Manulife Financial Corp (MFC) 2008 Q1 法說會逐字稿

Good afternoon and welcome to the Manulife Financial Q1 2008 Financial Results Conference Call for May 8, 2008. Your host for today will be Amir Gorgi. Mr. Gorgi, please go ahead.

Thank you. Good afternoon. I would like to welcome everyone to Manulife Financial's earnings conference call to discuss our first quarter 2008 financial and operating results.

If anyone has not yet received our earning announcement, statistical package, and slides for this conference call and webcast, they 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 the 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 Harbour provisions of applicable Canadian and U.S. Securities laws.

Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on them. 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 Management Discussion and Analysis section in our most recent Annual Report under the headings "Risk Management" and "Critical Accounting and Actuarial Policies".

When we reach the question and answer portion of the conference call, we would ask that each participant adhere to a limit of one or two questions. If you have additional questions, please re-queue, as we'll do our best to respond to all questions.

With that, I'd like to turn the call over to Dominic D'Alessandro, our President and Chief Executive Officer.

Thank you, Amir. Good afternoon, ladies and gentlemen. Thank you for joining us on this call.

Earlier today we reported first quarter shareholders' earnings of $869 million, down from the $986 million reported in the first quarter of last year. This resulted in fully diluted earnings per share of $0.57 and a return on equity of 15.1%. The decrease in earnings is largely attributable to the sharp decline in equity markets that occurred in the United States, Hong Kong, and Japan since the beginning of 2008. These markets have declined by 10% in the United States and 18% in both Hong Kong and Japan. Our actuarial practices require us to assume that these declines are permanent and to adjust our reserves for future benefits accordingly.

In this quarter an after-tax charge of $265 million was recorded. I want to clarify that this is a non-cash charge which, in the absence of further market declines, will not recur in future quarters. Should markets recover, this reserve adjustment will be reversed.

All other aspects of our business remain highly satisfactory. Sales continued their momentum from last year with total insurance sales rising 22% over the first quarter on a constant currency basis. Excluding the jumbo pension case sale in Canada in the first quarter of 2007 wealth sales also increased by 13%. These strong sales levels contributed to an impressive 35% increase in the new business embedded value, which of course this reflects positively on our current performance but it also positions us well for future earnings growth.

Before Peter begins his review of our financial results, I would like to comment on some of the operational highlights from the quarter.

All of our businesses remain focused on execution and on delivering solid organic growth. The pace of new product introductions remains strong and together with our expanding distribution we continue to enjoy strong sales across our Company.

In the United States we continued to achieve market-leading positions in our chosen product segments, including life and long-term care insurance and small case pensions. Our variable annuities sales also grew strongly this quarter.

In Canada we introduced a new, non-par whole life insurance product and continued to post robust sales in innovative products including IncomePlus and Manulife One. Our individual life insurance sales set a record for the quarter in Canada.

In Asia and Japan, our established franchises in Hong Kong and Japan continued to post strong insurance and wealth sales. Other Asia territories continued to execute on our core strategy with new product introductions in Malaysia, Taiwan and the Philippines, and expanded distribution agreements in Indonesia.

Finally, our China operation continued to grow and expand, receiving two additional licenses in the quarter, bringing the total up to 30, the most of any foreign life insurance company operating in China.

Now with that, I'd like to ask Peter to take us through the numbers in more detail with the usual question and answer session to follow. Peter?

Thank you, Dominic.

Shareholder's earnings for the first quarter were $869 million or $0.57 a share. The sharp declines in global equity markets in the first quarter of '08 negatively impacted reported earnings by $265 million or $0.18 a share. Excluding the impact of equity markets, earnings per share for the period would have been $0.75, an increase of 19% over the prior year. This reflects the broadly-based operating success achieved across all of our divisions this quarter.

You may recall that earnings in the first quarter of '07 were reduced by an asset repositioning charge of $69 million due to the adoption of new accounting standard 3855. Earnings this quarter were reduced by a not dissimilar amount of $70 million versus the first quarter of '07 due to currency movements.

As summarized on slide 8, global equity markets experienced sharp declines in the first quarter of '08. U.S. markets were down 10% while markets in Asia were down 18%. Our actuarial practices require us to assume that these market declines are permanent and therefore we took a charge in the current quarter for the reserve impact of these equity market corrections.

