Manulife Financial Corp (MFC) 2006 Q4 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon and welcome to the Manulife Financial Q4 2006 financial results conference call for February 13, 2007. Your host for today will be Patricia Kelly. Ms. 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 fourth-quarter 2006 financial and operating results. If anyone has not yet received our earnings announcement, (technical difficulty) package and the slides for the earnings call, 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'll then follow with a question-and-answer session. On behalf of the (technical difficulty), I wish to caution investors that the presentation and responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provisions 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 these statements. For additional information about the material factors or assumptions applied in making these statements and about the material factors that may cause actual results to differ materially from expectations, please consult the PowerPoint presentation for this conference call that is available on our website, as well as information under the heading Risk Factors and our most recent annual information form and under the heading Risk Management (technical difficulty) and Actuarial Policies, and Management's Discussion and Analysis in our most recent Annual Report.

When we reach the question-and-answer portion of this call, we would ask each participant to adhere to a limit of one or two questions. If you have additional questions, please requeue, and we will do our best to respond all questions.

Now I would like to turn the call over to Mr. 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.

Slide 4 shows that 2006 was a very successful year for our Company, with record shareholders' earnings of almost C$4 billion and earnings per share of $2.53. Growth in earnings per share was particularly strong and was well in excess of our medium-term target of 15%.

We were also pleased to report full-year ROE of 16.8%, up 270 basis points over last year, and also above our target of 16%.

A number of financial metrics presented in these slides highlight the growth in the value of our business. Our embedded value results increased meaningfully over 2005, driven by strong sales of profitable products and operational improvements. As well, funds under management reached record levels, and now exceed C$400 billion. Not only does this reflect positively on our performance in 2006, but you'll all appreciate it also provides a very substantial base for future growth.

As shown on slide 5, each of our operations performed very solidly in 2006, with all major divisions contributing to the growth in earnings. In the United States, our insurance businesses had a very good year, highlighted by exceptional sales growth and market share gains. As well, our U.S. wealth management businesses continue to deliver strong net sales, with good growth, despite the high benchmarks established in 2005.

In Canada, individual insurance earnings increased sharply over last year, and a continued focus on customer service contributed to record sales in the fourth quarter. The division's wealth management businesses also made good progress, with group pensions gaining market share, strong growth in bank assets, and record segregated fund sales in the fourth quarter.

Our Asia and Japan division had a good year, with strong earnings in each major segment. Positive developments in the region include a growing wealth franchise in Hong Kong, disciplined expansion in China and a good in-force growth in Japan.

Following a challenging year in 2005, I'm very pleased that our reinsurance division delivered solid earnings, with the P&C line returning to profitability and our life business reporting favorable results.

Before Peter begins his review of our fourth-quarter financial results, I'd like to mention some of the other highlights of the quarter. A notable achievement was S&P's upgrade of our financial strength rating to AAA. This is the highest rating afforded by S&P and makes us one of only two publicly traded life companies with this rating. I am particularly proud of this endorsement, as Manulife lost its AAA rating just as I was joining the Company 13 years ago. So you will appreciate that this development is particularly gratifying for me personally.

As well, we launched a number of new products this quarter. The most important of these was the launch of the IncomePlus, the first guaranteed minimum withdrawal benefit product to be sold here in Canada. The product has been very well-received by both consumers and advisors, and initial sales have exceeded expectations.

Finally, other developments in the quarter include the completion of a C$1.2 billion debt offering and two important real estate and timber transactions that further diversify and enhance our portfolio of invested assets.

So in conclusion, I'm very pleased with our performance in 2006 and look forward to further progress in the year ahead. With that, I'd like to ask Peter to take us through the numbers in more detail.

Thank you, Dominic. Slide 8 includes key financial metrics for the fourth quarter of '06. We're very pleased with this quarter's results, as our business has enjoyed strong sales and asset growth and record earnings levels. ROE set a postmerger record of 18% in the fourth quarter, an increase of 250 basis points from one year ago and well above our medium-term target of 16%. Funds under management exceeded C$400 billion for the first time.

We're also pleased to report strong growth in both embedded value and new business embedded value. Operational growth in embedded value was a very strong 21%, and the new business embedded value for 2006 of C$1.9 billion grew by 25% on a comparable measurement basis, driven by strong sales growth and improved new business margins. This change in embedded value is an important indicator of value creation being generated by our operations.

On slide 10, you'll see that both our insurance and wealth management businesses have contributed to the strong full-year growth in new business embedded value. In our insurance businesses, good sales and improved new business margins contributed to the 30% growth year over year. Wealth management new business embedded value increased by 21% to C$1.1 billion due to continued strong sales across our key wealth operations.

Shareholders' earnings for the fourth quarter were C$1.1 billion, an increase of 21% over last year. This represents the first time that our quarterly earnings have exceeded C$1 billion. Earnings per share increased by 25% to $0.71 a share. In-force business growth, favorable investment experience and stronger equity markets were all important contributors to the year-over-year increase in quarterly earnings.

Approximately C$40 million of this increase was due to a rise in the level of favorable tax-related items and an additional C$21 million post-tax was due to a net recovery on credit in the quarter. The combination of unusually strong investment returns in the John Hancock fixed business and of these favorable tax and credit recoveries, largely in corporate, added about $0.05 to this quarter's EPS results. Other unusual items were small and offsetting.

