Manulife Financial Corp (MFC) 2006 Q3 法說會逐字稿

Good afternoon and welcome to the Manulife Financial Q3 2006 financial results conference call for November 2, 2006. Your host for today will be Patricia Kelly. Miss Kelly, please go ahead.

Thank you and good afternoon. I'd like to welcome everyone to Manulife Financial's earnings conference call to discuss our third quarter 2006 financial and operating results. If anyone has not yet received our earnings announcement, the fiscal package and slides for this conference 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 the Q&A session.

On behalf of the speakers that follow, I wish to caution investors that the presentation and responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provision of Canadian Prudential 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 these statements. For additional information about the material factors or assumptions underlying these statements and about the material factors that may cause actual results to vary, please consult the PowerPoint presentation for this conference call that is available on our website as well as under the heading Risk Factors in our most recent annual information form and under the headings Risk Management and Critical Accounting and Actuary Policies in managements' discussion and analysis in our most recent annual report.

And now I'd like to turn the call over to Dominic 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 today, we reported third quarter shareholders earnings of $975 million and earnings per share of $0.62, each up over 30% from a year ago. Excluding the unusual items that reduced earnings last year, however, earnings per share grew by 14%. Total funds under management increased to a record level of $381 billion this quarter, driven by strong net sales and favorable equity market performance over the last 12 months. I would also note that this growth in assets was achieved despite the adverse impact of currency movements and of the sizable but planned contraction of our institutional fixed products book of business. Return on equity for the quarter was 16.6%, a post-merger record for our combined operations.

This quarter I was particularly pleased with the strong earnings in operating fundamentals across all of our divisions. In the U.S. our insurance group delivered solid earnings growth with John Hancock Life contributing record quarterly earnings. Wealth management earnings in the U.S. had strong net sales over the year, contributed to a good growth in assets and higher fee income. As well, favorable investment experience in a number of segments added to the strong earnings.

Canada, earnings were down marginally from a year ago but were very solid nonetheless. Particularly encouraging was the Canadian insurance sales which increased in key categories. In Asia and Japan, all segments reported strong earnings. Again, the benefits of strong net sales and increased scale were reflected in our bottom line. Finally, the reinsurance division had a very strong quarter due to unusually favorable claims experience.

Looking at our operational highlights, insurance sales increased over last year, primarily driven by growth in Canada and the U.S. As expected, wealth management sales declined from the extremely strong growth rates we had enjoyed over the past year and a half. This was primarily the result of a product suspension in Japan, a softening of the market for variable annuities in the U.S. and a sales slowdown in anticipation of a major product launch in Canada. To build on and revitalize sales momentum, our businesses continue to introduce new and innovative products. Over the last several months, we've announced the launch of a new wealth management offering including two variable annuity riders in the U.S. and the introduction of the first guaranteed minimum withdrawal benefit product here in Canada. We also received regulatory approval for our new variable annuity product in Japan which goes on sale November 13.

New offerings also include a leading edge long term care product in the U.S. and our first corporate product in Japan. We continue to grow in China and are now operating in 17 locations. The addition of new sales offices and growth in our agency resulted in a 50% year over year increase in sales in China. We expect to continue to expand our footprint in that country as several new offices are planned to open over the coming months.

Finally, we continue to redeploy our capital through share repurchases and dividends. This morning, we announced the extension of our normal course issuer bid and a 14% increase in dividends to common shareholders, which will rise from $0.17.5 per share to $0.20 per share each quarter.

With that, I'd like to ask Peter to take us through the numbers in more detail with the usual question and answer period to follow. Peter?

Thank you Dominic. Shareholders earnings for the third quarter were $975 million or $0.62. Year over year, the earnings did grow by 31% and EPS rose by 32%. As highlighted in slide eight, earnings in the third quarter of last year included a charge related to hurricane Katrina and the tax related gain in Japan. Taken together, these two items reduced Q3 2005 earnings by $133 million. Excluding this impact on last's years results, shareholders earnings increased by 11% and EPS rose by 14%. Factors contributing to year over year growth included more favorable investment experience, higher income related to the growth in funds under management and improved new business margins in both Canada and the U.S. Offsetting earnings growth to some extent was the unfavorable resolution of a pre-merger John Hancock tax assessment that reduced earnings in the corporate segment by $36 million. As well, currency movements over the last year continued to have a negative impact on reported C. dollar results. Considered on a constant currency basis, shareholders earnings would've been higher by $60 million or $0.04 a share.

Finally, I'd like to take a moment to update you on the potential impact of changes in interest rates. During last quarter's conference call we noted that it sustained the increase in interest rates over the first half of 2006 to have an overall positive impact on our results; however, since June 30, long term interest rates have declined. There is now a reduced likelihood of a material positive benefit due to interest rates as today's interest rates are more closely aligned with the levels currently reflected in our reserves.

Slide nine shows that credit experience remained very strong in the third quarter with net provisions of $17 million and a total portfolio yield of 6.4%. The positive impact of a benign credit environment combined with management actions to improve asset quality are also evident in our net impaired asset ratio. As of September 30, this ratio had declined to 0.27% down from 0.43% a year ago.

Below investment grade bonds declined in the third quarter by roughly $200 million primarily due to sales and prepayment. Investment grad bonds now represent 96% of our total bond portfolio, in line with our pre-merger levels.

On slide 11 you can see that over the last 12 months, funds under management increase by $21 billion or 6% due to strong top line growth and positive investment experience. Excluding the impact of currency movements, year over year growth in assets would've been $34 billion or 9%. And this was achieved despite the $4.9 billion of scheduled maturities on our John Hancock institutional business.