The $265 million outlined on this slide is consistent with our disclosure in last quarter's earnings call where we indicated an approximate $350 million after-tax reduction in income would result from a 10% market correction across all markets. Of the $265 million charge, $105 million relates to reserve strengthening for segregated fund guarantees, $94 million is in respect to strengthening of policyholder liabilities that are supported by equities, and $36 million was in respect to the equity impact on variable life reserves.

I'd emphasize that the $265 million charge is a non-cash item, which in the absence of future declines will not recur in future quarters. Furthermore, should markets recover, these charges would be reversed. As a matter of fact, as of April 30th, U.S. markets were up 4% from March 31st while Asian markets were up 10% to 12% over the same time period. Had our reporting period ended on that date, approximately $150 million of the first quarter charge would not have been required.

Because the volatility of equity-related results are distracting, it's important not to lose sight of the long-term profitability of our equity linked products. Given the long-term illiquid and often contingent nature of these obligations being supported by our equity exposures, the quarterly results are less important than the ultimate long-term returns achieved on these assets. Under today's accounting model, the volatility in earnings this quarter, while significant, is part of the normal cycle expected on these businesses.

Turning to slide 9, as we've previously noted, the exceptional credit experience reported in past quarters was considered unlikely to be sustainable and, as expected, credit experience is now returning to more normal levels as credit provisions rose and recoveries were down somewhat from previous levels. While still well within normal expectations, credit experience in the first quarter of '08 was less favorable than unusually strong results the first quarter of '07 and the very positive experience we've had over the past several years.

Included in this quarter's results but not reported as credit recoveries, are $20 million of John Hancock pre-merger impairments. Because the accounting convention dictated that we mark-to-market these assets at the time of their acquisition, they were not recognized as impaired assets and, as a result, subsequent recoveries are not formally reported as credit recoveries. In light of the macroeconomic environment, I am very pleased with our current credit experience.

Looking to slide 10 you have our source of earnings disclosure. Expected profit on in-force was $785 million in the quarter, down 2% from last year but up 10% on a constant currency basis. The impact of new business was an origination loss of $90 million, reflecting continued strong sales levels. Experience gains were $133 million, down significantly from prior quarters, largely due to the reduction that resulted from the declines in the equity markets that I just mentioned. Positive experience gains were caused by widening spreads and by some gains on private equities plus favorable claims experience. Finally, this quarter's management actions and changes in assumptions increased pre-tax earnings by $36 million, reflecting an update in premium accrual estimates in our reinsurance division.

On slide 11 you'll note that this quarter's new business embedded value was quite strong and all businesses enjoyed strong and profitable growth producing a record first quarter new business embedded value. During the first quarter new business embedded value totalled $590 million, an increase of 35% over the first quarter of last year, as both our insurance and wealth management segments grew strongly.

Our insurance businesses contributed $239 million of new business embedded value, up a very strong 46% from a year ago, with strong sales growth across the U.S., Canada, Asia, and Japan. Strong levels of new business embedded value were also generated by our wealth management businesses, particularly in our variable annuity franchises in the U.S., Canada, and Japan, producing new business embedded value of $351 million, an increase of 29% over last year. These results reflect positively on our current performance and position us well for future earnings growth.

On slide 12 you'll see the premiums and deposits amounted to $17.8 billion in the first quarter of '08. On a constant currency basis and excluding the large case premium booked in '07, premiums and deposits grew 12% over the first quarter of last year, driven by robust sales and growth in recurring premiums and deposits.

Effective January 1, 2008, we adopted a new allocation approach for investment gains and losses. As you will recall, previously, investment gains and losses were reported in the business units that owned a specific asset and credit experience was reported in the Corporate division. Under the new approach, general account investment gains and losses and credit experience are consolidated into two pools: one for insurance and one for wealth management. The investment and credit result for each pool is then redistributed to the business units on a pro-rata basis based on the respective policy liabilities.

Where investment gains and losses arise from specific product features such as variable annuity guarantees and future fees assumed in variable universal life and equity-linked reserves, or where investment gains and losses arise on full pass-through products, such as par insurance, these gains and losses remain in the business where the products are sold.

