Manulife Financial Corp (MFC) 2007 Q2 法說會逐字稿

Good afternoon and welcome to the Manulife Financial Q2 2007 financial results conference call for August 8, 2007. Your host for today will be Patricia Kelly.

Thank you and good afternoon. I would like to welcome everyone to Manulife Financials' earnings conference call to discuss our second-quarter 2007 financial and operating results. If anyone has not yet received our earnings announcement, statistical package, and the slides for this conference call and webcast, these are available 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 presentations 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. Actual results may differ materially from those expressed or implied in these statements.

For additional information about the material factors or assumptions applied to making these statements and about 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 the information under the heading risk factors, or in our most recent annual information form under the heading risk management and critical accounting and actuarial policies in management's discussion and analysis in our most recent annual report.

When we reach the question-and-answer portion of our conference call, we would ask each participant to adhere to a limit of one or two questions. If you have additional questions, please re-queue and we will do our best respond to all questions. Now I would like to turn the call over to Dominic D'Alessandro, our President and Chief Executive Officer.

Thank you, Patricia. Good afternoon, ladies and gentlemen. Thank you for joining us on this call. Earlier today we reported second-quarter shareholders' earnings of $1.1 billion and fully diluted earnings per share of $0.71. Growth over last year was strong, with earnings per share up by 18%. Adjusted return on equity was 18.5%, which is a post-merger record for our company and a significant improvement over the same period last year. Strong sales in the quarter gave rise to a new business embedded value of $540 million, a record level for our company.

We are very pleased with the performance of our businesses this quarter, as almost all segments showed substantial growth in earnings and sales. In the U.S., our Insurance segment had a very strong quarter with record earnings and excellent sales in both Individual Life and Long Term Care. In the U.S. Wealth Management, the variable products group also continued to perform very well, with both earnings and funds under management setting records.

In May, the Variable Annuity business launched its next generation product, leading to record sales in the quarter. Earnings from the Fixed segment portfolio declined as expected due to the non-recurring of investment related games.

Our Canadian division also had a strong quarter, with earnings approaching $300 million. Divisional highlights include record Individual sales, record new loan volumes from Manulife Bank, and continued strong sales of Income Plus, our new segregated fund product.

In Asia and Japan, earnings exceeded $200 million. Overall our businesses in Asia are developing well, with strong in force growth in almost all markets. Life Insurance sales from Other Asian territories are at an all-time high. In Japan, we introduced an innovative new Variable Annuity products through MUFJ, which we expect will contribute favorably to sales in the next quarter. Finally, Reinsurance had a good quarter, with improved claims experience in both Life and P&C segments.

Before Peter begins his review of our first quarter financial results, I would like to comment on some of the operational highlights in the quarter. Firstly, our businesses remained focused on product innovation and development and in the second quarter we again introduced several new products. Initial indications are that these products are being well-received in the marketplace.

In Canada we introduced -- we announced an agreement to acquire Berkshire-TWC, a transaction that will add nicely to our existing mutual fund dealer, Manulife Securities. When completed, Berkshire will more than double our distribution force to 1500 independent advisors and will triple our assets under management in this business to roughly $19 billion.

In China, we continue to expand our operations and now have 21 city licenses, the most of any foreign joint venture in the country. In Thailand, we launched a new asset management company, which will leverage our company's global investment expertise. Finally, we repurchased almost 22 million shares in the quarter.

Another encouraging development was the announcement from Moody's today have placed Manulife's subsidiaries under review for possible upgrade to Aa1. This is a very favorable development and is an affirmation of the strength of our global franchise and well-diversified earnings platform.

So in conclusion, I would characterize the second quarter as very solid. Both earnings per share growth and return on equity exceeded our medium-term targets by a substantial margin. With that, I would like to ask Peter to take us through the numbers in more detail, with the usual question-and-answer session to follow.

Thank you, Dominic. As is highlighted on slide eight, second-quarter earnings were $1.1 billion, up 15% compared to a year ago. Fully diluted earnings per share were $0.71, a year-over-year increase of 18%. Our adjusted ROE was 18.5%, up 2.2% from last year.

A number of factors contribute favorably to this quarter's growth in earnings, including strong in-force results, positive impact of rising equity markets on owned equities, segregated fund guarantees and fee income, and good investment results, including the favorable impact of higher interest rates, most significantly in our Long Term Insurance businesses in Canada and the U.S., and a very strong credit experience, with net recoveries of $16 million.

Offsetting this year-over-year growth in earnings to some extent was the non-recurrence of the very favorable investment results in the John Hancock Fixed segment a year ago and the non-recurrence of certain investment gains and Japan and tax-related gains in Canada.

Currency movements of the last 12 months reduced earnings by $16 million, however earnings were reduced by $47 million when compared to the first quarter of '07. On slide nine you can see that expected profit on in-force was $818 million, an increase of $55 million over last year driven primarily by continued good growth in our Wealth Management businesses. The loss on new business origination amounted to $16 million, consistent with levels reported over recent quarters.

