Manulife Financial Corp (MFC) 2007 Q1 法說會逐字稿

Good afternoon and welcome to the Manulife Financial Q1 2007 financial results conference call for May 3rd, 2007. Your host for today will be Patricia Kelly. Miss Kelly, please go ahead.

Thank you and good afternoon. I would like to welcome everyone to Manulife Financial's earnings conference call to discuss our first-quarter 2007 financial and operating results. If anyone has not yet received our earnings announcement, the statistical package and the slides for this conference call and webcast, these are available on the Investor Relations section of our website at www.manulife.com.

As in prior quarters, our executives will be making some introductory comments. We will then follow with a question-and-answer session. On behalf of the speakers that follow, I wish to caution investors that the presentation and responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial securities laws and 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 materially differ 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 in the most recent annual information form and under the headings Risk Management and Critical Accounting and Actuarial Policies in management's discussion and analysis in our most (inaudible) report.

When we reach the question-and-answer portion of this conference 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 to all.

Now I would 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 first-quarter shareholders' earnings of $986 million, earnings per share of $0.63, which included a one-time charge of $69 million related to the introduction of the new CICA financial instruments accounting standard.

Peter will discuss the nature of the charge in more detail. In essence, it is the noneconomic charge in the period as a result of positioning our assets as part of our implementation of the new standard.

Adjusting for this non-cash charge, net income would have been $1,055,000,000, an increase of 11% over the first quarter last year. Also on this basis, earnings per share would have increased by 13% and return on equity would have been 17.3%.

Funds under management showed good growth over last year, rising 11% to a record level of $426 billion. As well, premiums and deposits increased to $18.8 billion for the quarter, also a record for our Company.

In the United States, our Wealth Management businesses reported record shareholder earnings. Our variable businesses continued the growth, with funds under management up 19% over last year, producing a corresponding growth in related fee income. In addition, favorable investment in claims experience in our fixed businesses contributed positively to the strong results.

Earnings from our USA Insurance segment were below our expectations in the quarter due to lower investment returns and a temporarily reduced level of sales.

In Canada, we continued to see good growth in our businesses, with funds under management up 15% during the year. Earnings growth from our individual businesses was offset by group benefits, where unfavorable claims experience negatively affected our results.

Our Asia and Japan division had another strong quarter, with good earnings growth in each major segment. I was particularly pleased with the in-force business growth, which was very consistent across our operations.

Finally, earnings from our Reinsurance division were also quite strong, with improved claims experience in our core life retrocession business. Peter will provide a comprehensive review of our business unit results and operating highlights in a moment, and so I don't want to repeat what he has to say.

Overall, I would describe our first-quarter operating performance as solid. We benefited from a growing base of in-force business, favorable investment results and continued good control of operating costs. We believe we are off to a good start to 2007, and our Board this morning approved an increase in the quarterly dividend to $0.22 per common share, with effect with the next payment date.

I know that I don't need to tell you all that the effort required to adopt a new accounting standards that became effective on January 1st was very, very substantial. Our objective was to implement these new standards in a manner that would not in any fundamental way affect our investment strategies, which have served us so well for so many years. And we think we've succeeded in doing that.

Peter will now explain these accounting changes in more detail and review this quarter's results. Peter?

Thank you, Dominic. I'd like to start by discussing two accounting related matters. First, some of you may have observed that we did not include our Q1 U.S. GAAP results in the supplementary information package this quarter. That is because our audited Q4 U.S. GAAP financial statements contained some adjustments to the preliminary results that we discussed last quarter. These changes, although not material, did reduce our Q4 U.S. GAAP earnings.

The final Q4 U.S. GAAP accounts are on our website and we will continue to disclose our U.S. GAAP results quarterly. However, we will be doing so about a week after our usual results release to ensure that the accounts disclosed are fully finalized.

I'd now like to take a moment to review the impact of the new financial instruments accounting standards, Section 3855, on our accounts. As you may know, the new standard imposes significant changes related to accounting for financial assets and liabilities, excluding insurance contracts. Most materially, bonds and equity assets with reliable fair values are now carried at fair market value on the balance sheet.

For assets designated as trading, unrealized gains or losses flow to retained earnings. For assets designated as available for sale, unrealized gains or losses flow to accumulated other comprehensive income, or AOCI.

In general, assets backing liabilities have been classified as trading, and assets backing surplus have been classified as available for sale. For assets supporting actuarial liabilities, it is generally an offsetting adjustment made to the actuarial liabilities. As a result, we see the elimination of deferred realized gains and the fair-value adjustment for unrealized gains, both of which increase shareholders' equity.

Offsetting these two items are the reserve adjustments related to deferred realized gains and the fair-value adjustments on assets backing policy liabilities. Taking into account the tax impact, shareholders' equity increased by about $1.6 billion as a result of this new accounting standard.

As you see on slide 8, the $1.6 billion increase in shareholders' equity is made up of an increase in par equity of $13 million, a decrease in retained earnings of $176 million and an increase in available other comprehensive -- accumulated comprehensive income of $1.7 billion.

Our implementation of this new accounting standard maintains our accounts on a basis that is as consistent as possible post-implementation of the new standards. We are maintaining our investment assets mix on an unchanged basis. As you may recall last quarter, I advised you that we would be realigning our assets as part of the implementation of the new financial instruments accounting standard. This asset realignment has given us the desired outcome of maintaining a consistent financial position, both before and after the implementation of the 3855 rules.

As is highlighted on slide 10, there was an accounting impact due to this asset realignment which created a $69 million reduction in our reported first-quarter earnings. While the intercompany transfers implemented in the asset realignment had no cash or economic cost, differences in the accounting treatment for the surplus and liabilities segments related to valuing future tax impacts resulted in this reported charge to earnings.

I believe that a more appropriate reflection of this item would have been to reflect this charge in opening retained earnings. However, I have been advised that we are required to reflect this item in earnings, despite the fact that the asset repositioning was done directly as a result of the new accounting standard.