Our new allocation approach more closely aligns with how we manage our assets and related risk positions. We have restated prior periods to conform with this new presentation in order to provide you with some quarterly history. While business unit results are somewhat impacted by this new change, of course, in total our results are unaltered by this new reporting format.

Looking on slide 14 you can see the year-over-year progression of shareholders' earnings and the split between Insurance and Wealth segments. In the first quarter of '07 we took a charge of $69 million for implementing accounting standard 3855. Adjusting for the $265 million of equity market charges in the first quarter of '08 and the $70 million impact of currency movements, year over year earnings rose by $149 million or 14%. Insurance earnings rose due to the growth of in-force business, improved claims experience, and favorable investment results. Insurance investment results benefited from widening credit spreads and good results on alternative investments, more than offsetting declines in equity markets.

Wealth earnings were down due to the drop in equity markets and the non-recurrence of exceptional investment related gains in the U.S. Fixed Product segment that occurred in the first quarter of 2007. Overall, wealth products experienced a small investment loss in the first quarter of '08. The loss arose primarily from charges for strengthening equity related reserves that support long duration wealth products and also reflect the impact on reserves of reduced bond yields at shorter durations.

I'd now like to turn to a review of our divisional performance.

On slide 15 you'll see that U.S. Insurance earnings were US$208 million in the first quarter, up 34% from a year ago. The increase was caused by strong in-force business growth and favorable investment results, as I just noted. This was partially offset by higher strain on strong new sales levels.

Slide 16 you can see that U.S. Life Insurance had a record first quarter sales level of US$209 million. Sales exceeded the prior year by 42%, with growth in all major distribution channels and product categories, particularly Universal Life. Long-Term Care sales for the quarter were in line with the prior year, with Leading Edge sales representing an increasing percentage of total Retail sales.

On slide 17 you can see that U.S. Wealth Management variable annuity earnings declined significantly due to increased seg fund reserves and lower asset-driven fee income, both resulting from this quarter's decline in equity markets.

On slide 18 you can see the net flows for the Variable Products group were US$2.9 billion, up 5% from a year ago. In the Variable Annuity segment, sales exceeded US$2.5 billion, 18% above last year, primarily driven by the continued strong performance of earning Income Plus for Life rider. Also contributing to our sales growth in this segment were well-received product enhancements introduced early in the year and favorable initial sales results from a new distribution partnership with Edward Jones.

Our mutual fund segment achieved record first quarter sales in open-ended funds and a significant increase in net sales over the fourth quarter of '07. Sales for the quarter exceeded US$2.5 billion and were up 32% over last year.

Group pension sales and net flows were strong but below the exceptional levels of the prior year, partly due to the unfavorable equity market impact on assets transferred in, despite new case sales being at the second highest level on record for a first quarter.

In the Fixed Products group, first quarter earnings of US$58 million were down from the prior year, due to unfavorable yield curve movements and the non-recurrence of exceptional investment gains recorded in the first quarter of '07.

Turning now to Canada, the Canadian Division reported first quarter earnings of $254 million, up 7% over last year. Earnings benefited from improved in-force earnings and favorable claims experience in our group businesses. As well, strong investment results in insurance offset the impact of the decline in equity markets on guarantee reserves in the Individual Wealth Management segment.

In Canada our individual insurance segment had record first quarter sales of $74 million, with all channels in most major product lines surpassing sales of the same quarter last year. Group benefit sales were 13% below the prior year, primarily due to large case sales. Sales in our group pension business was down from the exceptional level of the prior year, which included a jumbo case sale of over $1 billion.

On slide 22 you can see the Canadian Individual Wealth Management net flows improved in all categories, with total net flows of $816 million compared to $447 million a year ago. Segregated fund sales were $1.1 billion in the first quarter of '08, led by continued strong sales of our IncomePlus Product. In addition, bank lending volumes of $910 million exceeded prior year levels by 21% with Manulife One sales continuing to lead this growth. Mutual Fund sales were down 10% over the prior year, with Long-Term and Mix fund sales being negatively impacted by market volatility.

