnings increased by 38% over the third quarter of '04 to $119 million U.S. Driving this strong result were favorable investment experience including the impact of good equity markets and claims experience.

In addition, the impact of new business contributed positively as higher sales volumes helped generate expense efficiencies and product changes improved margins on a per unit basis.

For students of our supplemental information package some will have noticed that the third quarter benefits and withdrawals increased sharply in U.S. individual insurance having a negative impact on funds under management. This movement reflects the surrender of a large COLI case in the closed participating block.

The actual financial impact of this event was negligible as substantially all of the cash value of this 20-year-old case has been loaned back to its corporate owner and the reserves release were approximately equal to the cash value surrendered.

Our U.S. individual insurance segment had another strong quarter with sales up 22% over last year resulting in a record for a third quarter for this segment. The strong sales during the quarter built on momentum evidenced last quarter.

The results were driven by new sales initiatives that we started early in the year, strong growth through John Hancock Financial Network channel and increased momentum in our UL product overall. Within the long-term care segment sales declined marginally from last year to 30 million, while retail sales increased for the second consecutive quarter, they remained below expectations due to industry-wide issues.

Our U.S. wealth management division had an exceptionally strong quarter with earnings of 136 million U.S. up almost 50% in the third quarter of '04. Strong sales and the positive impact of equity markets boosted the division's assets under management and contributed to increased fee income.

Investment experience was also positive due to stable credit environment and favorable interest rate impact. Within the annuity segment results were particularly impressive with earning up 73% to a record U.S. dollars 95 million.

In Slide 16 we provided net flows for the U.S. wealth management division. By this measure all segments are showing strong growth in contributing to the considerable increase in funds under management.

The most impressive increase occurred in the variable annuity line where net flows reached a record U.S. 1.4 billion driven by exceptional sales volume and continued strong persistency. Success in this product line can be attributed to our strong product offering and expanded distribution capabilities including excellent sales by John Hancock Financial Network and assets [our] bank distribution channel.

Gross sales for the division totaled $5.2 billion, an exceptional increase of 51% versus the third quarter of last year.

Our GS&FP segment reported earnings of $30 million on a U.S. dollar basis. This is a disappointing result and one that is in sharp contrast with the extraordinary earnings reported last quarter.

As shown on Slide 17 the second quarter benefited from various items that did not recur and in fact moved in the opposite direction in the third quarter. To a certain extent the recent earnings volatility reflects the fact that a relatively large proportion of our non-traditional assets resided in this segment.

As these assets are mark-to-market through our actuarial processes the full amount of gains or losses are reflected in our quarterly accounts. As such the segment is likely to demonstrate the somewhat higher degree of volatility from time to time relative to other business units.

That said, I'd like to take a moment to provide some further detail on the variance of these investment results.

In the second quarter strong investment results were driven by gains in hybrid assets. There were in fact four significant wins, the largest relating to an investment in Ark Lake Capital Partners.

Conversely in the third quarter there were losses in hybrid assets including the write down of the carrying value of an equity investment made with Abbott Labs. As well interest related changes in value also shifted from a favorable position in the second quarter to an unfavorable position this quarter.

Although the income emergence over the last two quarters has not been smooth, the average result is within our expectations for this segment. We also expect lesser volatility going forward.

In the third quarter the Canadian division surpassed the record earnings set in the second quarter by 23%. All segments contributed to the exceptional results.

Profits on both in force and new business were strong and the division also benefited from positive investment results. Individual life sales fell 14% from one year ago when the segment experienced very strong sales.

We continue to be very pleased with the sales levels achieved within our group businesses. Group benefit sales were very solid at 82 million, but down from the exceptionally strong quarter one year ago which included significant large case sales.

Within our group pension segment sales increased by 42% versus last year. This strong gain does not include a large sale to Wal-Mart which was announced in the third quarter, but will be reflected in our fourth quarter results.

Net flows within our individual wealth management segment in Canada showed strong year-over-year growth in both segregated funds and mutual funds.

Mutual funds business has performed particularly well over the last year with market share gains and strong growth in funds under management. A combination of scheduled withdrawals and weaker sales resulted in continued negative net flows in fixed annuities and GICs.

This result was expected given the current low interest rate environment and our strict hurdles on profitability. Gross sales for the segment increased by an impressive 34%.

Asia and Japan division reported net shareholders earnings of U.S. $177 million. Excluding the release of the 54 million Japan tax provision, earnings for the division would have been U.S. 123 million, a substantial 27% increase over last year.

While both Hong Kong and other Asia contributed positively to the strong results, the most notable gains came from Japan where strong in force growth in the VA business and good expense controls helped boost earnings to U.S. $48 million excluding the impact of the tax benefit previously discussed.

Turning to the Asian and Japan divisions third quarter sales both Hong Kong and Japan showed strong gains over last year. And while overall insurance sales in other Asia were down from last year, we are seeing improved momentum in several markets particularly in Singapore, Malaysia and China.

In Hong Kong wealth management sales remained strong and showed a sharp increase of 97% over last year. The addition of the bank distribution channel contributed to this positive result.

Wealth management sales in other Asia continued to be negatively impacted by the economic environment in Indonesia where a sharp rise in interest rates resulted in substantial outflows for a mutual fund industry-wide as a whole in that country.