As indicated in our results release, excluding the impact due to repositioning of our assets in relation to our implementation of 3855, this quarter's shareholders' earnings were $1,055,000,000, and EPS was $0.68 per share. This quarter, there are at least two views of earnings and equity that might be considered in various combinations when calculating ROE.

If we were to exclude the onetime charge related to the asset realignment and consider equity as it was viewed prior to implementation of this period's new accounting standard, our ROE was 17.3%. We have also reported equity on some alternative bases in our [SIP] disclosure, for those who may find it of interest.

On slide 11, we have provided the key components of this quarter's other comprehensive income. As we are reporting this income measure for the first time, I would like to take a moment to review this report. First, included in this amount was $191 million of unrealized gains on available for sale securities, which on a post-tax basis contributed $152 million to other comprehensive income. Having an offsetting impact was $84 million of realized gains, which reduced other comprehensive income by $65 million post-tax. Of note, unrealized gains in the first quarter were considerably higher than the gains realized on available for sale securities.

Gains on cash flow hedges added $18 million post-tax. And the impact of currency movements on self-sustaining operations reduced other comprehensive income by $312 million after-tax. This too is now reported in the OCI item. In total, other comprehensive income was a loss of $207 million for the first quarter, entirely due to the impact of currency translation.

On an adjusted basis, shareholders' earnings of $1,055,000,000 increased by 11% over last year, and EPS increased by 13%. Strong in-force business growth across almost all of our operations and growth in fee income on higher assets under management were the key drivers of this growth. We are pleased to see this growth emerge so consistently across our operations, and believe it attests to the strong and growing businesses that we are building throughout our organization. Slower equity market growth, particularly in comparison to the very strong markets of Q1 2006, somewhat dampened this quarter's earnings growth.

On slide 13, you'll see that funds under management increased to $426 billion in the quarter, a record level for our Company. In aggregate, funds under management increased by $40 billion over the last four quarters, driven by continued strong levels of premiums and deposits, good persistency and equity market movements.

Outflows of John Hancock institutional products continued, with $3.9 billion of scheduled maturities occurring during the last 12 months. The change to fair value accounting resulted in a $4.4 billion increase in opening funds under management. However, this was largely offset by the $3.9 billion negative impact of the strengthening Canadian dollar.

On slide 14, you'll note that investment experience remains favorable, with net impairments of only $15 million. Our total portfolio yield of 5.7% was down versus the previous quarter, driven by the impact of accounting changes. Of, in fact, the 120 basis point decline, 90 basis points related solely to the new accounting standards' presentation, with the remaining reduction due to normal volatility.

On slide 15 we've highlighted the FX of the new accounting standards on investment income. For assets supporting policy liabilities, the amortization of deferred realized gains and move to market were replaced with net unrealized and realized gains. While the resulting investment income was lower, the impact was substantially offset by movements in policy liabilities with little impact on earnings relative to historical levels.

For assets supporting surplus, the amortization of deferred gains and move to market was also eliminated and replaced with net realized gains. However, the realized gain impact in the first quarter was in line with historical amortization of gain levels. Overall, the moved to the new accounting standard did not have a meaningful impact on the first quarter's results.

On slide 15 we've presented our source of earnings disclosure. In the first quarter, earnings on in-force totaled $803 million, up 10% over the same quarter last year, reflecting continued strong growth in our in-force business. Loss on new business origination of $66 million was consistent with levels recorded in recent quarters. That result in Q1 '06 was lower due to the exceptionally strong life sales in that quarter.

Experience gains remained strong at $345 million, primarily due to continued favorable investment experience. We also experienced expense gains and claims gains, driven by overall favorable mortality in our key life insurance businesses.

Management actions and changes in assumptions would have been positive primarily due to improved revenues on repriced contracts in a number of businesses. However, the pretax asset realignment charge more than offset these items. Earnings on surplus funds increased to $305 million due to favorable bond and equity income.

I'd now like to turn to our divisional performance. On slide 17 you'll see that earnings in our U.S. Insurance operations were US$121 million, down from a year ago and below the results of recent quarters. In the John Hancock Life line, in-force business growth and favorable claims experience were offset by less favorable investment experience, driven by the relatively flat U.S. equity markets. As well, the contribution of new business was less favorable in the quarter due to lower sales volumes and a shift in product mix. However, product updates and other initiatives to improve sales have been implemented. We expect to see the results of these improvements over the next few quarters.

Our long-term care segment recorded earnings of US$27 million, up from US$22 million a year ago. This quarter, the favorable impact of negotiated repricing of some of our in-force contracts was largely offset by experience-related losses.

Turning to slide 18, first-quarter individual life sales were US$148 million, down from the very strong sales levels reported one year ago. The decline in sales was largely driven by a less competitive UL portfolio, as the business implemented UL price increases in January in advance of some of our peers. However, we are now seeing similar moves from our key competitors, and as the playing field levels, we would expect to see a positive impact on our sales.

As well, the business has implemented a number of new initiatives, including new product introductions, a sales campaign focused on variable life products and an increase in the number of regional wholesalers, which we expect will contribute to improved sales.

In our long-term care segment, overall sales increased by 24% over last year to US$46 million. This was the eighth consecutive quarter of growth in the retail segment, and the very strong results in retail were partially offset by lower group sales this quarter. Successful product sales and service initiatives have contributed to strong marketshare gains in both long-term care segments, and for the full-year '06, Manulife ranked number one overall for long-term care sales.

On slide 19 you'll see that in the U.S. Wealth Management, our variable products group delivered exceptional first-quarter earnings, totaling US$152 million, up 41% over the same quarter last year. Strong growth in funds under management and higher fee-related income in all segments contributed to this earnings growth. As well, the update of the acquisition cost amortization schedule for our new variable annuity withdrawal living benefit rider now appropriately reflects the longer expected duration of this product. After reflecting this adjustment, DAC as a percentage of funds under management as noted on page 39 of our supplemental disclosure, remained consistent with the previous quarter and is down from a year ago.