Turning to slide 23, Asia and Japan earnings were US$186 million, and increase of 21% over the first quarter of last year. This quarter's results benefited from earnings growth in Japan's variable annuity and life insurance businesses. As well, increased fee income and higher assets under management in the pension and wealth management businesses in Hong Kong and the growth of insurance sales across the region contributed to this quarter's rise in earnings.

Insurance sales in Asia and Japan increased by 46% to US$127 million. In Japan, insurance sales for the quarter more than doubled versus a year ago, benefiting from rising sales in the MGA channel and a one time spike in Increasing Term sales prior to the implementation of a new tax regime for that product.

In Other Asia, regular premium sales were above the prior year's result by 22%, led primarily by strong agency results in Singapore, Vietnam, and Indonesia. Hong Kong insurance sales were above the prior year by 11%, aided by two new critical illness plans launched in January of '08.

On slide 25, Wealth Management recorded net flows this quarter of US$1.3 billion, up 67% over the US$800 million reported last year. In Japan, variable annuity sales exceeded US$1 billion and doubled year ago levels. The increase was led by strong sales of our new VA product and both the broadening and deepening of our VA distribution through the regional bank and securities firms.

Wealth Management sales in Other Asia also increased to $361 million, up 33% from the prior year led by strong agency sales in Singapore and Taiwan and by continued growth in mutual fund sales in Indonesia and Thailand. In Hong Kong, net flows were also up nicely over last year, with excellent growth in our pension investment products, partially offset by the impact of weak equity markets on our Individual Wealth Management segment.

Slide 26, earnings from Reinsurance Division were US$73 million, up $14 million or 24% from a year ago. During the quarter, a special project was completed, which confirmed that our premium accounting methodology for Life Retrocession was too conservative and this resulted in a one-time booking of premiums. As well, the business experienced new business gains in Life, favorable investment results, and improved Property and Casualty claims experience. Offsetting these favorable items was the impact of lower equity markets on segregated fund guarantees.

The Corporate and Other segment reported a first quarter loss of $2 million, an improvement of $19 million from a year ago. Excluding the impact of the asset repositioning charge for 3855 that was reflected in the first quarter of '07, earnings for the segment are down $50 million year over year. This variance is primarily caused by lower realized gains on available-for-sale assets, less favorable claims experience from the run-off John Hancock Accident and Health business, and lower earnings from the Investment Division's external asset management business due to declining equity markets.

As illustrated by the graph on slide 28, general expenses have been relatively stable despite strong organic business growth. General expanses in the first quarter of '08 were $864 million, up 2% over the prior year. This moderate increase was largely the result of growth in business volumes and new initiatives, such as our continued branch expansion in China, as well as growth via our acquisition of Berkshire in Canada. We remain a very cost conscious organization.

Looking at slide 29, over the last 12 months, on a constant currency basis, funds under management increased by $7 billion, or 2%, due to strong top line growth and good retention. It is noteworthy that the sharp declines in equity markets in the first quarter of '08 decreased funds under management by approximately $15 billion.

Slide 30 summarizes our regulatory capital positions. Our liquidity in capital ratios remain strong and above required levels. MLI's MCCSR ratio declined in the first quarter of '08 due to the sharp drop in equity markets. While only updated annually, JHLICO's RBC ratio is not significantly exposed to equity markets, as it has limited equity exposure.

We continue to be active in our share buyback program, buying back 4.8 million shares at a cost of $180 million in the first quarter. We also continue to pay attractive dividends on common shares which total $359 million this quarter.

Slide 31 provides a brief update on our investment portfolio, which continues to be well diversified and of high quality. As discussed in more detail last quarter, our exposure to problematic investments is quite modest, and we continue to enjoy a very positive investment situation.

We experienced a strong quarter, impacted only by unfavorable equity markets. While quarter end equity market values reduced our reported earnings, this reflects accruals, not losses that are likely to be realized. We continue to grow nicely in all our key operating segments and credit and other investment experience remains satisfactory.

Sales and net flows both continued to reflect very strong results. New business embedded value creation was at a record level for the first quarter. Overall I am quite satisfied with our financial and operational performance this quarter.

Thank you very much.

Operator, we're ready now for the Q&A portion of our call.