In Japan variable annuity sales remain strong at U.S. $650 million for the quarter. Not unexpectedly merger initiatives underway at BOTM and UFJ disrupted their variable annuity sales levels and our important bank distribution channel.

However we believe this to be a short- term impact with positive longer term prospects expected. As well new product initiatives and additional distribution is expected to continue to drive our sales growth of this product in Japan.

Finally, it should be noted third quarter of '04 was a very tough benchmark of sales during that period [inaudible] by the very strong initial launch of BOTM distribution agreement.

In our reinsurance division, as you are aware, the U.S. $165 million charge associated with Hurricane Katrina was booked. This resulted in a net loss for the division of $127 million U.S.

Slide 23 notes that the reinsurance division's earnings excluding this charge were 11 million below those of a year ago, but 14 million above last quarter's results.

Turning to slide 24-hour our source of earnings. Our source of earnings presentation continued to show good growth on profits from in force business in the third quarter.

The impact of new business was an origination loss of $80 million. Compared to last year this is an improvement of 30 million as higher sales levels offset fixed expenses and product refinements resulted in group margins.

The experience loss of 70 million is due to claims related to Hurricane Katrina, recorded in the quarter and appear in our source of earnings in Canadian dollars on a pretax basis. Excluding those claims experience gains would have been about $200 million for the quarter.

Segregated funds performed well due to favorable equity markets and earnings on surplus were up due to strong investment performance.

Finally, a significant reduction in income taxes reflects the release of the tax provision in Japan.

On Slide 25 you see our U.S. GAAP/C-GAAP reconciliation. On a U.S. GAAP basis net income for the third quarter was $846 million, 100 million above the results reported in the on a C-GAAP basis.

As in past quarters the higher income is attributable to the impact of realized gains as these gains are taken directly in income under U.S. GAAP while under C-GAAP they're generally amortized into income over time.

In conclusion, we are very pleased with the results reported in the third quarter. This quarter marks the first period where quarter-over-quarter comparisons are not distorted by the acquisition of John Hancock. And from every key perspective this comparison points to a very successful transaction.

With the exception of reinsurance and GSFP all divisions demonstrated strong year-over-year growth in earnings and in many segments record sales levels were reached. Expense synergies are approaching our target of U.S. $325 million and are increasingly evident in our reported earnings.

Our capital position remains very strong and positions us for continued share buy backs. We expect that these positive trends will continue placing us on track for a record 2005.

Thank you very much.

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

[OPERATOR INSTRUCTIONS]. Your first question comes from James Bantis Credit Suisse First Boston. Please proceed with your question.

Good afternoon and congratulations on a good quarter.

Just a couple of questions on the sales front. If John DesPrez is there I just want to talk more about the variable annuities. Perhaps we can maybe get a little bit more color with respect to how much of the exceptional growth is coming from the introduction of the Hancock distribution versus perhaps the unique product features.

John, please?

Jim, it's a combination of the two. The key driver of the increase in sales was the introduction on May 16th of the Principal Plus for Life version of our variable annuity which represents just a change in the withdrawal benefit product that we had been selling for the last several years that had a twenty-year withdrawal guarantee and changing that withdrawal guarantee to a lifetime guarantee.

That is a very, very attractive feature in the market. It is one that we were early with, positioned very well through a new marketing campaign. And it is driving the sales more than anything else.

Having said that, the two new distribution systems that we obtained in the Hancock transaction, namely the bank channel, the Essex Group, as well as the captive sales force, the John Hancock Financial Network, each of those now represents roughly 10% of variable annuity sales. And they have grown in sync.

But I think it's important for you to know that our sales are up and up largely proportionately across all of the major distribution channels, the wire houses, the regionals, the financial planners. It's a very broad-based acceptance of the new product and I would just caution you that that success, a number of the other companies have reported, most everybody else is flat in their sales.

They've all seen and know about our sales success and they've, most of the major competitors have now filed products that are very similar to what we're selling.

John, how much of a lead time do you have versus the competitors with respect to them duplicating the product? Do you think you've the advantage over them for another two quarters or just perhaps another quarter ahead?

No, I don't think it's, most of those other products are coming live now. It's really, the advantage that we have is really two-fold.

One is that we have to a certain extent staked out this space in the market. People know about it. They know us for this benefit now, identify with it.

Our wholesalers have been telling the story for four or five months. There's not much reason to change to one of the new products if they're happy with what we're doing.

And the other piece of it is that the ability to offer this guarantee is predicated on our requirement that people put the money into balanced investment vehicles underneath as the underlying investment medium for the contracts.

We happen to have these life style funds that we've had in existence for 8.5 years. They're very highly rated and terrific performance track record. Even the people who copy our contracts, our annuity wrapper cannot copy the underlying fund and the track record.

So we believe that while people will copy the product that we do have something of a somewhat more of a sustainable advantage in this space than you usually have in our market. Usually you have three, six months and everybody can copy what you have. Because of this funding vehicle thing we actually believe our advantage will persist indefinitely to some degree.

Great. And just a quick question for Peter. Peter, last quarter there was an integration charge of roughly $0.03 and I'm not sure if you've just buried the number but if you can maybe perhaps quantify if there was anything left that was accounted in the quarter.

