Manulife Financial Corp (MFC) 2006 Q1 法說會逐字稿

Good afternoon, and welcome to the Manulife Financial first quarter 2006 financial results for May 4, 2006. Your host for today is Patricia Kelly. Ms. Kelly, please go ahead.

Thank you, and good afternoon. I’d like to welcome everyone to Manulife Financials earnings conference call to discuss our first quarter 2006 financial and operating results. If anyone has not yet received our earnings announcement, statistical package and the slides for this conference call and webcast, these are available in the “Investor Relations” section of our website at www.manulife.com. As in prior quarters, our executives will be making some introductory comments. We will then follow with a question and answer session.

On behalf of the speakers that follow, I wish to caution investors that the presentations and responses to questions may contain forward-looking statements within the meaning of the safe harbor provision of Canadian provincial securities laws and the U.S. Private Securities Litigation Reform act of 1995. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information about the material factors or assumptions underlying such statements and about the material factors that may cause actual results to vary from those expressed or implied in such statements, please consult the PowerPoint presentation for this conference call that is available on our website as well as the Company’s management discussion and analysis under the heading “Risk Management” in the most recent annual report. 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.

Dominic D’Alessandro: Thank you, Patricia, and good afternoon, ladies and gentlemen. Thank you for joining us on this call. Earlier today we announced record earnings of $965 million for the quarter. Earnings per share also reached an all-time high, increasing by 21% over the prior year. While pleased with this earnings performance, I have to say that I am particularly encouraged by the exceptional sales levels that were achieved across our global insurance and wealth management operations. Premiums and deposits for the quarter increased by 20% to $17.9 billion. Return on equity for the quarter was also strong at 16.3%, an improvement of 223 basis points over the first quarter of last year.

Before Peter begins his review of our financial results, I would like to comment briefly on some of the quarter’s operational highlights. In both Canada and the U.S., integration efforts are benefiting earnings through improved new business margins and expense synergies. With the integration largely behind us, our businesses are moving forward with new product launches, expansion of distribution capabilities, and customer service initiatives. Sales were strong in all our North American operations but were particularly so in the U.S., which enjoyed strong individual insurance sales and record net sales in the variable products group.

Our Asia and Japan businesses also performed well. In China, we continued our measured expansion and added two new licenses, bringing our total to 14. In Japan, we again expanded and diversified our distribution capabilities with the addition of three new banks and one securities firm. We now sell our variable annuity products in Japan through a total of 16 banks and 5 securities dealers.

Our reinsurance operations had a rebound in earnings in the quarter as claims experience improved noticeably; and previously reported hurricane losses were adjusted downwards after a detailed review.

Progress was also made in tidying up the business activities of the merged company. During the quarter, we completed the sale of First Signature Bank and announced an agreement to sell Independence, a third-party asset manager. Neither of these transactions had any effect on the quarter’s results; however, they will allow us to focus our efforts on our continuing operations.

Also this morning, we issued a separate press release announcing that the board of directors had approved a stock dividend, which has the same effect as a two-for-one split of common shares. Since becoming a public company in 1999, our share price has performed well, rising by some 300% over the period. This stock dividend is an indication of our level of confidence in both our current financial position and our future growth prospects. As well, we expect that the split will make our stock price somewhat more attractive for some retail investors. With that, I’d like to ask Peter to take us through the numbers in more detail, with the usual question and answer session to follow.

Dominick just noted first quarter earnings increased by 19% year over year to $956 million. Some of the factors contributing to the year-over-year growth included strong sales, [repeated] growth of in-force business, improved margins in Canada and U.S. insurance, and favorable investments and credit experience. These were partially offset through-- by unfavorable claims experience, largely in the U.S. protection and the run-off John Hancock Accident and Health block; and, as well, currency movements reduced year-over-year earnings by some $59 million.

On slide 8, you can see that sales growth was impressive in both our Insurance and Wealth Management operations. On a C-dollar basis, total Company Insurance sales increased by 22% and, on a constant currency basis, rose by 28%. While sales levels were solid across all our insurance operations, the strong performance in U.S. insurance was a key driver of this result. In our Wealth Management operations, sales growth year over year was up by 27%, excluding the impact of currency movements that increased by 33%. It is also worth noting that in many segments, we continued to improve our market share rankings, building upon our already strong positions. We have noted some of the particular highlights in slide 8, and I will review these in more detail as we discuss our operating results.

As we’ve highlighted on slide 9, we have made considerable strides in improving our ROE since we closed the John Hancock transaction. In just six quarters, we have increased our ROE by 430 basis points to this quarter’s 16.3% ROE. We are quite proud of this achievement and continue to focus on delivering our medium-term ROE target objective of 16%.

Our Investments division had another very strong quarter, with net provisions remaining at historical lows and the total portfolio yield increasing to 6.5%. As well, we continued to improve the overall quality of our portfolio with below investment grade bonds reduced to 5% of total bonds, down from 6.1% a year ago. Over three-quarters of the reduction was in the riskiest single B and below category. In the auto sector, our exposure to Ford and GM has declined to $126 million, primarily due to pay downs on short-dated maturities as previously discussed. All but $5 million of these exposures are now either secured by the pledge of asset security or represent issuance by finance company affiliates. Our total auto industry exposure is at a low 0.5% of total invested assets, or just under $800 million. Excluding GM and Ford, our exposure to the North American auto sector, including auto parts manufacturers, is 99% investment grade. So, I’m quite comfortable with our situation in the auto sector.

The chart on slide 11 shows the movement in funds under management over the last four quarters. In aggregate, funds under management increased by 10% over levels recorded last year and were up 14% on a stable currency basis. Record levels of premium deposits and strong net investment income both added to asset levels while normal-course policy payments and currency movements reduced reported asset levels. Outflows of John Hancock institutional products continued with more than $6 million of policy payments occurring over the last 12 months.