Thank you. (OPERATOR INSTRUCTIONS)

The first question is from Andre Hardy from RBC Capital Markets. Please go ahead.

Thank you.

First question is for Peter and page 8. So are you trying to tell us that if equity markets have not recovered since last quarter, the only ongoing impact on earnings would be income--be the decline in the run rate earnings? Am I reading that right?

Basically, if equity markets were stable, virtually all of the charge we took this quarter would not recur.

Okay, so in this chart you don't have the decline in fee income on variable annuity, segregated funds, and mutual funds?

We do. There's $17 million, and it of course, depends on what we do with net flows. We're doing very nicely with net flows as to how much that would move. But obviously weaker markets reduce average asset values, which reduce our fees.

Okay. So arguably except for the $17 everything was a reserve adjustment.

That's correct. And in fact if the average amount of assets over a long period of time was unchanged except for the volatility, even that number probably wouldn't move very much.

Okay, that answers my question. The next one is on value of new business and sales. So you had sales growth of 3% in wealth management but a very strong 29% increase in value of new business, and on insurance you had an 11% increase in sales growth but a 46% increase in value of new business. So can you reconcile the two? Is it a product mix issue? Is it margin?

I suspect you're looking at premiums rather than premiums and deposits; is that right?

I'm looking at the sales growth as disclosed in the subpack I believe on page three. At the bottom of page--

I think the difference would be currency, Andre. That would be a big piece of it. And maybe mix to a lesser extent.

But even--I mean if you look at the bottom of page three, your wealth management sales on a constant currency basis were up 3%.

I think the billion dollars from the prior year.

Yeah, I think you also have a billion dollars a year ago in sales that masks the change. The margin in there would be considerably different than our average business mix.

Okay, understood. Thank you.

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

Thank you. Actually, Andre-Philippe's question was one of the one's that I had. Okay. First of all, what was the impact on earnings of credit issues such as wider credit spreads, rating downgrades, or actual write-offs?

They were largely neutral, slightly positive. What happened is we gave you details of the credit, but the reinvestment has been more attractive this quarter than would have been the case previously. We don't track it exactly the way you've asked it, so I can't really put a definition around it, but it was a better climate for reinvestment this quarter certainly than a year ago.

Yeah, Michael, Don Guloien here. We've put a lot of money to work at the higher spreads that we enjoy today, and, you know, that's a significant addition.

What I'm really getting at is the impact on any reserve strengthening that might have been required because of things like wider credit spreads or rating downgrades?

No. That's not really a big issue for us. I know some other firms have described that as a challenge. It's not for us.

That's why I was asking.

No, that's not a key feature for us.

Okay. And secondly, do you hedge the impact of equity volatility, and if not, why not?

Well, as you know, we do hedge a portion of it, but by and large we retain the risk. There's two reasons. First of all, we think we're paid fairly to do it, and secondly, we think the Company is strong enough to accept the volatility and get the better return attached. Now even Manulife, with our big balance sheet, only has a finite appetite, and that's the reason that recently we set up a hedging program which we could escalate if we wanted to if we felt that our risk appetite was full.

What would be the parameters where you-you know, at what point would you want to start hedging equities?

Well, we do hedge some already, Michael, and it's really a case of how rapidly you'd want to expand that activity. And, you know, right today hedging is fairly costly. Interest rates are low and volatility's fairly high. So if you don't have as much vulnerability, if you could afford a bit of volatility, it's quite expensive to essentially take that risk off your books. But we would do more of it, as we're selling big amounts, commensurate with our risk appetite.

And lastly, I'm not sure I understood the answer to the previous question from Andre-Philippe about the faster growth in VNB than sales. And you said something about an extra billion dollars of sales. I don't understand.

Well in the wealth portion of our business last year in the first quarter we had one sale, that was over a billion dollars in deposits. I believe the profit component or VNB of that would be much less than let's say an equivalent $1 billion sale of--

Traditional life insurance.

Income Plus or traditional life insurance.

Okay. And if we look at insurance, so on a constant currency basis your sales were up 22%, and I'm just looking for the VNB increase. Was there anything happening to margins or mix on the insurance side?

Simon, do you have--?