Yes, I think it's in the press release. We're not profiling it as much, hang on, I don't recall it.

I think it was $18 million but I don't know --

17 million.

17 million.

17 million in the post tax. And it is in there. The reason we're not making a fuss is we're expecting to be finished next quarter, and so it's those $0.02.2 if you're looking on the EPS basis and so we'll be transitioning because many of our businesses have now been combined. And the ability to look at integration [says] versus operational [says] is becoming less distinct.

Great. Thanks very much.

Your next question comes from Rob Wessel, National Bank Financial. Please go ahead.

Good afternoon. I just have hopefully a couple of quick ones.

First of all, with renewal of the buy back if you take 50 million to buy back four you get a number that's much larger than what you've been buying back on an ongoing basis each quarter. Can we assume that although the buy backs are renewed at that level that the pace that you've set for now is sort of one you're comfortable with?

Well we've really never provided guidance on the pace. We do record on a very timely basis and we do have a bona fide interest in the material buy back but I'm really not wanting to clarify that.

With respect to the 39 million provision for credit losses or provision for impairment, is there a rule of thumb in terms of how much is allocated to shareholders and how much is to policyholders is the first question for that?

That was quite simple. Each asset belongs to a segment and so to the extent it's in a par segment it's for the par account and if it's in the shareholder segment it's for the shareholders account. I don't know if you have --

I would suspect most of it was for the shareholders.

I believe that's correct.

Okay. So --

Less than 20% would have been for the par account this quarter.

So if we look into [inaudible] can you give us an idea, Peter, or perhaps Dominic whether or not you sort of consider these credit losses at cyclical lows or they're sort of what you would characterize as closer to normal given that you mark-to-market part of the Hancock or all of the Hancock portfolio when you acquired it?

I think there's a bit of both. The credit environment is very benign and then again as you just said it's not every day that you acquire the quantum of assets that we acquired in the Hancock transaction and have a chance to fair value it. So you're seeing both impacts. I think that we're clarifying that this is very favorable level of loan losses or asset losses and it's unlikely to be continued indefinitely.

And last question on cost synergies. Can you give us some order of magnitude as to what the delta is in terms of sort of year-over-year, I guess it would be you've reached the full U.S. 325. So can you give us an idea as to what the delta is maybe even quarter-over-quarter? Sorry, sequential and year-over-year, just trying to get an idea.

I think it's $66 million but I don't want to mislead you because as it's ramping up it's not absolutely linear. So if you take this quarter over a year, a year ago.

Sure.

You know you were seeing a significant uptick. The fourth quarter is an important quarter for us. There's a lot of things that complete. And so we'll see another expense improvement I believe in the fourth quarter.

But we're already having issues and particularly in Canada where the businesses had so much overlap, distinguishing between a new initiative and an integration related initiative. I'm sort of wanting to shift away from ascribing too much credibility to expense synergies because we could say that we're hitting really wonderful numbers, I believe we are, but we also have new initiatives that are independent of integration that are starting up again now.

Okay. Let me ask a different question then. Great West Life they had set targets, they went far, far, far above what they had set out for the market. Now that the integration is complete should we consider sort of the amount of incremental synergies beyond this as sort of immaterial or di minimus compared to what you'd set out or is the idea that we set our target, we've met it and by the way, hopefully on an ongoing basis we hope to do still and over the amount?

The history of this is that when we first announced the transaction we think at that time expressed in U.S. dollars that we were aiming for 255 million U.S. dollars of savings because at the exchange rate then prevailing that was the equivalent roughly to 300 million, 350 million Canadian and then we increased it once we got into the details and understood what the possibilities were to 325 million U.S. Frankly, I think we will get closer in Canadian dollar terms to $500 million of savings on this thing.

The thing that we want to caution you about is that it's going to be very difficult for you or anybody else to track those savings because you have two phenomenoms at work. One, you've homogenized the businesses, you've put them together. So when you have a cost reduction how much comes from the acquired business and how much of it comes from the existing business?

And the second thing that you have at work is that many of these businesses are growing. And growing very, very rapidly. And then, you know, to what extent is some of the cost pressures or whatever going to be attributable?

I mean we think it's noteworthy that our book of business is up as sharply as it is, but year over year our costs are down. We are going to stop reporting and talking about expense synergies next quarter because it becomes less and less meaningful discussions.

We do believe we're doing better than even our revised estimate. And I think we're pretty comfortable that you'll be happy looking at our expense progress going forward.

Okay. One last point of clarification on that. If it's 500 million Canadian and 325 the target equates to about 400 million Canadian. Does that mean we sort of have like another 100 million left or is that not the right way to think about it?

That's my personal.

Aspiration.

Aspiration. And usually I have reasons for expecting that. We will do much better than what we forecast.

Thank you very much.

Your next question comes from John Reucassel, BMO Nesbitt Burns. Please proceed with your question.

A question for Peter. Peter, in the absence of Investor Day you usually update us on your medium to long-term EPS growth target. It's historically been 15%. Is that still a number that you're comfortable with?

Absolutely. It's unchanged. And we did just to clarify, we did have a session not that long ago in our Boston premise where we went through our operations and confirmed that and we're quite happy with that EPS objective as a medium-term objective.

Okay. Great. Just you mentioned that COLI in U.S. individual life on the funds under management if you took that out, Peter, what was the impact of that?