Compared to the fourth quarter of last year, a weaker U.S. dollar reduced earnings by C$29 million. Over the full year, the effect of currency movements on earnings was a reduction of C$235 million or $0.15 a share.

On slide 12, you see that funds under management at year end were C$414 billion, an increase of 11% or C$43 billion versus the fourth quarter of a year ago, and a record level for the Company. Strong net flows In our wealth businesses, improved sales and continued good retention in our insurance businesses combined with rising equity markets, resulting in a new record level of funds under management. Other revenue increased by 17% or approximately C$177 million over the same quarter a year ago, reflecting this strong growth in funds under management.

Our investment performance was quite strong, with total portfolio yield of 6.9% this quarter. Also, on slide 13, you'll see the credit experience remained quite favorable, with a net pretax recovery of C$32 million.

On slide 14, you can see that we continued to see good growth in our in-force business, with expected earnings on in-force up by 6% or C$44 million over the fourth quarter of last year. This growth on a constant currency basis was up 9%.

Experienced gains remain strong at C$379 million, driven primarily by favorable investment results, including better-than-expected equity market growth, as well as by positive claims experience within our U.S. and Canadian life insurance businesses.

Management actions and changes in assumptions prior to the impact of taxes and minority interest added C$31 million to earnings, driven by the impact of our fourth-quarter actuarial valuation basis review. Other of C$32 million includes the minority interest allocations and some impact related to tax items.

Strong equity markets in the quarter had a favorable impact on segregated fund guarantees. I would note that the CTE level in our segregated fund guarantee reserves increased from a level of 73 to 78. Had we maintained a constant CTE level, there would have been an additional reserve release to earnings of C$82 million pretax.

Also worth observing is the relative consistency of the key line items in this source of earnings report. Profit on in-force experienced gains and earnings on surplus had each shown very good stability and growth over recent quarters.

Looking at the '06 sales highlight on slide 15, organic growth was achieved throughout the organization. Sales levels were significant and growth was broad-based in both our insurance and wealth management segments and across geographies in which we operate. A review of our divisional results shows the benefits of this growth were reflected in higher assets under management, increased fee income and in-force business growth.

Also worth noting is that in '06, our general expenses were reduced by 3% even as sales in premiums and deposits showed good growth. This reflects the continued careful management of our expenses.

I would now like to review our divisional performance. Within U.S. insurance, John Hancock life earnings of $118 million were up 6% over last year, but down from the record third-quarter result. Record sales levels, strong claims gains, favorable equity markets and the continued benefit of improved new business margins all contributed positively to the year-over-year growth in earnings. Unfavorable lapsed experience and reduced investment gains partially offset these improvements.

Within the long-term care segment, earnings of $30 million declined from the strong results of one year ago, but rose from last quarter. The favorable impact of higher sales and investment-related gains were partially offset by above-average levels of LTC claims losses.

Our U.S. insurance group had a solid sales quarter, capping off a very impressive year. For the latest period for which comparative data is available, the 12 months ended September, 30, '06, we led, ranked number one in the industry, for total individual insurance sales. In the fourth quarter, individual insurance sales were (technical difficulty), down as expected from last year's record fourth quarter due to lower COLI sales. However, core life sales remained solid, with particularly strong growth from our recently launched variable life products.

Overall, 2006 was an impressive sales year for individual insurance, with full-year sales up 21%.

Within our long-term care business, fourth-quarter sales increased by 37% over last year to C$48 million and were up 34% for the full year. In the retail long-term care segment, distribution initiatives and enhanced marketing support contributed to the seventh consecutive quarter of sales growth and continued market share gains. The group segment also had a good quarter, with two large case plan upgrades contributing to their growth in sales.

Turning to U.S. wealth management, our variable products group had a record quarter, with earnings of $131 million, an increase of 24% over the fourth quarter of last year. Higher fee-related income was the primary driver of earnings growth, as strong sales, excellent retention and equity market gains drove an impressive 23% increase in funds under management.

In the mutual fund segment, continued investment in distribution and marketing initiatives modestly reduced earnings in the quarter. Full-year earnings for the variable products group was $470 million, up 27% over a year ago.

Q4 net flows from our variable products group were C$2.3 billion, a solid result, but down from the exceptional levels reported a year ago. In our variable annuities business, sales declined versus last year, but increased 8% over the previous quarter, following the launch of two new riders in the quarter. The business also announced the expansion of its distribution platforms, adding Morgan Stanley in the wirehouse channel and JPMorgan Chase in the bank channel.

Overall, 2006 was a record year for our variable annuity business, with full-year sales of $9.1 billion, up 15% over 2005.

In our 401(k) pension business, net flows were relatively flat year over year, but down from the third quarter due to seasonality and the nonrecurrence of the John Hancock pension plan transfer. For the full year, pension sales increased by 9% over last year, with recent industry surveys showing that market share gains have enhanced our leading position in the small 401(k) pension market.

In the mutual fund segment, the success of the lifestyle funds contributed to strong year-over-year growth in net sales. On a combined basis, each of our variable businesses contributed to an impressive $12.4 billion of positive net flows recorded during '06, up 31% year over year.

On the fixed side, fourth-quarter earnings were $132 million, up from $78 million a year ago, but similar to Q3 of '06. Favorable investment-related experience in both the retail and institutional product lines contributed to this strong earnings result. Consistent with prior comments that I've made, we would not expect this segment's investment results to continue to contribute to earnings at this current level.