Experienced gains of $339 million remained strong, although down marginally from last year largely due to non-recurring investment gains in the John Hancock Fixed segment versus last year. Management actions and changes in assumptions reduced pretax earnings by $36 million. This includes charges related to refinements of actuarial models and the finalization of the asset realignment charge. Accordingly, realized gains on public and private equity holdings and higher returns in other surplus investments resulted in strong earnings on surplus of $367 million.

Turning to new business embedded value in slide 10, this quarter's new business embedded value was quite strong at $540 million, up 13% over last year at a record level for our company. Excellent Life sales across the Company and continued strong Wealth sales resulted in good growth in both segments.

On slide 11, you can see that in the second quarter our very favorable credit experience continued with net recoveries. On the next slide, we go over investments in residential subprime. Given current concern surrounding exposures to subprime residential securities, I think it is appropriate to provide a summary of our limited exposure to this category of risk. Firstly, we have no direct holdings of subprime residential mortgages or subprime collateralized debt obligations. Our total balance sheet exposure to the subprime residential mortgage-backed securities market totaled $860 million at quarter end. The quality of our subprime mortgage-backed portfolio is very high, with an average credit rating of AA (high) and only $20 million at BBB and $1 million non-investment grade, but these exposures being the remnants of a discontinued business.

Our 2006 positions were all written at AA or AAA credit qualities and 2007 purchases were de minimis. Despite substantial downward rating actions by rating agencies since year-end in the subprime sector, downgrades by Moody's and S&P totaled less than 0.1% of our exposures, while upgrade in the period were 3.3% and 2.3% respectively.

I would also note that all of our exposures were underwritten based on cash flow modeling and we did not place particular reliance on RMBS ratings. As a result, we presently expect no noteworthy credit losses as a result of current problems in the subprime residential mortgage-backed security and CDO markets.

On slide 13, we look at investment income, which principally includes interest and dividend income and it increased marginally over the second quarter of last year to $2.3 billion. On assets supporting surplus, realized gains on bonds and public equities amounted to $111 million, somewhat above the average level of amortized gains prior to this year's change in the accounting method reflecting equity gains and surplus. Increased volatility in this measure is to be expected. As well, other gains were $24 million related to private equities and loans.

The total portfolio investment yield, excluding net realized the unrealized gains and losses on liability segment, was 5.7% in the quarter versus 6.3% recorded one year ago. For assets supporting liabilities, net realized and unrealized losses on securities and derivatives amounted to $1.3 billion driven by the impact of higher interest rates on bond prices, somewhat offset by gains in the equity markets. The impact of this item on earnings was, however, largely offset by movements in policy liabilities.

On slide 14, funds under management, over the last 12 months rose by $57 billion, or 16%, excluding the impact of currency movements and scheduled withdrawals of John Hancock institutional products. Strong premiums and deposits, good consistency, and equity market gains continued to drive the growth in total funds under management.

On slide 15 we have highlighted some of our key sales successes. Total Insurance sales were particularly strong this quarter, with broad-based growth driving sales up by 15% over last year. The number of sales records were set this quarter, including in the Canadian Individual Insurance, John Hancock Long Term Care, and Other Asia territories. U.S. Individual Life sales were also a record for the second quarter.

Our Wealth Management businesses also had a very strong sales quarter, with total sales exceeding $10 billion. Reported sales increased by 4% over last year, but excluding Japan and the impact of its VA product suspension, sales on a local currency basis rose by 9%. As I will shortly explain in more detail, we expect to see meaningful improvement in Japan's VA sales in coming periods.

Turning to slide 16, U.S. Insurance earnings were U.S. $163 million, up 44% from one year ago and a record for these operations. In John Hancock Life, earnings increased by 41% to U.S. $120 million. Good performance on our in-force block combined with strong equity markets rising interest rates to drive this quarter's earnings growth, particularly in contrast to the impact experienced a year ago when equity markets were weaker. I would also note that the contribution from new business improved over the previous quarter, driven by strong sales and a more favorable product mix. In the Long Term Care segment, earnings increased by 54% to U.S. $43 million due to investment related games driven by rising interest rates.

On slide 17, our U.S. Insurance segment had very strong sales, with record second-quarter results in Individual Life and sales in Long Term Care and an all-time high. In John Hancock Life, sales increased U.S. $201 million, up 36% over the previous quarter, driven by good growth across all core products.

The May launch of two new Universal Life products met with immediate success and contributed favorably to the strong improvement in sales. In addition, some of our key competitors implemented price increases, as we had anticipated, resulting in a more-level playing field.

In our Long Term Care segment, sales increased by 61% over last year to U.S. $58 million, while retail sales improved over last year, the key growth was the Group segment, which experienced an unprecedented level of sales in large case market. Given the lumpy nature of the sales, we do not expect to sustain this quarter's sales levels.

Turning now to slide 18, in U.S. Wealth Management, our variable products group continued to deliver exceptional earnings growth, with second-quarter earnings up 41% to U.S. $162 million. Favorable product funds under management increased by 25% over last year to $140 billion driven by a combination of strong net sales and equity market growth. Asset-driven fee income increased in all three businesses as a result.