As illustrated on slide 12, expected earnings on in force was $771 million in the third quarter, a 6% rise over last year and a 14% increase on a constant currency basis. The impact of new business was an origination loss of $62 million, down from $80 million a year ago due to improved new business margins and redesigned products in the U.S. and Canadian individual insurance businesses.

Experienced gains were $384 million in the third quarter, driven by favorable investment results and positive claims experience within our life insurance businesses. Experienced loss in the third quarter of 2005 was due to plans related to Hurricane Katrina.

I'd now like to briefly look through our divisional results. Slide 13 shows U.S. insurance earnings for $151 million up 27% from a year ago. Our John Hancock Life segment had a particularly strong quarter with record earnings of U.S. $131 million up 32% over last year. Very favorable claims experience, strong equity market performance and improved new business margins all contributed to this growth in earnings.

Within the long term care segment earnings of U.S. $20 million were uncharged from the third quarter of last year as growth from in force business volumes was offset by quarter experience.

Slide 14 shows our U.S. insurance group had another solid sales quarter with both life and long term care segments contributing to the year over year sales growth. The thing John Hancock life insurance sales were U.S. $168 million, up 19% compared to the same quarter last year. Over the past 18 months, product innovation and a continued focus on distribution excellence has resulted in strong sales and market share gains. This quarter, sales remain good but declined on a sequential basis due to seasonality and an increasingly competitive environment.

Sales within John Hancock long term care also continued to improve, driven by consistent growth in the retail segment. We increased product pricing early, but most competitors have implemented significant price increases leveling the playing field. As well, we continue to develop and bring to market innovative new products. Early in the fourth quarter, the business launched Leading Edge, an innovative long term care product that offer inflation protection and a simplified structure.

On slide 15, turning to U.S. wealth management, earnings from our variable products group were U.S. $117 million in the third quarter, an increase of 22% over a year ago. Strong sales over the last 12 months contributed to the 20% growth in funds under management and drove fee income higher. Growth of in force earnings was partially offset by lower earnings from segregated fund guarantees on the variable annuities side and increased distribution related expenses on a mutual fund business.

On slide 16 you'll see that net flow through from the variable products group increased by 18% over last year to U.S. $3.2 billion. The chance for a pension plan assets related to the John Hancock employee 401K retirement plan increased deposits by U.S. $560 million. That made a nice contribution to the segment's growth in net flows. Excluding this amount, our pension net sales remain strong as continued market acceptance of our fiduciary standard warranty helped to boost transfer sales across all size bands.

In the mutual funds segment, the success o f lifestyle funds contributed to a strong year over year growth in net sales. Compared to the previous quarter, net flows declined due to increased equity market volatility which we expect will be reflected across the industry as well. Variable annuities net flows remained strong at $944 million although down from previous record levels on lower gross sales. Early indications are that the industry VA sales are lower this quarter and we believe this has impacted our sales as well. I'd also remind you that at the current level sales are almost 50% above the levels reported two years ago and given the exceptionally strong growth, some slow down was anticipated. That set of the business is taking steps to increase sales and in the fourth quarter introduce two new version of its popular principle plus for life optional writers.

Slide 17 shows third quarter earnings in the fixed products group were U.S. $133 million, up $70 million from one year ago. The year over year growth in earnings is primarily due to the positive impact of investment related gains and interest rate movements. These strong results are in contrast to the third quarter of last year with investment related losses and the unfavorable impact of interest rate movements had a negative impact on earnings. The level of investment gains experienced over the last three quarters is expected to moderate in this unit and we would expect institutional earnings to decline as a result.

On slide 18 you'll see that net outflows continue as expected in our fixed product group, primarily driven by scheduled maturities, institutional products, and restricted sales in this product category.

Turning to Canada, on slide 19 you can see the Canadian division reported third quarter earnings of $229 million which was down 3% from last year. Compared to a year ago, earnings in the individual insurance segment increased by 26% to $91 million, driven by favorable claims experience and improved new business margins. Individual wealth management earnings were $70 million, down from the third quarter of last year when exceptionally strong equity market performance had a more significant impact on earnings.

In our group businesses, continued growth from in force business contributed to a higher spread of revenues and earnings; however, poor claims experience more than offset this growth, resulting in somewhat lower earning in the quarter. I would also note that the decline in divisions earnings from the second quarter is related to the non-recurrence of the Q2 gain, primarily due to the impact of federal tax rate changes. Excluding those gains, earnings increased by 13% versus last quarter.

In Canada, individual insurance sales of $64 million were up 19% from the third quarter of last year with strong sales evident in almost every fee product category. The sales growth reflects continuous improvements to service levels with specific initiatives that have been implement to reduce cycle times and enhance advisory communications. Group benefit sales increased marginally over last year and were up sharply from the prior quarter driven by success in the corporate segment. In group savings and retirement solutions, sales increased to $242 million in part due to the implementation of previously announced large pension case sale to Rogers Communications. Continued success in the large case market has resulted in market share gains in the defined contribution pension segment.

On slide 21, you can see that Canadian individual wealth management segment sales declined in the quarter. As anticipated third quarter sales of segregated funds declined in advance of our income plus guaranteed minimum withdrawal benefit product launch which took place early in the fourth quarter. This new GMWP or withdrawal product is modeled after our very successful USVA product and is the first offering of its kind in Canada. The product is primarily targeted to baby boomers and provides the security of guaranteed withdrawals as well as upside potential due to investment returns. This product launch has generated substantial buzz and initial indications of interest from both advisors and customers appear excellent.

I'd also note that third quarter of last year was very strong for sec run sales as it was the last quarter in which advisors can sell a guaranteed product that was subsequently withdrawn. Mutual fund segment sales declined to $7 million in the third quarter. Four new funds were launched and additional offerings are slated for later in 2007.