I’d now like to go through our divisional results. Before I discuss our first quarter results, I’ll note that beginning this quarter, we’ve realigned our financial reporting in the U.S. As in the past, U.S. insurance includes John Hancock life and John Hancock long-term care operations. Within U.S. Wealth Management, we have expanded disclosure and now report on five key product categories. For purposes of this presentation, we’ve grouped these products into variable and fixed product groups. I believe you will find this additional disclosure helpful in understanding and evaluating our results.

Our U.S. Insurance operations had strong first quarter earnings of US$137 million, an increase of 25% over a year ago. Exceptional sales growth and improvement in new business margins in John Hancock life combined with favorable investment experience and accounted for the majority of this earnings increase. Long-term care earnings benefited from in-force growth in higher sales. However, weaker life claims experience and a rise in LTC claims during the quarter more than offset these gains. The volatility in life claims levels is within the normal range of expected outcomes. In part, the increased level of LTC claims was due to seasonality, as this line tends to see a higher level of new claims in the first quarter; and, as well, claims levels were also impacted by recent initiatives to improve the speed of claims processing.

On slide 13, you can see that U.S. Insurance had an exceptional sales quarter, with John Hancock life sales up by 78% over last year to US$185 million. Our sales success was very broad based, with gains out in all major product lines and across all distribution channels. Product innovation and expanded distribution have resulted in strong gains in market share. For the full year ’05, we moved up from the number-three market share position in Universal Life sales to the number-one position. Our overall market ranking also improved noticeably as we moved to the number-three position in total U.S. Insurance market sales, up from number five in 2004. Our long term care segment continued to experience a steady improvement in sales. The addition of new distribution channels and marketing efforts to improve product awareness contributed to the fourth consecutive quarter of increased retail sales. In Group long term care, we finished 2005 with the number-one market share.

On slide 14, you can see that the U.S. Wealth Management segment delivered exceptional earnings of US$221 million, up 32% over the same quarter last year. Variable products contributed US$108 million to first quarter results. Earnings benefited from extraordinary sales, strong in-force growth, and the positive impact of higher equity markets. John Hancock mutual funds also had good earnings in the quarter, despite increased costs related to our ramp up of new sales initiatives.

On slide 15, you can see the first quarter was an extraordinary sales quarter for our variable products with gross sales of 48% over last year and net sales up a strong 62%. Variable annuities growth sales were US$2.4 billion, and net sales more than doubled the levels of one year ago. Obviously, this rate of sales growth is unsustainable. We also continue to gain VA market share with industry statistics showing increased market share in each successive quarter over the last year. By the end of the fourth quarter, we had improved our market ranking to fifth overall and moved up to the number-two position in the non-proprietary market for VA sales. Our Retirement Plan Services business also had a very strong sales quarter, as increased average case size contributed to a significant growth in transfer sales. Sales in John Hancock mutual funds were strong, with retail mutual fund deposits up by 61% and segment net flows more than double a year ago. The addition of the highly rated lifestyle funds and the meaningful expansion of our wholesaler sales force both contributed to the success.

Looking at slide 16, in the fixed products segment, John Hancock institutional and retail fixed products contributed earnings of $113 million in the quarter, with unusually strong investment gains driving the bulk of the year-over-year growth. As I have noted in previous quarters, John Hancock institutional, previously reported as guaranteed structured financial products, can demonstrate quarter-to-quarter earnings volatility due to investment-related results. Due to these investment gains, I do not view this quarter’s level of institutional earnings to be sustainable.

On slide 17, as expected, this quarter’s net outflow of institutional products amounted to US$1.3 billion, reflecting level of maturities while we continued to restrict new sales [inaudible] available in current markets. Net flows in the retail business totaled US$74 million.

On slide 18, you can see the Canadian division also achieved a record level of earnings, with year-over-year quarterly results of 29% to $238 million. Continued imports business growth and improved new business contribution due to better margins on the post merger product suite helped to generate the earnings growth. In addition, favorable investment experience and the positive impact of rising equity markets both contributed to strong first quarter earnings. Within our Group business, a gain relative to a revision of investment strategies, was somewhat offset by less favorable claims experience in the quarter.

Slide 19 shows that in Canada, insurance sales decreased marginally as we continue to maintain pricing discipline in competitive markets. Our Group businesses performed very well in the quarter, with sales in both product lines outpacing last quarter and up by 68% over a year ago. In Group savings and retirement solutions, sales gains were particularly noteworthy, given that the previous quarter included a jumbo [case sale] to Wal-Mart Canada. Success in this segment has also resulted in market share gains, with our business moving up to the number-two position for defined contribution pension sales in Canada from fourth one year ago.

Mutual funds and segregated funds continue to demonstrate positive net flows in the quarter. Segregated net flows declined year over year as gains from the restructured Manulife products were offset by net outflows in maritime funds. This result was not unexpected as prices were recently increased on the in-force maritime products. On a gross basis, segregated fund sales were strong with good sales in Manulife products resulting in a record level of deposits. Mutual fund net sales declined to $58 million following a very strong 2005. We recently launched simplicity funds in order to broaden our mutual fund product offering.

On slide 21, you’ll see that our Asia and Japan division had good earnings of US$141 million. Hong Kong earnings rose by 18% over a year ago. In Japan, growth of in-force business, tight expense controls and an improving investment environment contributed to year-over-year increases in earnings. As well, we recorded a gain of US$16 million related to the lengthening of our portfolio duration in the Japan segment. As we’ve noted on other occasions, this segment’s duration was positioned short to take advantage of the expected increases in market interest rates versus historic lows. As rates have recently increased, we have again taken the opportunity to lock in higher long-term rates.

