Manulife Financial Corp (MFC) 2007 Q3 法說會逐字稿

Good afternoon, and welcome to the Manulife Financial Q 3 2007 financial results conference call for November 6, 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's financial earnings conference call to discuss our third quarter 2007 financial and operating results. If anyone has not yet received our earnings announcement, (inaudible due to mike) and slides for this conference call webcast. These are available in the investor relations section of our website at www.manulife.com. As in prior quarters, our executives will be making some introductory comments. We will then follow with a question and answer session.

On behalf of the speakers that follow, I wish to caution investors that the presentations and responses to questions may contain forward-looking statements within the meaning of safe harbor provisions of Canadian provincial securities laws and the U.S. private securities litigation act of 1995. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on these statements. Certain material factors or assumptions are applied to making forward-looking statements and actual results may differ materially from those expressed or implied in these statements.

For additional information about the material factors or assumptions applied in making these at statements and making these statements and about the material factors that may cause actual results to differ materially from expectations, please consult the power point presentation available for this conference call that is available on our website, as well the information under the heading risk factors in our most recent annual information form and under headings risk management and critical accounting and actuarily policies in management discussion and analysis in our most recent annual 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 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. I hope you have all drawn down from the website, the hard copy of our presentations that we will be going through today.

As slide four shows, we reported third quarter earnings of $1.1 billion for the third quarter and fully diluted earnings per share of $0.70 compared to third quarter of last year, earnings increased by 10% and earnings per share grew by 13%. Return on equity was 18.9%, an improvement of 230 basis points over last year. Sales were very strong across the company with total insurance sales rising 23% over the third quarter of last year. And wealth sales increasing by 26%. The strong sales growth led to a 45% increase in the new business embedded value.

Now with the recent introduction of the new investment accounting standard, we expect to see increased volatility in our investment results as assets are market-to-market on a quarterly basis. However, we believe that our strategy of investing in high quality assets with appropriate diversification across a range of asset classes positions us well. This quarter was a good example of this strategy at work. While we experienced gains in some categories and losses in others, our consolidated investment results were very strong.

Slide five presents a breakout of our shareholders earnings by division and I don't intend to go through -- comment on that slide as Peter will be covering the divisional performance in some detail in his remarks.

Slide six, summarizes some of the operating highlights for the quarter. Those are that all of our businesses remain focused, execution and on delivering solid organic growth. The pace of new product introductions has been strong and together with our expanding distribution, has contributed to exceptional sales across our company and record levels in a number of our important businesses.

In Canada we completed the Berkshire TWC transaction in late August, adding significant distribution capacity and assets to our existing business. Manulife Securities has-- now has roughly 1,500 independent agents, advisors and a broader reach across the country. In China we continue to the expand our operations and now have 20 --and now have 23 city licenses. Having just returned from Asia, I can tell you that the quality of the business we are building there is first class. Across the region we are introducing innovative products and expanding and diversifying our distribution reach. The result is not just strong top-line growth but very favorable retention that is contributing to good growth (inaudible due to mike).

Our efforts are also being recognized externally. Fortune Magazine recently rated Manulife as one of the best companies in the greater China region in terms of both corporate culture and quality of corporate leadership. And in September, Moody's announced that they had upgraded the insurance financial strength ratings on our key insurance subsidiaries to AA-1. This endorsement, together with our recent up grade to a AAA rating by Standard&Poors, reflects very highly on the financial and operational strengths of our company.

With that, I would like to ask Peter to take us through the numbers in more detail with the unusual question and answer session to follow. Peter?

Thank you, Dominic.

As you just heard, shareholders' earnings for the third quarter were $1 billion, $70 million or $0.70 per share fully diluted. Year-over-year earnings grew by 10% and EPS rose by 13%. Excluding the impact of currency, earnings would have risen by 16% and EPS by 18% versus a year ago. Earnings this quarter benefited from enforced business growth and strong investment related gains. Business growth was particularly strong in our wealth management segments where higher funds under management resulted in increased fee income. The strong investment related results were driven by higher equity markets, gains on private equities and favorable real estate performance driven by real estate appraisals. This more than offset the impact of lower interest rates and demonstrates the strength of our diversified investment strategy.

Currency movements over the last year also had a negative impact on reported C dollar results, reducing third quarter earnings by $56 million or $0.03 a share.

As shown on slide nine, expected profit on enforce was $820 million in the third quarter an 8% increase over last year and a 13% increase on a constant currency basis. The source of earnings also shows that the impact of new business was an origination loss of $68 million, consistent with previous quarters. Experience gains increased $104 million versus the third quarter of last year, driven by positive investment results including the higher evaluation of real estate, particularly in Canada, with claims results continuing to be favorable. This was offset in part by the impact of declining interest rates particularly in our U.S. insurance operations. This quarter's management actions and changes in assumptions reduced pretax earnings by $31 million.

