Manulife Financial Corp (MFC) 2007 Q4 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon and welcome to the Manulife Financial Q4 2007 financial results conference call hosted on February 14, 2008.

Your host for today will be Amir Gorgi, please go ahead.

Thank you and good afternoon. I'd like to welcome everyone to Manulife Financial's earnings conference call to discuss our fourth quarter 2007 financial and operating results. If anyone has not yet received our earnings announcement, statistical information package and the slides for this conference call and webcast, these are available in the investor relations section of our website at www.manulife.com. As in prior quarters, our executives will be making some introductory comments. We will then follow with 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 US Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risk and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in these statements. For additional information about the material factors or assumptions applied in making these statements and about the material factors that may cause actual results to differ materially from expectations, please consult the PowerPoint presentation for this conference call, as well as the information under the heading "Risk Factors" in our most recent Annual Information Form and under the headings "Risk Management" and "Critical Accounting and Actuarial Policies" and "Management's Discussion and Analysis" in our most recent Annual Report.

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

Thank you, Amir, and good afternoon, ladies and gentlemen. Thank you for joining us on this call. We have a lot of material to share with you today, so I will be brief in my opening remarks. 2007 was a very successful year for our Company with net income rising to C$4.3 billion. Compared to last year, earnings were up by 8% and earnings per share grew by 11%. Excluding the impact of the strengthening Canadian dollar, however, earning per share grew by 17%, well above our medium term target of 15%. Return on equity was 18.4%, an improvement of 160 basis points over the prior year and also well above our target of 16%. Revenues were also very strong as premiums and deposit reached record levels of nearly C$70 billion. Revenue growth was noticeable across the Company with total insurance sales rising 14% and wealth sales increasing by 13% over last year. On a constant currency basis, sales in insurance and wealth increased 18% and 19% respectively.

The strong sales levels drove an equivalent increase in our new business embedded value, which also rose by 18% to a record C$2.2 billion for the year. The excellent revenue and earnings performance is well distributed across both of our major categories of business. Our insurance businesses had an exceptional year with strong earnings in sales in all geographies. Insurance earnings were C$2.4 billion in 2007, up 11% over 2006. On a constant currency basis, insurance earnings were up a very healthy 16%. In our wealth management businesses earnings grew to C$1.7 billion, an increase of 5% over 2006. Again on a constant currency basis wealth earnings were up 10%. This is a very satisfactory result considering the non-recurrence of the unusually strong investment related gains that were reported by the U.S. Fixed Products Segment in 2006. Now before Peter begins his review of our financial results I'd like to comment on some of the other highlights of the year.

As was set out in our annual report last year, our priority for 2007 was to continue to focus on the basics of our business by innovating and developing new products, by managing and expanding our various distribution channels and by further developing our financial and risk management capabilities. I'm pleased to report that we have made excellent progress in all of these areas. In 2007 our innovation efforts were evident across all major product segments and geographies. We continue to pioneer the introduction of new product classes throughout Asia, including new VA offerings in Singapore and Taiwan. We also improved on existing products with well received next generation introductions in our variable annuity franchises in the United States, in Canada and in Japan. And we introduced new insurance and mutual fund offerings across the organization, including new life insurance products in the United States and new equity funds in Hong Kong.

Our distribution capabilities were also enhanced during the year as we expanded our reach in all of our business operations. In the U.S., we established a distribution partnership with Edward Jones, a large retail brokerage with advisors and clients across the U.S. In Canada we completed the acquisition of Berkshire TWC, a transaction that more than doubled our distribution force of independent advisors. In Japan we added distribution capacity to our new variable annuity product through roll outs at five additional financial institutions. And we continued our expansion in China, where we are now licensed in 28 cities. Our captive agency force in Asia grew quite nicely and now stands at 25,000, an increase of almost 3,000 agents from a year ago.

We are particularly pleased that our key operating subsidiaries were upgraded to AA-1 by Moody's in 2007. This endorsement, together with our AAA rating from Standard & Poor's, speaks to the quality of our financial and risk management processes.

As will be explained in some detail later in today's presentation, Manulife has avoided the problems arising from subprime, monoline and other exposures reported by many other financial services company. Our investment division had another very good year and has kept our assets well diversified and of an exceptional high quality. Finally, in addition to our strong capital base, our ability to generate considerable organic earnings growth allowed us to increase our quarterly dividends twice in 2007 and returned almost C$3.6 billion to our shareholders through share buybacks and dividends. So in summary, I'm very pleased with our performance in 2007 and look forward to further positive news in the periods ahead. Now with that I'd like to ask Peter to take us through the numbers in more detail. Peter.

Thank you Dominic. As Dominic just noted, full year earnings were a record C$4.3 billion, up 8% over '07 and up 14% on a constant currency basis. Full year EPS grew by 11%, 17% on a constant currency basis. These are very satisfactory full year results. Sales were strong across all key businesses. Our operating experience was generally favorable and expenses were well controlled. Investment related results were particularly strong in our North American insurance segments, driven by improved credit spreads on our bond portfolio and gains on our timber, agriculture and real estate assets. This more than offset the impact of unfavorable yield curve movements and demonstrates the strength of our diversified investment portfolio strategy. Currency movements continue to have a negative impact on reported C dollar results, reducing '07 earnings by C$227 million or C$0.16 a share and impacting the fourth quarter results by C$163 million.

Fourth quarter '07 shareholders earnings were a record C$1.144 billion, an increase of 4% from one year ago. Fully diluted EPS was C$0.75, an increase of 7% over the fourth quarter of last year. On a same currency basis versus a year ago, this quarter shareholders earnings and EPS grew by 19% and 23% respectively. Looking at slide nine, I'm very pleased with this year's new business embedded value results, as virtually all businesses enjoyed profitable and strong sales growth. During '07 new business embedded value total a record C$2.2 billion, an increase of 18% over '06, as both our insurance and wealth management segments grew strongly. Our insurance businesses had a record year contributing C$842 million of new business embedded value, up 12% from a year ago due to strong sales growth in the U.S., Canada and our emerging businesses outside of Hong Kong and Japan.

Record levels of new business embedded value were also generated by our wealth management businesses this year. Exceptional sales levels across the Company particularly in our variable annuity franchises in the U.S., Canada and Japan produced new business embedded value from our wealth businesses of C$1.347 billion, an increase of 22% over last year. The fourth quarter results were also at record levels with new business embedded value as C$659 million, up an impressive 38% over the fourth quarter of '06. On slide 10, we report strong growth in operational embedded value, which was up 24% in '07, exceeding the 21% growth reported last year. This growth reflects the strong new business results as well as the very profitable in force business, which contributed to the generation of strong experienced gains. This change in operational embedded value is an important indicator of the value creation which continues to be generated by our businesses.