Looking now to slide 22. Beginning in the first quarter of 2006, our Japan business revised its method of reporting insurance sales, moving from gross sales to a new annualized sales measure. Conversion programs which extend the scope of an existing policy are a prevalent component of the Japanese marketplace. Net sales reporting only includes the incremental impact of such sales rather than the full amount of these premiums. Because we do not have accurate records of the level of historical upgrade sales in Japan, our prior period sales results have not been restated. As a consequence, this quarter’s result is biased downwards versus historic numbers. These observations aside, insurance sales this quarter in Japan were soft due to slower than expected growth in agent count. The business has stepped up recruiting efforts and implemented a new sales management incentive program to help increase headcount going forward. In other Asia, insurance sales increased by 20% over last year. As is usual, both other Asia and Hong Kong experienced some seasonality in first quarter sales levels versus the traditionally strong fourth quarter.

Looking now to slide number 23. Asia and Japan Wealth Management sales remained strong on both a gross and net basis. Japan VA sales continued to be a highlight, with quarterly gross sales topping US$1 billion for the very first time. Net sales were also exceptional, US$945 million. In Hong Kong, the launch of new funds and strong fund performance contributed to a 90% rise in year-over-year wealth management sales.

Earnings in our reinsurance division rose to US$80 million in the first quarter. To a large extent, the increase in earnings was driven by favorable claims experience in the C&C segment. This included gains on commuted contracts and recovery of some previously reported hurricane losses that on a combined basis added roughly US$21 million to the first quarter. Growth of in-force business and the positive impact of higher equity markets on segregated funds also contributed to the division’s first quarter result.

Looking to slide 25 in the Corporate and Other segment, first quarter earnings were C$51 million. Relative to prior levels earnings were negatively impacted by $19 million of accident and health claims losses and the non-occurrence of unusual investment gains. Partially offsetting this impact was $32 million of earnings related to gains from portfolio repositioning on the assets supporting the John Hancock businesses as part of our post-merger realignment of asset, liability, management of these businesses. Consistent with our previous practice, this has been recorded in our Corporate segment.

On slide 26, we presented our source of earnings disclosure. As some of you may have noted, we have revised the presentation and no longer report the impact of segregated fund guarantees separately. Rather, this is now reporting the matter consistent with our other risks and benefits. This means that expected income using normal market movements is now included as earnings on in-force while the impact of actual investment performance versus expected is reported as experienced gains and losses. The impact of this change for the first quarter was to move $35 million to expected earnings on in-force and $39 million through experienced gains. Prior quarters were restated to this basis.

First quarter earnings on in-force were C$742 million, a 12% rise over a year ago. The loss on new business origination fell again this quarter and is down from a year ago. The improvement reflects the completion of product portfolio restructurings in Canada and U.S. Insurance following the merger. First quarter experienced gains remained strong at $268 million, well above levels reported in Q1 ’05. While we continue to outperform our base actuarial assumptions, the benevolent credit environment, favorable impact of strong equity markets on segregated fund guarantee reserves, and the positive impact of rising interest rates drove the year-over-year improvement in experienced gains.

Management actions and changes in assumptions amounted to $81 million on a pretax basis. This line includes $44 million pretax, or $32 million post-tax, related to the gains from the portfolio repositioning on the John Hancock segments and US$28 million pretax, US$16 post, capitalized mature [inaudible] assets in Japan. The value of rising interest rates during the quarter in respect of our protection lines has not yet been reflected in our accounts, as these are generally reviewed annually. I would also note that at negative $7 million, Other is down sharply from a year ago when we received a one-time $89 million payment related to a residual interest in the [Diacu] estate.

On slide 27, you can see our U.S. GAAP accounts. On a U.S. GAAP basis, our earnings for the quarter were $787 million, roughly $170 million lower than the results on a CGAAP basis. Lower levels of U.S. GAAP investment income from lower realized gains in the quarter and differences in the reserve movement between the two bases to presentation accounted for the majority of this variance. When considered over several periods, U.S. and CGAAP results continue to emerge quite consistently. However, we do expect more quarter-to-quarter volatility on the U.S. GAAP basis, primarily because realized gains tend to drop to the bottom line each quarter under U.S. GAAP but are largely offset by matching policy liability movements under CGAAP. As well, numerous actuarial and other items can cause material quarterly differences.

Turning now to slide 28. Our exceptional level of sales in the first quarter resulted in excellent new business embedded value growth in the quarter. At $531 million, new business embedded value increased by an impressive 52% over last year. Because we have maintained and improved our new business profit margins, our sales success is adding strongly to the value of our business.

In the first quarter, we completed an offering of 300 million of preferred shares and issued 350 million of medium-term notes. Both issuances were completed at attractive market rates. We continue to buy back shares and in the first quarter repurchased 3.5 million common shares for some $1.2 billion, and in April, share repurchases amounted to an additional 2 million shares at a cost of approximately $400 million.

In summary, top line growth this quarter was extremely strong, with record sales and market share gains across most segments. Sales growth drove excellent growth in new business embedded value and profitability, so [while] we posted record Q1 earnings and strong improvement in ROE. Although all of the favorable environmental factors enjoyed this quarter may not persist, we remain very well positioned for continued strong financial performance. So, in conclusion, we are very pleased with these results.

Thank you, and I’ll turn the call back to you, Dominic.

Dominic D’Alessandro: Operator, we’re now ready for the question and answer portion of our call.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question comes from Ken Zerbe. Please go ahead.

My first question relates to your improving ROE. On page 9, a very impressive chart. It looks like a very steady upward move in your return on equity. But, given that your ROE target is 16%, what is changing in your business-- or how should we think about ROE going forward that’s going to cause that level of improvement to level off from this point forward? What’s changed?

Dominic D’Alessandro: Well, I think as we said in a variety of ways, we’re starting to see the benefits of the merger emerge. We’re starting to see-- we’re recapturing fully the expense synergies. The margins on our business are robust, so we’ve re-priced a lot of the product. We’re starting to see a very healthy level of new sales activities. And because of the re-pricing of the products, we have less strain on those new sales.