In addition the positive impact of equity market growth on segregated fund guarantees and first quarter refinements to the acquisition cost amortization schedule for our withdrawal living benefit writer contributed to the strong earnings growth in our variable annuity business.

Looking at slide 19, gross sales from our variable products group increased to U.S. $5.8 billion and net flows amounted to U.S. $2.5 billion in the quarter. We're particularly pleased with the record sales of U.S. $2.8 billion achieved in John Hancock Variable Annuities. The sales success reflects a number of recent initiatives, including a new optional living benefit product launched early in May and enhancements made to our investment platform.

In our Group Pension business, higher in-force participants and a growth in average renewal contributions per participant resulted in a 14% increase in premiums and deposits. Group pension funds under management exceeded the $50 billion mark for the first time this quarter.

In our mutual fund business, deposits of U.S. $1.9 billion were consistent with levels recorded last year. Net flows, while positive, declined due to increased redemptions in certain funds. The mutual fund business made significant progress in diversifying its product offerings and substantially reduced reliance on its successful classic value fund. This quarter's sales of other funds increased by 82% over the second quarter of last year, markedly broadening the range of our mutual fund sales.

Turning now to slide 20, second-quarter earnings in the fixed products group were U.S. $52 million, down as expected from the exceptionally high results of prior periods. Investment-related gains, which had been a key contributor to earnings in recent quarters, did not recur this quarter. As I previously indicated, a more typical run rate for earnings in his business is around U.S. $75 million per quarter. Earnings this quarter were below this expected run rate as a result of somewhat unfavorable claims in lapsed experience, as well the contribution of new business was less favorable and finally, the general increase in interest rates reduced earnings on a fixed differed annuity business.

On slide 21, you can see that net outflows of fixed products amounted to U.S. $850 million primarily driven by scheduled maturities of institutional products and restricted sales in this product category.

Turning now to slide 22 in the Canadian division, Canadian operations reported record earnings of $296 million. Excluding the $42 million tax benefit recorded last year and a smaller $14 million benefit this quarter related to Ontario's investment income tax harmonization, earnings grew by 25%. A number of factors combined to drive this record result, including good in-force business growth, particularly from the Individual Wealth Management businesses, favorable investment experience, including the impact of the increase in interest rates within Individual Life business, and the positive impact of equity market growth on segregated fund guarantees.

Earnings growth was offset by the Group segment, where earnings declined year-over-year due to unfavorable claims experience compared to a year ago, although significantly improved from last quarter. On slide 23 in Canada, Individual Insurance sales increased by 32% over last year to $75 million. Record Individual Life sales, which increased by 36% over last year to $57 million, reflect the continued service enhancements and reductions in cycle time.

Group Benefits sales also increased over last year. Of note, the business recently announced its largest sale ever, adding Canada Post to its list of clients effective July 1, which significantly increases their integrated asset management services block of business.

In Group Pensions, sales declined, as there were no large-case sales, which tend to be lumpy in nature. That said, we're very pleased with the significant progress made in this segment and the number one sales ranking achieved in first quarter of '07.

On slide 24, second quarter premiums and deposits in Canadian Individual Wealth Management increased by 20% over last year to $1.1 billion, driven by our highly successful segregated fund product, Income Plus. Segregated fund net flows increased substantially year-over-year, but are down from our record first quarter level.

Our mutual fund business has several initiatives under way designed to bolster sales. These include expanding our offering of global funds, rebranding existing funds to better leverage the Manulife name, and implementing a tiered pricing strategy that is more attractive to large investors. As well, the business plans to launch an advertising and marketing campaign designed to increase consumer awareness and promote sales growth.

Finally we continue to see exceptional growth in Manulife Bank, with assets up 18% over last year to $8.6 billion. As well, new loan volumes in the quarter reached $890 million with June being the bank's best month ever by this measure. To further increase awareness of our innovative Manulife One product, an ad campaign was launched beginning with print ads in Q2 and a television campaign which commenced in July.

On slide 25, you can see our Asian and Japan division had a very strong quarter with earnings of U.S. $220 million, up 23% over last year. Primary contributors to the record earnings were strong in-force business growth in favorable investment-related games in Hong Kong and Other Asia due to the strong equity markets throughout the region. Hong Kong also benefited from higher fee income.

In Japan, earnings were flat year-over-year after excluding investment related gains booked last year. On slide 26, you can see that insurance sales in the Asia and Japan division show good growth, with combine sales of 16% over the second quarter of last year. In Hong Kong the continued success of our new universal variable life product combined with recently implemented sales initiatives contributed to a 13% increase of sales. Other Asia territories demonstrated the most significant growth, with Insurance sales up 42% over last year to U.S. $44 million. Asian growth, improved productivity, and new product launches contributed sales growth evident across almost all of our territories.

In Japan, Insurance sales declined marginally on a local currency basis, although we're beginning to see an improvement in agent count, which previous reductions stemmed a moderate growth evident over the last few quarters. Asian and Japan Wealth Management net flows about to U.S. $643 million. In Japan, the year-over-year decline in Variable Annuity net flows reflects the products expansion, which occurred in July of last year. We expect that VA sales in Japan will improve in the third quarter, driven by our new innovative VA product, which was launched through our key bank distribution partner, MUFJ, on June 25.