Finally, despite C$3.6 billion of shareholders dividends and share repurchases and some C$4.9 billion of currency related reductions, the year-end embedded value of the firm still rose by 4% on a per share basis. Now let's turn to slides 11 and 12. You can see by the blue highlights, which indicate sales records over these next two slides, we had very strong sales results for both the year and the quarter. In the fourth quarter total Company insurance sales rose to C$642 million, up 15% over last year. Wealth management sales were also very strong across our Company, with total fourth quarter sales of C$11.5 billion, rising 24% over the same quarter last year. This quarter sales growth was even more impressive when considered on a constant currency basis, with insurance sales of 28% and wealth sales up 38%. Let me go now on slide 13 to the source of earnings. Due to the introduction in '07 of new accounting standard 3855 and our concurrent adoption of quarterly com, our quarterly disclosures by business unit have reflected higher volatility in respect of investment related results then was previously the case

Our life insurance businesses, as you know, have very long-term obligations and therefore our asset mix backing these liabilities includes more non-fixed income based assets. Because of this, not unexpected, we've experienced more quarterly volatility in our reported investment results by segment. When viewed over the full year these changes were less distracting. While we'll continue to provide all the unusual quarterly information in this walk-through, I'll also try to focus on key trends by reference to our full year results, in addition to my usual comments on the quarter. Given our experience with the new reporting formats, we'll be looking for ways to make our reporting easier to follow in future periods. So as illustrated on slide 13, you can see that expected profit on in-force was C$3.249 billion in '07, a 7% rise over a year-ago and an 11% increase on a constant currency basis.

The impact of new business in '07 was an origination loss of C$286 million, higher than the prior year due primarily to the record level of sales achieved in many of our business units. Experienced gains of C$1.485 billion continued to be substantial and were up from a year-ago, driven by favorable investment related gains primarily in our North American insurance segments and due to good claims experience. In '07 broader investment gains were partially offset by the unfavorable impact of interest rate movements. During the fourth quarter the U.S. Segment results were particularly void by strong investment results. You will recall that in the previous quarter we saw similar strong investment performance in our Canadian segment. Management actions and changes in assumptions produced a C$7 million charge to earnings over 2007 compared to a release of earnings of C$70 million during 2006.

Fourth quarter earnings increased by C$89 million as a result of the actuarial valuation basis review conducted at the end of the year, but this was more than offset by charges to earnings for management actions and changes in assumptions that were recorded in the first three quarters of the year. Earnings on surplus rose due to increased gains on public and private equity holdings and higher returns on other surplus investments. The effective tax rate for the year was somewhat lower than last year because of movements in the mix of earnings by jurisdiction and due to the reduction in the Canadian federal tax rate from 34% to 32% in the fourth quarter of '07. As slide 14 shows, the Company continues to have significant and growing provisions for adverse deviation in our policy liabilities. At year-end general count [PFADs] were 18.4% of policy liabilities and total provisions for adverse deviation and margins, including those on segregated funds, were 11.3% of liabilities in total.

Both of these ratios have sequentially increased in recent years, reflecting the impact of balance sheet business mix changes, strong equity markets and prudent actuarial practices. So the key here is that our earnings growth has not come at the expense of our disciplined approach to a strong balance sheet. As is our usual practice during the fourth quarter, we completed our annual review of actuarial valuation methods and assumptions for policy liabilities. The pretax net impact of this review is a C$61 million release of policy liabilities. Overall, there was an increase in policy liabilities associated with reducing the long-term ultimate reinvestment assumptions and an increase from updating economic assumptions, such as those for mortality, morbidity, and policy persistency. These were offset by other investment assumption changes, including reflecting the favorable impact of higher fixed interest spreads during '07 and other modeling refinements. The net full year impact of valuation basis changes was a C$33 million after tax income increase very similar to last year's C$24 million impact.

Turning now to slide 16. Although credit performance was less favorable than the exceptional results of '06, credit provisions remain modest, with net provisions of C$23 million for the year, of which C$6 million was booked in the fourth quarter. On slide 17, you can see that, as previously noted, in January of '07 we implemented accounting standard 3855 with respect to the measurement of financial instruments and we adopted quarterly CALM. While total investment income over full year '07 differed only modestly from the '06 result, the basis for recognizing investment related income changed. As a result, segment investment related results were more volatile on the quarterly basis during '07. Turning to slide 18, excluding the negative impact of foreign exchange, total funds under management grew by 8% due to strong top-line growth, good retention and a rise in equity market values over the year. Now I'd like to turn to the divisional performances on slide 19.

U.S. Insurance earnings. On a full year basis earnings for U.S. Insurance were US$718 million in '07, up 31% over '06, driven by business growth and strong investment results. This increase was partially offset by unfavorable claims experience in long-term care, lower mortality gains in life compared to the strong results of '06, and increased losses on new business as a result of record sales during the year. U.S. Insurance earnings were US$302 million in the fourth quarter, more than double the prior year as a result of strong investment related gains, partially offset by weak equity markets and unfavorable yield curve movements. As this quarter's U.S. Insurance earnings were unusually strong due to the timing of investment related gains, we would expect, particularly in our long-term care business, to resume a more normal level of earnings growth in future periods. Turning now to slide 20.

Sales in our U.S. Insurance group remain very solid, with both life and long-term care segments generating record sales levels for the year. We ranked number one in individual life sales across America for the second year in a row. We believe we have continued to gain market share in the long-term care business. John Hancock Life achieved record sales in the fourth quarter and over the full year. Full year insurance sales amounted to C$862 million. Sales were up across all major product categories and distribution channels. Fourth quarter sales were US$316 million, up 54% over the same quarter a year ago. Long term care sales increased by 24% over the prior year, both the retail and group segments achieved record sales levels.

Turning to slide 21. U.S. Wealth Management full year earnings from our variable products group were US$650 million in '07, an increase of 38% over the prior year. Higher fee income on higher average assets in variable annuities and retirement plan services drove this increase.

Fourth quarter earnings were US$172 million, an increase of 31% over a year ago, with strong sales being partially offset by weak equity markets, which had a negative impact on seg fund guarantees in the quarter. Looking at slide 22. Sales for variable products group were US$23.4 billion for the year, up 9% over '06. Fourth quarter sales were C$6.1 billion, up 20% over the fourth quarter a year ago. In the variable annuity segment strong sales during the year, in large part driven by sales of Income Plus for Life, drove net flows of 4% to US$4.8 billion and up 27% in the fourth quarter. The segment ended the year with sales exceeding US$10 billion, a first time achievement and represented growth of 18%.

Recent initiatives, including a new distribution agreement with Edward Jones which took effect in February of '08, the addition of new funds from Franklin and American Funds, and the October 1st launch of Principal Return, a complimentary guaranteed minimum withdrawal benefit rider, which positions us to actively compete in the "income now" annuity market segment, are expected to contribute to continued growth in '08. Group pension sales for the full year exceeded US$5 billion for the very first time, while net flows were US$3.9 billion, down from the prior year. During the quarter retirement plan services received approval for a guaranteed income for life product. This new product is a innovative way to introduce variable annuity style product features to the 401(k) market. Despite stable sales in the mutual fund segment, net flows declined due to market volatility and increased redemptions.

Turning to slide 23, the fixed products group full year earnings were US$374 million, down from US$532 million the prior year. While investment related gains remain strong, both in the quarter and over the full year, they were down from the exceptional levels of 2006. Net outflows continued as expected within the fixed products group, driven primarily by scheduled maturities and restricted sales of institutional products. Turning now on slide 24 to Canadian earnings. The Canadian division reported 12% higher full year earnings of C$1.1 billion, exceeding C$1 billion for the first time. The increase in earnings was attributable to growth in segregated fund, and Manulife Bank assets and strong investment related gains.