Included in this line item are pretax charges for valuation basis changes which increased our liabilities by $59 million primarily in our discontinued John Hancock accident and health business. This was partially offset by management actions that increased margins on certain enforce business in the Japan and U.S. insurance products.

On slide 10, you can see that the new business embedded value this quarter was $556 million. Up a very strong 45% over the third quarter of last year and an all- time record for our company. Our insurance segments contributed $194 million of new business embedded value, up 20% over last year. There is strong growth in other Asia, U.S. insurance and Canadian group benefits. We are particularly pleased with the record levels of new business embedded value generated by our wealth management businesses this quarter. Exceptional sales levels across the company, particularly in our V.A. franchise in the U.S. and Japan contributed wealth new business embedded value of $362 million, up 63% from last year. On the year-to-date basis, new business embedded value totaled $1.6 billion.

Slide 11 talks about the credit experience which remains strong in the third quarter with net provisions of $18 million. As anticipated, this quarter saw the downgrade of bail bonds to below investment grade, which caused us to strengthen actuary reserves by $42 million. This is not included in credit provisions but the post-tax impact is reflected in this quarter's reported earnings.

On slide 12, you can see that investment income which principally includes interest and dividend income, was 2.2 billion this quarter, down quarter-over-quarter due to the impact of currency movements. You recall the presentation of this line item changed at the beginning of the year with the implementation new accounting standards. On available for sale assets, net realized gains amounted to $102 million, a decline from $117 million reported last quarter. Other gains related to private equities and loans on assets supporting the surplice segment were $9 million, also down from the $24 million reported in the second quarter. Total net impairments were $18 million this quarter versus net recoveries of $16 million in the second quarter of this year.

The total portfolio investment yield, excluding net realized and unrealized gains and losses in the liability segment was 5.7% in the quarter, unchanged from last quarter. Net gains on assets supporting the liability segment moved from a loss position in if the second quarter to a gain of $834 million due to lower interest rates. However, as previously noted, gains or losses related to these assets are largely offset in the account change in actuary liabilities and therefore do not impact reported results.

Over the last 12 months, funds -- excuse me -- funds under management increased by $18 billion or 5% due to strong top line growth, good retention, and equity market growth. Exclude any impact of currency movements, the year-over-year growth in funds would have been $54 billion or 14%. I would like to take a moment to review this quarter's very strong sales results. Total company insurance sales rose to $594 million, up 23% over last year. Wealth management sales were also very strong across the company with total sales of $10.8 billion, rising 26% over the same quarter of last year. This growth was more impressive when considered on a constant currency basis with insurance sales up 28% and wealth sales up 34%. Almost all of our businesses contributed to the strong sales growth.

I would note the growth in total company wealth sales was dampened somewhat by the U.S. fixed products group where the low interest rate environment and continued restrictions on institutional sales resulted in lower sales in this segment. Overall, our continued focus on delivering innovative value-added products, combined with excellent service levels is driving solid sales growth across our businesses. I would like to turn now to divisional performance.

And on slide 15, U.S. insurance earnings were reported at -- U.S. $132 million in the third quarter, down from the value reported a year ago. In part, lower earnings in John Hancock Life reflected less favorable claims experience, particularly when compared to the third quarter last year when the business recorded very strong mortality gains. As well, lower interest rates in the U.S. which particularly impact our long duration insurance businesses and slower equity market growth compared -- contributed to the year-over-year decline in earnings. In our long term care segment, earnings increased to $32 million, as the negative impact of interest rate movements and unfavorable claims experience was more than offset by other investment related gains.

Turning to slide 16, sales from a U.S. insurance group remain very solid with both the life and long term care segments contributing to the year-over-year sales growth. John Hancock Life had a record third quarter with insurance sales up 17% over last year to U.S. $197 million. Comparable life sales increased sharply due to both competitive product offerings and a success of recent marketing initiatives. In addition, universal life sales also posted solid improvements. Long term care sales increased by 13% over last year, driven by continued growth in the retail segment. Group sales returned to more normal levels following the record sales in the second quarter.

Turning to slide 17, U.S. wealth management earnings from our variable products group were U.S. $166 million in the third quarter an increase of 42% over one year ago. Strong sales and good retention combined with equity market growth contributing to 21% growth in funds under management and driving fee-related income higher. As well, equity market growth had a favorable impact on segregated fund guarantees during the quarter. Earnings from our mutual fund segment declined to U.S. $7 million as distribution expenses increased and the business incurred a one-time cost related to a new closed-in fund that was offered in the quarter.