July VA sales of almost JPY40 billion are one-third better than the rate of last year's VA product before the withdrawal of our offering, indicating that sales moment for this product has improved substantially. As well, we launched a TV campaign at the end of July, which should provide additional support for future Japan VA sales.

Net flows in Other Asia improved over last year, in part reflecting strong gross sales in Indonesia and the launch of a new VA product in Singapore. Finally, in Hong Kong Wealth sales increased over the second quarter of last year by 8%, however, net flows declined as some customers elected to take profits on certain funds following a substantial rise in equity markets.

On slide 28, our reinsurance division had a strong quarter with earnings of U.S. $63 million. Compared to the second quarter of last year, earnings improved by 47% largely due to improved claims experience in both the Life and P&C segments. In the Corporate and Other segment, second quarter earnings were $81 million, similar to adjusted earnings last quarter, but up from a year ago due to a number of items.

As covered earlier, realized gains and public equities supporting surplus were $111 million, which was above the level of amortized gains recorded in prior periods and private equities contributed $24 million. However, this was largely offset by the negative impact of management actions and changes in assumptions, which reduced pretax earnings by $58 million this quarter versus a $19 million pretax charge last year. Included in the $58 million is a $31 million cost associated with the completion of the asset realignment actions related to 3855 accounting changes.

I would also note that despite the realized gains in the quarter, unrealized gains and public equities actually increased over the period.

Other favorable items included improved credit experience, which produced a net recovery of $16 million versus a $16 million charge a year ago, and the positive impact of tax items this quarter when compared to last year when changes to the corporate tax rate reduced earnings in this segment by $15 million.

Turning now to slide 30, we continue to return capital to common shareholders through share buybacks and dividends. In the second quarter, we repurchased almost 22 million shares to the total cost of a $867 million. In addition, dividends and common shares amounted to $337 million, with a dividend-payout ratio of just under 31%, above the midpoint of our target range. Taken in total, we returned $1.2 billion to common shareholders in the second quarter, or about 110% of our reported earnings. Despite the significant amounts, our balance sheet remains very conservative and our excess capital position remains substantial.

In conclusion, I'm very pleased with our second-quarter results. Shareholders' earnings increased by 15% to a record level of $1.1 billion and fully diluted EPS rose by 18% over last year. Our adjusted return on equity was 18.5%, up 220 basis points, and a post-merger record for the Company. Our businesses also achieved very strong sales results, with records set in a number of our businesses. New business embedded value continued to show excellent upward momentum and exceeded $1 billion on a year-to-date basis.

We also continue to redeploy our excess capital, investing $867 million repurchase of about 22 million shares. Year to date, we've repurchased 32 million shares. Despite these significant share buybacks, our balance sheet remains conservative with low leverage and significant levels of excess capital. As mentioned previously, in July Moody's placed Manulife under review for possible upgrade to Aa1, further affirming the strength of our global franchise.

So I have good reason to be satisfied with our financial and operational progress over the quarter. Thank you very much. I'll turn it back to you, Dominic.

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

(OPERATOR INSTRUCTIONS) Timothy Lazaris, GMP Securities.

Congratulations on a good quarter. My question is more of a general one, Dominic. This quarter ending in June, equity markets were extremely strong and I think we have seen the impact of negative equity markets in your earnings I believe about a year ago and now we've seen more indications of the sort of torque that your earnings have in positive equity market conditions. What do you -- is it safe to categorize, at least for now, that Manulife's equity sensitivity, if you will, has been increased from about a year ago? Or is it about consistent, because it does look like it can generate some pretty big earnings.

Well, I guess I don't know exactly whether it has increased. I would expect it has because the volume of our variable business that is equity-linked keeps growing. We're growing our VA and other similar businesses quite significantly. So I guess it has. It has an impact on our fee income and our reserve levels and so on and so forth.

Okay, my follow-up question really I guess maybe for Dom, is there anything in the investment category right now, considering the sort of changes in the way to market is looking at debt markets, is there any category of risk or any category of investments that you're carrying right now that you're concerned about or that you think may result in a less ideal return for you?

Not really, Tim. That is a nice lay-up question, actually. You know, we have been shedding credit risk and we're very well positioned to take advantage of the wider spreads. I just finished briefing our Board and it is kind of like our ship is coming in, so we are excited about what has happened. We see better covenants developing in the marketplace. There's lots we can take advantage of.

Okay, thank you very much.

You're able to track this. I mean, you see the consistent contraction in our blocks of business, particularly the Fixed products business or the Institutional business that we said at the very outset of the merger with Hancock that we would go about systematically producing. I think it must be down, I don't know how many billions, it is gotten at least 10.

We're essentially back to pre-merger levels and Manulife prior to the merger was known as a fairly conservative shop with respect to credit risk, and the combined operation is back to those levels, broadly measured.

Okay, thanks again.

Tom MacKinnon, Scotia Capital.