I can totally understand how you could have achieved that improvement in the ROE. I guess my question going forward is if you are targeting at 16% going forward, or that’s where ROE’s going to be, is it safe to assume that you’ve already seen the full benefit of those synergies and new products?

Dominic D’Alessandro: I’ll let Peter intervene here in a moment. I think there’s just still some expense synergies to emerge. I think, as well, that the quarter’s results-- don’t forget; we’ve had very favorable equity markets across the world. When you look at the source of earnings, you see clearly there that there’s a very high level of experience gains, which means that, in essence, the experience has been better than what we’ve priced for or allowed for in our reserves. So, all of that put together gives you a very healthy level of ROE.

That’s exactly right, Ken. In fact, if we continue to enjoy the current economic climate, our ROE would probably continue to improve. I guess we’re feeling that things have been pretty good. If they got a little less consistently a factor for us, that would not be a surprising scenario. I guess that’s why it’s difficult to say we should raise our ROE target to, I don’t know; say, 18% or something. This is a climate that’s quite attractive for us to operate in.

I see. Okay. The next question I had was-- I was hoping you can give us an update on the Hancock accident and health business. Obviously, you had some unfavorable experience there. What is your exposure, and what could potentially trigger additional losses?

Dominic D’Alessandro: Just to correct that, I don’t think we had favorable experience on the accident and health block that we inherited with the John Hancock merger. In point of fact, we added to the reserves.

Just the opposite. The property block was the one with the recoveries--

I’m sorry; I meant unfavorable.

Dominic D’Alessandro: I just wanted to clarify. That’s a huge block of business, and that’s in run-off mold. Virtually every single contract is in litigation. We have what we think are robust reserves to deal with the eventualities, but they could swing either way. I can’t tell you that the situation will be totally dealt with in the next six months. I think that this is, as I say, a work-out period. It may extend several quarters beyond that. Every quarter that goes by, of course, we resolve one or two files, and the situation becomes a little clearer. But, it will be with us for a while. The reserves we hold for that block of business are very substantial. Have we disclosed the level of reserves?

I don’t recall, Dominic.

Dominic D’Alessandro: Anyway, they’re very substantial. It’s not our practice to surprise people. So, we think we hold a comfortable level of reserves. We’ll not know the outcome for quite some while yet.

Okay. Great. Thank you very much.

Your next question comes from James Keating. Please go ahead.

I wonder if I could just ask Peter to bear with me. On slide 26, I couldn’t keep up with you on the assumption changes. I think you had two sources. Could I just ask you to slowly give me a re-explanation of that one, Peter?

The management actions and changes in assumptions?

Thank you. Yes.

I’m going to ask Simon to walk you through that again, if I could?

Yes. The management actions and basis change in the function line is primarily picking up this quarter to C$28 million pretax from the terming out of the-- in the Japan bond portfolio, as well as $44 million from some re-segmentation activities in the asset portfolios back the Hancock [inaudible] segment. These are both real economic actions that took place to add gains [inaudible] an income result. Just to give a bit more flavor, the C$28 million in gains from the terming out of the Japan bond portfolio was included here because we had highlighted earlier that we had this intention to opportunistically term out the bonds in Japan as the rate grows. It was a bit of a subjective decision as to whether it came into this line or went in investment gains, but we felt it was clear [inaudible] put it here. The assets for that re-segmentation gain involve basically some work on the Hancock segment, retail fixed annuity segment, where we-- this is from a subdividing of the assets and liabilities into shorter term fixed annuity and longer term [inaudible] segment. This allowed us to both [include] the [inaudible] sheet and increase the expected spreads. Consistent with the reserve requirements, it generated a reserve [lease] that we input through that line. So, those are the two key drivers on the, really--

Just another small point here on the Group benefits in Canada. We’re hearing a lot from [inaudible] long-term disability issues. No one seems to think it’s important. Would you be in the same camp? This is a short-term blip, or is there anything we should be concerned about on the LTD experience in Group benefits?

Dominic D’Alessandro: Bruce, long term disability - are there any trends that are--? Bruce, do you want to come closer?

LTD can be volatile month to month. We had one bad month. We have not seen a bad trend yet. The total Group benefits claims were not as good as the first quarter last year, but nothing indicating a significant problem.

Great. That’s all I need to hear. Thanks, Bruce.

Your next question comes from Rob Wessel. Please go ahead.

The first question I wanted to ask you about was-- I guess if I were to think of, for lack of a better phrase, “items of note,” the four that I think sort of jump out are the gain in reinsurance of $23 million, the gain on the repositioning of the John Hancock asset portfolio of $32 million and the accident and health claims losses, and then the gain in Japan. All that sort of nets out to about $54 million to the positive, or about $0.07 per share. Are there any other items that you can think of which would-- that should be added to that list or you can think of as sort of unusual?

I’d have two items, just off the top. It’s very hard when you try and define something as being unusual because [inaudible] does have a bit of bounce. [Inaudible] $59 million just in FX year over year, and our experience generally on claims has been weaker this quarter than is the case. Credit and other items have been good, but the operating experience has not been as positive as is normally the case and would probably be a [not immaterial] number.

Dominic D’Alessandro: I think, as well, the fact, as I think Peter mentioned in his comments, that there’s been a gradual but noticeable rise in long-term interest rates, and that would normally have a very significant impact on our overall reserves, remembering how big our reserves are. That positive impact has yet to be reflected in our accounts in any way shape or form. As we explained, our protection businesses, our life insurance businesses, the revaluation of the reserves because of the complexity and just the sheer volume of data that has to be manipulated, we measure once a year. So, should these interest rates hold at the levels that they exist today, we would expect to see an emergence of additional earnings that has not been reflected in the current quarter’s results, which would dwarf the amounts that you just mentioned.