On slide 18 you can see that net flows from the variable products group were $2.3 billion U.S. In the variable annuity segment the main launch of the income plus for life rider contributed to record sales of US $3 billion and drove net flows of 59% to $1.5 billion. More recent initiatives in the business include a new distribution agreement with Edward Jones which will commence in early `08 and the October 1 launch of a complimentary GMWB rider which positions John Hancock to actively compete in the income now annuity market segment. Group pension net flows of US $809 million were somewhat lower than last quarter due to reduced transfer sales but were down significantly from the last quarter last year when US $600 million of pension plan assets were added in relation to the John Hancock employee 401K employee retirement plan. Mutual fund sales were relatively fat -- flat versus the third quarter of last year, however, market volatility combined with increased redemptions in classic value fund contributed to the net withdrawals observed in this segment.

On slide 19 in fixed products group, third quarter earnings were U.S. $92 million. U.S. $41 million before -- below the levels reported last year. While investment related gains were strong, these were down from the exceptional levels of a year ago. Net flows flows continued as expected within the fixed products group, primarily driven by scheduled maturities and restricted sales of institutional products. The Canadian division reported third quarter earnings of $333 million, up strongly primarily due to a rise in investment results. In individual insurance, investment results drove the growth earnings with modest offsets from higher new business expense and the non-recurrence of a year ago gain. Earnings in our group businesses were also up sharply due to investment results. As well, higher enforce earnings contributing favorably to year-over-year growth. Individual wealth management had a solid quarter with earnings up 24% to $87 million. Fee income rose as strong net sales and rising equity markets boosted funds under management to $43 billion. As well, the growth in equity markets also had a positive impact on segregated fund guarantees in the quarter.

Slide 22 you can see that in Canada, individual insurance sales increased to $68 million due to the continued strong individual life sales and good growth from our finity markets business. Group benefit sales were $179 million, up sharply over the third quarter of last year due to the inclusion of the record absence management sale to Canada Post. Sales in our group pension business were $102 million, down from the third quarter of last year, which included a large case sale.

On slide 23, you can see Canadian individual wealth management sales increased to $1.9 billion, up from the $1.3 billion in the third quarter of last year. Segregated fund sales of $746million were up 53% from last year due to strong sales of our guaranteed minimum withdrawal benefit product. We expect sales momentum will be favorable for the balance of the year as this business launched its next generation segregated fund product on October 22. The new product is the first of its kind in Canada to offer guaranteed income for life and is expected to be well received by baby boomers who are concerned with longevity risk.

Mutual fund segment net flows remain negative,although improved from the previous quarter. The business is seeking to improve new sales through the launch of new mutual fund product offerings. As well, Manulife Bank continued to grow nicely with new loan volumes approaching $1 billion in the third quarter and with the completion of the Berkshire transaction, integration efforts have commenced and over coming periods, the rebranding to the Manulife Securities label will be implemented.

Turning to Asia and Japan, earnings in that division were U.S. $260 million, an increase of $55 million over the third quarter of last year. Hong Kong had a particularly strong quarter with earnings up 58% to U.S. $124 million. Growth and fee income on higher funds under management contributed to the growth and earnings. As well, the business benefited from equity market driven investment gains in the quarter due to the exceedingly strong performance of the Hong Kong stock market, which was up 25% in the quarter.

In other Asia, earnings rose by 60% to $34 million, reflecting continued growth of enforced earnings across all of our operations in the positive impact of equity market growth. Japan earnings declined marginally as a gain related to product repricing was offset by the impact of lower local equity markets. Division funds under management exceeded U.S. $40 billion for the first time this quarter, rising 39% over the same quarter last year.

Slide 25 you can see that insurance sales in Asia and Japan increased by 25% to U.S. $115 million in the quarter. In other Asia sales were well above prior year with almost all territories contributing favorably to the year-over-year growth. Insurance sales also improved in Japan driven by higher sales of increasing term. A relatively new product aimed at the corporate segment and due to sales of the new UL rider introduced earlier this year. Hong Kong insurance sales were stable while our sales force successfully grew our wealth management product volumes in that geography.

On slide 26, wealth management net flows reached record flow levels in our Asia and Japan division with strong sales in all major segments. In Japan, variable annuity sales increased to U.S. $1.2 billion. U.S., an all- time record due to excellent sales of our innovative new VA product, launched in late June through Mitsubishi UFJ Financial Group. As well, launches of new VA product occurred in our agency channel and with other distribution partners throughout the quarter. Net flows in other Asia amounted to US $109 million with continued strong mutual fund sales in Indonesia and good growth in wealth sales, particularly in Singapore and Thailand. In Hong Kong, net flows were also up sharply over last year and the preceding quarter with good growth in investment products and a large case mutual fund sale which together boosted sales to record levels.