One of the reasons there were some strong growth on the insurance side is that the P&C reinsurance line has its renewal season primarily in the first quarter, and there were some very strong margins on the business this year, and that served to boost the VNB. And that would probably not have shown up in the premium line.

Okay. And are the margins on--have the margins on Japanese VA sales remained as favorable as they've been since the outset?

Those are fairly consistent. Yes.

Thank you.

The next question is from Doug Young from TD Newcrest. Please go ahead.

Good afternoon. I guess the question is for Don. I guess there's three parts to it. I know when we met in January you suggested that credit was starting to deteriorate but there wasn't any particular segment that was concerning to you. I'm wondering has that changed? Is there any area in particular that's starting to be of concern to you?

I guess the second is can you talk a bit about your watch list, how it is today versus, let's say, last year in terms of size?

And lastly, I think you used to provide the amounts of reserve held the back of your credit and actual liabilities. Is this in the SIP? I haven't seen it, and maybe you can point me to it. And can these reserves be used to offset some of the deterioration in the credit that you're seeing or can they be drawn down?

Yes, I'll deal with those, Doug, in the order that you mentioned them.

The first is credit deterioration. We're not seeing any market credit deterioration. We're seeing more small problems crop up, but there's no significant industry. Obviously with the exception of things related to the housing industry in the United States as an obvious exception. And our watch list is not growing in any significant way, but I think we're moving into a different type of environment.

We have enjoyed net recoveries, you know, in a number of quarters looking backwards and it's a statement of--automatic statement that that can't continue forever. So we're expecting that we're going to glide more into a more normal period of credit where taking the occasional provision. But we're not seeing any widespread or significant deterioration in our book. The last one was reserves. I think we have dropped that in terms of reporting it. The C1 reserves tend to be formulaic, and no we can't draw on those in any--

Well, we can, but it upsets everybody.

And, more importantly, we've had no change in our methodology, so there's not much interest in that disclosure.

So there's been no change?

No.

Then on page 36 of the SIP, the $80 million versus the $15 million for the net impairments, that's what's flowing through in terms of impairments through the income statement, right?

Well, no, except for that 20 that I told you is not formally categorized as a recovery.

Okay. So there's the reversal of 20, so it's net--

Right, and some of that, I think, let me just--I don't have it in front of me. There's some equity in there that is not really credit but is other than temporary impairments.

How much is that?

I think it's shown there.

It's 20--

Is that the $24 million?

$24 million on equities.

And that's in the other category.

Yes. So that would be the difference between the numbers I put on the slide I walked through in that table.

The second part of the question here is we listened to Hartford's call, they talked about the variable annuity market being real competitive, yet you guys continue to show pretty good sales growth, and I'm just wondering if you can provide us some color as why you're able to buck the trend. Is there new products that are being released, distribution agreements signed that are really having a big impact here?

We'll ask Hugh McHaffie, who runs that unit, to speak to that question. Why are you showing growth that's more robust than the market?

Hi Doug, it's Hugh McHaffie. I think there's a couple of factors.

Number one, we did enhance our product in January of this year and we've had a good reaction to that. I think most importantly we've kept our head up with our distribution capabilities, even in these markets that have been somewhat turbulent. We have 145 wholesalers in the VA business and it's--when the market's get tough your relationships really count, so that's coming through for us.

And then finally, we're beginning to make some significant inroads the Edward Jones organization. We just started that distribution agreement mid-February and we're starting to see some nice early returns on that. I think it's just keeping our distribution strength strong and it's getting through this, turbulent times, is really the success story.

This is related to Japan?

This is U.S.

U.S.

No, in Japan we're enjoying great success, not only with our partners but at MGFJ but a wide number of regional banks.

I think that's the story there is the distribution capability and the platform in Japan has been expanded regularly and cumulatively the effects of that expansion are now being evident. We've added a lot of securities houses and regional banks.

Okay. Thank you.

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

First question: Looking at that expanse slide that you have, can you give us a little more color with the very strong growth you've had, how exactly have you been able to keep the expenses so level?

Well, thank you for that. In fact, we're continuing to work on expense initiatives. So it's a big focus. And while we're not unhappy with the good expense situation, it's something that we think is very, very important in a difficult market environment. We're very disciplined. We're focused on not putting a whole bunch of money forward in a market that's a little turbulent.