Net outflows continued as expected within the fixed products group, primarily driven by scheduled maturities of institutional products and restricted sales in this product category. On slide 22, you can see that the Canadian division reported fourth-quarter earnings of C$247 million, up 24% from a year ago. Individual insurance earnings were C$108 million and included a C$20 million benefit due to changes in the Ontario tax rules relating to investment income tax credits. Excluding this item, earnings increased by 29% over last year due to improved claims lapsed and investment experience.

Individual wealth management had a very strong quarter, with earnings of C$80 million, up 36% over a year ago. Growth was driven by higher bank and seg fund assets and by effective expense management. Fourth-quarter earnings in our group businesses were C$59 million lower due to poor claims experience compared to the very positive claims experience of a year ago. Full-year earnings for the Canadian division of C$981 million were up 21% from '05.

Turning to slide 23, our individual insurance segment finished the year with a very strong fourth quarter, as quarterly sales increased 16% year over year to C$72 million. The individual life segment had a record sales quarter, as almost all major product lines contributed to the year-over-year growth. As we noted last quarter, our ongoing focus on customer service initiatives and enhanced advisor communications continues to benefit sales levels.

Group benefit sales increased by 9% over the same quarter last year to C$83 million, and fourth-quarter sales declined in Canadian group pensions as the large case sales of '05 were not repeated this quarter. However, the business has made significant strides, as '06 was a record sales year and market statistics indicate that our third-quarter year-to-date sales growth has significantly outpaced that of the total market.

On slide 24, you can see the net flows in the individual wealth management segment. Net flows increased and were driven by the very successful launch of IncomePlus, the first guaranteed minimum withdrawal product sold in Canada. The strong reception from both consumers and advisors contributed to a 36% increase in segregated fund deposits and resulted in record quarterly segregated fund sales.

Following 22 quarters of positive net flows, the mutual funds experienced a net outflow during the quarter. The business has several initiatives underway to expand its product offerings in response to shifting demand. Net flows of fixed products remain negative, as expected, in the current low interest rate environment.

Turning to slide 25, our Asia and Japan division reported fourth-quarter earnings of $167 million, another solid earnings quarter for the division. In Japan, quarterly earnings declined from one year ago, when we enjoyed several favorable nonrecurring items. Excluding these items, Japan's earnings increased by 33% over last year due to more favorable claims experience and growth on in-force earnings.

In other Asia, earnings increased by 8% over the fourth quarter of last year as business expansion continued to add to our in-force earnings. As well, improved margins in Taiwan and the recent acquisition in the Philippines also contributed to improve earnings. This growth was partially offset by additional expansion-related expenses in China, where we're growing rapidly.

Hong Kong earnings were $81 million, down marginally from the record level of earnings recorded last year.

Looking to slide 26, insurance sales for Asia and Japan were level with the fourth quarter of last year, as strong growth from other Asia was offset by lower sales volumes in Hong Kong and Japan. As previously noted, Japan implemented a new reporting methodology for sales in Q1, which makes historical comparisons somewhat difficult. We believe, however, that on a current basis, insurance sales in Japan have increased modestly this quarter.

Insurance sales in other Asia increased by 24% year over year due to higher agent count and branch expansion in China. Increasing contributions from Taiwan, the Philippines and Singapore also contributed to the growth in insurance sales.

Hong Kong insurance sales declined versus a year ago as sales continued their shift to wealth management products.

Asia and Japan wealth management net flows of $609 million declined year over year, but improved over the previous quarter. In Japan, the mid-November launch of the new variable annuity product contributed to improved net flows and the 22% increase in sales versus the previous quarter. Although sales are increasing, the ramp-up has been slower than originally expected due to increasing competition from VA providers during a period when the entire industry had reduced sales. However, despite this, Japan's segregated funds under management have grown by 37% year over year.

In other Asia, net flows of $186 million represented a significant increase due to the improved sales environment in Indonesia and good growth in both Singapore and Malaysia.

In Hong Kong, wealth management sales increased by 34%. However, net flows in the quarter were relatively level, as some customers elected to take profits on certain funds following a substantial rise in equity market values.

Turning to slide 28, the reinsurance division reported fourth-quarter net earnings of $60 million, with favorable experience in the life retro segment contributing to the strong result. The loss reported in the fourth quarter of last year was due to hurricane-related losses and was not repeated.

As many of you have likely heard, on January 18, winter storm Kyrill caused 47 deaths and significant property damage in northwestern Europe. The current estimates of industry losses due to property damage range from $3 to $11 billion, but it will taken a number of months before the true level of losses is known. Kyrill will not cause any losses to Manulife unless industry loss levels total $7.5 billion or higher.

Turning to slide 29, fourth-quarter earnings in the corporate and other segment were C$126 million, up modestly year over year. Earnings increased year over year due to strong investment in credit experience, an increase of approximately C$40 million due to the beneficial impact of tax items referenced earlier, and lower integration costs. Offsetting the increase in earnings was the impact of our annual review of policy liabilities, methods and assumptions, which reduced policy liabilities by C$36 million and contributed C$4 million to the current-quarter shareholders' earnings compared to a contribution of C$49 million from the same item one year ago.

Key themes in this year's basis change were reductions in policy liabilities from the impact of favorable 2006 investment markets on insurance reserves, and from modeling refinements related to taxes and investment risk. These reductions were partially offset by a reserve increase from the adoption of a revised valuation interest scenario under [COM] and persistency-driven reserve increases related to assumptions.