In our variable products group, gross sales declined marginally from the same quarter last year, but increased by 10% over the previous quarter. Similarly, net flows are down year-over-year, but up strongly by 20% over the previous quarter. Variable annuity net flows remained strong at US$848 million, but declined from previous high levels.

Decline in top-line growth reflects increased competition in the VA marketplace that was previously anticipated. To boost sales momentum, the business has undertaken a number of initiatives, including a revision to our popular guaranteed minimum withdrawal benefit product, which reduces the minimum age for withdrawals to 59.5 years old. As well, we recently announced the launch of a new feature-rich VA product designed to appeal to our target market.

Finally, we are pleased to see that sales through our new distribution partners are developing well. While we started from a small base and it will take time to fully ramp up to expected run rate levels, VA sales through both Morgan Stanley and JPMorgan Chase are growing nicely.

In our group pensions business, net flows increased to US$1.5 billion, driven by strong sales and increased renewal premiums per participant. Strong new sales in recurring deposits in this business have contributed exceptional growth to funds under management. In just 12 months, group pension assets have increased by almost US$10 billion, or 24%, to a record level of US$48 billion.

Mutual fund sales were US$1.9 billion, up 16% relative to the fourth quarter, but down from record levels reported a year ago. Net flows declined to $342 million on increased redemptions due to market volatility. We are also successfully expanding our product offering. We previously had a high concentration of sales in one fund and now our sales are more broadly based.

In the fixed products segment, first-quarter earnings increased to US$133 million, driven by continued strong investment gains and favorable claims experience. As expected, funds under management continued to decline modestly due to scheduled withdrawals and restricted sales.

On slide 22, you can see that sales in the fixed product group were US$412 million, down from one year ago, due to lower annuity sales and nonrecurrence of a large single premium sale that occurred in the first quarter of last year. Net outflows were generally consistent with prior quarters at US$1.3 billion, reflecting a continued managed reduction of institutional products.

On slide 23, the Canadian division earnings are shown to be 218 million in the first quarter, down from $238 million a year ago. Favorable investment experience and higher asset-driven fee income was largely offset by the impact of slower equity market growth on segregated fund guarantees. In addition, group benefits (technical difficulty) results were adversely impacted by higher long-term disability claims experience. A number of steps, including pricing action, have been undertaken to address this situation.

On slide 24, you can see that the Canadian division had a strong sales quarter, with year-over-year growth in most major segments and record sales levels in both segregated funds and group pensions.

In individual insurance, sales rose 7% year-over-year to 60 million as service-related initiatives continued to have a favorable impact, with growth evident across our key product categories. Our group pensions business recorded its largest sale ever, driving sales to a record $1.3 billion in the quarter. This success in the large case market extended to other segments of the group pensions business, where sales were also strong. In group benefits, sales increased by 9% versus a year ago.

Slide 25, our individual Wealth Management segment premiums and deposits are depicted at $1.3 billion. Segregated fund sales reached record levels and exceeded 1 billion for the very first time. The successful launch of IncomePlus, our new guaranteed minimum withdrawal benefit product, contributed to this strong result.

In the mutual fund segment, net outflows reflected lower gross sales. The business has implemented several initiatives to expand its product offering in response to shifting demand, including the second-quarter launch of five new global funds. Continued net outflows of fixed products reflect the prevailing low-interest rate environment.

On slide 26, our Asia and Japan division had an exceptional quarter, with record earnings of US$183 million. We were particularly pleased with the strong growth of in-force earnings across every one of our territories this quarter. In Japan, earnings increased by 38% to US$90 million, with favorable claims experience and in-force growth in the variable annuity segments. As well this quarter, we reduced our equity position on assets backing the (inaudible), which was overweight equities versus our target, and recognized a resulting gain.

Insurance sales in Asia and Japan increased over last year, driven by strong growth in the other Asia territories. Sales from other Asia increased by 23%, with good growth evident across almost all our operations. In Japan, sales were similar to last year. Agent count showed some improvements and our new, more rigorous recruiting standards should produce improved productivity. Hong Kong insurance sales were stable.

Slide 28, you can see that in Asia and Japan, Wealth Management sales remained quite strong, exceeding the prior quarter by 31%, but down versus a year ago. Japan VA sales continued to show improving momentum, with our new guaranteed minimum withdrawal benefit offering selling well through all channels.

Other Asia net flows improved to US$160 million as the recovery markets in Indonesia contributed to increased mutual fund sales versus last year. Hong Kong net flows declined year-over-year, but increased over the previous quarter, due to growth in both individual Wealth Management and group pension sales.

On slide 29, you can see the first quarter in our Reinsurance division result was US$59 million. A year ago, the P&C segment's earnings included a release of previously established hurricane loss provisions. Excluding that item, earnings were level with a year ago, as favorable claims in our life segment were largely offset by lower P&C volumes and a smaller benefit in segregated fund guarantees.

At this time, we do not expect to incur any losses related to European windstorm Kyrill as current consensus for industry losses remains well below our attachment points.

Included in the corporate/other segment on slide 30 was the $69 million charge related to the asset realignment that I discussed earlier. Excluding this item, corporate earnings were $77 million. More favorable credit experience, good A&H claims and effective cost controls all contributed to this year-over-year growth.

Offsetting the growth was the negative impact of changes in actuarial methods and assumptions, which reduced earnings this quarter by $5 million versus the benefit of $32 million recorded a year ago. Compared to the previous quarter, earnings declined due to the nonrecurrence of tax-related gains.

This quarter, the results of the corporate segment included 84 million of realized gains on available for sale assets. This is similar to the level of amortized gains reflected in this segment over recent quarters. During the quarter, the gain in accumulated other comprehensive income relating to available for sale assets rose by $107 million, significantly above the level of gains reflected in this quarter's accounts.