In both '07 and '06 the federal government enacted reductions in future corporate tax rates. And in '06 there was also changes in Ontario tax rules with respect to investment income tax.

While these changes contributed positively to earnings in both years, the '07 impact was less favorable than in '06, dampening year-over-year earnings growth. The accounting for the federal tax rate in Canada resulted in a somewhat unusual outcome. While the benefit of the lower tax rate on the accrued tax provisions was recorded within the tax line, this was offset by a charge for the reduction in future investment returns on tax preferred assets that is captured through our actuarial reserves, mostly in the Canadian individual insurance line. The future quarterly results will be advantaged by the tax rate return. Overall fourth quarter earnings for the division were C$256 million, up modestly over last year. Earnings reflected solid operational results and strong growth in Manulife Bank and segregated fund assets under management over the past year contributing to higher earnings. This was partially offset by the impact of less favorable equity markets and by dropping interest rates, as well as by higher new business strain as a result of strong fourth quarter sales across the division.

Turning now to slide 25. In Canada individual insurance sales achieved record levels for both the quarter and the year, with sales up across all major product categories. Including affinity markets, individual insurance sales were C$285 million, up 14% over the prior year and fourth quarter, with both segments contributing to the growth. Group benefits achieved a record full year sales level of C$437 million, a sharp increase of 36% over '06, partially driven by the record Absence Management sale to Canada Post in the third the quarter. Sales in our group pension business were also very strong, with full year sales in '07 more than doubling '06 levels and up 210% in the fourth quarter. Growth in both the fourth quarter and the full year were driven by large case sales, including the segment's largest sale ever, which was reported in the first quarter. On slide 26, Canadian individual wealth management achieved record sales of C$8.4 billion in '07 up from C$6.6 billion in the prior year. The segment also reported record sales in the fourth quarter, up 39% over a year ago.

Segregated fund sales of C$3.9 billion were up 36% over last year due to strong sales of our guaranteed minimum withdraw benefit product, Income Plus, for sales that approached C$3 billion over the year. Net inflows for '07 totaled C$706 million, a significant improvement over the net outflow of C$359 million a year ago, primarily driven by strong sales and good retention on Income Plus. Mutual fund segment reported negative flows in '07, although quarter over quarter improvements were achieved throughout the year. The business implemented several initiatives over '07 to improve sales and retention, including expanding its product offering, rebranding its funds to better leverage the Manulife name and implementing a tier pricing strategy that is more attractive to larger investors. Continued net outflows in the fixed product segment reflected prevailing low interest rate environment. Manulife Bank continued its strong with new loan volumes approaching C$1 billion in the fourth quarter and for the first time the bank ended the year with more than C$10 billion in total assets, up 26% from '06.

As well with the completion of the Berkshire transaction, integration efforts continue and we are already observing some increase in sales of proprietary Manulife products.

Let me turn now to Asia and Japan on slide 27. Full year earnings were US$798 million, an increase of 23% over the prior year. This increase was driven by the impact of rising equity markets on investment income in Hong Kong and the other Asia territories, and by increased fee income from the growth in funds under management across the pension and wealth businesses. Growth in Indonesia's earnings on in force business and new product launches also contributed to this increase. These were partially offset by the unfavorable impact of turbulent equity markets in Japan. Division's funds under management continued to post impressive growth, rising 36% over the prior year.

During the fourth quarter earnings were up 7% from a year ago on a US dollar basis driven by increased fee income from higher assets under management offset in part by the Japanese equity markets. On slide 28 on a full year basis, you can see insurance sales in Asia and Japan increased by 14% for the full year. Other Asia territories demonstrated the most significant growth with insurance sales rising 32%. Sales growth was experienced across the majority of territories with growing contributions from new sales offices in China and agent growth in Taiwan. Insurance sales were generally stable in Japan and Hong Kong. Fourth quarter insurance sales in Asia and Japan increased by 7% to US$114 million. In other Asia fourth quarter sales were 48 million, 17% higher than the prior year, with almost all territories contributing favorably to this growth.

On slide 29 wealth management net flows were very strong in our Asia and Japan division, with full year net flows of 4.4 billion up 36% from '06 and fourth quarter net flows more than double a year ago. Overall in '07 growth was fueled by strong net policy holding cash flow from variable annuity sales in Japan, increased business volumes and retention in wealth management products in Hong Kong and continued strong mutual fund sales in Indonesia. In Japan our variable annuity sales were strong, exceeding C$3 billion in 2007 with continued market acceptance of our innovative new VA product launched late June. We also added distribution capacity for the product, with several new partner roll outs throughout the fourth quarter. Strong sales in the fourth quarter, however, were partially offset by the negative impact of increased compliance and disclosure obligations as a result of the new financial instruments and exchange law that came into effective in early October.

Net flows in other Asia exceeded US$600 million in '07, with continued strong mutual fund sales in Indonesia and good growth in wealth sales in Singapore, Taiwan and Thailand. In Hong Kong full year net flows were also up significantly over last year due to strong fund sales.

Turning to slide 30 our reinsurance division full year earnings were US$246 million, down 5% versus the prior year. Strong investment results and improved claims experience in life segment were more than offset by unfavorable claims experience and lower business volumes in the P&C segment. Still quite a satisfactory result.

Turning to slide 31, corporate and other. In this segment earnings were C$223 million up modestly from '06. Contributing to the full year increase were higher investment income largely driven by gains in public and private equities and by more favorable claims experience in the John Hancock accident and health business.

Offsetting these items were somewhat less favorable credit experience compared to very strong '06, a charge for asset repositioning at the beginning of '07 as a result of the implementation of 3855, and the unfavorable impact of declining interest rates on the corporate results which reflect the interest rate mismatch position related to our larger North American insurance segments.

Turning to slide 32. Capital remains very strong and is above targeted levels. We continue to redeploy our excess capital, buying 56.4 million common shares for a total price of C$2.2 billion across '07. Combined with dividends paid to common shareholders, we have returned over C$3.5 billion to shareholders in '07. As well we redeemed all the outstanding class A series 6 preferred shares of MLI at a cost of C$89 million. So overall I'm quite satisfied with the financial and operational performance of our businesses in '07 and in the fourth quarter.

In force earnings continue to growth nicely across our key operating segments and investment experience remain favorable, despite the challenging market environment. Our continued focus on product development and distribution excellence contributed to exceptional sales, growth in premiums and deposits, and record new business embedded value. Full year earnings were a record C$4.3 billion, up 8% over '07 and up 14% on a constant currency basis, while full year earnings per share grew by 11%, 17% on a constant currency basis. Finally, a return on equity increased substantially over last year to 18.4% and remains well above our medium term target. That concludes my portion of this presentation. Given the prevailing market conditions, I'd now like to ask Don Guloien to take us through a brief overview of our investment portfolio, which is in excellent shape, and then we will proceed to the usual question-and-answer session. Donald.