I think the numbers that show very flat growth are in converted dollars. If we look on a constant currency basis actually the rate of increase is bordering on 10%. And the 10% is broken down that a third of it or a little more is due to expansion initiatives.

We continue to grow our business in Asia and China in particular and we continue to add distribution capability, in Canada we acquired Berkshire, and so there's a whole host of costs that are related to the growth of our franchises. And then there's a second series of costs that are--some are natural inflation due to increases in salaries and other of about 3%, and then the final, there's a good chunk too is because of the way we more smoothly accrue for year-end incentive payments.

So the complete answer to your question is the costs on a comparable basis are up 10%, but a lot of that is due to the growth in the productive capacity of the organization.

My second question, considering we're in this more turbulent environment, how is the M&A outlook? Are you maybe seeing some more opportunities out there? Can you comment on that?

Well, we continue to--I think most people know of us and so we see the transactions that maybe are being considered by various parties and we keep looking. I think you know as well as I do that the impact of this financial decline, at least financial prices, at least so far, has not affected the insurers to the same degree, or at least not yet. So the pace of activity that one might be expecting in other sectors of the financial services is going to be a little less quick in showing itself in the insurance sector possibly.

Thank you.

Thank you. The next question is from Darko Mihelic from CIBC World Markets. Please go ahead.

Hi, thank you. I was wondering if--maybe this is a question for Peter: Have you broken out somewhere the charges as they relate to each individual segment?

Sorry, which charges are we speaking of?

The $265 million.

No. We haven't done that, although you could certainly see the key categories just by the nature of what they relate to.

Okay, but you're not willing to provide it on a--

Well I'm not sure it's awfully helpful to you. It's not that we're unwilling.

Of the $265 million we do know that the seg fund part was $105 million and that would have gone directly to the variable annuity business.

Right. And it's pretty well reflective the geographies in which it occurs and the equity supporting the general account, we also would have in each segment a different amount. But I think the key message is in a normal environment we wouldn't have had these charges; in this environment you've got a pretty good idea of what it's done to our bottom line. And one of the things we're trying to do with the new methodology is avoid sort of who has the good bond or the bad bond kind of discussion, because it's not really how we run our business.

Overall, in the aggregate, our wealth management revenues from one of your slides are down quite sharply.

Sure.

Like a several hundred million dollars, quarter-over-quarter or quarter to last year, and it's all because of this $265 million.

Okay. Fair enough. I just wanted to get a more exact read, but that's fair.

I guess the second question then becomes one of, philosophically, had you have hedged, or I guess the way to look at this is, if the markets recover this all comes back; if they fall back down again, it all comes back out. To what extent would a full hedging program prevented some of this volatility?

It would have reduced our income and reduced the volatility quite materially.

Okay. I guess one last question if I may then, just with respect to the U.S. insurance, looking at page 11 of your SIP pack, you explain in the MD&A that strain is high because of sales, but it looks as though, on a percentage basis, strain is much higher than it was in the past, and it looks like that this is a trend that's been happening for about four quarters now in a row. I'm just wondering, is that a mix issue or is that margins, or why would your strain as a percentage of your sales climb so dramatically in about four quarters?

Good question. We've got everybody looking. Jim's got an answer here.

Jim Boyle from U.S. Life Insurance.

Really, the strain can't be attributed to the increase in sales and to the actual mix. If you look at the aggregate amount of the strain that's been reported and our high sales levels, it's a fairly low level of strain. And last year, I think you'll remember in the first quarter, we had strain levels and we continued to work our way through those the whole year.

So we don't view this as extraordinary in any way, and really in some sense planned for. It's really just a function of the sales mix and the absolute sales. We don't break it out by line of business, but when you look at the strong new business embedded value across the Company, and particularly in the insurance lines, I think you can take comfort in knowing that the U.S. Life Insurance is well represented there, that our products are fully priced for in hitting the Company targets.

So should we expect, however, that the level of strain to increase, or is this about right in terms of a mix point of view and/or pricing?

We don't expect it to increase during the year, and again, we can't predict the exact--how mix will come into play for the full year, but this would be at the higher end of the range for sure.