Sure. Maybe I missed something, also, but on the corporate-- If I were to take out the two items that appear to be items of note, I guess, if you will, out of corporate, I think that brings earnings in that segment to close to $0.00.

You did miss something, and that’s-- Corporate, almost [serially] has had investment gains that have been quite favorable, and this quarter didn’t have any of those. The recognition of investment gains on some of the corporate assets is quite lumpy. So, that would have been a very soft performance in that segment.

Okay. And, maybe there was-- And John Hancock institutional was maybe $20 million stronger than it usually is? I know you had alluded to it.

That’s right. That was also investment related, and that’s correct.

Okay. Great. Sorry; not to dwell on that. I’m sorry, Peter; you had mentioned in the SOE disclosure-- I know you had taken out the segregated fund guarantees. That was $42 million last quarter, if I recall. You had said it was $74 million this quarter? Maybe I missed that.

I think I gave you the split.

Was it 35 and 39?

Sounds right.

Yes. It was $35 million in expected earnings on imports and $39 million in the experience gains this quarter, for a total of $74 million, pretax.

Okay. Great. And then I wanted to ask you about your medium term EPS growth target. I know in previous conference calls you’ve mentioned or felt comfortable with the idea of 15% as a medium term target, but given a $0.90 Canadian dollar, do you still--? I recognize that it’s-- at the time you’d suggested that. It was medium term not necessarily this year. But the Canadian dollar has moved forward quite strongly. Is that something you would still feel comfortable with?

That is our medium term objective. In fact, I guess what I would say is unless the C-dollar can maintain this pace of change, our earnings would become stronger. It’s not only the bad C-dollar but the pace at which the U.S. dollar is becoming less valuable. It’s put pressure on our growth rate.

Sure; it’s been quite meaningful.

It has been substantial. You can see it in the accounts. But, our medium term target which we believe is achievable is to grow EPS by 15% per annum.

Okay. If I was to think of that in terms of this year, I guess the base for that would be last year’s EPS of [4.07]?

I don’t really comment on quarter to quarter and year to year.

Sure. Okay. That’s great. Thank you very much.

Your next question comes from Michael Goldberg. Please go ahead.

Over time, you’ve had great success with the bank and dealer channels in selling variable annuities in Japan. Can you talk about the potential to sell other products through these channels as regulation changes?

Dominic D’Alessandro: Who wants to try that one? Anybody? We of course are having discussions with them all the time as to expanding the product offering through the bank channel. I think that they’re embryonic, our discussions at this stage. There is a reform of the whole industry in Japan with the change to the status of the post office. You know the post office is in fact the biggest life insurer in Japan. So, a lot of the arrangements are in flux. Obviously, we’ve had success in North America. We try to build on the experiences that have worked well for us here and to migrate them to other parts of the Company. Beyond telling you-- saying those things, I’m not sure that I could point to any immediate expectation of a breakthrough through the bank channel in Japan next quarter.

Mainly, the banks at the moment are not allowed to sell life insurance products in Japan at this moment. They’re talking about a regulatory change which may be coming at the end of 2007. It will allow them to sell our other life insurance policies. Obviously, we’ll be talking to the banks about the potential to do that over the next couple of years. As Dominic says, nothing’s in the short term because we’re not allowed to, really.

Okay. I have one other question. We’ve seen continued strength in the Canadian dollar. I’ve asked this before. Canada represents, I think, about 25% of your earnings. What’s the justification for continuing to report in Canadian dollars as your operating currency?

Dominic D’Alessandro: Well, because-- It’s a good question, Michael. Because while it may represent 25% of our earnings, it represents 60% or so of our shareholders. The best indication we have is they’re very interested in what our performance is in Canadian dollars. We could report in U.S. dollars. That would add another wrinkle to what are already very complex accounts. We look at this all the time.

You’ll remember, Michael, we in fact asked the analysts and investment community if we switched to U.S. dollars, would that be helpful. I guess the response I got was some indifference. It’s a fair amount of work, but it’s something that is-- It’s how we run the underlying business. We run it on a local-currency basis, and U.S. dollars is a bigger piece than the C-dollar. That’s absolutely correct.

Dominic D’Alessandro: Michael, I’m astounded. You haven’t made any comments on embedded value.

Well, it’s great information, and I’ll follow up afterwards.

Your next question comes from Mario Mendonca. Please go ahead.

I want to talk a little bit about long term care. Do you folks still like that business, given, well, maybe this quarter and some of the proposed changes? Specifically-- when I say proposed changes, I’m referring to the whole idea that the costs of new policies-- the premiums charged for new policies-- Or, the rates charged on existing policies will have to be sort of in line with the cost of any new policy. I ask that because there are articles going around that show that certain companies have-- over time, they increased the premium on a long term care policy by-- somebody estimates as much as 480%. I think that’s been the pattern with long term care insurance companies for a long time. I think one day that’s going to get them all in trouble. If you can’t jack up the premium on a long term care policy ten years from now, doesn’t it make that policy sort of horrible?

Dominic D’Alessandro: Maybe I can make a few comments and then ask John-- I have my whole team here with me today, Mario. You ask these tough questions. Yes; we still like the business. It’s a relatively young business compared to life insurance in the United States. I think long term care products maybe have been available for a long time, but, really, they’ve been more available within the last ten years. Yes; there has been a lot of re-pricing because the experience initially proved to be quite a bit different than the assumptions that went into the pricing of those initial products. A lot of people backed out of the business and so on. So, now, today, we have three large providers. We think that it’s a product that the public needs. All of our major price increases were done-- Hancock did them a few years ago and suffered through compression and its market share as a result. You’re partially correct. It’s difficult to change prices because you’ve got to get approval from each of the various state regulators. But, quite frankly, what someone is buying is a basket of cash that’s going to be available to them in a time of need. This is no different in many respects than many of our insurance products where we have to make estimates about long term behavior. What’s new about this business is that it’s a relatively young business, and therefore the statistical and actuarial tables and so on and so forth are not as robust or as-- based on past experience, as we would like. But, we like the business. It’s a firm belief of ours that if a product is to be offered that’s required by the marketplace, it will be offered at a profit. Some people will get it more right than others. We think that most of the upheaval in this business is, in fact, behind us. The pricing actions that Hancock took-- we were gratified to see that the competitors took them over the past year or so. That’s, I think, partially the reason why we’re having some more success in our sales efforts. We’re more competitive because everybody’s caught up to us in pricing.