Turning to slide 30, fourth-quarter U.S. GAAP earnings were C$907 million, C$192 million lower than the earnings reported on a CGAAP basis. In the fourth quarter, we took a charge to earnings of approximately C$150 million for other than temporary impairment on assets, and that was reflected in the U.S. GAAP bottom line, but did not have a direct impact on CGAAP accounts. I would note that the majority of these write-downs relate to interest rate movements and over one-quarter of these assets that had charges were treasury securities.

When measured over multiple period, U.S. GAAP and CGAAP earnings continue to emerge relatively consistently. Over the past four years, average CGAAP and U.S. GAAP earnings have differed by only about 5%.

I would now like to take a moment to update you on 3855, the new Canadian accounting rule that will become effective January 1, '07. As many of you are already aware, 3855 requires us to fair-value our assets and liabilities, replacing the existing method of deferring and amortizing gains and losses. As well, all financial instruments must now be classified according to intention, with the classification selected determining the accounting treatment applied.

Going forward, assets backing liabilities will generally be classified as held for trading, with both realized and unrealized gains and losses flowing through the income statement each quarter. To the extent they are matched, liabilities will generally moved in tandem with assets. Surplus assets will be classified as available for sale. Therefore, for surplus assets, only on the sale of the asset will there be an impact on the income statement for the current period.

I would also note that a practical implication of the new guideline is that all segments have now been moved to (technical difficulty) for our insurance segments, which (technical difficulty), adjustments on an annual basis previously.

In implementing 3855, our goal has been to minimize the impact of the new standards on earnings. To achieve this objective, some repositioning of assets between the surplus and liabilities segments has been undertaken. As a result of these initiatives and the asset classifications selected, we expect that earnings under 3855 will remain substantially unchanged.

I would also note that the asset mix supporting our liability and surplus segments remains unchanged. As we have previously stated, we believe our current asset mix is the most optimal, given our mix of business, and we remain focused on economics. As well, we do not expect any material adverse impact on MCCSR due to the implementation of 3855.

Finally, I would note that 3855 is only an interim step in the transition to international accounting standards, and we're likely to see additional changes in future years.

So in conclusion, I'm very pleased with the record quarterly and full-year earnings that we have announced today. All of our major businesses performed very well, with in-force business growth and favorable investment performance contributing to quite solid results. ROE continued to improve and reached a postmerger high of 18% in the fourth quarter. Funds under management increased to C$414 billion, a record level for our Company and an impressive base for future growth. Finally, we recorded very strong growth in embedded value and new business embedded value. Both metrics attest to the significant value being created by our businesses.

With that, I'll turn it back over to you, Dominic, and we can open it up to questions.

Operator, we're ready for the question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS). Ken Zerbe, Morgan Stanley.

Can you talk a little bit about the competitive environment for variable annuities in Japan? I know your product was launched mid-quarter, and I guess I was surprised not to see a little more sales in that product. Are we just sort of at a new lower level of sustainable sales, given how competitive some of the more domestic annuity writers are?

We, too, are a little disappointed that we had to shelve our product there for a period of time, and then reintroduce it mid-quarter. And we are enjoying some success. It seems that the competition has intensified, as you say. There are some domestic providers of competitive products. And as well, the market is showing a preference for mutual funds as opposed to the variable annuities.

What we're doing in response is redoubling our efforts with our major distributors and have in fact been successful in signing up some new distribution that became effective in the new year. So we expect to see a nice, steady growth in the sales levels.

I guess from my perspective, one of the things that's very encouraging is the growth in the asset base itself. The fact is that the assets under management, which give rise to our fees, are growing very, very nicely year over year. I think they're up over 30%. And so we remain very optimistic about the savings business in Japan.

Great. And then just a follow-up on the U.S. side of the variable annuities. Obviously, you have introduced a couple of new products, new riders, the sales probably still up against a difficult comparison. But what's the outlook that you have for the variable annuity market in the U.S.?

I have John DesPrez here with me, and so I'll let him answer about the conditions of the U.S. VA market.

We're very optimistic about the VA market in the United States, which remains quite strong. We introduced the Principal Plus for Life product about a year and a half ago, and obtained a significant competitive advantage by doing so. We picked up about 1.5% of market share in the total market by doing that, and we've managed to hold on to that.

But now, the reality is that all the major competitors have copied that product. We're in an intensely competitive stature in the market, and in order to make our next significant incremental gain in market share, we're going to need to introduce some new product. And while I can't announce to you what that is today, I can tell you that we are hard at work with that and believe that we are well-positioned, when we can come with the next-generation product, to capitalize on our distribution strength to make our next jump forward in that market.

Jim Bantis, Credit Suisse.

Maybe, John, if I can just circle back on the U.S. VAs, when I look at page 14 in the slide pack, what seems to be the problem is a real pickup in withdrawals reaching $1.2 billion, almost 40% increase. Can you explain what's actually going on on the withdrawal side and maybe how long you expect, perhaps, the elevated level to continue?

I'm trying to find on this page where you're referring to. Yes. I don't know that that's indicative of any particular trend there. Withdrawals tend to vary with asset levels a little bit. We've had significant asset growth. You see the withdrawal jump is a little bit higher than the asset jump. So you get some year-end 1035 exchange kind of activity from time to time in the market, but I don't believe we're in a significant challenge there.