On slide 31, you can see that new business embedded value remains strong at 482 million, above the quarterly average reported in our record full-year 2006 result and the second-best result adjusted for changes in currency. The continued improvement in Japan VA sales and the strong first-quarter Wealth Management sales in Canada contributed to this quarter's good new business embedded value result.

So in summary, we are pleased with our results this quarter. Our adjusted shareholders' earnings of $1,055,000,000 produced per-share results that were up 13% versus a year ago. Overall, the fundamentals across our businesses remain strong, with solid in-force business growth, favorable claims and expense experience, and continued strong investment and credit results.

Premiums and deposits and funds under management both continued to grow nicely, reaching record levels. As well, we continued to return capital to shareholders. In the first quarter, we repurchased 10 million shares for $402 million and distributed 310 million in quarterly common dividends. Share buybacks continued in the second quarter, with 3 million additional shares being repurchased during April. Despite these distributions, our excess capital level remains above $3 billion.

Finally this morning, we announced that our Board of Directors has approved an increase on our quarterly common shareholder dividend to $0.22 per share, up from $0.20 per share previously. So overall, this has been a very satisfactory quarter. Thank you very much.

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

(OPERATOR INSTRUCTIONS) Steve Cawley, TD Newcrest.

My first question relates to expected profits. If we look at your wealth businesses in the U.S., 17% year-over-year growth looks great -- or I think it was 25%. In Asia it was 17%. But looking at your U.S. individual business, despite what has been some pretty -- sure, it was down a little this quarter, but it has been pretty consistent, strong growth over the last four quarters -- your expected profit growth is only up 5%.

And in Canada and insurance overall, I think it is negative. Could you speak to the two insurance businesses in North America as to why the expected profit seems pretty disappointing?

Well, I'm not -- Steve, I guess that quarter-to-quarter movement in expected profit figures from new business, I'm not sure, are as robust a metric asked you are maybe taking from it.

It doesn't have any sort of (multiple speakers) --

I was just going to turn the matter over to Simon, who might have a more complete answer to your question. I don't know, Simon, what you would comment to Steve's observation.

Well, I think in the -- it's Simon Curtis speaking -- I think in the U.S., there's some impact from our valuation basis changes that take place, where on some of our insurance businesses, the par businesses, we have a slightly different relief pattern on our PADs than we did a year ago after we went through our external reviews and peer reviewers, which changed our PAD levels.

And I think that is dampening some of the normal growth [you'd see] from the in-force business. So the [Viv] evaluation basis change impact from last year dampening the growth in that number. But the core business is growing quite strongly.

I think in Canada, a bit of it is volatility due to the business mix, largely driven by the group business. I don't know if Paul, Paul Rooney, whether you want to add anything on that.

It's not outside the range of normal volatility. I wouldn't be too alarmed by it. And it really is driven by some fluctuation in the shorter-term businesses (inaudible).

So I shouldn't read into there being any sort of pricing challenges? I recognize expected profits and the normal release of the PfADs. But I am wondering if those changes that you referred to, Simon, speak to there being inadequate pricing in prior periods or not.

No, not at all. It was just really normal updates to our PAD levels in the U.S. and most of the Canadian businesses.

Steve, I might add to that, the pricing for new sales, there is always competitive issues. But the new sales are a small percentage of the size of the total block. So it takes quite a period of time for that to have an impact migrating your profits and in-force. So I think really you have to look over a longer timeframe, is really, I think, the key message on that item.

Okay. Can I get a second one in here?

Sure.

Group in Canada, conversations that we've had with various people in the industry talk about how crazy competitive the space has been, both in group and in individual. And then you see the profitability in your group side really slide.

Your sales, really though, increased quite a bit in period -- and I know it is still pretty small relative to the size of your book. But in-quarter, were you pricing the product properly? And do you think that we can expect a return next quarter of more normal profitability from your group business?

Well, I think as we -- I thought we indicated that our group business was affected by a very adverse experience. There are claims levels, particularly in the long-term disability block -- and it doesn't take many claims. Every time you get a claim, they are roughly $100,000 a pop. So we had adverse experience in the first quarter.

I can't tell you exactly when it's going to reverse, but our results are not a function of having reduced our pricing, Steve. Our profitability is not affected because the product is being sold at a discount.

Once we complete our analysis in the end, your pricing for the product is going to reflect the level of claims that you've experienced. I don't know that we are in a position to tell you that claims experience is deteriorating permanently or whether it is a temporary phenomenon. Paul, do you have --?

Yes, we are watching this very closely, and we have a number of action plans in place to deal with this. Dominic is right -- it is too early to see to see temporary or permanent. In discussion around the industry, it appears to be an industrywide issue.

We did take some pricing action in the first quarter, increasing pricing for all renewals. Of course, renewals come up throughout the year, so you won't see the full impact of the price increases immediately; it will come into over time. And we will continue to monitor that and to look for -- to see if the pricing actions have been sufficient or if we will need further price action later in the year.

Thanks very much.

John Reucassel, BMO Capital Markets.

Thank you. Just a question on the U.S. fixed and on the investment gains there. I guess in my notes here, Peter, and I keep seeing these investment gains and I think the word unsustainable occasionally comes up. But you keep having them.

Are these assets that you are getting these investments, are these under the old accounting system, are these amortized gains that are coming through? What is it that we are seeing there?

No, it's nothing to do with the accounting changes. The credit market has been phenomenal, so that is part of it. I think I have indicated repeatedly that the level of earnings on that block is higher than we would expect; that is the case again this quarter.

The people who run that business accuse me of being pessimistic, but they also, when analyzing it, would expect the kind of earnings I'd indicated, plus some good things from time to time. We've had quite a number of quarters now where we've had good things almost back-to-back. So we are very candid about telling you that is not what our core expectation is. But it has got nothing at all to do with accounting changes.

Okay. I have written here -- I don't know if it's true -- 75 million -- I have this as a baseline number. Is that --?

Yes, the US$75 million would be a baseline, and we would expect some favorable items from time to time above that. But there have been more of them and they are bigger than I would, on average, have anticipated.