A couple questions. One with respect to Canada, if you can look at page 20 of the supplement, $125 million in experienced gains in the quarter, kind of looking like it might have been about a $40 million or $50 million run rate in the previous quarters. Is there some seg fund reserve releases in this experienced gains number here or is it -- maybe not reserve releases, but the impact of moving to CTE in the seg funds here? What is accounting for this significant amount of experienced gains here in Canada in this quarter? Then I have a couple follow-ups.

I think it is a combination of all the things that we talked about -- good credit overall; very favorable investment performance, generally; some equity gains, as the markets were good. I do not know to what extent reserve releases related to the CTE are there or not. Simon, do you have --?

We had approximately $20 million higher gains in segregated fund guarantees than the second-quarter.

In Canada?

Yes, in Canada.

And that's pretax?

That is pretax, but the experience gains were high across the board. Good investment gain, excluding the seg fund guarantees, good claims gains, and a big back up from the equity market.

This was as a result of -- did you move the CTE level slightly, as well?

That is on page 38 of your (inaudible) and CTE moved from 77 at the end of Q1 to 76 at the end of Q2.

That was 44 million released, as per the footnote there?

Yes, that is just consistent with our methodology. Essentially, it is virtually unchanged.

So the 20 was in Canada and where was the other 24?

Probably in the U.S.. Maybe a bit in Japan.

It would mostly be -- probably three areas were you would see the reserves are Canada, the U.S. Simon are the two main ones, and a little bit in our Reinsurance division, so the rest of it would primarily be in the U.S. businesses.

If the in-force businesses growing substantially in Canada, how come the expected profit from in-force does not substantially -- it is only growing $5 million year-over-year?

That is on the source of earnings?

On the same -- page 20.

This is for Canada?

Yes, again.

I don't know why it is only a $5 billion. Isn't that roughly consistent with the growth in the average business base?

And the main reason that the growth might look at it means it is some of the expected margins are down in the Group business that some of the cases renew, but generally, there has been strong growth in all the businesses.

Okay come a than one follow-up. I think it is on page 26 of the sup. The Hong Kong earnings were substantially higher this year than what we've seen in previous quarters, $116 million versus $66 million a quarter before, $72 million last year. What is going on here? Is there some sort of favorable investment-related gains here? What should we be looking at as more of a run rate for Hong Kong here?

In Hong Kong, the Hang Seng up quite sharply, but again, you have a situation where the business base is growing. Our -- we introduced some new products there. We do have a VA product. Our savings businesses are growing. Our pension business is growing very, very nicely.

The quarter was also a little stronger because we had a performance-based result that is looked at periodically on assets we manage, and so that was reflected in the quarter there.

Okay, and the tax rate looked higher in Asia/Japan as well -- sorry, looked lower, I should say.

That is because we're getting more earnings I think at lower tax jurisdictions. You know, Hong Kong is a lower tax.

Okay, so that was a function of the 106 -- that is a function of a large increase in Hong Kong then?

Yes, that would drive it.

Okay, I will just get my last one in here is if I just look at Japan on a yen basis from page 20 -- where is that one in the sup? Pardon me, on page 31, 7500, I guess this 7.5 billion, is that we're looking at here? Anyway, in terms of the yen, where down substantially both quarter-over-quarter and year-over-year and seem to be running a lot less than the run rate we've seen of the last five quarters. Is that just because of the sales volumes down and maybe assets a little bit down?

No, I think that in the comparable quarter last year, if we're looking at the net income for shareholders, some unusual gains that quarter because we sold some equities and rebalanced -- we were able to release reserves related to some asset categories that were moved into less reserve-intensive assets. I think, specifically, we sold equities and bought JJVS.

I think if you go back, you'll see we actually explain that in some detail in that quarter. I don't have the details with me.

The same for the first quarter, it was down substantially from the first quarter as well. Is that the same story?

Yes, it was a slightly different item, but we went through it. It was another useful item in the quarter.

Okay, thanks.

Jukkaa Lipponen, KBW.

My first question is just I noticed that your allocation in cash and short-term is up quite a bit. Is this sort of getting ready for this opportunity that you talked about?

We have been reluctant to buy longer bonds and the credit has not been giving us the returns we want, so there has been a bit of leakage to the short-term and cash, but we would not expect to maintain that long-term.

My second question, the U.S. Individual Life market, can you give us some color in terms of how you saw the quarter trending in terms of the competitive environment?

I will ask John DesPrez to answer that question. John, the U.S. Life business?

Sure, the primary dynamic there is that the series of price increases that have been -- the various carriers have been putting in place on universal life, particularly at older ages, that cycle kind of played through. We were one of the earlier companies to raise our prices and so we had a fairly -- a weaker first quarter. As the other competitors raised their price and effectively leveled the playing field, what you saw was our sales come back very strongly and basically back in the position we were before this whole round of price increases started. So the market has reached, I think, a certain equilibrium on the pricing front that has been sort of making the market shares jump around a bit over the last few quarters. But I think the cycle has kind of played its way through.

Thank you.

Mario Mendonca, Genuity Capital Markets.