If you look at our net sales, what really matters in this business, everybody likes to talk about gross sales and increases in sales, but the reality is net sales is how we make our money. And our net sales continued to improve last year. There was some C$4.5 billion positive cash flow from this business. Many of our principal competitors are in net outflows in the VA business. So I am not concerned about our relative position with respect to net sales at all.

So along those lines, John, do you think you can get double-digit growth in terms of VA sales on a net basis in 2007?

I would like to believe we can. It's really -- for us, it's where we are in the product cycle. We have essentially sold the same product with some minor enhancements for about a year and a half now. And we're ready to come with our next-generation product at some point during this year. And how the market reacts to that will basically dictate what our ultimate sales level will be.

How important is adding Morgan Stanley in terms of the distribution? When I think of the top six brokers or wirehouses, how many do you have relationships with now?

We have relationships essentially with everyone other than ED Jones, if you're counting them as a wirehouse, which some people do. But Morgan Stanley has 8000 reps. It's one of the largest sellers of variable annuities. It will make a -- we launched there in the fourth quarter. We're looking to that to be a substantial adder to sales in 2007, along with JPMorgan Chase, where we also entered in the fourth quarter. And so those two firms alone have very substantial capacity that we can tap into. Essentially, we sell through everyone other than ED Jones and Ameriprise, are really the only substantial intermediary outlets that we don't sell through.

Got it. Thanks very much, and congratulations on the AAA rating.

Saul Martinez, Bear Stearns.

Two questions. Just a follow-up on Japan -- I actually want to ask about the fixed business there. The agent counts have been coming down. Sales I think on a -- were flattish if you use the new methodology. But can you give us an update as to what your strategy is there, and whether you think you can regain any kind of momentum there?

And secondly, on the M&A market, what's your view on the M&A market in the U.S.? I think Pru had mentioned in their call that they think asset prices remain rich, and I'm just curious if you're seeing any change on the margin in terms of assets that are available, or pricing trends.

I'll deal with the second part of your question first. I would concur with the sentiments that you heard from the Pru that values are pretty high. This is a good time in the financial intermediary world, as credit cycle is good, the equity markets are buoyant, and there's nobody that has a great urge to do anything or a compulsion to do anything. So you would expect that prices would be relatively firm.

Our focus is on managing our business and growing our business organically. That's been our focus for a long time now, and to avail ourselves of opportunities that present themselves on a case-by-case basis. I think we're of a size now where we see most things happen in the marketplace before they happen, and -- so what can I tell you beyond that, that we're keeping a watching brief on developments. We certainly are not planning our future on the basis of a big banging together of a couple of companies.

With respect to Japan, I would say that it's a competitive marketplace. We're working at the basics of the business. We continue to introduce new product, expand distribution relationships, manage our costs. We're not unhappy with our position. We're selling I think business or product that has more profit embedded in it than we had before, than the Company historically has sold into that market. And we're very optimistic that there's new distribution channels that are available for us to exploit. Heretofore, we have been distributing VAs through our capital sales force, but principally through other relationships.

We have not really made big use in Japan of the brokerage market. We think that there's a potential for us to tap into that distribution source. You know, the Japanese business is all in all one that we're very pleased with. We're very happy that we made the investment when we did. We think that market has lots of potential. And we intend to avail ourselves of our share of the market.

Mario Mendonca, Genuity Capital Markets.

A question for John DesPrez. Last quarter, you suggested that the sort of slowdown we saw in variable annuity sales in the U.S. related to equity markets and that with the introduction of a couple of new products and possibly even commission enhancements or bonus features, that would sort of help drive VA sales this quarter. I guess the question is, were there any commission enhancements or bonus features offered this quarter?

Yes. We introduced the dollar cost averaging program that is very prevalent in the wirehouse distribution channel, which is a relatively modest promotional type of activity. And we also redesigned our bonus annuity slightly to pay slightly higher bonus to the purchaser, as opposed the intermediary. So we did some modest promotional activity in the fourth quarter, and we will continue to do that, frankly, until the next-generation product comes.

On the commission front, anything for the Asian?

No.

Not this quarter, at least. A more broad question than -- about net flows -- John, you emphasized net flows, and Dominic, you have as well on several occasions. But we really have to focus on the net side of the business. If you look at Manulife's net flows, premiums and deposits, less the withdrawals, and just compare that to the opening assets, just as a measure of the extent to which net flows drive your overall asset growth, prior to the Hancock acquisition, those net flows were somewhere in the neighborhood on a quarterly basis a little bit above 2%. Over the last couple of quarters, it's dropped to below 1%. I'm wondering if all we're seeing here is the runoff of that fixed products business, formerly the G&SFP business, or if the Hancock acquisition, that business is just -- call it slower growth than Manulife's older businesses?

I think -- I don't know where to begin. Overall, our assets have grown by 11% year over year, and that includes some market value movements. But there's been strong business growth in the underlying franchises. I think the best indicator of that is we give you the new business embedded value, and we were very pleased and encouraged by the fact that we're generating almost $2 billion of new business embedded value, which is about 20% higher than what we generated the year before. I look at our market positions in the different geographies and I'm was very pleased that they're trending in the right direction.

So I really don't know that we're not enjoying a level of net flows. In the Hancock business, as far as I can -- my appreciation of it is it's very good business. We're very pleased with the position it's given us in the U.S. and Canadian marketplaces. The fact is that Hancock is probably selling more insurance in the United States than anybody else. I don't know how you could do much better.

The VA growth year over year, we had a period of time in the U.S. when we had some features of our products which were unique and had the whole market to ourselves. Others have now come into that market space, and that's competition. So overall, the ability of the Company to distribute and deliver products to its customers has never been better.