Thank you Peter. In the face of all the turmoil in financial markets, investors are expressing a lot of interest in the asset side of the balance sheet at all financial institutions. We thought it was timely to take you through some of the areas of most topical concern and explain the limited nature of our exposures here at Manulife. For those of you who want to go directly to the punch line the message is this. Number one, Manulife's asset portfolio is in great shape and number two, we are actually very excited about the opportunities currently being presented by these markets.

Slide 35 outlines our investment philosophy. Manulife's asset mix is built from the bottom up, with a mix of assets designed to meet the term cash flow pattern and liquidity of the underlying liabilities.

We use a blend of asset types, not exclusively fixed income assets, in order to defease those liability requirements. And for those of you who have seen our efficient frontier presentation, I guess my recent presentation at the City Bank conference has it for those who want to check, we believe we derive superior return enhancement and risk reduction by using a blend of assets. And when we are not getting paid to properly take -- getting paid properly to take asset risk, we are not afraid to curtail liability originations, as we have demonstrated by exiting the wholesale funding agreement and GIC businesses when the spread economic simply did not pay. Bottom-line and most pertinent for today's market, we are not dependent on the riskier end of the fixed income markets in order to meet our yield requirements.

As slide 36 indicates, since the time of the merger with John Hancock in the second quarter of 2004, our bond quality has steadily improved. Below investment grade bonds have gone from 6.9% to 4.4%, triple Bs from roughly 31.7% to 23%, in fact B and below bonds have fallen most dramatically, from 3.3% to 1% today.

Why? For the simple reason that we didn't think we were getting paid adequately for taking credit risk and we didn't need to reach for spread in order to meet our liability requirements. So let's take a look at some other key areas of exposure. Slide 37 shows our subprime RMBS exposure. First of all, it's a very small number for a Company of our size. C$694 million, less than one half of one per cent of our invested asset. It would actually be less than that but we've been selectively adding an issue here and there where we see exceptional value in the marketplace. Secondly, it shows how we decreased originations and dramatically increased credit quality in the latter years, where spread and risk simply didn't add up to us as an attractive proposition. We don't have a slide on subprime CDOs because we have none. Zero.

Slide 38 outlines other ABS holdings. Yes, we have other forms of asset backed securities, none of which are backed by subprime. C$440 million of prime RMBS, C$278 million of ALT-A securities, C$470 million of agency securities, C$142 million of auto loan securities, C$367 million of credit card and C$389 million of other asset backed securities. As you can see from the slide, it's a very high quality book and as you would expect originations were biased towards the better quality vintages.

Slide 39, a range of other notable items. We have no exposure to issues in asset backed commercial paper, nor do the money market funds that we manage, nor has collateral from security lending programs been invested in these instruments. We have no SIVs, nor have we bought commercial paper issued by SIVs. We have no synthetic securitizations and most notably we do not write credit derivatives.

The next area of interest is commercial real estate.

A lot of investors have been asking do we believe the troubles in the residential real estate market are going to spread to the commercial real estate market. And if you were to observe the spreads in CMBS portfolios and current REIT pricing, you'd conclude that it already has. We feel the fundamentals of the commercial real estate market are very sound. Unlike many aspects of the residential real estate market, there is very little speculative building, absorption rates exceed available supply in most major markets, borrowers are not relying on unusual terms such as zero and negative amortization loans and/or teaser rates in order to carry the mortgages. And finally, borrowers are qualified and provide documentation, unlike some aspect of the subprime market. You don't have the phenomena of people buying large, unoccupied real estate, second and third homes for example, simply because the carrying costs are low and they have expectation of price increases in the future.

But as we all know, CMBS spreads have blown out significantly. To some degree this is warranted, as the quality of underwriting has certainly suffered in recent years. On the other hand, we believe commercial real estate markets are a totally different matter than subprime or the entire U.S. residential real estate market. Slide 41 deals with our CMBS holdings. Having said that, we have gotten out of the way of the train in CMBS origination. We have a portfolio of C$6 billion of CMBS holdings, which represents about 4% of our invested assets. Most of our portfolio was underwritten in 2000 prior years and most is AAA rated. And most significantly, we underwrite our CMBS portfolio on a mortgage by mortgage basis, not relying simply on rating agencies to do the work, so we feel an extremely high degree of comfort with our holdings and their ratings. Next slide 42 outlines our direct mortgage portfolio. We've a carrying value of C$26 billion, representing 16% of our invested assets. First thing I would note is that 21% of the loans are guaranteed by Canada Mortgage and Housing Corporation, a federal government agency.

And on the rest of our commercial book we have been extremely conservative. The portfolio has in force loan to value ratios of approximately 60% and debt service coverage ratios in Canada of 1.68 times and in the U.S. at 1.57 times. We are also heavily diversified by property type. We have little exposure to ailing economic regions within North America and we have no loans in arrears other than two loans worth C$1.8 million in total, both of which are guaranteed by CMHC, the federal government agency.

Slide 43 deals with our equity real estate portfolio. It is C$5.7 billion representing 3.5% of our total invested assets. This is an extremely high quality portfolio. There is virtually no leverage on the entire portfolio. Most of it is in the highest quality urban office towers and as you can see it is concentrated in cities with high growth and highly diverse economy. We have a 96% occupancy rate and an average lease term of 7.9 years in the United States. So if there was a commercial real estate recession, our cash flow would continue largely undiminished and we would look forward to buying more real estate at lower prices.

Finally, there's the issue of financial guarantors or monoline insurance companies. First of all, we have no direct exposure to monolines, either equity or debt. We have C$883 million of bonds that are wrapped by monolines and the exposure we have tends to be the strongest names in the industry, but that is secondary. Virtually all of this debt, 97% in fact, is investment grade debt without the monoline wrap and we'd be happy to hold these securities with or without that extra guarantee. We underwrite the individual securities and treat the wrap as an incidental feature. In fact, if the entire monoline industry went broke tomorrow and we were to mark the entire portfolio to the expected spreads of the underlying assets, the financial impact would not be material to Manulife. We estimate a potential charge of less than C$25 million under that extremely remote situation. So bottom-line, the issue with financial guarantors or monolines is a nonissue for Manulife.

Slide 45 deals with equities. We have public and private equity exposure of approximately C$8.5 billion in the shareholders accounts. The remainder is being par and other types of passthrough liabilities. Obviously this goes up and down with the markets and of late has been going down more than up. But again, it is a highly diversified portfolio and we've had a relative over weight to Canada and Europe, where the returns have been good relative to the United States. In addition, our private equity and mezzanine portfolios have also enjoyed excellent returns. Most importantly, we see great buying opportunities in these markets and to paraphrase Warren Buffet, when you're a net buyer of equities you should be happier when the market is down.

With that I've given you a quick path through the most topical elements of our asset portfolio. As you can readily see, we have been preparing for this credit crunch. Our balance sheet is in great shape and we are looking forward to capitalizing on opportunities at a discount or higher spread. Thank you.

Thank you, Donald. Operator, that concludes our presentation. We are ready for the question-and-answer portion of our call today.

(OPERATOR INSTRUCTIONS) First question will be from Andre Hardy from RBC Capital Markets, please go ahead.