I think it was just shy of 800 million Canadian or six odd U.S.

600 million U.S.

Yes.

Okay. Last question for John DesPrez. I guess you talked about the distribution trends in VAs, if you talk about individual life and particularly how the M Group and the Hancock channel and those type of things?

I think I might just pass it over to Bob Cook since he's sitting right next to me and let him report on that.

Sure, John. It was a good quarter for individual life setting another record and turning around what was a disappointing first quarter with good results each of the last two quarters.

Actually, all of our channels had good results in the third quarter. Led notably by John Hancock Financial Network which has been having an outstanding year.

But in addition to that both the M Group, National Financial partners and the rest of our brokerage outlets are all firing on all cylinders as they accept some of the new product initiatives that we introduced this year which I think is the primary driver behind this.

So, about 10% of sales in the VA [inaudible] and the Hancock network, would you say it's about the same in the individual life business?

No, because JHFN is about 20 to 25% of our total so the math doesn't quite work out that way but JHFN is up almost 40% quarter-over- quarter. And the other ones are up more proportionate to the overall sales increase shown in the information package.

Okay. Thank you very much.

Your next question comes from Timothy Lazaris, GMP Securities. Please go ahead.

Thank you. I've got two questions. The first I guess is for Dominic, or Don Gulolen if he's in the room.

On the G&SFP business, you know you mentioned a disappointing quarter. I'd more segment it or describe it as volatile. It seems to go up and down and the last time I looked at this business it looks like something that perhaps is a unique and was a unique business within Hancock and not something that Manulife was operating in.

I'm wondering what your views on that business are right now considering the fact that it's had a negative impact on your credit quality, you have to mark-to-market the investments and it does not look like something that a life insurance company typically does. I wonder what your opinion of it is and how you're going to manage the risk?

I'll take a stab at that, Tim. We've been quite clear that this was a business that was imbedded in the John Hancock Company but in our view wasn't one we wanted to do see grow tremendously. In fact if you look at the experience since the acquisition I think the assets, the maturities exceed new business by, what, 7, $8 billion U.S.

I run off on average 1.3 plus billion in a quarter.

Having said all of that, we don't want to see it grow, the fact is that it is a large asset base and it's going to be around for many, many years as it matures. I mean $30 billion doesn't run off overnight. And we expect it to generate a few hundred million dollars of earnings for the foreseeable future.

And we are going to manage all those assets with the same care that we would manage, that would you expect. So I don't know what more I can add to that.

You're right in assuming that we're not going to build the growth of our Company going forward on the spread type business like that because we don't think that's what our investors want.

On the other hand there are some pieces within the G&SFP segment that don't have that credit risk aspect to them, and like we just did a deal with a very major national company in the United States where they funded some employee benefits and we essentially administer them within the G&SFP, administer those benefits for them and we collect fees which is very nice. More of that and less of the balance sheet risk stuff.

Okay. Just a follow-up question on a different point. Could anyone in that room give us the current, their current views on the competitive landscape in Canadian individual insurance and in particular UL? We've heard some mixed comments out of some of your peers this quarter and I'm wondering if competition is increased in the UL market in Canada?

We have Bruce Gordon with us here so I'll ask Bruce to answer that question about the competitive landscape in Canada.

Sure, Dominic.

In our opinion it is a very competitive landscape right now. You'll see from the SIP that our sales are down.

A couple of reasons for that, the product mix that's there is different than it was a year ago but there are a couple of thing being done in the market that we deem to be uneconomic and we are not following those practices in the market. So it is very competitive now.

And Bruce in particular, UL?

Yes.

Okay. Thank you very much.

Your next question comes from Mario Mendonca, Genuity Capital Markets. Please proceed with your question.

Good afternoon, everyone.

Hello.

A question about, this is a broad question and then I'll drill down on something down a little more in detail.

You only ask broad questions.

I won't disappoint.

All right.

There are these two things that I looked at a lot trying to help me gauge earnings growth for an insurer. There's this value of new business which clearly matters and then there's premium deposits, and this growth in premium deposits. I imagine both are very, very valuable, have informational value. What I'm trying to understand and perhaps this is something Simon can help us with is, what's a better gauge for say, earnings growth over the next say, 12 to 24 months, premium deposit growth or premium deposits or value in the business?

I'm going to encourage Simon to tell you that it's the value of new business. That is the actuarial computation. It's the best estimate at the time of issue of the profit imbedded in the business transacted.

The problem that you have is to gauge when is it going to emerge because some businesses have a short life and other businesses have a longer life. But we show you every year our imbedded value movements for the Company and so that's a very powerful, that's a very powerful metric.

Insurance companies are bought and sold in many parts of the world on the basis of that information and there's a lot of effort that goes into the preparation of it, there's a lot of supporting systems. We wouldn't do it if it wasn't useful.

Certainly I look at it like any other measurement systems it's only as good as the assumptions that you make. We try to highlight for you what those assumptions are and to help you draw your own conclusions as to the intrinsic value of that business.

I recognize that both are valuable. I was trying to think, we all like to, we're all sort of long-term thinkers in a way.

Really. Really. Holly cow. That's news.

Long-term, next quarter. Bear with me here. Over those next 12 to 24 months, though, does premium deposit, does that give me a better flavor for what's going on?