On slide 27 in reinsurance, you can see earnings from our reinsurance division were US $58 million, down somewhat from prior periods due to modestly unfavorable claims experience in both the life and PNC segments, particularly when compared to the third quarter of last year when the division recorded unusually strong claims gains in the lifeline. In the corporate and other segments, earnings increased over last year to $45 million. The year-over-year growth in earnings is primarily due to realized gains on public equity holdings, as well, experience in closed John Hancock accident and health block improved. Although this was largely offset by the negative impact of basis changes related to that segment that I mentioned previously. Compared to the previous quarter, earnings declined due to less favorable credit experience, unfavorable tax related items, and lower realized gains on private equity holdings.

On slide 29, you can see the capital ratios remain strong and above target levels. We continue to redeploy our excess capital, going back 21.2 million shares at a cost of $849 million in the third quarter. Year-to-date, we repurchased 53 million common shares with a total value exceeding $2 billion. Combined with dividends paid to common shareholders, we returned over $3 billion to shareholders year-to-date. As well, this morning we announced that quarterly dividends on common shares will increase from $0.22 a share to $0.24 a share each quarter.

Overall, I'm very satisfied with the financial and operational performance of our businesses this quarter. Enforced earnings continue to grow nicely across our key segments and investment experience remain favorable remain some challenges in the market environment. As well, we continue to focus on product development and distribution excellence, contributed to excellence -- exceptional sales level, growth in premiums and deposits and record new business embedded value. We continue to redeploy our excess capital through dividends and share buybacks and finally, our return on equity increased substantially over a year ago to 18.9% that remains well above the medium term target. That concludes my prepared remarks.

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

Certainly. (OPERATOR INSTRUCTIONS)

The first question is from Dennis West -- Dennis Wesfall, I'm sorry, of Merrill Lynch. Please go ahead.

Thank you, two questions on Japan. The first one on the new variable annuity product. How unique is --What kind of time line, or lag do you expect before the others can copy that? Sort of, how long do you really expect (inaudible) to continue and on the post office, can you give us an update on sort of the remaining contenders on that -- for example, one of three remaining for that distribution agreement?

With respect to the post office, I'm not sure what has been put out in the public domain in Japan. We expect eventually -- key word is eventually -- to be on the post office shelf. Whether or not we make it in the first go around remains to be seen. As to how long our advantage with respect to the VA product will continue in Japan, unfortunately we don't have Geoff Crickmay here with us. I would suspect that product features in the Japanese market get copied pretty quickly and our experience in North America suggests that's the case. So we might enjoy a little clear -- clear time where we are alone with the offering, but I wouldn't -- we are not counting on it persisting for very long. I don't know, Bob, if you have got any comments you would want to add.

I just have two things. One is as Dominic said, the product life cycle in Japan is accelerating and we are certainly factoring that into our product plans for next year and in anticipation that we will have to tweak the new product some time in the first half of next year to keep the sales momentum going. The other thing I would point out to you is that, you know, in terms of the outlook for the fourth quarter, there is a certain amount of seasonality in the Japan variable annuity business. But we are also going to see the impact of the change in the financial disclosure law in Japan which is impacting the sales cycle for variable annuities now. So I guess that would be my answer to your question.

Okay, thank you. One more on the Canadian mutual fund business. Can you give us any update on that strategic initiative to the review you've had underway?

Maybe I can ask Don to talk about -- or Paul, sorry, Paul.

No problem.

You're so big, I missed you. I apologize. Paul Rooney will answer that question.

Hi, Dennis. Yes, we have launched a number of new funds primarily with global mandates, and they are not having an immediate impact because they have not developed a track record, but we but we like these funds and we are pleased with their performance. We rebranded all of our funds to Manulife mutual funds. We instituted a large case mutual fund pricing model. We introduced a T class of funds and we have increased our advertising and wholesaling. So, in terms of all the basics of preparing for the RSP season, I think we are in better shape than where we were. In terms of where we are on an overall strategic review of the mutual funds, I think it's a little early yet to make any comments on that. But I think the basics are in place for us to start competing more effectively in the marketplace.

Thank you very much.

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

Thank you. If Simon's around, question: can you explain the volatility of (inaudible) of valued new business on a quarterly basis? It has been quite volatile. I'm just looking. The past three quarters from 170 to 230, then down to 194. And also as a percent of sales, the margin has been very volatile also, moving around from the low 30s to the low 40s. Can you explain what accounts for that volatility?

In answer to your first question, Michael, in the second quarter we had a renewal of some of our PNC business that caused a jump in the insurance new business embedded value. If you took that out, that number in the second quarter would have been just under $200 million, so you would have a more logical trend from quarter to quarter. And as to your second question -- I don't have a precise answer, but we do have seasonality in our different businesses worldwide so sometimes you see that coming through in a different weighted margin. But thats --

Every mix changes quarter to quarter as well.