Thank you. I have a big picture one for Dominic, probably. If we think back to the last time the life insurance industry went through a tough macro environment it would have been 2001 and 2002 and what would be interesting to hear is your perspective on how Manulife is positioned today versus how it would have been positioned back then, i.e. is it more or less exposed to equity risk of declining interest rates or potential weakening in credit.

Well, I guess relative to the time period you said 2002, I guess in general I would say to you the following. Our Company has never been stronger than it is today. Each of our businesses is better entrenched and enjoys a stronger market position. Our distribution capabilities has been referred to continuously growing, they 're much, much more robust and extensive than they were some years ago. Our balance sheet is stronger. We have more capital. We have reserves, I think, by any measure, we've shown you lots of detail there, you can see the level of pads that we carry in relation to our expecteds. So on a net I would have to say that the Company is stronger now than it was in 2002. And you can look to external indicators of that by the fact that we regained our AAA rating back in 2006, I think, and this year we were upgraded again by Moody's. So we do have, I think, all of the risks that are embedded in our balance sheet have just been reviewed with you just a few moments ago. We have the ability to withstand fluctuations in the marketplace. We have done so in the past and expect to comfortably do so in the future.

Would it be fair to say the toughest thing to hedge would be equities?

We are -- Bev isn't here now, we have started to hedge our equity exposures at least to the extent that it relates to and emanate from our VA business. We like the risk reward aspect of the equities that we hold for our own account. They have served us, as I say, very very well over a long period of time. So we wouldn't be looking to hedge the exposures related to our own or the assets we own for our own account. We are looking to hedge the exposures that rise from our very rapidly growing VA business. We do analyze our risk position, our economic capital is at risk in different parts of our business and that is what led us to initiate a hedging program.

Thank you. I'll requeue.

Thank you. Our next question will be from John Reucassel from BMO Capital Markets.

Thank you. Peter, just a question for you on the U.S. Insurance business. Could you give us a sense of what the unusual investment gains, the size were in the quarter or talk about what a normalized run rate should be?

I think if you look at four quarters, this would be an outlier and the average would be more typical of what we expect. And the biggest gains related to investment assets and they were very lumpy and unusual in the quarter. But if you look over a four or six quarter period, it's more meaningful. We had the same sort of thing last quarter in Canadian Life and we have had last year, if you recall, in long term care. So it's nice when investment results are quite strong but it's distracting in the segment in the quarter when it happens.

I think John if you look at experience gains as have been reported on the source of earnings, on the slide that Peter presented, you can see that year-over-year the level of experience gains have stayed relatively unchanged at C$1.4 billion. I think Peter made reference in his remarks that we were examining ways, given the new accounting methodologies and so on, to present our results so as to remove the confusion caused by the lumpiness of some of these gains. Lumpiness in relation to specific business lines. If you look at the total Company they come in at a fairly smooth and regular level.

What's unusual is that sometimes they all fall into one particular business line and it causes all kinds of distractions for that particular business line in that particular quarter. And we think that there might be better ways to present this information. What's relevant for you, I think, is to look at the overall level and to what extent do you think is sustainable or not, the overall level of experience gains. If you go back ten years you'll find that we've consistently and regularly had experience gains, most of which come from investment performance where we actually are able to earn on our mix of assets returns that are greater than those that we needed to satisfy our policy liabilities.

Okay. Great. And I guess, Dominic, while you are there I'll -- you know the comments on potential acquisition opportunities have been in the past that it takes two to dance and there aren't a lot of willing sellers or people that they are discussing. Has that changed at all or is valuation expectation still too high?

When you have, I guess, unsettled markets, can I use that expression as you do today, it always takes a little while to -- for things to fully shake out. I'm not aware that at least so far it's led to a wholesale reexamination by people of their strategic intent. All I can tell you, John, is that we are very interested. We have the capital. We feel very comfortable with our management team and so we keep our eyes and ears close to the ground.

And, Don, a question for you. You talked about the C$25 million financial impact from, I guess, unwrapping your monoline bond. Is that an earnings impact or is that total C1 in capital extra chart you would have to do? What is that C$25 million?

Maybe a pre-tax number in terms of earnings hit that we would have to strengthen reserves to reflect the fact that it's no longer AAA securities in our cascade and something less than that. But it's very minor diminutive. These are high quality assets, John. These are assets that I'd be happy to hold in the portfolio with or without the wrap.

And, Don, there is a lot of information here so I apologize. The 97% that is investment grade, what is that? Is that mainly munis or is it asset structure finance, what exactly.

It's a combination of things. The biggest holdings in that portfolio would actually be utilities. Utilities, government agency, in some cases is a wrapped municipalities, a whole range of things. Some financial instruments, some other pools of asset backed securities, but the biggest chunk of it is utilities and again fairly safe.

Would you say investment grade, would you say unwrapped or triple B or on average A.

No, no. They are higher than BBB on average. There's some triple Bs, certainly, in there but the biased towards A and higher quality.

Okay, thank you very much.

Thank you, our next question will be from Michael Goldberg from Desjardins Securities.

Thank you. I am wondering if you could give us some idea of your equity sensitivity in terms of, I guess, one scenario that we heard from another company yesterday where they gave us an indication if you took a 10% drop in equity markets on January 1st and then you assumed the normal market appreciation that is embedded in your assumptions anyway, what the earnings impact of a scenario like that would be. And if possible, could you split that between sort of the fee income impact and the equities backing surplus.

That's a very fine question. I think we can answer the first part of it, which is what is the impart of a 10% decline. I'm not quite sure we have the detail available with us as to impact on fees and the impact on carrying value of the equities. Simon, do you have this information?

The impact of a 10% correction, so that over a year we were earning a 10% less total return than we would have expected at the start of the yea, would be C$350 million approximately on full year income. I don't have that exact breakdown that you have asked, Michael, but given the nature of our business, the majority of that is related to the fee income businesses.

The vast majority?

We are not sitting with a split here Michael.

It is the substantial part of the number. I don't have the exact amount.

Okay. And a question for you, Don. Could you give us some idea of what opportunities in particular you think you have where you can use your AAA rating?

Use our AAA rating. If the fact that we are very light, Michael, on credit exposure that we can afford to load up on it if the circumstances warrant. We've been complaining for years on these quarterly calls that spreads -- we are not sufficient to justify us taking any credit risk at all, so we've migrated into a position of extremely low risk. The CIBC transaction that we entered into recently was an example of that. We are raising money for what would be called a distressed debt fund to be run through our declaration subsidiary, Declaration Mortgage Opportunity Fund, I think it is called. There is another example. We are basically making outbound calls to financial institutions pretty aggressively if their stock was stranded debt or equity positions that we can help them with at a price, we are here to help.

Is there any way that you can take advantage of the problem that the monolines themselves have and come in and assume some of the coverage for the local governments?

Well, I think, Michael, you and others have pointed out that the basic business of monolines wrapping municipal bonds and like instrument is a pretty attractive business and it has attracted the attention of people like Warren Buffet for that reason. They sort of got into other things more laterally, which has caused the problem. We tend to be very disciplined about going into businesses that aren't really part of our core. I mean, one can say that it's the same credit judgment that is being applied and I can accept that argument. Anyway, we are pretty opportunistic but we like to stick to our knitting. So that is the balance that we have there.