Again, the premium, I'm not trying to make this [inaudible] I'm giving you answers as I think about when I look at this information and premiums and deposits is a good indicator of activity, but it's not quite as good as the value of new business simply because within the premiums and deposits you have a blend of revenue items, some of which are very profit laden and others that are less profit laden. Some that have very short time spans and some that don't.

And so you can't just look at the, so what I tend to do when I look at the business of our Company is I look at the breakdown by division and then, of course, I use previous experience and I compare things to plan and draw conclusion as to overall are we making progress.

So with that said, why is it that we get reams and reams of pages in the fiscal supplement of premiums and deposits and the occasional one liner of imbedded value?

Well because the imbedded value is the, I mean the systems are set up to report on a quarterly basis to the, that's the way the accounting systems are designed. The imbedded value calculations are quite comprehensive and time consuming to prepare. And Simon has his rule of thumbs and so on but we're not prepared to publish them on a quarterly basis because they don't have the same rigor on a quarterly basis that they do once a year. Anyway.

I think you know where I'm going with this anyway. It sounds like it's so much more valuable but we don't really see it.

The reason to give you a big statistical package, is quite frankly, I don't know how many of you are on the call, over 100, and every one of you have some particular aspect of the business that you're fixated about. So some people want to see the breakdown by business units, some people want to see the source of earnings by business units, some people want to see the sales levels. So it's all there.

Some people are interested in assets and reserves. It's a pretty comprehensive package. If there was some way we could do away with it we probably would get our EPS up a cent or two.

Let's finish up with one detailed question and I should get off of here.

Individual life in the U.S., sales look great, premiums not as great, now I think I understand that COLI business I suppose was part of it. But earnings. That business just doesn't seem to get to where I would have thought it would be at this point. What was it this quarter, was it mortality? Because the sales were pretty solid so [inaudible] couldn't have been outrageous. What's going on in that business that just isn't really getting there?

We love those bad level of earnings. What is it?

$119 million.

Like almost a record level.

No, individual life pretax about 148 million, so down from last quarter. Maybe that's the way to talk about it. What caused it to decline from last quarter?

Well, I think last year, last quarter, rather, you had some items, Bob, why don't you answer that question?

The quarter-over-quarter change was a [inaudible] up adjustment made in Q2. So I guess we would more draw your attention to the year-over-year growth Q3 last year to Q3 this year which is a pretty solid 20% growth in earnings.

I guess, it's just that one seems to not have reached where I thought it would be but thank you very much for helping. It was a pretty solid quarter.

Thank you.

That's high praise from you, Mario.

Your next question comes from Steve Cawley, TD Newcrest. Please proceed with your question.

I would have appreciated one other piece of disclosure in the subpack and it would have been you and Peter's heart rate on October the tenth when Jefferson Pilot and Lincoln got announced.

We were fairly calm. That's not a development. It wasn't a surprise to anybody in our business, Steve.

JP was for sale for a long time. Do you want to talk about why it wouldn't have made sense for you?

Well I guess our conclusion was that we had, there were better prospects out there for us. These things, it's like finding a wife, everybody's beautiful to somebody. I wouldn't want to tell you your wife is less beautiful than mine.

It was a question of fit and we're very happy with our choice of mates and I'm sure Lincoln will be very happy with their choice.

Well you've now mated and the deal's almost over and I think I can remember from past conference calls, our past discussions that I think that there was a lot of happy people that there hadn't been consolidation in the U.S. market since the a Hancock deal of any, of real substance.

That's not true. HI mean, you know, you had you Travelers being acquired by Met and you've had Genworth spun out. You've had this merger, there's another transaction, I can't remember just now.

I mean, you know, Steve, you draw your own conclusion. The U.S. market, I mean the biggest players, all of us we have, I don't know, 4 or 5% of the market. That's hardly a consolidated marketplace.

There's still opportunities for consolidation.

We think so. I mean we're just getting, we're very selective because we've done a number of important transactions over the years and we're rewarded for being patient. We're enjoying very, very good organic growth as you can see from looking at these figures. And I think we are in, and the diversity, the geographic diversity of our Company, so we've got lots of growth prospects.

We don't have to hunger to consummate a merger with anybody to deliver the type of performance that we said we would. We wait around, wait around, wait around, eventually something good happens.

Okay. Next question. Catastrophe reinsurance, I suspect this quarter you probably lost as much money as you'd made in the last, I don't know, five to ten years in that business line and you probably don't like volatility of earnings. Does this business make sense?

But as much as we made in the past three.

Okay. So it is quite profitable then.

It's a very profitable line of business. Conceptually, this is a business that is highly sophisticated capital is put at risk and it's going to be serviced over cycles and the accounting model doesn't allow you to set aside in good times when you're earning a 30 or more percent return, you can't set any of that aside for the inevitable bad time but we knew that. I mean I tell people it's hard to be happy about a loss of that magnitude but I am happy because our limits behaved the way they were supposed to.

We participate. We provide catastrophe cover starting at an attachment of $20 billion. And then we provide that cover for very thin and specified layers. And we made the decision to participate in this business with our eyes open.

We think we have good people that administer and negotiate our arrangements and we do so with good counter parties. And these things are going to happen. I mean that's why we were.