Page 13 of the presentation, perhaps [Pierre], you could help me with this, you refer to it several times in your presentation. $111 million net realized gains on AFS securities being higher than what the amortization would have been last year, would I be right in saying the amortization last year was in that $60 million to $70 million range?

Approximately, yes.

$60 million to $70 million, and the net realized gains on private equities and loans, $24 million is not a big number, but would that have been, say, close to zero last year?

That's an item that might have been higher in certain quarters. No accounting change there, so those happen when they occur. In fact, probably that number is down.

That number is probably down a little bit, okay. Every insurer this quarter, Manulife, Sun Life, Great West, Industrial Alliance, everyone talked about the effect of higher interest rates and positive equity markets. Could you sort of ballpark it for us? It is not so much that I want to pull these numbers out. It is more the environment is different now, although today has been pretty solid, but the environment is different. Can you give us a sense here for how important were equity markets and interest rates this quarter?

I think generally they were positive. It is hard to take a number, because you have to look for each market and how much it varied from what our quarter expectation was, but it is clear that generally across all business units, we enjoyed benefit from both attributes.

Could I go back to your sensitivity, the sensitivity you provide for interest rates in equity markets. Insofar as interest rates are concerned, talking about the initial interest rate assumption, could I go back to those two and ballpark it that way?

It would be a good indicator, but for example, on equity markets, Asia was very hot. Each one would be slightly different. Interest rates to be the same thing, but that is a good general indicator.

But I should put some serious pads around that to be careful?

I think that would be fair.

Pardon me?

We have been known to do that.

Yes, of course. The VA market U.S., good numbers, 14% and perhaps this is something, John, you could speak to. I looked at all the U.S. players there and we saw some very, very good numbers not only gross flows, but also the net flows side. Manulife's net flows, there is nothing wrong with them, just not as good as I am used to seeing. Would you say Manulife is giving up a little bit of market share in VA right now?

No, quite to the contrary, I think we're gaining market share now. But that did not start until partway through the second quarter. We launched the -- as you know, we had -- let me back up. Our VA sales peaked in Q2 '06 and that is why you're seeing a comparison that shows us up 14% versus some of the competitors considerably higher than that. We brought a new product in the middle, in early May of Q2 '07, and so the sales started pickup then. So we really only had the new product for two of the three months of the quarter. You'll see our period-over-period comparisons grow very dramatically. In July, our sales were 60% ahead of July of last year, so I suspect that -- I do not know what will happen for Q2 on a stand-alone basis, we will be gaining share now in the VA market with the new platform.

That was extremely helpful. And VA Japan, is there anyone there that could offer the same sort of detail that John just did?

Well, I think that we hope to be in a position to report really good news, as Peter said in his comments, the sales for the month July were -- what did you say, JPY40 billion?

Yes, we're running faster than a year ago before we pulled product by 30% and is still just ramping up. So we're feeling pretty good about our prospects there.

Sales for the month July were very, very strong, so year-over-year, you'll see a very sharp growth in Japan, barring some unexpected reversal for the remainder of this quarter.

Well done, thanks very much.

John Reucassel, BMO Capital Markets.

Peter, maybe just go back to the interest rate question for a second. In the past you have said that Manulife is well positioned for higher rates and I think you talked about your number in the hundreds of millions. Do you -- where does that stand today, I guess? Just if you could update us on where that position stands today?

Yes, the opportunity would be if we turned out when we hit a target rates, which we've not hit yet, so rising rates are favorable to us and we would expect some significant economics if we extended, determined, picked up returns by hitting the target rates that we're waiting for, so rising rates are generally favorable, but we have not hit a target bogey yet and have not done substantial term-outs. As we previously reported we did the same sort of thing in Japan, we would advise you when we do those things of the impact and exactly what we do.

Okay, so none of that was in this quarter?

No, none of the term-outs, because we've not done any.

I guess you could get the same way there if spreads widened out. Is that fair to say?

Yes, spreads contribute to -- have picked up for us and yield curve shape as well.

Okay, just a question on the in-force growth and profit in the U.S. You know, like Canada, it looks like it has kind of stabilized and I think it is page 11. That is Insurance. I think it stayed -- it's around $125 million. Explain to us what is going on there and maybe why or why not we should not expect a little better growth out of that.

That is a very, very large block of business, so the profit on in-force would be fairly stable, even with quite good sales. It would take a period to grow or shrink expected profit on in-force because it is a very large block we have had over many years.

So this year it is just an issue of size and the impact to your new business?

Your quarter's result against a very big in-force block is smally incremental. Over time it will matter, but it is a very big in-force block of business and it's long duration.

Okay, thank you.

Michael Goldberg, Desjardins Securities.

I am looking at your protection value of new business and it has been really volatile over the past few quarters -- $230 million this quarter (inaudible question - microphone inaccessible) I think the volatility and also it looks like --

Michael you're cutting out. We're not hearing you.

It looks like your margin on protection sales is up quite dramatically this quarter. Can you explain if that is mix or margin on individual products?

I would suspect that in some respects it is due to the sheer volumes. What page is it on?