Okay. Peter, just so I am clear on this OCI -- the CTA is $3 billion, is that right?

It sounds right -- it is in the schedule, yes.

Oh, so that is not -- there is no CTA -- no currency translation in the 1 billion 741?

That is correct.

Okay, okay. And I guess for Dominic, I will be the first to ask, but lots of excess capital and you're buying back a few shares. But last quarter you commented how expensive targets are. Is it still a tough market out there, or what is your view on M&A activity?

I'm sure I'm not going to tell you anything you haven't heard. We're a large company -- everybody knows -- you guys are very fertile in canvassing -- looking around for --. We get visited by everybody, every possible initiative is run by us. We remain of the view that there isn't any, as I said to you, I think, on the last call, that everybody is feeling pretty good, right? Markets are very benign and companies are flush with capital, and no one feels the need to reorganize themselves. So we are being patient.

Okay. And still comfortable with the payout ratio range that you have now?

Yes, I think as we've got a sense of a payout ratio, we return quite a bit of capital to our shareholders, we will continue to monitor developments in our business and listen to our shareholders. And they will tell us what appetite they have for dividends and we will respond accordingly.

Thank you.

Timothy Lazaris, GMP Securities.

I have two questions. The first question is the net impaireds at 0.31%. Peter, could you tell us if that number, which seems to have moved up a little bit this quarter, was impacted by the new accounting? Or is that just a condition of the situation there with those investments?

I think there is a small impact -- I don't remember precisely what has caused it. I'd be happy to go through it offline, due to the presentation. Certain assets get treated slightly differently. But basically, it hasn't moved awfully much. These are still quite low numbers versus what we would expect, given our asset mix.

Okay. And then the second question, there was a comment and on slide 19, there is some discussion of the VA acquisition costs amortized --

You are breaking up. I don't know if you can hear us. We can't hear you.

Can you hear me now?

Yes.

Okay, sorry. On slide 19, there is a section or bullet that talks about updating the VA acquisition cost amortization schedule. Could you tell us did you extend the amortization or what is the impact on earnings in the quarter as a result of that?

Yes. We introduced a product that has a longer life because of the terms and the nature of it. And we had used initially the shorter amortization of the predecessor product. The impact is about $12 million, and it is likely -- it is expected to recur, varied by volumes, obviously, quarter to quarter.

My recollection is that we extended -- and correct me if I'm wrong -- but we apply a ten-year amortization period to the -- series of GMWB --

That is correct.

As opposed to the previous seven -- is that what it was?

I think it averaged about 7 before and now it is maximum 10.

So because of the nature of that product, where the payout is over a long period of time, we, I guess, concluded that a more appropriate matching is to write off the acquisition costs over the 10 years as opposed to the shorter period we previously (inaudible)

Okay. And I just thought of another quick question, and it has to do with similar --. But in the domestic market, your IncomePlus product, could you just give us an update on how that is selling post the quarter end and if you are experiencing the same success you had out of the gate?

I think the success in steady. I don't have actually, Tim, numbers at my fingertips. I don't know whether any of my colleagues have them.

It's progressing exactly as we expected. It's not an RSP product, so we don't get the significant jump you would expect in the RSP season. This is a product that we expect to sell levelly throughout the year, (inaudible) to the former (inaudible) accumulation products. And we continue to be very, very pleased with the results on the sales on IncomePlus.

Okay, thank you very much.

Jukka Lipponen, KBW.

Good afternoon. We've seen in the U.S. in terms of life insurance sales numbers sort of bouncing around from company to company. Can you comment on what you are seeing in the marketplace at the moment?

Who wants to take that question -- U.S. Select Insurance marketplace -- Jim?

Yes, this is Jim Boyle. Our sales were off this quarter, as we had indicated they probably would be. We've raised prices on our UL products, really in response to higher Reinsurance costs. And I think we were a little bit early to the market. We've now seen our competitors, for the most part, announcing price increases in Q1 and Q2. And I think (technical difficulty) we would expect that we would gradually gain back our share as the year progresses and we are on more of a level playing field.

So you are not continuing to see competitors being sort of irrational?

No, I wouldn't say we see them being irrational.

My second question, on the M&A front, Dominic, can you update us on your preferences, what you would like to acquire if it was available in terms of types of businesses and geographically as well?

Well, we'd like to acquire another John Hancock. I think we like the geographies that we are in and we like the businesses that we have. And so if something became available in either the life insurance or the savings or investment management side of our businesses, we would be interested in those. We are not -- the geographies in which we currently operate, we like those.

Realistically, I'm not sure that there is many things to buy in Asia. There might be more M&A activity possible in the United States because it's a somewhat more fragmented market. And we would be receptive in our own -- in our home market here in Canada, of course, the industry has consolidated very significantly, so there aren't that many moving pieces left -- or independent pieces, rather, left.

So we are not looking at expanding in a dramatic way outside our comfort zone. We'd like to stick to the areas where we do have some demonstrated expertise and some confidence in our abilities to deal with any merger or business combination.

Does that take UK and/or the Continental Europe off the list, so to speak?

I don't know that you should ever say never, but it is not our prime focus, I can tell you that.

Thank you.

Tom MacKinnon, Scotia Capital.

Thank you very much. Good afternoon. Some of the questions have been answered already. What was the impact, if you can tell us, of the -- on the (indiscernible) block of reducing the equity portion in that block -- what was the impact to earnings? And I've got a follow-up.

I don't have it exactly that way, but year-over-year, that thing is up about $15 million due to that item. You will recall, of course --

Is that US dollars?

Yes. You will recall that a year ago, equity markets were dramatically stronger. And so this quarter, all our other businesses (technical difficulty) much less favorable impact from equity. So this mitigates it to a small portion of that amount that we are off in terms of equity benefits net by quite a significant amount.