I guess the rate environment's become a lot more favorable.

The rate environment, there has been an increase I believe, I don't know, Steve Mannik is here and he could give more precise information as to what's happening. The rates are hardening but by how much?

There's still, because this is an unprecedented event there's still negotiations going on so there haven't been a lot of January 1 renewals consummated yet. But there are sort of commodity products in this area and we've seen some rate increases on the commodity covers of up to 50%. So a cover that went for 15% premium last year is trading up at 22, 23%.

I'm not sure that you can extrapolate that across the whole range but that gives you some idea of how the market reacts to this. You've just taken 40 to $60 billion of capital out of an industry and people have to make that back over time.

One quick numbers one for Peter. Peter on the SOE and it shows expected profit on in force was up about 11% year-over-year. On a same currency basis, on a consistent currency basis what would it have been up by? I don't know if you've got that there.

I don't have it in front of me. I think it's about a six or so percent difference due to FX but I think you also, let me just pull that slide up, I think you also should consider that the seg funds was up as well and that's a proportion if you will of earnings that also relate to our performance [inaudible]. I would say a portion of it clearly is FX, managed by FX.

Don, I'd be remiss to not say congratulations for raising the bar a little higher.

Sorry, Simon's telling me that he thinks it's 60 million.

60 million would be the difference on that line item alone due to FX.

Steve, did you have a compliment for Don?

6.07% he just wants to keep raising the bar it will be interesting to see how long it can stay there.

Steve, a follow-up to your comments on the last quarterly call if you want to invest with us it's MFC global.com.

Thank you, Don.

And we will be happy to take your money.

Your next question comes from Michael Goldberg, Desjardins Securities. Please proceed with your question.

Thanks a lot and the earlier questions about VNB were coming from Mario if I can just remind you. A unique situation but I endorse what the point he was making.

Let me start with a number question. Could you give us some idea how much seg fund guarantee reserve was released during the quarter and where your CP level is at the end of the quarter?

It's in the SIP, Michael, on Page, towards the back someplace.

Page 38.

Simon, why don't you answer Michael's question there?

The seg fund guarantee reserve this quarter went from 623 million to 559 million on a Canadian dollar basis, and of that change 21 million was currency and the other 43 was just a normal release for movement. And the CT level just moved from 73 to 74% so virtually unchanged.

Okay. And also the Japanese tax release, where did that go in the source of earnings statement?

Look on the tax line.

Oh, right, okay. And also I want to get back a second on the question of VNB. You talked about very robust new business activity for the year.

Last year I think I recall that overall VNB was up about almost 50% on a constant currency and discount rate basis with half a year of Hancock. Now you've got a full year. Could you give us some idea even in round numbers what you figure organic growth in VNB that's occurring right now?

I see Simon here, brows are getting furrowed. We don't recognize the number, the 50%. I don't remember that number. Did the value of new business last year grew by 50%?

The number that I have is it would have been 1345 compared to the 2003 level, up 49%.

But that would have been because of the merger I think at some part. We don't have those figures in front of us, Michael. We're not trying to put you off. Simon, why don't you call Michael back when you have the numbers in front of you and you can review this with him? Is that okay with you?

I think just, we're quite happy with the value of new business which you can obviously understand by the tone of our comments and interim calculations we do, will be confirmatory.

Do you think, I mean are we within a year or I mean or within my lifetime that we're going to get this more timely?

Well, Michael, I think that in fairness to us, I mean look at this data that we put out every quarter. Look at this SIP. And you're asking for some information that's of interest and it's enormously detailed to prepare and not everybody is fixated by it.

I mean we are gradually educating people to the utility of the tool but it's not a concept in the United States that anybody is passionate about. And so I would ask you to can you tell us a little bit of slack that there are reasons. It's not that we're denying you what you need to analyze the Company. There's practical considerations here.

We can't be, I mean it's a madhouse here to prepare the information. This is a very complex company operating in many, many currencies, many geographies, different accounting basis.

We spend a lot of effort to prepare U.S. GAAP statements on a quarterly basis for one shareholder constituency. So you get the picture. It's a very laborious reporting process already.

I understand.

I'm sorry to disappoint you. We'll bear in mind your comments and obviously we want to please our owners. If there's a demand for this information we'll do our best, but I've got to be reasonable, too, in what I ask people to prepare. I can't ask them to do the impossible, Michael.

Okay.

Your next question comes from Eric Berg, Lehman Brothers. Please proceed with your question.

Hello and good afternoon to all.

I wanted to return to the GIC business, the guaranteed and structured financial products business. I'm trying to understand in further detail than I do what is really different about this business, because after all, fixed annuities, fixed option of variable annuities, universal life insurance, these are spread-based businesses, too, that place Manulife's balance sheet at risk, require you to take investment risk, interest rate, you know, credit risk, interest rate risk.

What is it about these businesses, this particular GIC business which if my memory serves me correctly was the largest business of John Hancock that is leading you effectively to exit it?

Maybe I'll start and then Peter can answer.

In the other businesses that we have that involve credit risk it's more a vanilla type risk and I think we're more comfortable that we can assess and evaluate the degree of credit risk. What was unique about the GIC business and what causes some of the variability in fact in the results is that, not the GIC business, but the G&SFP business, is that in order to capture the spreads that we're required to service the capital a lot of the assets had aspects to them that were unconventional.