Page 40.

Dominic D'Alessandro New business embedded value, Simon, why is it up is the question? Is it margin or is it volume or is it a combination of both?

It is a combination of both. So relative to Q1, the sales were up quite significantly in the U.S. Insurance, LTC lines, and in the Asian territories. It was the growth in all three of those businesses led to increase in new business embedded value.

No, but I was acting about the volatility. Like it is gone from 162 to 215 to 170 and now back up to 230.

Well, but isn't it a function of the volumes?

It would be the volume. It would be the mix. You know, basically we record it as it occurs. You can see some businesses this quarter were very strong in sales and if they were weaker last quarter, it shows in the new business embedded value. Another thing is the volumes are up, but the margins are very good on the volumes we're doing. You can see that on the result we have this quarter.

I think Q3 last year was a softish year in terms of new sales because of the VA problem in Asia and as well in United States, so I think you're seeing a nice rebound and the growth in new business embedded value is a function of our recaptured, re-established positions in the marketplace generally.

It is not just your sales are up -- in protection, your margins up about 9% also?

Some of these businesses, you know, have a fixed component to them, so as you sell more, the incremental dollar generates more margin.

Okay and I have one other question. You have said that earnings and profitability exceeded your long-term goals. What would you say the biggest variances from your goals were and what accounted for them?

I think we've done well in quite number of metrics, sales, retention, market conditions, whether it is equity or interest rates, credit, it really was quite a nice quarter.

And our costs under good control. All the fundamentals of our business that we can manage directly are doing well and we were helped this quarter by generally benign, if not outrightly positive, market conditions, so our feeling is that we should exceed our targets in these type of environments.

Is it fair to say that you were firing on all cylinders this quarter?

No, there are some businesses, you conceded yourselves in Japan we think we can do a better job there and we hope to report growth that is more impressive in the future quarters. Our fixed business year-over-year, Michael, we lost $100 million of income on that business after-tax. That is because we had gains that we kept cautioning you were not sustainable. Last year, I think in the second quarter -- whatever you call -- what do we call that division now? Fixed products, I think the earnings are down $100 million.

Sure, and they're below what would probably expect of them.

So we always do better. We're always hoping to do better here at Manulife.

Thanks a lot.

Eric Berg, Lehman Brothers.

I have a couple of questions, one regarding Japan and one regarding the U.S. First with respect to Japan, why would the selection of assets affect reserving in the sense that certainly in the U.S. GAAP -- maybe this is different in Canadian GAAP, but in U.S. GAAP a reserve is, what, the present value of the expected benefits minus the present value of future net or valuation premiums. How you invest the money really does not affect reserves, so I am trying to understand the answer given before for the 30% decline in yen-denominated Japan earnings.

I think, Eric, in Canada -- I do not know what the actuarial practice is in United States, but depending on the type of asset that you have, when you do your present value calculations you just described, you add a provision for adverse deviation depending on the nature of the assets. So if it's a secure AAA government bond, you do your calculations one way. If it's an equity, you do your calculations and then pad it. So we moved away for equities, in other words, we reduced the risk profile of the assets, it allowed us to release reserves that we were holding in respect of the original, more risky asset mix.

Would that have led to higher earnings rather than lower earnings, though?

It did in the prior quarter. That is exactly what happened.

I am explaining why year-over-year, second quarter '06 to second quarter of '07, why '07 is more modest earnings.

I understand now. My second and final question relates to response that, Peter, you gave in connection with U.S. Insurance earnings. I understand that this is a big block of business. I heard that part of your response, but can you one more time explain are their other factors that prevent it in the current quarter or that have prevented the expected profits from the in-force business from growing more rapidly than it has?

I do not want to give you the impression that this is not a number that could move. I would expect as our sales are strong and business does well that it may well move, but there's quite a number of things happening. We increased pricing on some products, which will eventually be reflected in, I hope, increased margins. But it is not as sensitive as the sales quarter-to-quarter might suggest because of the size of that in-force block. I think that is the point I was trying to emphasize.

Thank you.

I think, as well, it is worth mentioning that the source of earnings are particular convention and depending on how you choose to set up your reserves, you might have more or less experienced gains and more or less earnings from business in force. We have traditionally set up very conservative expectations regarding our expected level of experience, and that is why for the last I don't know how many years we've been reporting sources of earnings, but we have always consistently had hundreds of millions of dollars of experienced gains. Another definition might look at that and say, well, you're understating your expected because you are consistently showing these experience gains. Do you understand what I am saying?

Yes, I do. There's a certain discretion in how these items get allocated, if you will.

It is not as much of a bright line, so if you look at the two together you're actually saying the progress that is being achieved. We try and be consistent, but it is not exactly a science.

The other thing, I guess, is when you do quarter-to-quarter comparisons in lines of business for a calculation like this, you've got to be mindful of the fact that these are quarter calculations against a product that has a very long life and I am not quite sure that quarter-to-quarter movements are quite as meaningful as year-over-year movements or trends.

I understand and I thank you.

Darko Mihelic, CIBC World Markets.