In slide 22, you can see our Asia and Japan division had a strong quarter with earnings of U.S. $161 million. Excluding last year's non-recurring tax related gain of U.S. $54 million in Japan, earnings for this segment increased by 29%. Strong growth in funds under management and higher fee related income contributed to the year over year improvement. I would also remind you the second quarter included a U.S. $29 million gain in Japan related to action taken to extend the portfolio duration and reduce equity exposure in our [Diacku] block. Other Asia territories also reported solid earnings of U.S. $21 million as improved equity market performance had a positive impact on results.

Hong Kong earnings were U.S. $78 million in the third quarter, an increase of 32% from a year ago. Higher fee income due to growth in funds under management and lower policy holder terminations each contributed to the year over year gains.

On slide 23 we see in Japan insurance sales declined y ear over year to U.S. $20 million. Over half of this reduction is due to a change in reporting methods implemented in the first quarter. As well, a decline in the number of the agents also contributed to the lower sales. The implementation of a more rigorous and selective recruiting strategy has reduced the number of new recruits and led to a decline in agents. We expect this trend should stabilize in reverse in coming periods and ultimately we expect to see improvements in agent quality and retention rates. Also of note, late in the quarter the business began selling increasing term, our first product designed for sale to corporate clients.

In other Asia, sales increased 16% year over year with China, Taiwan, and Singapore each being key drivers in the sales growth. Hong Kong insurance sales were in line with a year ago as we continued to experience a shift to wealth management product sales.

On slide 24, Asia and Japan wealth management net flows at U.S. $470 million increased by 62% from a year ago but we're down from previous record levels. In Japan, the previously announced suspension of our guaranteed minimum withdrawal benefit product resulted in lower sales this quarter. However, as Dominic noted, in October we received regulatory approval on new GMWB product and we'll be launching that in November. Net flows in other Asia rose substantially with good growth from Singapore contributing to the gain. In Hong Kong, strong group pensions sales contributed to the 25% year over year increase in net sales.

On slide 25 you can see that the reinsurance division also had a very strong quarter with earnings of $76 million driven by unusually favorable mortality experience in our life reinsurance business and catch up reporting by their clients. Excluding the U.S. $165 million of charges related to Hurricane Katrina in Q3 of 2005, earnings are still double year ago levels.

Premiums were down from the third quarter of last year due to the non-recurrence of Katrina related reinstatement premiums. In the corporate and other segment, the unfavorable resolution of a tax assessment related to a pre-merger John Hancock item reduced earnings by $36 million. Earnings are down from the third quarter of last year when the segment realized very strong investment results. But compared to last quarter, earnings increased as the investment experience was more favorable and there was a non-recurrence of a corporate tax rate charge which was small, unfavorable in the corporate unit.

Looking at slide 27, new business imbedded value of $1.408 billion year to date increased 32% relative to the same period in '05 with both our insurance and wealth management business contributing to this strong growth. There was some slowdown in the third quarter on the wealth management side due to lower VA sales. Although we generally expect some short term volatility and I would urge you to focus on the longer term value of new business being added.

Overall, we are on track for a record year of new business imbedded value as year to date new business imbedded value is already closed to full year 2005 results. Our outstanding level of new business imbedded value relative to overall imbedded value remains the key distinguishing metric of Manulife, driving our consistently strong rate of imbedded value growth.

On slide 28, I would like to take a moment to highlight a change to our quarterly disclosure. As you'll see on page 36 of our supplemental information package, we have modified our segregated fund guarantee disclosure to include a confidence level metric. This metric is easier to understand, I believe, intuitively than the CTE level that we normally reported as it measure the percentage of scenarios tested that the reserves we are currently holding will cover. As illustrated on slide 28, the confidence level of the reserves we are holding has remained quite stable over recent periods and we are consistently covering a 90% plus confidence level by our reserves. We have modified the reserve disclosure to show that total recoverability margin in our reserves. That is the excess of the actuary reserves held over the expected net impact of the segregated fund guarantees and their associated income.

As you can see, this recoverability margin has increased materially over time and currently stands at an excess of $2.1 billion.

On slide 29, our U.S. GAAP earnings of $813 million were $162 million below that of our C. GAAP report for the quarter. Lower levels of realized gain activity depressed U.S. GAAP investment income relative to C. GAAP this quarter. The smaller negative impact of other actuary related items this quarter reflects a less significant difference in how investment related items impacted the two GAAPs in Q3 versus Q2. While current U.S. GAAP earnings are below C. GAAP levels, I would remind you that over longer periods of time, U.S. GAAP and C. GAAP results have on average been quite similar.

Return on common shareholders equity was 16.6% in the third quarter, a record post-merger result for the Company and the third consecutive quarter above our target rate of return of 16%. This is an impressive improvement of 460 basis points since the third quarter of 2004 and our first full quarter of combined op – which was our first full quarter of combined operations with John Hancock. We are very proud of this achievement as it reflects the combined impact of strong sales, improved new business margins, expense efficiencies and good capital management.

So in conclusion, our businesses continue to develop and launch innovative products including the launch of new VA products and riders in Japan, Canada, and the U.S., a new long term care product in the U.S. and increasing term, our first corporate product in Japan. Our return on equity has improved substantially to 16.6%. Assets under management also demonstrated strong growth and contributed to higher fee income across our business units. As well, we announced a normal course issuer bid, allowing for the purchase of up to 75 million shares over the next 12 months. We continue to redeploy our excess capital in the third quarter, repurchasing 10.8 million shares and this morning announced that our board of directors has increase in our quarterly common shareholder dividend to $0.20 per share.