Long term care has always seemed like a bit of a bait-and-switch type policy. “Here’s your premium now, but”--

Dominic D’Alessandro: That’s not our business. Manulife doesn’t do business that way.

It’s just everyone else is.

Let me just clarify the facts, Mario, a little bit, because I think you’re misstating even the history with respect to John Hancock.

I’m not saying Hancock; I’m saying the industry.

My understanding is that John Hancock has never increased the price on a policy that it originally issued. The price increases that have been put through were all on the acquired block that Hancock acquired from [Forintz] in a transaction a number of years ago and were anticipated as part of that transaction. Our pricing philosophy, which is [technical difficulty] the market in its conservatism, particularly as it relates to ultimate lapse rates, has always been designed to be supportable in the long term for the life of those policies. So, this in no way is being positioned as a bait-and-switch type arrangement where we sell an artificially low price with the expectation of raising prices. We think as a practical matter, it is a marketing impossibility to raise those prices and maintain your ongoing distribution relationships and everything else. So, I just have to disagree with your base presumption here.

I think you’d agree, though, that if the senate and the congress are actually contemplating legislation to prevent companies from raising pricing after the fact, then, clearly, this has been an issue for the industry. I don’t think congress would have spent the time unless this were an issue. I acknowledge, of course, that it’s not a Hancock issue.

Let’s move on to something else, then. If we can think a little bit about this interest rate issue-- I think your disclosure shows that a 10 basis point change in interest rates-- if you were to change your long-term assumption, it adds something like $300 million-- something like $0.37 - this 10 basis point change. What does it take--? This is, I guess, Simon - a question for Simon. What does it take before you actually go and start to revise those assumptions?

Well, we would normally do that for the protection products, Mario, at year end. So, that would be our normal cycle. So, to the extent rates are up, we would expect to do that at year end in respect to those products, which is where the interest rate sensitivity is predominantly resident.

And, Japan for a moment? You get the $18 million benefit this quarter, or $16 million or whatever it is. Is there an ongoing benefit from having extended the duration [picking] up additional yield?

Dominic D’Alessandro: Well, the additional yield on the portfolio extended. We still have a portion of the Japanese portfolio to term out. That wasn’t really a hard decision to make [to stay] exposed on that book because rates were like 50 basis points there a few years ago. At the end of the year, we will relook and rerun all of our protection business reserves, using the latest and up-to-date assumptions for lapses, maintenance expenses, investment returns, mortality and so forth. And, as I said in my comments earlier, should interest rates remain at these levels, we would expect to see a very substantial adjustment to the reserve levels, an adjustment downwards, which means an increase in equity or an ability to increase other reserves or other pads. In any event, we’ll give you a full accounting once that’s done. But, our practice is to do that on that block of business once a year for the reasons - the practical limitations I talked about earlier.

One final very quick thing on the Corporate segment. If it was one area where there was weakness relative to my numbers, it was in Corporate. I suspect it was in that investment portfolio. Is there a way we can think about that? How much weaker was it than the investment returns, and why would it have been? What particular hybrid investment didn’t come through this quarter?

If you recall, Mario, each quarter when we do have a gain, we tell you the nature of it. They’re very lumpy. They’re sometimes quite substantial. And, there weren’t any of those noteworthy items this quarter. It’s an unusual portfolio. It’s got a lot of that sort of stuff. So, it was on the soft side and no special positive items. That’s an unusual event, but it’s been volatile right through the piece. When it’s been volatile favorably, we’ve been telling you the components. There’s not much to tell you because it didn’t happen. There was no components this quarter.

Dominic D’Alessandro: I think, Mario, you also heard that in virtually every other segment we had positive investment results. It just didn’t happen to fall in this segment this quarter.

That’s going to happen from time to time.

Okay. Thanks very much.

Your next question comes from John Reucassel. Please go ahead.

Just a question for Dominick - I guess Dominick. Every time a [inaudible] company is for sale around the world, Manulife seems to be the first name people say.

Dominic D’Alessandro: Isn’t that great?

So, if you could refresh my memory what your priorities if an acquisition comes along are, just in no order? I assume it’s contiguous U.S. businesses and Asia book. Could you just--?

Dominic D’Alessandro: That’s exactly right. We would look at a business-- Our first item of consideration is the strategic fit. Is it in an area that we understand well, where we can bring some expertise to the table? We’ve repeated that order many years to you religiously. I’d hate buying a business where the only thing I’m bringing to the table is my wallet. My experience with such arrangements is that they don’t last very long. So, it has to be a strategic fit. We’ve identified the areas of interest to us. It’s the geographies that we’re now in. We like Asia, we like North America, we like Canada, we like the United States. I guess, beyond that, I would say, we like the life insurance business. We don’t want to run too far afield into businesses, again, for the reasons that we don’t have the expertise, etcetera, etcetera. Of course, price is a very big consideration. I happen to believe religiously that most merger deals go bad when they’re negotiated. Quite apart whether there’s a good fit, usually one party ends up paying too much for the other party. I can’t see any good things that happen as a result of that. I can’t tell you how many times I’ve been told by bankers that if you’re making a strategic acquisition the price doesn’t matter. Well, that’s fine for them. To my way of thinking, it matters immensely. If you overpay for something, you’re going to live with that overpayment for a long time. You’re going to put terrible pressure on your operating people to deliver levels of cost savings or revenue gains that are just not reasonable. Now, I know that it’s fashionable because you buy these things and you go three years, then you write off $3 billion. A new CEO comes along, and everybody forgets what was paid for the original investment, except, if you’re a shareholder, I think a long-term shareholder, you might remember. Those are some thoughts about-- We’d like to stay focused in the geographies where we are, in products lines that we now have. One of the nice things about our Company is that, frankly, we have such a platform that at least gives us-- we have reason to aspire to be able to continue to grow on our existing base. We’re not hemmed in by Canada’s small size. We do only 25% of our business here. We managed to position the Company in, I believe, the most attractive markets in the world. It’s up to us to--