One final very brief question.

John wanted to pipe in.

Let me just add to that to try to set the context here just a little bit -- is that we had a very strong year in our wealth management businesses in the United States in 2005. But over that, if you look at the year-over-year growth in premiums and deposits of the three core wealth management businesses that we're growing, namely variable annuities, 401(k) and mutual funds, our premium deposit growth was 15% in VA, 26% in 401(k) and 45% in mutual funds in 2006 over 2005. So I don't think that's a -- just even on a gross level, I think that's a very acceptable result.

And if you look the net flows for those three businesses, setting aside some of the fixed businesses that we're less enthused about, as you know, our net flows in those three businesses were over C$13 billion in 2006, and they were just over C$10 billion in 2005. So we had a 30% increase in the net. So I don't think that we're losing momentum with respect to the development of these businesses. And just to echo what Dominic said, is that the most gratifying part of the 2006 result is that not only did the net flows go up, but our margins went up, as demonstrated by the growth in the new business embedded value.

Let me answer one last thing -- you can't rule in the fixed products, because that runoff is something that's quite material. It's over C$1 billion a quarter, and that's deliberate and planned.

I highlighted that as well. Those are all very good points. I want to just touch on one other sort of smaller issue. Peter, you talked about the new accounting changes, 3055. Can you give us a sense for the extent to which the Company's shareholders' equity, excluding the OCI, will increase on, or has increased on, January 1, 2007. Essentially, what I'm asking for is the after-tax realized and unrealized gains on assets supporting surplus.

We will be presenting all those numbers next quarter. They're well-developed, but they're not finalized for us just yet.

Jukka Lipponen, KBW.

First question, on the U.S. individual life sales, some of the other companies have said that because of the competitive environment, they don't want to be the number one seller at this point. What's your response in that context and the profitability of the new business?

I guess we wouldn't want to be a loss leader either. Our metrics tell us that we're writing very acceptable and profitable business. I think that over the history of our Company, we've been very disciplined in that regard, and have been prepared to sacrifice market share if to do otherwise would have meant writing substandard business. In fact, that's what we did in Canada. For the first three quarters of this year, we were really prepared to do just that. So I don't know where this statement comes from that they don't want to be number one, because it means selling unprofitable business. It's news to me.

Let me just add to that if I could. It's John DesPrez. During the course of 2006, our life business improved its IRRs on its product portfolio from about 13% to 16% over the course of the year. As you can see from our source of earnings there, we essentially eliminated the front-end strain on our life portfolio of businesses, the products that we sold, which had become quite negative in the wake of the Hancock acquisition, and we greatly strengthened our measures to eliminate the IOLI cases coming through that we all want to prevent from issuing. So if you can do those things, I guess I would tell you I'd be very happy to be number one.

My other question is, did you look at Putnam as a potential acquisition, and if you did, why did you pass, and if you didn't, why not?

It's not our practice to comment on transactions that others have concluded. The purchaser of that company is a very informed purchaser, so I assume they have their own reasons for doing it. You should ask them.

But did you consider buying Putnam?

The fact that the property was for sale was I think well-known by people in the industry.

Tom MacKinnon, Scotia Capital.

A couple questions. One on the fixed business, the John Hancock -- Peter, you had mentioned that you're not expecting this segment's investments and results to contribute at the pace they're contributing to earnings in the future. Can you give us some idea as to what would be more of a normal run rate for the fixed business, which I think John DesPrez said you might be less enthused about?

Sure. The main reason I've commented is I think three of the last four quarters has been very strong on the investment side. Something around C$75 million would be average, and we have been above that. But it's an item -- there's a C$40 billion portfolio that could move around, as particularly these favorable items to do occur from time to time. But it certainly looked like a trendline, and it's not that, I guess, would be my comment.

C$75 million average per quarter versus the C$132 million that you showed up in the thing --

I think that would be the baseline, and these favorable items would occur from time to time.

The second question, if you could -- on Japan, on page 29 of the supplement, I'm just looking at the funds under management, and the earnings, all in yen, so we can look right through on a -- involving currency. If I just look at it versus sequentially, assets are up and earnings are down. I'm looking at it versus the first quarter, where there wasn't really anything unusual. Assets are up, earnings are down. How should we interpret that?

I think that certainly last year, there were some adjustments. There was the release of some tax reserves or some terming out of the portfolios. I forget exactly the date.

You've had three quarters that have had significant beneficial items that we've highlighted. I think that's what's driving the (multiple speakers)

This would be more of a normal run rate for it, then, without any of these additional items?

It's not bad.

And then one final question -- I think you mentioned the northwest storms in Europe, Kyrill. No impact, if it's a -- no greater than $7.5 billion total?

Yes, that's right.

If we were at $10 billion, what would be the impact?

Steve, do you have the answer to that question? If the losses in Europe were to the storm, $10 billion, what would our losses be? It would be capped by our contracts.

If all the limits went, the net loss for the business in that quarter would be $130 million. But that would need to be probably well in excess of $10 billion. If it was $1 below $10 billion, a number of contracts wouldn't kick in, and that loss would be significantly reduced down to around half of that level.

So it seems to be a bit of a step function. If we were at $11 billion, would we be closer to that $130 million figure that you (multiple speakers)

It would depend on our client losses. We've instituted in all cases going forward and our whole book is structured this way now, where it takes a combination of client losses and a certain industry loss before we pay out. So that step that we talk about is a function of the level of industry loss we've instituted on selected -- on the contracts.