So in conclusion, I'm very pleased with the third quarter results as all of our operating divisions delivered strong earnings and implemented important new business initiatives.

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

Thank you. We will now take questions from the telephone lines. [OPERATOR INSTRUCTIONS] The first question is from James Bantis of Credit Suisse. Please, go ahead.

Hi. Good afternoon. And congratulations on a very strong earnings quarter.

Thank you.

Just wanted to talk a little bit about the sales initiatives, particularly in the U.S. and if John is there to talk about the life sales, the seasonality and the competitiveness this quarter, maybe, John, you could talk about what's going to be different going forward in terms of some of the changes that you're making and is something happening in the industry that we're not aware of?

Okay. Life insurance sales were up about 19% in the third quarter over the third quarter of last year which is a bit of a tailing off of the growth rate that we had seen earlier in the year. And we would expect to see that – consistent performance with that in the fourth quarter. We had, as you might recall, a huge fourth quarter in 2005 which was driven in some significant part by some large volley sales that we made towards the end of the year last year which we do not expect to recur this year. So, our overall life sales will be down somewhat in the fourth quarter from the levels last year, but consistent with the levels that we've seen earlier. Seasonality of life sales, as you know, in the fourth quarter is by far the strongest quarter. And we expect that it will be a very strong quarter for us again.

The basic dynamic at play here is the pricing situation in the UL guarantee market. We have chosen to start raising our prices which we did earlier this year and which were reflected in our sales in Q3 for the first time. As you know, we – frankly, we're taking advantage of the strength in our sales momentum to try and improve our margins in that business, particularly at the older issue agents. A number of the other companies have already raised prices as well. We're all trying to figure out what one another are going to do. We expect that there will be fairly widespread price increases in the first quarter of next year and – so there's a bit of a pricing dynamic, who goes first, who goes second activity taking place in that market. But at the end of the day, everybody is going to raise prices at the older assuages in the UL guarantee market and those of us who may go earlier in the cycle than others will suffer in the short term but I don't expect it to have much impact on the longer term market share position in the market.

Got it. Thank you. And I just wanted to follow up on the wealth management side. It was mentioned earlier that two new versions of VA products coming out in the fourth quarter. Give us a bit of the timing and again a bit of an update in terms of how the segment is operating from a competitive perspective?

Those two products have been launched. They are – one is a spousal continuation rider where you simply let your spouse step into the contract owner's shoes on death. The second is an annual step up in the guarantee basis, both of which are designed to effectively react to the product enhancements that have come from the competition since we introduced the principle plus for life product last May. The VA industry was soft in the third quarter, reflective of the sort of challenging equity markets and world events. We saw that in the mutual fund business as well, the mutual fund industry anyway as well. And we believe that we are now back in a fully competitive stance. We have done some other things on the commission and other aspects in the bonus products and the like. So we expect to be in a very strong competitive position here in the fourth quarter.

John, when you look to 2007, most of 2006 you experienced record sales on the VA side. Can the industry as a whole and yourself have up to double digit growth?

Well, I don't know. I hope so. It would depend largely on what the equity markets do. If we get a favorable equity market environment, I think we can sustain that type of growth. The key to this whole dynamic is that these for life guarantees fulfill a real legitimate need that people have and we have only scratched the surface of that market in terms of its penetration in the pre-retiree world. And there's an enormous pool of assets for which that is an attractive application and so given any kind of favorable equity market environment, I expect there's a very large upside in the variable annuity business.

Great. Thank you. I'll re-queue.

Thank you. The next question is from Ken Zerbe of Morgan Stanley. Please, go ahead.

Thank you. Can you just talk about what drove the unfavorable claims experience in your long term care business?

Unfavorable claim experience in the long term care business. John? You want to say a few words about that?

We've have an increase in claims in the last couple quarters of long term care. I don't know that there's any underlying drivers to that. It's just – it's like mortality or any other types of experience we have. We sometimes have blips. We don't know whether at this point that constitutes a trend or whether it's just an ordinary statistical variation. But it's one that obviously we watch very carefully.

When you say an increase in claims, you're talking the frequency of claims, not severity issues, not lapse issues? It's a frequency issue?

No. It's the frequency of issue and in fact the rate of the claims that end up in zero payout is also going up as a proportion of the total. So there's a number of different dynamics at work there but we don't have enough information at this point to say whether or not that's a trend and one that we need to react to.

Okay. Then the other question I had was can you just remind us in layman's terms why the U.S. GAAP earnings have been $100 to $200 million below the C. GAAP net income over the last four quarters? I guess I'm just trying to identify why the lower – sequentially for four quarters, what's going to be the drivers actually to get that back around?

Let me try that at a general level and maybe Simon could add to it. But it would be coincidence if the two were the same each quarter because the two calculations are quite different. The recognition of investment income is differed and amortized on a Canadian basis based on realized gains on a U.S. GAAP basis and the actuary methods are quite different as well. This quarter the key different was the level of realized gains didn't track as closely to the amortized investment results on a C. GAAP basis. There are a lot of other little differences but that was the most noteworthy. But over a number of quarter, four or eight, the two tend to be fairly similar. And you'll remember I think it was a year and a half ago, we went through U.S. GAAP versus C. GAAP. The U.S. GAAP earnings is generally much more volatile that C. GAAP but it tends over time to book more income generally speaking historically. And that's been the case cumulatively to date. I don't know if you want to add something to that Simon?

No. I think you've covered it pretty well, Peter. Realized gains are our key driver. They have been much lower this year than last year and that's one of the main reasons that the two numbers have diverged a little bit.

I wouldn't read much into it. It could flip around next quarter or be the same for a period.