Okay. And then the press release had talked about new business profits in the U.S. individual insurance. To what -- does that imply that some of the earnings -- I assume that when you price this product, it meets the internal hurdle. But does that mean that the earnings are actually fronted to some extent, rather than your typical kind of heavy insurance would have a loss at issue and then recoup it later on? Is that what we are talking about here, a bit of almost a hockey stick look to the earnings, the other way around?

No. Simon, why don't you answer that question?

Simon Curtis. There is no outfronting on the insurance block. It is -- there was some impact from new business that was negative; it was really acquisition expense losses. The gain or loss on the fixed acquisition expense infrastructure is also shown in that new business impact. So sales drove a bit of an acquisition expense loss; that is why the business impact was negative.

Just help me understand. If the sales had been higher, would this hit have been -- would this reduce new business profits had been larger or smaller?

We take a small loss on our new business before you consider the expense gain or loss. And what we see is as the sales move around, we tend to get a slightly bigger impact from the impact on acquisition expenses than we do from the impact on sales volume on rest of those.

So there is absolutely no fronting. There is a loss at issue, sales were down, but you still talked about reduced new business profits. I'm still having a problem understanding that.

Just to make it really simple, we have an expense base. It doesn't vary each quarter, so we have to incur that expense base over a smaller population of accounts, and we reflect that in this line.

Okay, so --.

Maybe I can try to put it in laymen's terms or at least the way I understand it is that we didn't generate enough sales to fully absorb the fixed component of our distribution costs, and we write off that unabsorbed portion. So had we sold more, the strain would have been less.

Sort of the unit costs implied in the pricing weren't necessarily being covered --.

That is exactly right for this quarter.

Okay. So then if we continue to see sales --.

At this level --

Right.

-- we will continue to eat the extra cost.

Maybe I can word it this way; what sales growth does the unit cost priced in the product entail?

You've got to understand, it's quite a mix of products we sell. I think the key point is if the sales were at this level for a sustained period of time, then we would address our overhead exactly. So to the extent that is not adjusted quarter to quarter, we reflect it in this line.

Okay. So can you quantify this reduced new business profit amount in the quarter?

How much of that negative is --?

This is Jim Boyle, Tom. I think you're looking at the $17 million, is that right, the impact of new business (inaudible)?

I'm not taking it from there necessarily, but I'm just asking you guys just to put a number on it.

Okay. I will speak to that as it is in the source of earnings at 17 million, and I think Peter's comments reflect that. There is two components, and one Peter and Simon spoke about which is covering off some of your fixed costs and sales being lower.

And certainly we expect as we commented earlier as the market is rationalized here and we are launching new products, we expect to gain sales momentum as the year continues.

The second piece of it is also the mix of products you sell. When you look at the way we price products, we price products, they are all profitable and they are modeled to have no strain whatsoever. The reality is in any underwriting category or any age mix, you may at any point in time have some slight amount of strain. And we are seeing some of that come through this quarter. We've seen that in the past. We saw it back in 2005, and then we addressed that. And we believe we've addressed it with the products we've launched in January and the products we've launched in May.

So as we were to look forward over the course of 2007, we would expect to see some positive momentum on the sales side; we expect the new products to fill in on the mix side; and we would expect to be back to where we priced for here, which is a zero type of number.

Okay, thank you very much.

Mario Mendonca, Genuity Capital Markets.

Good afternoon. Going back to Steve's question, the opening question on this call, expected profit growth individual life, Canada/US. Perhaps for Simon, in this environment, with interest rates where they are and given that a lot of companies, Manulife included, have released a good chunk of mortality PfADs, would it be fair to say that in an environments with interest rates this low, it's not reasonable to expect very strong expected profit growth until maybe the environment improves? Interest rates, specifically.

I don't understand the premise that very material amounts of PfADs have been released. I guess that we've been showing you source of earnings now for how many years? I mean, a long time. The source of earnings in any given the quarter, I think, can be subject to fluctuations, as we talked earlier. But if you look at them over a series of time, I think they are very revealing.

And we have consistently reported very, very significant experience gains. Very significant. Which I think -- at the same time we were reporting a growth in the expected profit from the in-force blocks. So I think you should get some comfort that our expecteds are very conservatively stated. I mean, had we released the conservativism in the expected amounts on our balance sheet, they wouldn't be there to show off as experience gains. Do you follow -- I don't know if I'm making that clear.

So, I guess I don't feel that our business is any less profitable today than it has been in the past. We've always been very rigorous -- all of our products that are priced across the company have to meet profitability standards that are set at the Corporation. There is maybe some smallish products that we talked about in the past in the fixed annuity side, in particular, where we were prepared to accept low double-digit returns because we wanted to keep our system supplied with the product, but that is the only one I am aware of.

And I wasn't implying anything sinister. I was suggesting --

No -- I'm trying to communicate the use that I would make of some of the data we gave you, which is very, very exhaustive.

I think you would acknowledge, though, that over the last couple of years, with rates moving as they have, a lot of companies have had to release some of the conservatism in their mortality to cope with the low long-term industry rate environment.

Mario, you will recall we don't have the typical asset mix of many of our peers. We've enjoyed -- there was a question earlier about where do these investment gains come from. It comes from our diverse asset mix. And while it's true that we're earnings lower returns on our bond yields, by and large, a lot of that has been locked and is matched. There is a certain portion that is short, but we also have very substantial non-fixed income holdings that have done nothing but appreciate far beyond even our wildest expectations.

If I could just move on to my second question. In Japan, I understand there is a bit of a dress rehearsal for a number of insurance companies, where the Japan post -- the post office, essentially, is contemplating or intends to bring a few insurers, and as manufacturers, they will do the distribution on the annuity side. They have already sort of gone through this process as it relates to mutual funds. Is Manulife a candidate here?

We are having -- we have met with the post office and continue to meet with them. I don't know exactly where their process is and how far along, whether the triage has gotten down to a short list or not. But we have cordial relationships with the post office and of course we would be very desirous of providing them products.

Presumably you're part of the broader list of folks that they are considering, I'm guessing.