That's an after-tax figure?

Yes.

Timothy Lazaris, JMP Securities.

I've got a two-part question. Basically, my first part is a general question of Dominic and/or Peter. You have had a remarkable year. Your earnings are up I think well in excess of what people expected. And I'm wondering if -- Peter, at one time you stated, I think it was three years ago, that the conditions were optimal. Is there any view of the senior managers in terms of what the guidance might be like in terms of ROE earnings or anything? I'm not asking for specific numbers, but you have had a terrific year.

And then the second part of the question is, with the Canadian dollar weakening as it has, if you just look at the average conversion rate of U.S. to Canadian dollar in Q4, it was like C$1.14. We're sort of sitting at C$1.17. That's going to be quite positive for you. Have you considered that in your guidance?

We don't provide guidance. We provide medium-term targets, just to be clear. And it continues to be very good times. Certainly credit and equity markets have been very nice from the point of view of our institution. And we have no crystal ball. I can't tell you how long that's going to continue, so we run our operations to take advantage of that, but be protected, because inevitably those conditions will get tougher.

Yes, we're very aware of course of the FX rate, as are investors. Again, it's an item we don't have control over. We run our businesses on a local currency basis. So some three-quarters of our earnings are U.S. dollar or U.S. dollar-linked, and the big exchange rate differential of recent years has been a burden on our growth in earnings. So if that moderates, that would certainly help earnings growth.

I don't know, Dominic, if you would like to add to this.

I'm not sure I could add anything, Tim. We're planning to continue to grow our business at the rates that Peter indicated.

If I could, is it safe to say that in a period of a weakening Canadian dollar, your book value should appreciate at a pace greater than earnings?

That could happen. To a certain extent, a weak Canadian dollar will be good for earnings, and for book value, but yes.

But book value can outpace it, as the opposite occurred when the dollar was strengthening, right?

Exactly right. It's a question of degree, but I would agree with that.

Our book value has suffered by about C$3 billion on the way down. So if the dollar continues to strengthen, it will recover those unrealized losses.

Thanks very much, and congratulations.

Michael Goldberg, Desjardins Securities.

I noticed that your protection value of new business is up 26% in the fourth quarter, and sales down 3%. Is that the impact of COLI or margins, or what is going on? I also noticed that on the wealth side, both the VNB and the sales are down 8%. Is that a coincidence, or can you discuss some of the important margin factors going on there?

I think overall, the profitability of the business we have been writing is getting better all the time. Plus we're writing more of it. I think as John has indicated in his remarks, in the U.S. a number of pricing actions were taken to remove the strain and improve the overall economics of the contracts that we write. I think that's true of Canada as well. There's been a nice rebound in sales. So I don't know the other question that you've asked about the wealth business. What was that question? Can you repeat the second question?

Between us, we haven't got it down --

I said that both the wealth sales and VNB were down 8% in the quarter. I was just wondering if that's a coincidence or if you could discuss some of the important margin factors that would've impacted on that trend.

I think to a certain extent you're looking at the impact of Japan, where sales and value of new business --

In the fourth quarter of last year, I think our Japanese VA sales were, what, C$800 or C$900 million or something. And the values are less than half that this fourth quarter, because we were out of the market for half the quarter. So I think that the impact of the activity level in Japan is impacting that overall number. Is that right?

It's Simon Curtis. Yes, we actually looked at that and normalized it. If the Japan sales had been level, that 8% reduction would've been a 5% growth. So it's a 13% impact.

Michael, did you get that?

Yes, I did. Hopefully, I'll remember it. Was there also an impact of changes in assumptions that affect value of new business, as the year progressed? I'm thinking in particular of changes in reinvestment rate assumptions.

I'm not aware of any -- the question is, did we change the assumptions on which we've based our VNB calculations?

It's Simon Curtis again. I don't think there were any material impacts on changes in assumptions. As we introduce new products, we do always update the assumptions. So the new products may have picked up the new assumptions. But I can't think of any material impacts from changing assumptions to increasing products.

Okay. And with the strong growth overall in value of new business during the year, could you give us some idea of what we should be looking for in 2007? And do you see margins continuing to improve?

Overall, you know that in the wealth management -- there's an element of scale here, that there are some costs that are then spread over a bigger base. So as our asset base under management grows, you would expect that more of the incremental dollar revenue would flow to the bottom line, right? So we don't -- to the extent we don't reinvest that additional spread or those efficiencies in promoting our products, we should sustain our overall profitability levels quite nicely.

I think this year's growth, though, was quite strong, because sales were so strong, and a number of -- the markets were good and a number of products were able to increase their margins. So this would be a very good result. But we're certainly pleased with it.

Andre Hardy, Merrill Lynch.

My question focuses on reinsurance. Can you please tell us what happened with renewal this year? Last year, you were able to push the big price increases, obviously, but in terms of risk assumed, and general pricing levels, what went on in this year's renewal season?

This is P&C?

P&C, yes.

We were quite pleased with the renewals. The prices more or less held up from the spike that they came up at midyear last year. And attachment points, where we would normally be paying out on a U.S. event that would be 20 billion a couple of years ago and then 25 billion last year, we now have 25 billion as the industry minimum and we're expecting to pay out more in the 30 to 35 billion range. So, in general, we're pleased. There is on the horizon, as you may have heard, Florida has decided to go into the catastrophe cover business, and that will probably impact the market a little bit as we get into midyear and next year's renewals.