Just a couple quick questions. First, Peter, you mentioned that fixed business in the U.S. should be about a $75 million run rate and that this quarter was below that. Could we infer from that the you're still sticking to that $75 million run rate?

Yes, I would caution that that is not a forecast. It is an indication, because that business had so many unusual gains that were investment-related that I wanted understand where we thought that the earnings level was likely to be. You can see this quarter, we were below that because it had some less favorable experience on the operations.

Just to clarify for everybody on the phone, it might be useful for us to take a minute just described what is in the business that we now call Fixed Products, which is a $40 billion block. There's really four businesses there and the block that is giving rise to these variable gains, institutional block, is about $10 billion of the $40 billion. There is an individual annuities, I think fixed annuities there, another $10 billion, and then there's closed-out something or other, which is another $10 billion. You remember what the -- it is not the whole $40 billion that is contracting at some accelerated rate. There is a stable core of businesses there that we -- some of which we're enthusiastic about and some of which we're very opportunistic about that we go in and out of, depending on what spreads we can earn, like on the retail annuities, for example, or fixed annuities.

The institutional business is the one that we have consistently set to you that we do not want a trade-off our credit rating to lend money to lesser rates and borrowers at a spread. That is not our business. That this is now is down to $10 billion or so, so I give you this byway of explanation so that this is a big block of businesses that should produce some ongoing and dependable earnings. The best estimate we have is around the $75 million a quarter level. Interestingly, the business this quarter I think actually lost money because interest rates, the interest rates going up penalizing components of --

The fixed deferred annuity component we strengthened reserves, reflecting what happened with interest rates. The reality, though, is Dominic is absolutely right. There is a core business of size that will have continued earnings and should not be disregarded just because we're not favoring that institutional client that's in there.

We took note of the fact that some of you did make the observation that we did not give this particular line of business or this group of businesses the attention we should have at the time of our investor day and we will do a better job of profiling what is in there so that you have a better appreciation to make your own assessments of the values of those businesses.

Okay, great. Thanks. That's very helpful. I guess just following upon earlier question, maybe for Don, with respect to the assets in the portfolio, with respect to contagion coming from subprime, obviously your subprime book looks very manageable, but the question I think that was asked was were there any other pockets of areas that would cause you concern. I guess my question would be are you seeing some stresses? For example, I'm hearing their surly stresses now happening in the commercial paper market and what these stresses perhaps not changed your investment strategy perhaps it could some of these lead to reserve strengthening or credit or so on? Am I chasing something here with respect to too much fear in the market or is there any credence to what we're seeing with respect using contagions in commercial paper as an example?

Well, you are quite right, there is some contagion and we have observed is very manageable, but you're absolutely right. Even very high-quality CMBS spreads that are in no way related to what is going on in subprime CDO or RMBS land have opened up a bit. We also seen that LDO activity has slowed down. The door has basically slammed on bridge loans and so on. We're seeing high yield spreads up 125 basis points, BBB spreads are up 25 basis points. Some of that is clearly repercussions of what is going on the subprime space, so there is a lot of movement, but again, we have been predicting that spreads would widen out for some time. We've positioned the portfolio. It is about as safe as it can be.

Unquestionably there is some stuff that will get marked down in our portfolio on a mark-to-market basis over the coming quarters, but it will be very minor in amount and we are positioned to take advantage of the spread widening. Nobody could be happier about what is happening in the general marketplace than our investment guys right now, because they're providing opportunities for us.

From the perspective of reserving for credits, is there no change in outlook there?

The biggest exposure that I would identify is if and when the Bell Canada deal goes through and Bell Canada bonds are downgraded to, say, BB status. If that is what happens, we would have a reserve strengthening associated with that. That sort of thing, clearly a non-cash item and something that most people would say is a money-good bond, but yes, some of that would happen. There is going to be some mark-to-market on spread widening as big parts of our portfolio are marked to market, but nothing that would -- should cause anybody any degree of concerns.

Okay, great. Thank you very much.

Tom MacKinnon, Scotia Capital.

Just is there any updates on hedging of Variable Annuity now that it seems like Japan is back on fire and your U.S. variable annuity sales are sort of picking up the momentum as well?

We're in the final stages, I think, of a pilot and hope to go live later this year some time.

Would there be any kind of incremental EPS impact as a result of putting that hedging strategy in place?

We're assuming that we could hedge well within the fees that we charge for that guarantee and I guess that beyond that, I'm not sure we want to -- there is not much more I can tell you. We collect, what, 55?

It varies by product series, anywhere from 30 to 50.

I guess we've come to the conclusion that we are prepared to invest some of those fees in buying protection and we're going to administer that protection ourselves. We intend to start the program, as I say, towards the end of this year.

Tom, our plan is to start with business being written currently, so the existing block, we're not unsatisfied with.

Okay, thanks.

Mario Mendonca, Genuity Capital Markets.

That was exactly the question I was going to ask. That was it, thanks.

Thank you, everybody. We look forward to talking to you soon. If any of you have follow-on questions, don't hesitate to call the usual characters at Manulife. Thank you very much.

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.