Well, I suspect they are considering us, but I don't know their criteria. I'm not as close to -- my understanding is they may make a decision by the end of the year for --. And I don't know when it would become effective, whether it would be early in '08 or towards the latter part of '08.

Would Manulife be at some sort of disadvantage if they were not invited in? Just given --

Well, it's hard to -- I don't know. I mean, no one knows how successful the post office is going to be or not be. I mean, it's a new channel that's going to be established, and the whole post office structure, I think, is being reorganized into three largish businesses.

I mean, I don't know to what extent it -- and you don't know what policy considerations are being given to their choice of providers. So I think it's an unfolding situation.

We are very pleased with our relationships in Japan, as I expressed to you. We are -- when I was there just a month or month and a half ago, I met with the post office people, and I certainly detected there was an interest in exploring how we might do business together. But we've got excellent relationships with all of the -- the major bank in the country and a whole bunch of regional banks, with -- by Nomura and Nikko Cordial and a few other securities firms.

So I'm not sure that I would be traumatized if the post office didn't select us. It's a very, very big market and we are a very small piece of it.

Thank you very much.

Andre Hardy, RBC Capital Markets.

I know the long-term care business is pretty small, but you can you update us on your thoughts of this market going forward? Because it has consolidated, presumably pricing is better; yet the industry continues to have negative experience in general. Maybe that is two questions, but could you update us on that business, please?

Thank you for the question. Jim, do you want to --

Yes, I would be happy to. This is Jim Boyle. In the United States market, we like the prospects of the LTC business; the demographics are incredibly good. And it is really a three-way race. We're one of three major competitors in that market space that have significant market share. And we are quite bullish on the products we have on the street and our distribution capabilities.

I think it is fair to say that relative to other insurance products, it is still somewhat of an immature product. And we in the industry continue to refine the products to adapt to what we see from actual experience. The product we launched at the end of last year, Leading Edge, I think is an indication of how you can take your embedded knowledge and adapt to the marketplace. It was a much simpler product; it was a much lower-priced product; and it was a product that didn't work with compound inflation features, but instead dealt with a CPI type of mechanism.

So we still have some learnings to do in that business as we sort out the core fundamentals, but I'd say we are quite bullish on it and committed to it.

Maybe if I can just ask one last one. Presumably you've got an older book on which you are getting poor experience, and then a new book which is, as you said, is simpler and it has got features that should work better. What would be roughly the mix of your book? I presume it's still mostly the older sales.

I don't know that -- of course, that business came to us through the merger with Hancock. I don't have the history of how it evolved -- I don't know.

Okay, thank you.

We will get back to you if you are really interested in that.

Appreciate that. Thanks a lot.

Jim Bantis, Credit Suisse.

Good afternoon. Just a quick question for Jim Boyle. I think there were some comments made about expanding the wholesalers on the individual life side. Maybe you could just talk a little bit about that.

And then the other question is for Dominic. It just kind of seems strange to me that a company the size of Manulife still hasn't been able to kind of get it together in terms of the mutual fund operations in Canada. I know it's a small part of the business, but also in the U.S. as well, it seems a step back in terms of net sales. Maybe you can address the distribution or the product issues that is preventing the mutual fund business from going to the next level, Dominic.

Okay, well, I will let Jim address your question regarding the wholesalers on the life side in the U.S.

Thank you, Dominic. We sell through an expansive wholesale network with all of our products in the United States, and distribution really is the scarce resource. And we think we are pretty good at it. On the life side of the business, we've had a group of regional directors, otherwise known as wholesalers -- group is about 36 strong, that drove us to be number one in the marketplace.

As we look to expand our product offerings, particularly in the variable life segment -- and you can see the first impact of that -- our sales in Q1 were up some 16% in variable life -- we will use these new wholesalers to get into new distribution channels with different products, like variable life. So it is extending our productline and our product reach, and we are quite happy with the results we've seen so far.

And with regard to the mutual fund businesses in the United States and here in Canada, those are businesses that we like very much, as we've indicated, and we think those are big, big markets. In the U.S., John, maybe you can say a few words about -- we do have quite a program, I think, in place to get our fair share of that business.

As you know, Jim, we have somewhat underscale mutual fund operation -- (inaudible) in assets. We are aggressively growing that. We are expanding the sales force very rapidly.

But the reality is that that size, we are quite under scale in the U.S. marketplace and it will probably take a combination of both organic growth and some acquisition activity over the next number of years to make that a more viable enterprise.

I'd also point out to you that in terms of assessing our size and scale, everybody else that you would compare us to includes their 401(k) assets in their mutual fund business. So if you combine those two for us, you are looking at $85 billion, not $35 billion. And we actually run the underlying fund structure covering all of our mutual funds, both those that are (inaudible) variable products and those that are retail. And if you add those, then we have $135 billion mutual fund complex.

So we are able to capture some of the economies of scale that are present in the underlying operation sides of those businesses in the structure that we had, while we are reporting them separately to you as business lines that are really structured around their distribution arrangements. So we are actually quite pleased, I think, with the progress that we are making there.

And you commented that net sales in the pure retail mutual fund is off a little bit. That is a phaseout of we had to close our biggest fund over the last little while, and replacing those sales. So that is expected. We've got a lot of new product in the pipeline, so we are actually quite pleased with the progress there.

And with regard to the last -- the Canadian mutual fund sales, I guess that we too have noticed that our growth, which had been great -- we'd had I don't know how many quarters of successive growth in the mutual funds, which I think stopped two quarters ago. And I guess there is a few reasons.

I will just repeat to you what I am told by the people responsible for that business, is that the introduction of IncomePlus, a lot of our energies went into the distribution of that product, which, as you know, is significantly more profit rich and services more capital than would the mutual funds. As well, I would say that our product offerings -- some of our more popular offerings, the underlying performance hasn't been as strong. And third, I think that we -- what is the third reason that --?

It's Paul Rooney here. Our Wealth Management business is not predicated on any one line of business. We have a holistic approach to gathering assets, be they fixed, segregated funds or mutual funds. And we have a wholesaling group to go out and attract assets and find the right product and service for the customer.