Okay. And I'm wondering with respect to Edward Jones, what do you see is the potential through this channel? How many products do they typically carry on their shelf and did you displace somebody else?

I will ask John DesPrez to respond to that, Michael.

Michael, we -- our selling agreement at Edward Jones relates to -- the new one relates to variable annuities. We currently sell long-term care and immediate fixed annuities in that system. We are now extending that to variable annuities. It's a relatively short shelf. I think there's five carriers there now. We are the first carrier to be added in quite a number of years. And we are very excited about that. Obviously, the objective over time will be to add mutual funds, life insurance, and the like. But on the annuities, I wouldn't -- I'm not going to give you any numbers. I would just caution you that while the Jones system is a very high quality one and one that we've sought access to for a long time, it presents lot of challenges in wholesaler coverage. It's I think 9,500 registered reps in their firm and they're in about 9,000 separate offices so the challenge of covering that firm -- it takes awhile to ramp up there but once you get going, it's a very attractive distribution outlet. So we expect to have relatively modest sales there in 2008. But in 2009 and beyond, I suspect it will be become, if not our largest, one of our largest accounts.

Thank you very much.

Thank you. The next question is from Jim Bantis of Credit Suisse. Go ahead.

Hi, good afternoon. To better understand the surge in earn earnings from Canada, can you detail, Peter, the value, or the creation of the gain in terms of the real estate appraisal and what caused that appraisal?

We have a -- an annual cycle for our largest properties and different time frames for the smaller ones to review appraisal gains. And I would say that it was lumpy this quarter because we had a concentration of appraisals being reflected in the quarter, which turned the up in the results. I think the impact, typically, is less bunched and partly reflects, if you read the Globe today, very strong commercial real estate markets where the west -- Western Canada, Vancouver and Calgary in particular have been very strong but the commercial markets in Toronto are pretty good as well. So, that was on the Canadian side and is reflected in the accounts.

Could you give us a rough estimate in terms of what that added to earnings?

I don't have a number. A comment I guess I can make -- because we look at it at total company level -- I know it turns up line by line differently. Is that the impact of unfavorable interest rates was basically offset by the favorable change in value of real estate so sort of the same sort of same magnitude and we also had the reserve for [bells]. So those items, they do move around were largely offsetting this quarter.

Okay, thank you, Peter. And just maybe if you can summarize where you think your excess capital sits at the end of the quarter post all the buybacks of the first --.

I guess our estimate is that it's largely unchanged from the previous period, the asset opposition is not such that as a few basis - a few percentage points decline, I think, in the MCCSR ratio. But it's still very robust.

Thank you Dominic. And that would be north of $3 billion?

I would say that's a good indication.

Thanks. I'll requeue.

Thank you. The next question is from Doug Young of TD Please go ahead.

Hi, good afternoon. I guess the first question is for John DesPrez. When I look at the U.S. insurance earnings, they were down a lot more than I had expected, even if I backed out the effects impact,and so I know there was the mortality gains with the drop year-over-year. Can you give us what the delta there was, and is there any impact here from a competitive perspective that's having some pressures on you? And the second question, I guess for Peter, on the segregated funds side, you said there were some benefits from segregated fund guarantees a few time in your presentation. Were there reserve releases in the quarter?

I will pass the U.S. insurance question to Jim Boyle, who runs that unit, who's sitting right here.

Okay, Doug, we are very pleased with the quarter in U.S. life insurance. Sales were quite strong. As you highlight, earnings were off slightly. Certainly, this business was effected by both interest rates and equity markets. And in a sense those were offset by real estate gains as Peter had mentioned. And, you know what drove the delta quarter-over-quarter in a sense were these less favorable claims. I would point out they were still favorable. It's just quarter-to-quarter some quarters are bigger than others as we compare back to sequentially and year-over-year quarters, they were not quite as strong but still favorable. And when you look at that delta, if you try to quantify the number, in the sense the delta is driven in fact, by those claims gains.

I think the (inaudible) fund reserve adjustments are detailed in the -- what schedule is it?

It's page 38. Basically the reserve was virtually unchanged when you adjust for currency. There was a $29 million decrease but $20 million of that was the currency change.

So $9 million is what came through the earning side, is that right?

That's right. That would be net of translation, that's right. And it wouldn't be the same in each unit.

Thank you

Thank you. The next question is from Jukka Lipponen of KBW. Please go ahead

Regarding China, could you give us color? Where are we in terms of sort of the, profit ramp up, profit contribution ramp up from China? And -- Is the business there the financial performance tracking, how is it tracking against your expectations?

The business in China is profitable and generating a modest amount of net income. It would generate a more substantial or noticeable figures if we stopped growing. We opened up -- I forget how many offices this quarter -- but we are in 23 offices and the course, the costs of starting up in those different regions of the country are -- we bear them at a current earnings. So, our strategy in China is not to maximize near term earnings, but rather to develop a national footprint, maybe eventually to have ourself do business in 50 cities. And, until that build-out is further along the way, we are unlikely to see emergence of noticeable earnings.