Okay. Great. And the final question I have was just in terms of your new variable annuity products with the annual step up features, arguably probably one of the more desired products by consumers. Have you guys done anything or thought more closely about your hedging programs and what you might or want – might need to do to hedge your risks there?

Yeah. We are looking at hedging probably starting some time during 2007. We have a project in place. And we believe if our sales continue to be as robust as they've been that we will want to be hedging sometime during 2007.

Great. Thank you very much.

Thank you. The next question is from Michael Goldberg: of Desjardins Securities. Please go ahead.

Thank you. Couple of questions. First of all, is there any way that you could give us an idea of the impact of the Japanese variable annuities suspension on value of new business?

We don't break it out with quite that detail, Michael, but clearly the fact that our VA sales in Canada and Japan were softer impacted the wealth side of the new business imbedded value.

Okay. More generally, could you give us a bigger picture reason for the slow down in wealth sales that occurred in a number of territories and categories and do you think it's going to continue?

The Japanese situation we explained to you that we withdrew a product and in anticipation of the launch of a new product, essentially that channel went into maintenance mode. It didn't really generate a whole bunch of sales. In the united states, I think the entire industry for the reasons that John mentioned were somewhat soft. I don't think that notwithstanding out reduced level of sales in the third quarter that we really lost any market share. The indications are that we held our position. In Canada, I think it's a whole bunch of reasons and one of the more significant ones, I believe is that the market was expecting the launch of our new income plus product and it had been developed and discussed and all of the producers were aware of it and we suspect that a lot of them that had clients that would find savings products of ours attractive waited until the launch of this new product to make a decision. So those are some of the reason, Michael, that our wealth management sales were soft. One of the things that we track, which we think is very important, is the net sales. And we were very encouraged that for example the net sales in the united states were $1 billion. The net sales in Japan notwithstanding in absence of our major distributor were also positive. So overall, there are some positives in the wealth business.

Okay. If I – I have one other question if I could. Your dividend payout over the past – for the first nine months, just dividends, 28%. The payout including the buyback is over 85%. Do you have any idea in mind where your optimum payout of just your common share dividend is particularly in light of the appetite for income that exists among investors and the developments in the income trust market in Canada?

Well, the developments in the income trust market are very recent. So it'll take another day or so to digest what the impact might be on our dividend policy. But for the moment our policy is to payout 25% to 35% of earnings which is an increase if you recall that we implemented a few quarters ago from our prior target which was 20% to 30% of earnings.

We're very attentive to listening to our shareholder base and to respond in the way we think is best. But we're generating a lot of capital. We are de-risking our BS due – as it's been mentioned, we think one of the attractive things that's happened is that we're now back in terms of asset quality. We're where we were before we merged with John Hancock. If you remember, we took on quite a load of below investment grade assets and so we've got this capital and we're using it and returning it as you pointed out to 80% or so between dividends and share buybacks.

Okay. Thanks very much.

Thank you. The next question is from John Reucassel of BMO. Please, go ahead.

Thank you. Just a question for John DesPrez just on the net flow in the VA. I guess – I understand the industry is down so you're around $944 million if I have my numbers right. Is it – is the decline costing trade in any specific distribution channel? Is it mainly wire houses or – ? And has your John Hancock been pretty stable or is it pretty broad based, the decline in the net flows?

Well, the – if you're referring to the block of business that we inherited from John Hancock, there's a significant net flow there because we ceased selling that product. So all the surrenders – the total surrenders equal net – negative. In terms of distribution channel, it's really frankly fairly evenly distributed as a percentage of the business. There's no significant ideation there. The – it's actually – the last – the net flows are better in the bank channel for us than they are in any other channel but that is only by virtue of the fact that that is the newest channel for us. We don't have a big enforced bank and lock. So I wouldn't attribute much significance to that fact that it's better there.

Okay. And would you say the same for the individual insurance? It's pretty well balanced?

Yes.

Distribution channels? Okay.

Yes.

Just – the disclosures changed on the institutional retail and fixed. So you've combined then?

Yes.

In the disclosure? I heard Peter say that I think earnings are going to be down or you're going to drive down earnings? I always know you've been deemphasizing that business. Is this – are you taking a more aggressive stance on this to deemphasize it more because there's growth in other areas or is this no real change?

No. That wasn't the point. It's had unusually strong investment results on the assets in that category and I was just observing that even though it's happened a few quarters in a row, it is unusual and it's unlikely to recur at that very favorable level.

Okay. So we've had earnings from $30 million to $129 million I think.

There's been lots of – that's two quarters, three quarters that have been quite favorable in investment returns. That's the observation I was making.

Okay. Okay. Thank. And last –

It's going to grade off fairly slowly this block. It's not going to change immediately.

Okay. And last, a question for Dominic. I think I know the answer but I'll throw it out there. Are we a 16.5% -- your target is 16%. Is – are we talked out here or is this – is there potential to go higher? Or is this – when you talk to the board and – this is the range you're comfortable in?

We're comfortably above the 16% when we did the transaction with John Hancock. We have nothing against being – earning more than our target. The 16% is relevant because that's what we built into our pricing. When we design a product and the actuaries do their calculations about what capital is going to be required and do their modeling and so on, they're looking to service that capital at 16%. We can earn more than that and I am aware that there are some insurers in Canada that earn more than that. They get there somewhat differently than we do. But – we think we're doing a good job.

Okay. And will the – I guess, just these investment accounting changes? Any indication of what this might have on your ROE? Include the OCI or you don't include it? Has that analysis been done?

We're working on it, John. The – in a nutshell, what I would like to end up with is the category of assets called equities that will generate for us a return of 8%, 10% per year. That return will be comprised of two components, the dividends on that equity portfolio and the systematic realization of some gains. So that between the capital gains and the dividends, we can show a yield. Otherwise why hold the asset category, right?