So it is a holistic strategy, and if we decide to split up that strategy between mutual funds and segregated funds, we put more focus on the mutual funds. But we like this strategy to date, and it has been very successful for us, as we've seen the mutual fund business as well as the seg fund business grow dramatically. The mutual fund business is closing in, I believe, on $9 billion now.

So the strategy is working for us with this holistic approach. And with the new product, IncomePlus, we're seeing segregated funds not only growing or taking other segregated fund assets, but actually taking money away from the mutual funds, because this is a new product category, as boomers move out of the accumulation phase and into the payout phase. And this is a wonderful opportunity to actually capture mutual fund share through a segregated fund product.

Got it. Okay. I appreciate the responses. Thank you.

Eric Berg, Lehman Brothers.

Thank you and good afternoon to all. My first question is a follow-up on the questions regarding the U.S. life insurance business. A number of companies have told us that -- in the course of their earnings calls this quarter -- that they are raising prices sort of consistent with what you were saying -- they are raising prices, tightening underwriting standards, and in general taking a much harder line than they did in the recent past in accepting applications from older Americans, say people over the age of 70.

I could see why this would be good news for the companies; it means that terms and conditions are better. But what is this going to do to demand? And isn't there a possibility here that the reason that sales have been as strong as they have been is that it was a very good deal from the consumer's perspective and may not be as attractive going forward?

Jim, would you or John --?

Maybe I will speak to that, Eric. I think you are right that there could be the some dampening of demand in a higher price environment. That's sort of (technical difficulty) that's the case. Although I'm not sure that the elasticity of demand in this type of marketplace is exactly what it would be for consumer products. Typically, people are buying high-end (inaudible) life insurance for very specific financial engineering reasons, whether that be to defease state tax liabilities or to deal with wealth transfer challenges around businesses, large properties of very sorts.

So you could be right, but the reality is to maintain our pricing standards, to get the hurdle rates that we want to have, we have to have higher prices in light of the higher reserve requirements and the more expensive Reinsurance environment that we face. And the reality is most of the give and take in the market to this point has surrounded who has gone first.

And the reality is we have been, as we usually are, early in the price rationalization for program, and (technical difficulty) some short-term pain for doing that. But it is no different than what we did in the long-term care market over the last two years. We led the pricing rationalization there. We lost a fair amount of marketshare temporarily; we now have it all back and more, and are the fastest-growing group in that category.

So we are confident that the combination of the distribution power that we have and the financial strength that we have and the ratings that we bring to these kinds of market, that we will do fine as it all sorts out.

John, I have one more question actually for you. Could you give us an update on your efforts to come forward with new products in the variable annuity area and thereby sort of give fresh momentum to your efforts in that corner of the U.S. business?

We introduced a new product two days ago, on May 1st, which we think will re-establish our position in that space. It is as good a product, if not better, than anything that is on the market today. Our weakness -- if you really -- I don't know if you wanted all this detail on it -- but most of our weakness in the VA space was in the wirehouse channel, where the firms segregate and rate the products in a way that was not working for us very well in the sense that our product was good in all of the sub-categories, but not the best in any.

Well, we now have the best product in the largest category. So, I think that you will see our sales react here over the next -- over the balance of this year in a very happy way.

Thank you.

Michael Goldberg, Desjardins Securities.

Thanks. Recognizing that there's a lot of moving parts in the aggregate numbers, when I look at the trend in your value of new business over the past several quarters, I noticed that for about the past six quarters it seems to have plateaued at around 480 to $500 million per quarter. And what I'm wondering is whether this is a reflection of an -- in an inaggregate, competitive environment where you (technical difficulty) offset by margin contraction and vice versa?

Is it -- bottom line, is it going to take another acquisition for you to get another significant run-up in value of new business growth, or is there something that I am missing in looking at the aggregate trend?

It's a very interesting question you posed. I hadn't thought about it that way -- has our value of new business generation capability peaked. I wouldn't think (technical difficulty) I think it's a function of how successful we are in getting new product and increasing our sales.

I look across my Company and the way I look at it is I try to look at our business space, is it growing? Is our distribution capabilities growing? And I guess the answer to that is that they are. Simon, do have a more scientific fact-based response to Michael?

I think the one thing you could point out is that it is our second-best quarter ever in terms of new business and better value. So it is certainly not been completely flat. The first quarter last year was, as we said at the time, particularly strong. Apart from that, there's been some --

So what is the variation between the best and the worst quarter? If the first quarter last year was the best, what was that --?

On page 41 of the SEP, you can see we had 520 million of new business embedded valued in the first quarter of 2006. And it is 482 million this quarter.

And so in the third quarter of '06, it was 384 million. That's quite a bit of variability, depending on what --.

I guess the short answer is no, we don't think that to grow our value of new business we are necessarily having to undertake an acquisition.

I guess the one other comment I would make is that certainly some of the growth rate over the last four quarters has been impacted by Japan, with the variable annuity sales dropping off. And if you adjusted for that, you would (technical difficulty) a more steady state of growth.

Did you pick that one up, Michael, that --?

Yes, I did. It's just that that kind of fits in overall with, as I said, on an aggregate basis, where you previously had very strong variable annuity sales, those have fallen back. They are currently about half the level they were at the peak. I'm looking at a picture of the trend.

And if I started -- the fourth quarter of 2005, it was around $440 million. In the first quarter of '06, it did reach the high point. And then it dropped off to a low level in the third quarter of '06 and it's come back the past couple of quarters around the 480 odd million dollar level. Which is why I'm just wondering whether it is plateaued on an aggregate basis.

You know, I think, Michael, we don't subscribe to that. And I think with a little patience over a few quarters, you are likely to see that we will continue to grow that number in a very satisfactory way.

Okay, that is great.

Thank you. There are no further questions registered.

Terrific. Thank you very much, operator.

You are very welcome, sir.

Thank you, everyone.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.