And performance against your expectations so far?

Well, we are happy where we are. We've got about 7,000 agents there now. We have noticed that with the stock market interests that exist in the country, you have all read about how the Chinese are -- fascinated with the opportunities to invest in equities. And we are noticing that some of the disposable income that would otherwise have gone into insurance product is now being directed towards the market. But we think that's a temporary thing and the fundamentals for our business in terms of the demand by the population for our products is unfinished.

My other question is how would you characterize your mortality in this quarter in your Canadian individual business?

Paul, you have that at hand?

Yes. Our Canadian individual mortality gains were quite strong both on the affinity side and our individual life side. Slightly better than prior quarters, but a continuation of good, solid mortality results.

Thank you.

Thank you. The next question is from Timothy [Lazarus] of GNP Securities. Please go ahead.

Thank you. I have two questions. Perhaps the first for Don Guloien. on, could you update us on how the portfolio, particularly the U.S. portfolio looks relative to any exposure you might have with subprime direct or indirect or CDOs? My second question for Dominic will hold.

Okay, we spoke quite a bit last quarter, and, basically good news from there, the portfolio was actually reducing in size. We have about 40 million matures each month, approximately. Obviously, currency and market values have diminished somewhat. We actually have added some in select cases but the portfolio has diminished in size from the $840 million we talked about at the end of the second quarter. Our portfolio was aged, most of it was written, underwritten, over two years ago when we were in the high quality conscious so we are not anticipating any significant losses associated with our subprime portfolios.

And we don't have any CDOs, do we?

We have no CDOs. We have no third party asset backed commercial paper we're in the plain vanilla securities, so we have none of the issues associated with a establishing marks that you read about every day in the paper, we don't (inaudible) backstops to anything, so we have a very clean book.

Thank you, Don. And Dominic, my question to you is, I guess over the years when analysts and shareholders have asked you about your strategy on wealth management, I think your response has generally been that you don't need to buy wealth management businesses, that you could build them and that you're, essentially you're just getting people and a lot of goodwill, et cetera. I'm wonder if that philosophy or that view has changed at all and if so, how has it changed?

Well, I think that the basic premise that we should -- the main avenue view to growing businesses is to develop them ourselves remains unchanged. I think if you look at our various businesses in the United States, for example, all of the wealth business no are approaching $50 billion plus in assets under management. And we are seeing similar growth in Asia, which is very, very attractive, and Japan which is very, very nice, and in Canada. So having said that, we are growing very nicely. This quarter you saw the figures. The -- I don't know, the wealth sales were like 30% up year-over-year, I think, for the company. We wouldn't be adverse to looking at opportunities to add to our asset base if something that we thought had value was presented to us.

Thank you very much.

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

Good afternoon. Question, a point of clarification first. The -- I understand that lower rates, that was offset by the real estate appraisal gains. The question I have is, do they go through the same line of the sources of earnings, the experience gain line?

Yep, they do.

They do. A broad question for Don Guloien. You talked in the past about how Manulife has room to pick up additional yield as credit spreads sort of widened and that's precisely what we saw this quarter. Was there any move in that direction?

Yes, we are taking advantage of higher spreads as we put our money out. We have not degraded credit quality in order to do that, basically putting it out at the same quality, enjoying a little bit broader spreads. The - we think spreads are going to widen further and there will be greater opportunities and might at that time consider adding a little bit more credit risk to the portfolio. But we're far from doing that at this stage, Mario.

And any changes you've made right now have been very modest, I suppose?

Oh yes, absolutely modest, there's plenty of room to go. And then --

The big change is if we are writing a mortgage today, we probably picked up 40 basis points of additional spread over what we would have gotten six months ago.

I'm trying to understand how important this is to the company from an earnings perspective. Is there any way you can size it for us, Don, in terms of how much room you have to --

Mario, I think that, the way to properly visualize it is that the entire asset portfolio will get repriced and the rate at which, orr the pace at which it gets repriced is a function of the maturities as they happen so everyday -- you won't will not see a cumulative impact on that schedule as time goes by and the additional spreads are available. We have not undertaken a whole sale purchase of higher spread assets at this time, as Don just mentioned.

Yes, and it also depends, Mario, how much of it is passed through the consumer because with wider spreads I expect that competitors would pass through some portion of that to the consumer and I can't speculate how much of that would occur.

That's a great point, particularly in individual life insurance. Another, just sort of final thing. I'm not sure how to ask the question. Maybe Peter, maybe you're the appropriate person for this one. Looking at this Canadian dollar, it's unbelievable.