And not bad features, they were just unconventional and they all have a disproportionate proportion of that book against Manulife has a lot of contingent consideration attached to it, the warrants, the options, participation rights, entitlements which is very difficult to quantify what they're worth at the date that you enter into the transaction.

We didn't, we're slowly paring down our exposure there because as I think we've told you in the past, we don't think our shareholders are investing in Manulife in order for it to go and use its AAA or AA rating to invest in BBBs as a business. I mean I think that if our, certainly the large investors I've talked to that own our stock, they prefer a little less adventure. And so for those reasons, Eric, we've adopted the posture that we have.

Now again we have a very geographically diverse company with a very diversified by-product and we have growth opportunities available to us and I don't know that our posture would be different if we didn't.

I mean if you don't have these avenues for growth and you start looking and, who knows, we might have come to the same conclusion that arbitraging the balance sheet was the thing to do. But we don't have to make that decision and we early on signaled to everybody that this is a business that would be controlled and managed down.

Indeed you did. I have a couple of numbers questions for Peter but before I do so I want to ask you, Dominic, one more general question.

I am struck by your personal optimism and sense of enthusiasm about the U.S. and I think John DesPrez seems quite optimistic, too. It is in stark contrast to your competitors in the sense that they could not be more negative about the current environment describing it as extremely competitive.

They complain about the flat yield curve, the low level of interest rates, rising reinsurance costs, higher capital requirements, reserving requirements, they're kind of a mopey bunch these days and --

It's all true.

It maybe all true, but I mean-

All of those things that you said is true. That is absolutely correct what you said but, you know, we've been doing the same thing for quite sometime now.

We've been focusing on the fundamentals of our business and we've described those to you in the past. We absolutely insist on having product that's leading edge. We worked mightily at expanding our distribution channels.

You'd be very impressed if we went through and gave you an expose of just how many points of distribution we have in the United States. I mean we made some decisions years ago that are bearing fruit. We have an excellent reputation with the distribution channels wherever they are. And all of that stuff we try to be easy to do business with.

We've invested enormous amounts of money in our technology to make as seamless as possible the processing and servicing of the recording of -- I can't give you a one, I think I'm paid to lead this Company and to try to deliver and use all of our wit to deliver results in good and bad times.

And I've got a superb management team here and I think the record speaks for itself that consistently year in, year out, in high interest rate, low dollar, you know, I don't, you know, it's just a mindset that we can compete and our results show that we're successful in that view.

Now John is dying to say something. John DesPrez you want to add something?

Sure. I think what you're seeing is the tangible proof of the diversification benefits from the Hancock transaction. One of the reasons all those thing that you listed are primarily focused on life insurance and the fixed dollar wealth businesses which are very challenging in a variety of ways, but if you look at the numbers in our SIP our wealth management on our securities based products are at record levels across the board.

And so there are other types of environments where that will become challenging and the fixed products will come back and as things involve in life insurance. So the diversification that we have as a result of this transaction allows us to compete really in almost any type of environment you can envision.

Thank you. That was very helpful and complete response. Peter, just to clarify this COLI related issue, I presume that this was once again an outflow of a COLI contract? Is that correct?

It's a contract that was in force. They had borrowed the money so when we had the retirement there wasn't the cash disbursal of any material amount, and it surrendered. It was a 20-year-old contract.

It was a very old contract and the beneficiary is a corporate contract, the beneficiary had some tax issues related to it and they collapsed the contract. And so on our balance sheet essentially what happened was that the policy loans went down and the reserves went down by equivalent amounts.

And you're showing on Page 11 of the statistical package an outflow of 1.581 billion

Included in that is this very large COLI case.

Even though there was no, that wouldn't be a cash outflow, though?

I don't know, let me have a look here.

Page 11 in the reconciliation of the funds under management.

Eric, it's Bob Cook.

On the policyholder benefits line, the two things net out so it doesn't affect that line. But on the funds in management you are only seeing the one half of the transaction and that's why you see the delta from the 800 to the almost 600.

Great. I'll circle back to get more details.

I think the exact amount contained in the 1.581 billion is 840, which accounts for the full difference versus the prior quarter on the benefits and withdrawals line of that item.

And are you saying there was an inflow as well?

No, no, Eric, the question is absolutely, the answer is, listen, all you're looking at is fund under management. You're not seeing the liability side of how are those funds under management financed, they're financed by all the reserves, the credit side, the right-hand side of the balance sheet. So, you know, the right-hand side went down by the 600, you're just seeing the movement here in the assets, the assets under management.

Very well. Thank you.

Your next question comes from Tom MacKinnon, Scotia Capital Markets. Please proceed with your question.

Good afternoon, everyone. A question has to do with the variable annuity business and the fact that it's becoming significantly large and when you couple that with the Japanese variable annuity business, this is probably a much larger percentage of your bottom line than it probably was several years ago. But as I understand it, correct me if I'm wrong, I think you still just hedged the business through product design.

Have you considered, I know there's diversification within the Company, but have you considered perhaps introducing another level of hedging with respect to the variable annuity business? And if so why or why not and what would be the impact of such hedges?

Well, everybody here is anxious to answer that question, Tom.