Yes.

And we think that we can manage our affairs to that overall objective. Now, nothing is as good as when you actually apply it. And we think we can apply it but quite frankly, we'll only know for certain once we get into this new regime and are working with it.

Okay. Thank you very much.

Thank you. The next question is from Colin Devine of Citigroup. Please, go ahead.

Good afternoon, gentlemen.

Good afternoon.

Two questions and I guess probably both for – one for John, one for Dominic. John, if you can talk about the impact you've seen with the sort of clamp down on the life settlement markets or starting your own life here in the U.S. And your thoughts on that? And then perhaps for you, but really, I'd like to turn this one over to Dominic. I thought you announced a pretty major partnership during the quarter and I'm getting at the inclusion of your annuity in fidelities 401K system where you've clearly taken what might've been the competitor and made them a partner. Can you talk about what that may mean for Manulife? And also, where you're going with your own 401K business in terms of potentially opening it up to competitors and making them partners and really turning it into a distribution system, not just an asset accumulation business?

Well, let me take the first one while we try and figure out what you meant by the second one question with fidelity. We as you know are very much against the invest you own life insurance business and have been doing what we can to discourage it. In the third quarter, we instituted some additional measures on our end to try and eliminate to the extent we can any further business that was coming through which may have also had an impact on our sales trend. We instituted some additional questions on our underwriting applications to try and discern additional information about the ultimate use of the contract. We also rescinded some contracts and fired some – terminated some distribution contracts, all of which I think has sent a very significant message to the market, the world of high-end life producers is really a pretty small circle and I think the message from us has been very clear that we don't wish to participate in that market.

As to your second question, I didn't understand your reference to fidelity. I don't –

Fidelity announced that the Hancock annuity is in their 401K system. I guess, I'm shocked that's news to you. But – okay. Fair enough. Thank you.

Thank you. The next question is from Eric Berg of Lehman Brothers. Please, go ahead.

Yes. Thanks very much. My questions relate to the U.S. business and perhaps John DesPrez could field them or whoever is appropriate. You know, just by way of preamble, very quickly, you can't go to an insurance industry conference of actuaries these days without hearing about some session on old age mortality and what comes through very clearly is there's a lot of dissent and debate in the actuarial community about how long old people are going to live. So I'm thinking to myself, and ultimately my question will be, John, for you to react to this, whether you think there's any validity to what I'm saying, that the reason we're seeing this rash of price increases in the universal life insurance area is that the insurance companies, Manulife included, have suddenly become quite concerned about having under priced for several years universal life insurance in the old age market, that this in turn has triggered a wave of basically this arbitrage that you reference of old investor owned life insurance driven by under pricing and that what's really happening in the marketplace is that the companies are trying to address this under pricing that has taken place. Is there – what do you think of all that which is not only my thoughts but I think the thoughts of other people who study the business.

I'll leave the actuarial question to Simon who is sitting across from me, but I'll tell you that the market dynamic, the reason for the under pricing at the older ages is because that's where the largest and most lucrative business is and the competition has been the most significant between the carriers. The very upper end of the life insurance business is in those age parts that the huge premiums reside and the natural course of competition between the vendors has been to drive down the pricing in those cells. As to whether the actuarial underpinning of that – I'll turn it over to Simon.

I had not certainly come across any systemic views in the actuarial community on upper age mortality. The – from my perception, one of the things of that has changed is the reissuers have become less aggressive and that has had a knock on people's pricing quite directly. So it's possible that they've taken a more conservative view of mortality but certainly I don't direct writers have been fundamentally changing their mortality outlooks.

I guess, Eric, I would add that Manulife has been known as an older age underwriter for forever in the United States. It's been around the survivorship products that we built our business there originally. So we have a lot of experience with it and we're quite comfortable with our underwriting and I think you should be too when you look at the historic experience gains that we've consistently reporting.

Fair enough. I have one more question related to long-term care. It seems – it wasn't clear to me whether long term care helped your earnings or hurt your earnings in the quarter because it seems like it was sort of mentioned twice in cross currents. Good news in terms of growth and in force but claims experience being adverse. What is – can you clarify whether long term care helped the results or hurt them?

I would describe it as okay. It was a little soft. But it wasn't a big variance from say their client objective.

Alright. Thank you very much, Peter.

Thank you. The next question is from Mario Mendonca of Genuity Capital Markets. Please, go ahead.

Good afternoon, everyone.

Good afternoon, Mario.

Quick question, Peter. When you were referring to group pension business, the $560 million, the transfer, could you perhaps just offer that one more time?

Yes. Hancock had a plan and it was moved into our pension business. We didn't count it as a sale but it shows in the revenues. So I wanted to make quite clear that because we had a relationship to that plan, it was big enough that you could see it in the funds flows. The unit did quite well even without that item but of course the funds flows did come into our accounts and we wanted you to understand that.

Was that part of the premium deposit number when you quote the funds?

Yes. Three is in the net flows in that U.S. pension business are $1.7 billion for the quarter, Mario. And about $5 –

$560 U.S.

$560 million of it was Manulife's pension – or John Hancock's pension plan.

So it went from the general to the sec fund then?

No. It's an outside provider.

It's an outside provider. We didn't have to –

I'm sorry.

- didn't have to bring it in house. So it becomes funds under management.

Right. So it is part of the $15.3 billion you referred to? The $560 million?

I don’t know. It's part of the premiums to deposits. Yes. Not part of the sale.

That's exactly right.