Thanks very much.

Michael, I'm disappointed you didn't ask us about embedded value and I was expecting you comment on how fantastic it was.

It was fantastic, Dominic.

Excellent.

Thank you. Our next question will be from Jukka Lipponen from KBW.

Dominic, when can we expect a decision in your own situation whether you will stay on to lead the Company or will there be a succession?

Well, I guess you will expect a decision when the decision is made and there is no decision made and that is all I can tell you today.

And my second question. How did your variable annuity hedging perform in this quarter?

Well, Bev Margolian is not here, but I think Simon.

I'll be happy to speak to it. We were pretty happy, because of course this was quite a volatile quarter and it tracked very nicely against what we expected. I would say that the hedging cost was a little higher than in an average period because of both volatility and low interest rates, but it performed exactly the way one would expect in that market and that's about as good as it gets when it's as volatile as the last few quarters have been.

So not much breakage?

No, we didn't have any surprises and you know how volatile particularly there was a month and a half there the period was.

Thank you.

Thank you. Our next question will be from Tom MacKinnon from Scotia Capital. Please go ahead.

Thanks very much. Just a couple of questions. Just looking at the expected profit on page 10 of the Statistical Information Package from the source of earnings. Wasn't up much, just 5% year-over-year. What was that figure excluding currency? Do you have that available?

Does anybody know what the impact of the currency was on our -- ?

On the full year I think it was 11%, Dominic.

So it would have been 11% stronger? I'm hearing -- 11% total. It would have been 11% on a constant currency basis.

That's the same as the annual then, right? Yes.

It was the annual. You asking about the quarter?

I'm on page 10 of the SIP and the quarter one.

I'm not sure we have that conveniently at hand.

I think we can probably get the number in a second.

Why don't you bear with us, we'll -- ..

Then if I look over at the -- in Canada there wasn't any growth in terms of the -- I think it's on page 20 of the SIP, there wasn't any growth in the expected profit year-over-year. How do we interpret that?

I guess I tried to caution you earlier that because we must have 20 lines of business and the fluctuations in any given quarter in any given line are going to be -- just exist by the sheer nature of the attribution process. I think it's far more meaningful to look at the source of earnings for the Company overall. And there I think you see very nice progression. That's the way I look at it.

All right. Well, then, one other follow-up is on the CTE level, just on page 38 in the SIP, keeps going -- fell from -- was 78 about a year ago. Now we are down to 72. Do you know what would have been the impact on earnings if we would have kept the same CTE level?

Yes. That's actually disclosed under - you get that information from under the disclosure on page 38.

So 74 would have been -- it says there is C$74 million in a footnote there. So if you would have held the same CTE level as the quarter before, there would have been an additional C$74 million.

There would have been an additional C$60 million. So we had a C$14 million increase and there would have been a C$74 million increase if the CTE level hadn't -- .

Okay, I got you. So effectively if you would have froze the CTE level your earnings would have been C$60 million less. Is that correct?

That is a pretax number.

Tom, isn't it much more interesting that when you look at that same schedule page 38 that our recoverability margins now. We have C$2.6 billion of value embedded in our existing contracts over and above any expected problems. C$2.6 billion compared to C$2.1 billion at the beginning of the year.

Yes. And the net amount of risk has grown, though, too.

That's what the amounts here intended to indicate the extent to which you have got a margin. The margin takes into account the amount at risk.

And maybe, Peter, if you can just elaborate on the tax rate being zero in Canada, but that was only -- that was fully reflected in terms of the change in actuarial liabilities.

As I tried to explain without getting super technical in my comments, that was just the line items and maybe Simon you want to add to that? Simon has the other number, let me just finish the tax item. What had happened is you had one part of the posting in the tax line and one in the operating line and that's why the tax rate looks peculiar in Canadian ops in the quarter.

Just one final general comment. This is the first time then in the slide show now we are just looking at things on an annual basis. Do you think -- obviously there's a lot of volatility on each one of the segments on a quarterly basis here and is it going to be the trend now just to show like a year-to-date type results or previous 12 months.

What we are thinking, as I think Peter said in his opening remarks, is that we now have a bit of experience with 3855 and quarterly CALM and we think there is a better way to display to you so that you can understand what is happening in our Company than the way we are doing it now. In other words, credit risk is allocated out to each of the operating units on the basis of their priced for amounts and any short fall or excess is kept in the corporate as part of the corporate pool. We think an approach like that or some variant of it might work for investment income, where for example you would attribute to each of the divisions their priced for investment returns and any overage or short fall would be separately identified in a separate line item in corporate. So that when you look at our results you can see whether the results overall were advantaged by favorable investment markets or disadvantaged by favorable investment markets, instead of having what you have now where this is all buried across 20 business lines and you have some going up and some going down.

So, Tom, just to finish up the comment. So by looking at it over a one year period, particularly at the year-end, I think it smooths some of that out and you get to see a more normalized number. But we are still providing good commentary on all the quarterly and if we can simplify it so it isn't so distracting to have these investment anomalies turn up by segment, we are working to try and find a way to do that as well.

Okay. Did Simon -- did you say that it was C$350 million annual impact on a 10% decline in equity markets? Is that what I heard.

That's right.

And that's an after tax figure, correct?

That's right, yes. And, Tom, just to circle back on a couple of your earlier questions. You had asked about the year-over-year growth of expected profit on in force all going from C$770 million to C$808 million.

Yes.

And if we actually did it on a constant currency basis, you'd actually probably have about an C$880 million number in 2007 Q4. So that's about a 14% or 15% growth on constant currency. And I think there was a question as well about the Canadian expected earnings on in force and the main reason that the discontinuity between the third and fourth quarter is there is quite a bit of seasonality in the expected profit margins on our group business in Canada which shows up in that line.

Okay. But that would have been -- the year-over-year number was relatively flat as well. That's the seasonality assumed is not reflected in the year-over-year change in the figure.

That would not be. It would be there in the quarter over quarter but not the year-over-year.

I understand. Okay. Thank you.

Thank you. Our next question will be from Mario Mendonca from Genuity Capital Markets.

Good afternoon. The C$350 million, Simon, you referred to after tax number, that presumably you are not baking in anything for the effect on reserves, that would be on top of the C$350?

No, that's all in. That's the income impact of a 10% correction on the bottom-line.

Oh, that's important. So the fee income and the effect of having to strengthened variable annuity and (inaudible) fund reserves.

That's everything. That's on balance sheet holding of equities, that's the fee income, and that is the guarantees.

The reserve effects. Okay. I didn't realize it was all encompassing.

Mario, Paul here. Just to be clear. What Simon talked about is different than Mike Goldberg asked in his question, where he asked about a 10% decline followed by a normalized return. I think Simon is talking about a 10% decline for the year.

With no recovery from there?

It's really at the one year 10% decline, than normal growth thereafter.

And then normal growth.

We don't have a scenario where we have the current year's earnings go back to normal.

He said it dropped 10% on January first and then it resumed its normal growth from that lower level.

So I think we are all confused now, which one is it.