Okay. That’s helpful. I guess just to follow up, how do you find valuations now out there? And, does this Canadian dollar--? Does this make the situation any easier for you? Is it blocks of business, or is it public companies?

Dominic D’Alessandro: Well, I think all of those things, John. The fact is that we are trading at-- our currency is very strong these days - not just the Canadian dollar, but Manulife stock price. I look at these things, believe it or not - the relative PEs and so on. We have the wherewithal, I believe, to consummate important transactions. But, again, they have to be transactions that fit within the strategic parameters that I outlined to you before. We’ve never been in the business of doing a deal for the sake of doing a deal.

That’s great. I guess the last question for Peter. In the John Hancock Life, in the funds under management schedule, there is a $1 billion outflow in Other on Page 11 of the supplementary package. What is that?

Dominic D’Alessandro: We’re looking up the answer.

It’s almost housekeeping. What we do is annually take the profits and move them back to Corporate surplus. So, with it built up and because it’s a bigger unit, there was a larger amount to move.

So, it’s just an inter-Company--

Yes. It’s just making the segments balance, which we do only periodically. We’re actually looking at doing that more frequently as the numbers get bigger.

And, last, this is more of a request. I know you guys already have a big package, but some of your competitors in the U.S. do show sales by different distribution channels. It would be great to see those trends over time.

I’ll take that under consideration. Maybe that’s something for analyst day or something.

Dominic D’Alessandro: We might feature it. I’ll poll a few and see if there’s a generalized interest, and we’ll try and accommodate it if it’s of general interest.

Thank you.

Your next question comes from Tom MacKinnon. Please go ahead.

A question about, I guess, it’s the asset liability refinements that were done with the John Hancock block and the realization of, I think, $32 million in after-tax gains. If you could elaborate exactly what was done-- Is that moving the G&SSP in with the fixed and combining everything together? [inaudible] a little bit more what you did there.

Dominic D’Alessandro: That’s a very good question, and I’ll let Simon answer that question. The segmentation we did of the--

It’s primarily on the retail fixed annuities side as opposed to the G&SSP side. The segments that we inherited managed all the shorter term accumulation fixed [inaudible] annuities in one segment with the longer term payout annuity retail block that John Hancock had, which was inconsistent with how we would manage the business. So, we’ve been able to split the two blocks of liabilities off and create much more appropriate asset portfolios matching basically long duration locked-in set of cash flows and a more shorter duration adjustable set of cash flows.

This was something at your disposal ever since the close of the deal; correct?

The issue is that it takes time to do everything in an orderly manner. We’ve had a lot of work to get through on the deal. This was a decline for doing that--

I think you’re right, Tom. But, practically, in the Q, this is when it came up.

Is there any--? Do you have any other opportunities in this regard going forward?

There are some other things which may or may not be significant once we get through them.

Okay. And then a question about the extension of the duration in Japan and the $18 million gained from that. Correct me if I’m wrong. Did you do something like this the fourth quarter of last year as well? Is this a continuation of that project?

That’s right.

What would this mean? Do you just lock in the gains that you’ve made as a result of that if you have a reserve release?

Dominic D’Alessandro: As I understand it, you recalculate your reserves based on the expectation of the higher level of income that you’ve locked in, and you discount it to present value. That present value is the amount you book.

So, the only way to have them prove-- if yields-- I guess if Japanese interest rates then froze at that level when you did that exercise and stayed there forever, there wouldn’t be an improvement in future asset yields going forward. Is that correct?

I think we still have a short position in Japan. We haven’t termed out fully. So, it would still be some benefit from that remaining term-out position. But, apart from that, you’re generally correct.

Dominic D’Alessandro: We bought the assets from and locked it in in respect to what’s been termed out. As Simon said, there’s [the B] still to go. In terms of upside on what’s been termed out, there would be no upside and there would be no downside. We’ve locked in the duration. There will be an upside when we choose to roll from government to do corporates. There’s obviously some pickup. But, given tight spreads that prevail in Japan and the rest of the world, we’re going to take our time in doing that.

So, for all intensive-- we’re kind of done with this exercise for now.

There are some small pieces left. One is a duration mismatch, and one is to the extent that spreads open up, we could move from what is right now governments to commercial credit, which would also raise yields.

Thanks.

Your next question comes from Timothy Lazaris. Please go ahead.

Most of my questions were asked, so I’m going to ask Dominic one that was asked of me. I wondered if you’d have any thoughts on this. Dominic, there was a letter from OSFI written to financial institutions regarding the Avian flu and the potential impact it would have on companies’ operations and financial conditions. I think in that letter it actually said that this was going to be an area of increased focus of OSFI. Can I ask if Manulife has considered this something that they have to implement and what your views are on the possibility of this?