Unbelievable.

Isn't it?

Very interesting.

Yes. I guess the question I have is -- Peter, you've talked about 15% earnings growth over the medium term. Currency alone takes 15% out of the earnings year-over-year at these rates. How do you think -- could you offer us anything in thinking through this?

Yes, I think because we are reporting in C dollars, our investors are pretty sophisticated and I think they understand we run major businesses in different geographies and so, when we explain how our business is gets bigger and has more customers and whatever, there's a real receptivity to see the scale and we do talk about currency adjusted. I don't want to distract you from the point but if we reported in U.S. dollars, it would look the other way, it would look like a phenomenal situation because the growth would be very good and would be strengthened by the C dollar portion of our business. I think the key here is we are very transparent about what activities we are in and I would say obviously the C dollar reported earnings can't rise at our target pace if you have got to carry 10% or 15% change in the exchange rate. But that's not likely to be a sustainable burden.

I think you have to make a judgment -- is this permanent dimunition in the Canadian dollar value of the business that we are generating around the world? We don't operate the business day-to-day movements in the currency in mind. Our business is, we have always had a long-term focus and the idea is to build the businesses steadily and regularly and for purposes of evaluating the different business units, we actually evaluate them in their currency that they operate in. So, U.S. businesses are looked at in U.S. dollars and progress vis-a-vis their plans are against that currency. So, if you think it's a permanent state of affairs, where the Canadian dollar is at $1.07, $1.08, whatever it is, then, you can make the appropriate adjustments to our figures. We, I think, were planning purposes were thinking it was going to be slightly over par certainly no $1.08.

No, I don't think anyone did. Thank you.

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

Thank you. Just -- Peter, in the past you have talked about the mismatch you carried in the U.S. being a little short. And if you extended out the curve and cut that up to $200 million in earnings, are you in that position waiting for higher rates?

We are, and, you know, the value would be quite considerable if rates rose long enough for us to term out that position.

What is the threshold? I mean, is it above 5%? What is that threshold?

We have a sliding scale of targets we would grade into it as rates rose. And we are not going to publish our bogey, but the fact is depending on our view of the circumstance, we would seek to start to term out as we hit points. And we are not at that now. We are clearly not looking at a high interest rate environment right now.

And that includes not just long rates but also spreads you could earn, right?

It is more complicated than the posted rate because it relates to the long end of our liabilities that we are trying to match and you're quite correct. Spreads of course would also impact it.

Okay. Last question is -- on Japan, the general funds in our management -- I don't know if it's just an anomaly but it looks like it rose this quarter in U.S. dollar terms. Have we turned the corner there in terms of the [diaku] block and adding the new business? Or if you could just maybe provide an update.

We had a -- I think there are -- we are starting to broaden our distribution approach for the sale of life insurance products in Japan. But I don't think it has yet had --

There has been some insurance sales that have added to the size of the general account.

I was going to say that I thought a lot of the insurance product we are selling now doesn't have a lot of cash or balance sheet value. So that the movements that take place in the general account with respect to direct life insurance are not as trackable as they are in other businesses.

I think this quarter had some translation impact as well. I think we were reporting in dollars in that table you're looking at.

Okay. So, okay, all right, thank you very much.

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

Thank you very much. Good afternoon. Question about Canada. Peter, you had mentioned that the BC writedown and the gains from the real estate appraisals were largely kind of washing out each other. Bit if I look at the experienced gains, in the [sip] here, 204 seems to be running about three times the average over the last four quarters. So I mean, what is driving these experience gains in Canada then if these items that you mention were offsetting, and is it sustainable?

Yes Tom, they are offsetting at the total company level. In fact, what happened in Canada is the gains were stronger and in the U.S., the cost of interest was more adverse so in total it was a wash. But business unit by business unit and geography by geography, it all danced around this. As you expect. Because the short position on interest rates is biggest in the U.S., and the commercial real estate values move most sharply in Canada.

Okay, but there was a commercial real estate appraisal value gain in the U.S. as well, is that correct?

There was, but it was considerably smaller. The Canadian one was more material

The release talks about a favorable updating of the [jack] schedule and the variable annuities in the U.S., what was the impact of that?

I may not have picked the best words. Just compared period to period, it was slightly more favorable. I think I might have implied more than is there. You actually have the detailed table so, (inaudible) just went through. But there's not much going on. We have a (inaudible) that's, there's pretty much nothing happening.

And any color on what the private equity favorable investment results in the U.S. were?

It was more modest this quarter but still favorable. I don't have a number at my fingertips, but there was not like an outstanding item,it was the more normal stuff -

It was pretty nice -- Certainly nice year over year or it wouldn't have been written up.