C$350 million use that number I think that's a good rule of thumb.

In our case we are in many different geographies and markets as well so it's never going to be just a straight 10% number. Of course if markets went down 10% you wouldn't expect that we would just sit here and watch the market, we would do some things to our business.

But we are not asking you to be exact. So C$350 million is good enough for me. A follow-up question for Don. I'm always sort of -- I've seen your efficient frontier presentation a few times and I'm always sort of stunned when we come to a quarter like this where Lincoln, Principal, Nationwide, Met, Pru, everybody discloses these charges and now I appreciate that they had a heck of a lot more on the all day and subprime and structured products, certainly, than Manulife. But, Don, your report on the quarter where you are talking about excellent experience on the investment side. I guess what I'm getting at is what is it in the individual -- what U.S. Individual life assets -- were we talking about realized gains this quarter in the surplus account? Is that sort of what we are looking at.

I think it's a whole variety of things and I think higher spreads are contributing in a significant way, both in terms of what we are rolling over the portfolio and our assumption about what we can do in the future reflected in the reserves. So we are separate and apart from any different investment activities. What we are rolling over now is at significantly better spreads than we experienced six months ago.

I think isn't it a fact that Manulife is a little unusual in its blend of assets compared to other insurance companies, who for accounting and other reasons particularly the American one's, don't have as diversified an asset mix as we do. Is that right?

I think that is awfully close. I would agree with you on that.

And they have more credit risk as a result because they go and defease everything by investing in fixed income assets and so they don't get the benefit of the efficient frontier.

And Don just to clean up a few things here. So it's not so much that realized gains in the quarter were very strong -- Maybe you could just tell us -- .

No, no,no. Mario, realized gains they show up, they were very steady. We don't play that game. We have portfolio -- we would actually lock-in a very fixed amount, but for the fact that certain amount of portfolio management activity requires it be taken. So realized gains are very steady numbers.

There are some appraisal gains, but I think the big, big difference is we didn't have those losses in the weak categories that some U.S. companies were fairly exposed to. We have been very particular. We have had terrific returns in timber, agriculture, and real estate.

And that's what I'm trying to wrap my mind around here. Don, you also said things like you are rolling over your portfolio into higher yielding securities and you changed certain expectations about what you can expect to earn down the road.

That's right, they go together.

When you change an expectation about what you expect or you change what you expect to earn on say, for example, real estate or any other -- or a bond with a higher credit spread, does that go through your experience gains or change in assumption?

No. That's in your basis review. That would be an update that we would have got, rising spreads would have had a favorable impact in the basis review.

So it's management action then? You wouldn't put that through -- ?

And number two, as I understood it anyway. There are two -- there are many but two important movements regarding interest rates. One was we lowered the URR by 25 basis points. Largely offsetting that URR movement was the fact that spreads are much wider now and we reflected a portion of that widening spread in our future reinvestment assumption.

In management actions and changes in assumptions.

Yes. So the net of them all is shown on that line, Mario.

And that's very helpful. I guess what I'm trying to understand now, again, if that sort of thing goes through management actions and changes in assumptions, then what are we seeing in the experienced gain line? It kind of goes back to the first thing I was getting at.

Okay. So there's rise in values. There are updated appraisals. There are some realized untraded and there is an absence of large credit losses which is good and is better than expected.

Let's say for the sake of argument, Mario, today I tell you that my URR is 3.5%. To the extent that tomorrow it unwinds and I'm really earning 6%, the 2.5% extra goes into my experience gain. It has nothing to do with management assumption or -- to the extent that our actual experience is different from what's in our expected reserves, that difference shows up as experience.

I'll just add something, Mario. Basically experience gains contains all of the impact of investment experience different than expected. The only item this year that did not flow to experience gains and went through basis changes was the impact of spread changes on our reinvestment rates in the first three quarters this year. We hadn't historically seen a lot of volatility there, so we had not been putting that item through as an experience gain every quarter. Going forward we are looking to change that practice and that will probably be going through the experience gains as well.

And, Mario, last but not least, we have a portfolio of about C$1 billion of timber and agriculture and the only time we get appraisal -- C$1.3 billion. The only time we get a appraisal for that is at year-end so it gets reflected in the fourth quarter. We are looking at ways of spreading that across the year so that the results will be more normalized.

I appreciate all the help. But I think you can see where I'm coming from as well. It's a large number and I'm trying to understand where something that large can come from.

Well, I'll try to help you in layman's terms. Where it comes from is that our reserves are very conservatively stated. We have for the last 10 or 12 years, however long it is that we have been displaying a source of earnings, you always see a fairly significant experience gain, Mario. And those experience gains they are small portions that are related to mortality and lapsation and expenses, but I would say the bulk of them are always investment related, which again goes to the fact that our reserves are very conservatively stated.

And I would agree they were conservatively stated last quarter as well, right?.

Yes.

So why would it be this quarter where we would see such a huge experience gain.

It's really just the timing over which -- we have a very diversified investment portfolio and certain assets that -- .

That is not correct. The reality is that our experience gains on average have been C$300 plus million every quarter. So it's not that last quarter we didn't have -- .

I'm referring to U.S. Individual life.

That's the problem that we talk about earlier, which is with this CALM and this 3855 we are looking for ways to modify our reporting so as to avoid this yoyoing by business line.

I think the best thing then is probably just to wait till we get a cleaner picture of this going forward.

I think it will be helpful. I think our new reporting, we are going to dry run it here, and I think it will help everybody, not just you, it will also help us.

Thank you very much.

It's hard enough to generate the gains. You can appreciate to get them in the right segments at the right time is next to God-like. When we have somebody approach us on a deal and say we'll pay you twice what you bought this thing for, will you sell it to me. I don't sit down, this may shock you, but I don't sit down and say what segment is it in, what impact it is going to have on the quarters earning. We look at the economics. If a good deal, we sell it. And if they end up being jumbled into long term care this quarter and in the next quarter into the guaranteed product segment and the third quarter into the life insurance, that's happenstance. There is nothing we can do to control that but we do have some ideas as to how we can prevent it better.

We are spending some time on this because it's important that you appreciate what we are trying to do. We went through this with our credit experience, if you remember, some years ago. It was very lumpy. So one division had the misfortune to happen to have the bond that went bad, its results looked -- so we decided then to pool credit experience and therefore you don't have the volatility in individual lines of business any more and we are thinking that the same concept might well apply to investment income in total.

Thank you very much for indulging me on this. I appreciate it.

Thank you. Our next question will be from Jim Bantis from Credit Suisse.

Good afternoon. Just a couple of quick questions. Hartford on their conference call gave some guidance with respect to their Japanese operations and specifically talked about the FSA in Japan putting through some laws that protect the consumer and then will slow down the sales process for distributors. And I am wondering if you saw the same type of actions and will it affect insurance and VA sales in the first half of 2008.

There is no question that the more onerous sales process and disclosure requirements that have to be made at the point of sale have, I think, affected everybody in that business. We are hoping that the expansion of our distribution capabilities in Japan will mitigate a large portion of the drag caused by this complexity. The other thing that is happening too is that people are getting more experienced and comfort and used to the new sales process, so I expect that it will become somewhat easier and less problematic going forward. But I confirm to you what Hartford has told you, that net/net the new sales procedures are a damper on the industry.