I guess that it is growing nicely, the VA related businesses and it will continue to grow because we expect to expand that product offering into other parts of the organization, and in many respects the seg fund businesses that we have here in Canada are similar and it could be said to be comparable to VAs.

With respect to the, we've done some things to de-risk the products, the 100% guarantees and the balance of the type of investment vehicles, were always very controlled. For the longest time we had reinsurance on the major blocks here where someone else provided us protection.

We have for the last couple of years dealt with the issue by maintaining reserves. The reserves that we have on our balance sheet is about 500, $600 million.

We recently are, we've undertaken a number of studies and we're in the piloting mode as to whether or not we ought to add another level of protection through hedging using the hedging techniques and derivatives to protect us against fluctuations. But that decision hasn't been made.

The two key changes I'd point out is first of all we can't get reinsurance that we can rely on the counter party for so we've moved to product design as Dominic said, but our view in the past was that dynamic hedging doesn't necessarily provide full protection from tail risk. But it is attractive to reduce volatility and it becomes affordable now that we're expecting to get capital credits for having a valid hedging program.

And so we're looking at putting in that other layer Dominic talked about based on cost justification on a go forward basis, but we're not of the belief that it's going to totally obviate the need for good product design.

Thank you.

Your next question comes from James Keating, RBC Capital. Please go ahead.

Good afternoon. Great quarter. A simple question. I wonder if you could ask John DesPrez to address the mutual fund sales and perhaps the fixed annuity sales? I'm curious about if there was anything unusual in there or if whether we're in the early stage of a nice turn in trend and what the product specifics might be that are driving that?

Let me touch on each of them.

Fixed annuities, we're trying to stay in that market to a modest degree. We would like to be selling at about 100, 110 million a month or so. Which we think is sufficient to keep our distribution channels open and our product development capabilities up to speed and whatnot.

For the same reasons that have been discussed as it relates to the G&SFP business with the narrow spreads and interest rate levels and the like, we don't want to right a lot of that business in this particular environment but we do believe that there will be other points in the interest rate and credit market cycles when that business will be attractive so we want to maintain our capability. And we're basically turning the dials on that business to stay at the levels that we want to be at.

And with respect to mutual funds there's a lot going on there. We have, that business has turned back into positive net flows really for the first time over the last several quarters in five years since the end of the bull market.

We have some product there that's quite attractive and selling well as you see the sales numbers have improved considerably, and we're bringing a whole host of new products to market over the next three months or so.

We introduced our life style funds into the retail mutual funds market on November 1st, I guess two days ago. Those have terrific records and have been quite successful as I underlying vehicles for 401(k) and variable annuities. We hope to have similar success in the retail mutual fund business.

And we announced an arrangement with GMO, [inaudible] where they're going to manage a series of funds for us that will be introduced after the first of the year. So we have a lot going on in the mutual fund business and are quite encouraged and are expanding our sales force in that space and the results so far are good.

Thank you, John.

Operator, we're past our time now. We'll take one more question.

Thank you. Your last question comes from Jukka Lipponen, Keefe, Bruyette and Woods. Please proceed with your question.

Good afternoon. There's been a lot of talk recently regarding the pandemic exposures and [inaudible]. Can you give us some color of how you think about that internally both in terms of your risk management and also the possibility for business disruption and that sort of thing?

Well, that's a good question. But it's a difficult one to give you an exact answer to because there's so much unknown and the scenarios are so, well, they're just so complex.

We have done some preliminary work on what the mortality bill might be to us given different levels and different intensities of the spread of this disease. We really haven't got a good feel for what the knock-on effects might or might not be, I mean what effect would it have.

Our efforts today are concentrated on developing the plans to make sure that we can keep the lights on and service our business and so forth, that we have an operating plan that will deal with the eventuality. I'm sorry I can't give you -- we've done a lot of reading. We've had this issue in front of our risk people for a while. And it's very, very, I mean what scenario do you want to model, it's just impossible.

But we are updating our contingency operational plans for modest disruption or a more significant scenario so we can continue to service our clientele.

The U.S. UL business, the secondary guaranty product now with the higher reserving requirements in place what kind of price increases are you seeing in that market as a result of that?

Well, I think our primary response to that is to redesign our products so as to minimize the capital consumption and reduce the impact of the 38. And I guess we don't see it as a show stopper, and taking comfort from the relatively placid way in which those who have to deliver earnings here are reacting to the introduction of AG 38. But, I don't know Peter or Bob you want to add anything?

I'll just add one comment.

It's, you know, it's a difficult time to develop products because all the companies are doing it simultaneously and we don't have a competitive target to shoot for. But I mean all I can tell you is that it is although some company's have said that it's their intent to ride this out until we get to a principal based approach, we do intend to introduce new products in the first quarter of next year which we expect will significantly reduce our reserving requirements over the current versions of those products.

Ladies and gentlemen, thank you very much for joining us on our call and for your interest in our Company and we'll talk to you next quarter.

Ladies and gentlemen, that includes the Manulife Financial third quarter 2005 third quarter results conference call. A recording of this conference will be available as of 5:00 p.m. today by calling 416-641-2124. It will be available until the end of day on Thursday, November 10. An archive of the Webcast will also be available on www.manulife.com later today. You may all disconnect and thank you for your participation.