Maybe I'll follow up on the value of new business. You had a big pickup in individual insurance sales in Canada and your new business stream went down. I was under the impression that you lowered prices in individual insurance last quarter. So can you tell me how you managed to improve margins on new sales there?

I'll turn that over to Bruce. Bruce, how did you improve margins?

It's Bruce Gordon. The changes that we made in the individual life products in both June and September were marginal. The biggest difference in sales, number one, is service. We have substantially improved the front-end turnaround service, and that pleases the end client and the producer.

Second thing is volume. If you look at the acquisition costs, they don't ramp up with the volume of business dollar for dollar. So we do not have strain on acquisition expense, if you want to call it that. So there was not a substantial reduction in prices. It was service and volumes.

Thanks. Enjoy retirement.

Steve Cawley, TD Newcrest.

A couple of quick ones on capital. It's pretty difficult for us to try to calculate how much excess capital you have at this point in time. Can you disclose roughly where you stand?

I know -- that's not a metric I measure every day. We're very amply capitalized, and -- I don't know, Peter, do you have a ready statistic you want to put up there for Steve?

It's bigger than C$3 billion. It's a metric we've had for a very long time. It really depends on what level of capital you're prepared to run with and it will depend on what we're doing. So it's quite generous, and it's grown, I think, this year with our good financial results.

I guess that's capital defined the way we define it, which is equity capital.

And you are underlevered as well.

We do have leverage capacity, that's correct.

There's pretty easy follow-through with this. The second question is your buybacks went down quite a bit, and without there being real tangible potential acquisitions on the horizon, I'm wondering if there was any rationale for that?

I think our annual objectives for buybacks, as we've indicated, hasn't changed.

Neither has your target payout ratio on the dividend.

That's correct.

Do you see -- considering that you are, to use Sun Life and Great-West as your best comps in Canada on the lifecos, they are considerably higher, selling life at 30% to 40%. Great West is 40%-plus. There's no real pressure internally, I suspect, to look at that target payout ratio and bump it up some?

We talk about payout ratios all the time. I think we're not uncomfortable, but it is something we always look at.

Finally, maybe a quick one for Bruce, since this is his last call. Was this -- were you pleasantly surprised with the sale of your new GMDB candidate -- exceeds your projections, and have you seen any slowdown so far this year in the sales momentum?

What a nice question (technical difficulty). Lob me a softball, did you?

I'm going to miss the big guy. It's been great to (technical difficulty).

We were very pleased with the GMDB product launch from October through the end of the year. Secondly, the rest of the seg fund sales held up, which was very pleasing. Early in 2007, it's too early to tell -- we're into the RRSP season. The (technical difficulty) big minimum, 50,000. It's going to take until the end of the first quarter, and then I'll let Paul Rooney give you that answer.

John Reucassel, BMO Capital Markets.

Just a quick question on the U.S. individual life business. I guess the in-force profits there have been bouncing around, C$120, C$125 million. Nice year-over-year growth, but it was down in the quarter. I guess, Peter, was that just related to long-term care, or is there something else going on in that business? You've had pretty nice growth in the sales.

I wouldn't read awfully much into it. I think long-term care has danced around a little bit. USI is also, its results have varied quarter to quarter a bit. I don't think there's a real trendline that I would extrapolate there.

But in this quarter, the decline, was that mainly attributable to the claims experience in long-term care? Was that --

Just a sec. We will -- Simon, does that strike a bell?

And I guess, Peter, while you're looking at that, have you any indication on the ROE impact of 3855?

It shouldn't have much impact on our affairs. The ROE shouldn't move much.

We're having trouble understanding your first question. There has been some fluctuation with long-term care, having a year-over-year fourth-quarter to fourth-quarter decline. And there's been nice growth in the life piece. In any given quarter, given the nature of the business that we write, you have a couple of monster claims. Our retentions are fairly high because of the size of our policies. So you could have some fluctuations. But underlying business is robust and growing nicely.

I guess last question, if the timber and real estate investments, I think these investments come under the old accounting rules? Are they going to be in your surplus assets or your assets backing liabilities?

I have our Chief Investment Officer with us here, and he has been dying to give you a few words. So Don, where do we put those real estate and timber assets?

Most of that will go into the backing insurance liabilities, in the reserves.

And can you guys, or Peter, can you tell us what's the asset mix in the surplus assets currently? Are you willing to disclose that at this stage?

We will give you a fair amount of information next quarter. I don't have something at my fingertips, but it's going to be something we will cover in detail next quarter.

I think the important thing is that we haven't had, as we feared at one time -- you remember in one of these calls I put forward the idea that these new accounting rules may in fact lead to us changing our appetite for certain asset categories, and that has not happened. We believe that we will be able to live with our asset mix and continue to hold assets based on our appreciation of the economics of the underlying asset as opposed to being driven by accounting methodology.

And so I guess the issue of concern there, Dominic, was the equity side, and --

Exactly. Some of that will depend on our communication to you, and your assessment of the income stream coming from that asset category.

So are we almost done, do you think? One last question?

Mario Mendonca, Genuity Capital Markets.

Why don't we just end it there? Thanks very much.

Thank you very much, everyone, and we look forward to talking to you again next quarter.

The conference has now ended. Please disconnect your lines at this time. We thank you for your participation, and wish you a great afternoon.