Dominic D’Alessandro: We have prepared an operational plan, which its focus is on keeping the doors open and on keeping our ability to service our customers in tact. So, we have such a contingency plan. I frankly don’t know if it’s been reviewed yet with OSFI or not. It’s certainly been presented to our board and met their satisfaction. We’ve done some very, very, really, back-of-the-envelope calculations are actuaries have done on what a possible pandemic could do. But, frankly, the range is just so all over the map, it’s not really useful. So, we’ve chosen to, as I say, focus our efforts on our operational ability to continue to service our clients. I don’t know that anybody has a good handle on what the financial impact of this event should it come to pass. I don’t know that it’s useful to try to come up with any precision. What do you do? If you expect this to happen, what do you do? You’re running a business. Do you go and liquidate all your assets that are likely to be affected on the expectation that it’s going to happen? I think that that could be very problematic for everybody. I don’t know, has OSFI--?

We have previously provided some information to OSFI. I think there’s another iteration it asked for. I don’t know, Simon, if that last one is in yet. But, it’s been an ongoing dialog. They’re sensitive to the issue.

They surveyed us earlier on the potential impacts of a pandemic, and we did a high level analysis. I know they’ve recently sent out a letter to all the financial institutions, asking them to include pandemic testing in their financial stress testing. We will be doing that as part of our stress testing. But, as Dominic was saying, the range of outcomes is very dependent upon the assumptions you make. Of course, the big wild card is less the claims impact than it is the more general economic conditions impact.

Okay. And since I came up with a question here that I actually wanted to ask, I wondered if-- There was a comment about pricing discipline. I guess I take from that that you’re referring to Canada. I’m wondering if you’re referring to UL. Could you comment on what the UL market is looking like in Canada, in particular, and whether your feelings are the same as they were last quarter in terms of the way you’re operating in that market?

Dominic D’Alessandro: I’ll ask Bruce to answer that question. Bruce, the UL market and the competitive landscape and how you’re responding or not responding.

Sure. It’s not that common. It was not specifically targeted at UL. It was targeted at general pricing, underwriting practices, compensation practices. Basically, we’re sticking to the business that we know is meeting our profit hurdles. So, it’s not specifically UL. It’s not that there’s unusual competition there.

Okay, Bruce. And, are you seeing any adverse impact at all from one of the large Canadian companies re-entering the MGA market in Canada in individual insurance?

No. As a matter of fact, our business from that channel has been growing. We got more MGAs from the Maritime acquisition.

Dominic D’Alessandro: I think it’s safe to say, Tim, that the life insurance market in Canada is very competitive at the moment. It’s settled down into three largish players, and our success has not escaped the notice of our major competitors. There’s a full-court press to compete. That’s what markets do. I’m telling you that we have not relaxed our pricing standards in any way. We’ll see how this plays out. Obviously, we’re not going to be indifferent forever, and we’ll assess the situation as the events unfold. But, it is a very [technical difficulty]. You’re absolutely-- I want to confirm that for you.

Okay. Congratulations on a great quarter.

Your last question comes from Jim Bantis. Please go ahead.

Just a couple of quick-- Well, one question regarding Japan first. You have been expanding, obviously, distribution channels on the banks and security firms, but at the same time, the number of agents continues to decline. It’s down maybe about 10% year over year, and another 100 agents were dropped off this quarter. Where is that channel with respect to productivity and profitability? Are you happy where it is right now? Sorry; the second question I wanted to ask is-- I’ll just throw it out-- is-- Dominick, when I go to the bank meetings, the commentary, or people consider it rhetoric, coming from them regarding access to insurance products through the branch networks and marketing the customer lists continues to increase. I wanted to get your comments regarding that. It seems that they’re not really concerned about bank mergers anymore but more with respect to insurance products.

Dominic D’Alessandro: Well, let’s start with the Japan situation. Clearly, a priority of ours is to grow our sales force in Japan. We have been working at this mightily since we got there. It’s not an easy thing to totally transform a sales organization. We’re continuing to work at it-- is the best I can tell you today. We have specific programs and increased-- We’re tinkering with all manner of arrangements to attract more experienced professionals to our sales force. We’ve also become more exigent. We’re less willing to tolerate-- people have to perform. Then, you’re seeing a little bit of that in the Asian count that is reported. Overall, our Japanese business-- Frankly, I couldn’t be happier with it. When you think that we went there at the end of ’99 or whenever it was, and then a year later, we were phased with a situation of a sale of the company that we had to negotiate long and hard to secure the assets and the policy holders from that base-- we’ve managed to carve out a place for ourselves, and I expect continued good things from our Japanese business. I’m very, very bullish on our presence there. It’s significant and will only continue to grow, in my opinion.

With respect to banks in the insurance business, I would suggest you read my comments at our annual meeting today. [I think we’re] crying wolf a little too much. At the end of the day, they are all in the insurance business. They all have subsidiaries of one kind or another. They just don’t like the fact that they can’t use the very detailed information that they have on their customers to sell them insurance when they’re in a branch. They’re perfectly free to go out and sell insurance the same way we sell it. So, I’m not at all sympathetic to the notion that they should get into the insurance business. As to why they are choosing all to-- It is an amazing coincidence that all of them at the same time are lamenting the fact that their success is being hampered by the silly regulations that inhibit their ability to sell insurance. I think that they are sort of given up on the idea of merging between themselves in the near term. They’re locked into, most of them, a domestic strategy, and the reality is that Canada is a population of 33 or so million people. They can’t go any further, so now they’re looking at how could they maximize the value of their network. “Why don’t we go and steal the insurance agents’ business by selling to our clients?” I’m not sympathetic to that. I don’t think that it’s in the nation’s best interest to allow that at the present time. There are more fundamental, important issues that need to be addressed before we deal with that issue. So, read my annual meeting-- speech. I think it will answer all your questions about what Manulife or Dominic thinks about the banks end roads into the insurance business.

I think your comments were pretty clear. Thanks, and congratulations on a good sales quarter.

Dominic D’Alessandro: Thank you.

It was a good earnings quarter too.

Dominic D’Alessandro: Ladies and gentlemen, thanks very much, and we’ll talk to you again this time next quarter.

Ladies and gentlemen, this concludes today’s conference call. Please disconnect your lines, and we thank you for your participation.