Totally with you now. I completely understand that. There were several references this quarter and in prior quarter both in the institutional segment and in corporate, references to either favorable or unfavorable investment experience and in some cases causing material swings. Peter, you talked about how the last two or three quarters in the institutional business, sick and institutional have added materially to earnings. What I'm trying to understand is what asset base are you referring to? What's causing these sort of swings? And how are these changes in assets being accounted for?

The balance sheet on the institutional business is quite large. I think it's $20 odd billion. So it's a quite big portfolio. Contained in there are a number of hybrid and other assets that emerge in a lumpy manner. You can have significant windfalls when there's a liquidation or a gain or a transaction and that's been quite favorable recently. There's a tendency over time I would expect it would be favorable. We probably are not accruing for the full value of some of these items until they're realized but I think it's been unusually good. Now corporate has quite a rang of assets including some of those types of assets and other circumstances that could impact the investment income. So it can be volatile. But it's not as big a block.

When you say "hybrids", what types of assets are you referring to?

Those would be things like warrants, participating some things –

Mezzanine debt.

Mezzanine debt. Other non-traditional assets, some other bonds that have things attached to them, et cetera.

How do those assets fit into the new accounting regime in 2007? Do they have a place in that new accounting?

By all means. In fact, I don't think their status largely changes because most of those are not quoted securities and would be treated in a not much different manner.

And then sort of from a general perspective, and perhaps this is for Dominic. I'm not sure if we're ready to talk about this yet – is there any sort of change in philosophy so far as the investment – the investment philosophy is concerned going into 2007 and the change in accounting centers?

I think Dominic covered that earlier and that is our objective is basically to continue the same philosophy which we've had which is to be economically driven. If you said the proof is in pudding to see how we all will be able to operate under this new accounting model. But the fact of the matter is we regularly harvest gains from the sale of our equity type securities and we would obviously get accounting recognition for doing that.

And no – you don't anticipate changing the mix of assets then?

We've been served very, very well by the mix of assets. We would hope not to. Obviously again the proof is the pudding. We'll have to have a couple of quarters running with it to see how it works. But at this stage, we're pretty comfortable. We don't have to change the basic operating premise. We will have to do some things differently but not the basic operating premise.

Thank you. Peter, you also – you were careful with this in your opening comments in saying in prior quarters we suggested that with rates moving higher we had this benefit perhaps accruing. Not so now because rates have declined. What message is that? That there could've been a windfall and there isn't a windfall? Or earnings growth would’ve been better and now it's not as good as it could've been? What's the message? The windfall or - ?

Do you recall, Mario, that our insurance products are on annual comp and therefore we would normally review at year end the impact of the interest rate mismatch where we've not gone long on some of our product investments. And as rates rose, that would've turned up as a favorable accounting development. It could've been not insignificant when rates were at mid-year levels. As that long term interest rate moderates, that is likely to be less material and I just wanted to remind people, there's been a change from the last comment we made a quarter ago.

But how would that have played out in earnings? Would it have been just an excess reserve that could've gone to fill up some other area where you may have felt a little light or was that some kind of – or is that more of a growth issue like an earnings growth?

It could've played out in a number of ways. At the end of the year, we would've looked as we will look on all our insurance reserves and look at all the underlying assumptions and clearly had interest rates remained where they were, the current levels of interest rates have needed less reserves for that particular item. Now would we have released it to income? Would we have added it or bolstered maintenance or laps or other components or our reserves? I can't tell you. I don't know.

Don't know. Okay. Just one more final thing. Perhaps this is a general question for you, Dominic. Manulife talks about 15% earnings growth, sort of medium term, long term objective, 15%. With P&D being just a little softer than certainly I expected this quarter, what do you need to see in terms of P&D growth on a sort of long term basis to hit that 15%. You don't need the whole 15%.

I think we're getting into the realm now where beyond P&D you have to look at asset movements because quite frankly you can have the greatest P&D but then if you have redemptions that are running ahead of plan or you have adverse equity markets or other markets, you're obviating all the benefit that you worked so hard to generate new sales. So I think a better indicator, at least certainly for our wealth management business is to track markets generally and look at asset movement as a better indicator of the level of income to be expected.

So it would be fair to say you need about 10% asset growth to get to you 15% earnings growth? Is that a reasonable thing to say?

I haven't done that calculation so I don’t – it sounds not unreasonable, but I don't have that number handy. So I don't know how to answer your question as to what level. We go for the maximum growth we can get, meeting our hurdle rates. I personally am not fussed when any given quarter we may have softer or strong sales because the reality is that in the near term that means nothing. It's much more important to us and to me to see what's happening to the underlying businesses, the number of insureds, the number of policies, the assets. Are they growing?

And you feel good about that stuff?

That's what I feel good about. Yes. We have a number of businesses where others sell a lot more than us. But then you look at the in force and our in force is growing much, much faster which indicates the quality of our sales is very, very high. It's sticky. You don't have lapse rates in the 30% and 40%. That's particularly true in Asia for example where – China, we've had a wonderful book of business because our persistency is like three times what our nearest competitor.

That was very helpful. Thanks.

Thank you. The next question is from Timothy Lazaris of GMP Securities. Please, go ahead.

Thank you. I've got two really just small accounting questions. One, I think there was a comment at the beginning of this presentation on the currency impact on earnings and I didn't pick that up. Could you comment on what the impact on currency was on earnings per share?

Year over year it was $60 million or $0.04 a share.

Okay. And secondly, Peter, on the source of earnings, not to focus on such a small number, but management's actions – excuse me – actions and change in assumptions was a positive $5 million. But when you look at it on a quarter over quarter, the swing is a little more material. Can you comment on what goes in that line, if there's any specific reserve releases that might have occurred?

Yes. I'm going to ask Simon to speak to that one if I could.