Dominic, you had also talked about broadening the distribution agreements in Japan. Are most of those agreements with the banks exclusive?

I don't know. I don't know if anybody else here knows.

Exclusive in the sense that the bank can only have one supplier?

Yes.

It varies. The larger money center banks would not agree to exclusivity. They have a broader range of suppliers. Some of the regional banks they are in fact exclusive, either legally or practically.

Got it, thanks, Don. I'm just wondering also on the VA front in the U.S., at what point will we see the impact of hitting the Edward Jones franchise.

We have just the guy here.

I knew he was there.

I thought we were going to get through this whole call with no questions about business operations, which usually means they are great. Anyway, Edward Jones launched actually on Monday of this week, so it's in its infancy. I will tell you that it will take about two years to get full penetration there and when we do it will be our largest account, just given the overall distribution power of that firm and the number of competitors that are in there and the like. So it will be a relatively -- it will take some time to wrap it up but it will be very very significant to our overall sales.

Got it. And Peter, I guess just with respect to all the questions on the investment gains in the U.S. Life, I guess part of the issue is you gave us a very simple answer in Q3 when it was just Canadian real estate appraisals and I guess that's where we were looking for that one liner in terms of that one question.

I can give you sort of the highlight but it's a little more complex this time but it would be real estate, agriculture and timber. It would be the three biggest categories upgraded appraisals primarily but some valuation -- some actual transactions.

Got it. Thanks very much.

Thank you. Our next question will be from Eric Berg from Lehman Brothers. Please go ahead.

Thanks. I have a couple of specific questions but first sort of a general over arching question for you, Dominic. Candidly I must admit it's a little bit surprising to listen to the management just because here we are in the most tumultuous financial markets that I can remember. We have stood at loan organization unable to raise money, cities unable to raise money and what we are hearing is business is booming at Manulife and the fixed income portfolio is in pristine shape. My question, what are the challenges that you are facing. We haven't heard anything about challenges.

I mean both of those statements are true. The challenges that we face is that we are operating in a back drop of very unsettled markets which our life business less so but our wealth businesses is going to be affected. People don't invest if they are worried about their jobs or whatever. They have a propensity not to save quite as much to buy some of the products that we sell. So I don't want to leave you with the impression that we are all busy twitting our thumbs here. We are looking at and are developing and haven't acted already responses to the situation, because the market value of the assets goes down, well that is going to have an effect on our fee income and that goes almost directly to the bottom-line. So we worry about those things. A lot of things we worry about.

But I don't worry about the asset quality. I mean, we have over many years been very, very disciplined. We don't mess around with exotic instruments. It is not an accident we don't have any credit defaults swaps, it's a decision. It's not an accident that our derivative activity is de minimis, we only do them where it's necessary to hedge an asset position. I think that our conservatism and our approach has served us very, very well. You might argue that we take risk in other ways, like we have oil and gas assets, other people don't. We have agriculture assets, other people don't. When Bev Margolian, our Chief Risk Officer, does the economic capital at risk, we choose to put our economic capital at risk in different ways than our competitors. And so far, it's been a wise decision.

I have one question, specific question for Don about commercial real estate. Don, what did you mean when you said that you have seen deterioration in underwriting standards in CMBS? And relatedly, how would you assess the state of the United States commercial real estate market? Are we not seeing weakness or just what is the state of the market?

That's a great question. I distinguished the real estate market separate from mortgage lending. The commercial real estate market I think is good. Buildings have appreciated enormously in value in recent years. The returns going forward might not be as good total return but it's a very solid market, for the simple reason that there isn't enough supply to deal with the net absorption and the growth in the economy, even though it's slowing, there aren't enough buildings out there. Why aren't there enough buildings out there? Because buildings weren't built on a spec basis. So it is totally different than the last real estate recession in terms of equity real estate. When it comes to mortgages, we have seen a deterioration in underwriting standards. This isn't new.

This has been going on for at least four years, where instead of principal lenders, people like life insurance companies and banks who underwrite to keep, it is basically underwrite to sell and put it in a securitized vehicle package, you'd up tranche it, sell it off to people. And I think in the early days, four or five years ago, the underwriting standards were similar between those two groups of originators. As you get people more fee driven, there has been a fundamental change and the people who package and sell seem to care less about the quality of underwriting. So we witnessed that and said we know what is going to happen. We don't know when this party is going to end but you know how it's going to end and we moved to progressively more conservative underwriting. We would rather do a deal at a tighter spread with a 50% loan to value ratio then fight with someone who has got an exaxerated appraisal and arguing it's worth 20% more than the guy paid for it to fit it within their standards and package it into a pool.

So quite distinct. The real estate market is very sound. Some people who followed very aggressive underwriting practices were -- the destiny was there and that is being reflected in CMBS land. Earlier vintages of CMBS are in great shape and our direct underwriting of mortgages is in direct shape.

Thank you.

Thank you. Our next question will be from Michael Goldberg from Desjardins Securities.

Thanks. You said that there's virtually no leverage on your US equity real estate or equity real estate holdings. Is the same true for timber, ag and other high absolute return asset categories? Are there circumstances where you would put leverage on those assets? Would you, if you were doing that, would you look to do it on a nonrecourse basis? And overall if you took all those kind of assets, what kind of capacity would you think for -- to extract capital out of those assets do you think that there would be?

Michael, those are great questions. We don't put leverage on real estate simply for the fact that we pay people good money to originate mortgage loans. So if I bought a building, why would I offer to one of my competitors a mortgage loan that I would pay one of my originators to originate for our portfolio. So we don't put leverage on -- the only place we have leverage in our roughly C$5billion worth of real estate, I think there is C$50 million of leverage, it is because we got a partnership with someone in the building and they want some leverage on it. It's not unusual for pension plans to leverage a building at 50% loan to value ratio. So that's the only reason we would have it.

We don't fool ourselves by -- if we expect to make 8% on a timber asset, we don't fool ourselves and say, gee, if we got 90% leverage against that we can crank it up to a higher number. That's not necessarily a better economic outcome. You are quite right. We would get a capital saving if we were to leverage our real estate portfolio, but we take the conservative posture. Most of the capital formulas that are used do not discriminate between equity real estate held with no leverage and that with leverage and that's a silly part of the system and you can criticize us for not taking advantage of that. But we are happy with our posture. It's the underlying economics that we care about more than capital shaves.

Well, I am also thinking -- .

Timber and ag, Michael, there is a small amount of leverage where we are in deals where others want it as well, just as in the real estate side, but our preference in these types of total return assets is un-leveraged unless there's somebody participating who strongly in favor of some leverage. It is always, fairly modest.

We are about 15% of the timber portfolio. The other 85% is outside investors and sometimes they have a preference for minor amounts of leverage in the deals.

I'll just leave it at that. Thanks a lot.

Thank you very much operator. That concludes our call for today. We've run on a little bit longer than originally planned but we have had a good discussion. Thank you very much, everyone, for participating and as usual we look forward to reporting to you next quarter. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.