But,Tom, one of the things that, to look at is the source of earnings on a consolidated basis. mean, the point you just made about the favorable equity gain and one line of business -- of course, if you look the earnings on surplus on the source of earnings, you'll see that it's down quarter-over-quarter and that's because -- one of the reasons it's down is because we didn't have any equity gains in the surplus segment this quarter, we had them in the line of business. So,I would urge you to look at the source of earnings on a consolidated basis and I think that will give you a better picture of the extent to which the numbers for any particular quarter are affected by any special items.

Okay, now the que -- Just one other update on hedging at all. Are we getting more volatility in markets right now? I don't think you hedged the variable annuity business --

We are getting close. We are getting close. We have got a program that we think we're going to activate later this month, and we have been dry running one for some months now. There's been lots of work on that for a good, long time. Bev Margolian, our chief risk officer is not here, but we had a report on that just the other day. And we are ready to go.

And what would we see different in the results as a result of it?

Well, you would probably see a cost because it's going to cost money to hedge, the exposures. So the extent of the cost will depend on the number of factors, not least of which is volatility and the quantum that we hedge. As we, on the roll of the program we will explain it more.

Is there any -- can you give us any ideas as to whether -- what the cost could be?

Well we think -- I'm cautious about giving you a number but it will be well within the priced for rider. In other words, if we charge a customer -- I will use a number now, 50 -- 70 basis points for that guarantee, we -- I think, expect that we could hedge well within the cost of that 70 basis points.

Okay, thanks very much. Looking forward to it.

Thank you, Tom.

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

Yes, good afternoon. Just wanted to clarify. On the accounting for the real estate in Canada, would it will correct to say that the change in accounting at the start of the year really did not affect the accounting for real estate and that therefore you continue to essentially bleed these unrealized gains into earnings? Or -- I was just reviewing your notes to readers section on page 2. It really doesn't mention any changes in the real estate accounting.

Well, the change in the real estate values is manifest in the financial statements in two ways. One is through the change in the real estate asset itself where you amortize whatever it is there, the 10% rate. But the more important impact is through the updates of the reserves. When the actuaries do their calming under the Canadian method, they factor in now into the calculation of the reserve the higher value of the asset that's been written up and there you will get the more important movement. Now, as we highlighted in my introductory comments, that because of all these new rules, the volatility of reported results is affected because of the changes. We used to calm our insurance results once a year, if you remember, in December. With the beginning of this year we started to do it every quarter so you have this volatility in line of business reporting that you didn't previously have.

As the liability is effectively in this incidence, Dominic, marked down?

Exactly.

Thank you.

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

Thanks. I would like to get back to currency for a minute. Canada counts for about 1/4 to 1/3 of your earnings, about 1/3 of general fund assets less than 20% of seg fund assets, under 10% of mutual fund assets. The movements in other currencies cause a lot of volatility in your earnings, balance sheet and other financial metrics. How do you justify continuing to use the Canadian dollar as your reporting currency? Why not switch to the U.S. dollar, mainly to reduce the volatility? Obviously, nobody can predict whether it's going to go up or down. But it seems unlikely that the Canadian dollar is ever again going to be 50%.

Of course you understand that our capital is denominated in various currencies in which we do business so that if we do 75% of our business in other than Canadian dollars, we would maintain 75% of our capital in other than Canadian dollars. Why do we do that? It is to protect our capital ratios to make sure that in each of the countries where we do business, each of the jurisdictions, each of the currencies, there's adequate capital there to support the policy liabilities that exist in that jurisdiction. And so, because of this policy, we have not had any volatility in our capital ratios in those different jurisdictions. To the point as, should we be reporting in U.S. dollars, this is an issue we've -- we talk about regularly. While we do have a large non-Canadian shareholder base, we also have a larger Canadian shareholder base and from time to time we have talked to some of our shareholders to elicit their views as to whether they prefer to get their information in Canadian or U.S. dollars. And quite frankly, there is not any consensus.

Is a lot of companies that they invest in where they get they numbers in U.S. dollars already?

Well, they are used to getting ours in Canadian dollars. We will go and do a sounding again and see if there's a huge appetite for -- it would be just -- it's something that could easily be accommodated.

Although it is something --

I'm sure you could program your little machine there and multiply all the numbers by 108 over 100 or vice versa and get all the numbers in U.S. dollars if it's a fixation.

Okay, thanks, Dominic.

You're welcome, Michael.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back to Mr. Dominic D'Allesandro.

Thank you very much, operator, and thank you, everyone for attending our call. I think we have had an exceptionally strong quarter. Revenue levels are very, very good. Our asset quality remains very, very high. Our costs remain under good control and we are very pleased with the position we find ourselves in. These are turbulent times in the financial markets, and, you know, I'm very pleased with how Manulife is emerging and dealing with the volatility that's being created. So we look forward to reporting to you on future results next quarter. Thank you very much.

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