Yes. This quarter, there was really only one material item which was that there was a distribution reorganization in Canada which led to a reserve release to do with some future renewal commissions that no longer would need to be paid. The – in the past quarter, last quarter there was some valuation basis items that went through that caused an earnings hit. So that was the main difference. This quarter there was really only the one item. Last quarter we had a couple of items that went the other way.

Can you quantify the reserve release if possible?

Well, the $5 million is basically all the reserve release. I think the reserve release was about $9 or $10 million offset by a charge for windup expenses.

Okay. Thank you very much.

Thank you. The next question is from Tom MacKinnon of Scotia Capital. Please, go ahead.

Thanks very much. Good afternoon. You talked in this reinsurance segment that mortality experience was unusually good. And what I anticipate is that experience gains in there are largely kind of sustainable to a level of only about a quarter of the $40 million that you would've got. I'm trying to get more of a run rate on this segment. You expected profit from in force business. It tends to be relatively flat and you don't really know how to look at this segment going forward in terms of what is a reasonable level of experience gains. Obviously this quarter was unusually high level.

There were – to put a ballpark number on it, the claims, the favorable claims element were in the $20 million range. And that was – part of that was just plain favorable mortality and I think Peter also mentioned that we had some catch-up premium reporting from clients. So that was a one time variation there as well.

Is that a pretax figure?

No. That would be post.

And then just a question on the long term care business. I wonder if your long term care competitors in the states, it's sort of been suggested that industry sales were probably down 10% the first nine months of 2006 and you guys are showing something – 30% growth in long term care sales in the first nine months of 2006. So I'm trying to – what are you doing differently here? And then if you could then elaborate a little bit more about the unfavorable experience you had in long term care? My impression was you don't really have too many people on claim here. So was this more of a loss interest or an interest rate issue?

Okay. I'll John to answer the question about the – why are sales are so good in the face of an industry that's having a difference experience.

Our sales are up about 30% year over year. And it is really a recovery of a position that we seated by leading the pricing repositioning in this industry. If you go back three years, four years, you would see that Hancock had about a 20% new sales market share in this segment. We were back to about 19.3% in the third quarter this year and we had fallen back to about 10% because we raised prices and used more conservative assumptions ahead of the curve. But all through this period, we've maintained our distribution capacity and relationships and everything else. And so as the market has backed up their prices to ours, those distributions assets that we have have been brought back to bear and we've effectively recovered the position that we were in. I would tell you that we have very high hopes for this segment going forward. The new product that we introduced the second or third of October here, called leading edge, is a pretty radical repositioning of this product line in the sense that it greatly simplifies the product and it lowers the price point. And so we expect to see continued strength in this area and hopefully we're going to move to a market share position that's actually higher than our historic position. So I'll turn it over to –

The second part of your question was whether or not the claims were a function or instance of lapses and it's not lapses. It's a higher level of claims for benefits.

Okay. And then one final question is on Canadian Mutual Fund. Sales were definitely off in the quarter and the net sales I think were negative. I haven't see negative net sales in some time. I was wondering if you could comment on this? I know there's some industry headwinds here as well but how you look at the trend and prove that going forward?

Sure. Tom, it's Bruce Gordon. Mutual funds sales were disappointing. Through most of 2005, we had three funds in the hot spot, monthly high income on a large cap. As consumer preferences changed to balanced and away from where we had the top performing funds, we have seen sales slide. We have other funds performing exceptionally well in some other areas that are only – well, 4% and 7%, I think are the mutual fund sales. From the viewpoint of the net number, you're right. It's negative. It's not that withdrawals went up. It's that sales went down. So we want to recover in that marketplace. You're right. Through 2005 and early 2006 we were doing quite well in the growth of assets and those mutual funds.

Okay. Thanks.

Thank you. The next question is from Jukka Lipponen of Keefe, Bruyette, and Woods. Please, go ahead.

First of all, on M&A, what's your current view on asset manager acquisitions in the U.S.? As you know, there's been some properties in the market recently.

What's our view on asset manager acquisitions? We have traditionally and historically wanted to build our businesses and we've been a little careful about buying things unless they were businesses that we felt we had some particular expertise or some value added to bring to bear. I don't know what else to tell you. I mean, everybody looks at these different complexes and has a different assessment of them. They are fragile in terms of their franchise value as we've seen, given what's happened in the marketplace to some of them. And that fragility has caused us to be cautious in how aggressive we are in pursuing opportunities that there might be to acquire blocks of business.

Second question, in Japan, the policy holder benefits seemed unusually high. Was there anything unusual going on there?

I don't know. Was there anything unusual in the Japanese? Does anybody have a comment on that?

I don't think so.

That could be relative to last quarter. It went up. Because last quarter got lined with the impact of the reserve alignment when we de-riffed the balance sheet.

Oh. Yes. So this would be a normal quarter.

That's right. Yes. So it was abnormally low last quarter.

Okay. And then my last question. Your comments regarding some of the unusual items, you have the Hancock issue and then you made some comments about the favorable investment experience. Can you give us a little more color on that favorable investment experience and were there really some non-recurring type things in there?

Yes. I think credit was good. There were no huge items. But accumulatively, the investment performance was better than average. But if you look quarter to quarter, we've had the flip side as well. It's quite a big balance sheet and of course it performs differently each quarter. There really isn't awfully much that's noteworthy on a stand alone basis. But it was a nice performance for investments and we're pretty happy when that occurs.

Thank you.

Thank you.

Operator, do we have time for one more question if there is one?

There are no further questions registered.

Fantastic! Thank you very much everybody and we look forward to talking with you next quarter.

The conference has now ended. Please, disconnect your lines at this time. Thank you for your participation. And have a nice day.