Okay. Thank you. I will re-queue. Thank you.

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

Yes, thanks very much. Good afternoon. Just a couple questions here.

One on this $265 from slide 8 that we talked about here. This is the first time we've seen kind of a slide like this, but if I look in the fourth quarter of last year the TSX was down quarter-over-quarter 3%, and the S&P 500 was down 6%, so not that much different than what we've seen in quarter-over-quarter in first quarter of 2008. So why are we just bringing this up right now really?

You know, 6% versus 10% in the U.S. is not even material and 18% in the two Asian markets is quite substantially different. We presented this slide so you'd get another look at--a detailed look at it, but the fact is bad equity markets are generally not good for our results.

Okay, but I guess we'd have to say that there would have been this hit in the fourth quarter of 2007 as well, or something of this magnitude.

There was a small hit.

So the swings in the Asian markets really hurt--really made this thing a lot bigger.

They were not minor.

Okay, and the seg fund guarantee, I mean which one of those things would have been more the stuff on the Asian? Any of those items?

Both would have mattered. The actual equity investments as well as the guarantees. 18% is a pretty dramatic move.

Okay. Now, with respect to this equity supporting general account liabilities there of $94, what's happening here? These equities are going down as a result of the markets going down, but I would have thought the actuarial liabilities would have moved in tandem with that. Help me understand what that $94 is.

Tom, it's Simon Curtis.

Tom, those equities generally support the long cash flow tails where we can't get matching fixed interest investment, and when they're backing the products where you can't pass through the experience, you have to take the mark on the equity, even though it's probably a temporary phenomenon that will go up and down over time. We do have to take the mark each quarter.

Okay. And then I assume the seg fund guarantee thing doesn't--the CTE went actually down from 72 to 68. So that number would have been $35 million higher or something like that had you froze your CTE level? Am I correct in saying something like that?

That's correct. It was $57 million pre-tax, so about $35 to $40 million after tax.

Okay. And then on the source of earnings, the expected profit was down 2% year-over-year; what was the impact if we exclude currency?

Yes, I gave it to you. I think it was up 10% excluding currency, 2% as reported, unfavorable.

Okay, and then the final question is--as I understand it from your NAIC filings you've got about an $82 million exposure in Sprint Nextel. I know Sun took a hit on this stuff, they took a write-down on it; when will you or why won't you?

I think we actually did have a minor hit on the downgrade, but it wasn't a significant number.

Okay. Thanks.

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

Thank you. Just a question for Peter or Dominic. You've talked about a medium term EPS growth target of 15%, and I guess in '07 it looks like it was 12% or 13%. It's going to be a tough year in '08, at least it started that way, so let's it call it flattish or up a little bit. So I guess the medium term means three to five years; is that a target you're still sticking with?

Well I guess two things. We're not prepared to throw in the towel on this year. We think that we're not ready to abandon our plan. Our revenue levels remain strong if the equity markets behave or react. So it bears watching. We certainly haven't given up on the year at all.

With respect to the long term, we are able to price our products to earn our targeted returns. Now, will we be able to price in that way forever depending on what macroeconomic conditions are like? Who knows? But we've served our shareholders well by having target returns that we've mentioned and pricing accordingly. And I can't tell from the evidence in the marketplace that we're uncompetitive. I think quite the opposite.

So, Dom, you're still pricing well enough to generate these type of growth over time?

We certainly are for 90-plus percent of our businesses. I won't mislead you; there might be very specific and very controlled product lines where we want to keep a presence for strategic and operational reasons, that we might tolerate a lower return, but the lower return, we're not talking 5% or 6% or 7%, we might be talking returns of 10% or 12%. And in a very controlled and limited way.

Okay. And philosophically, Manulife has historically not hedged, whether it's equity markets or not a lot or currency. I kind of thought that works well for Manulife over time, obviously this quarter notwithstanding. Is that still--are you going to still stick with that?

Just to be clear for everybody, again, what have we done is go back over the history here, until 2003 we hadn't really dealt with this exposure through reinsurance. We were paying other people amounts so we didn't have any risk. Then in 2004 the size, the amount of the risk in relation to our balance sheet, etc., etc., was such that we felt it was a better economic decision for us to retain the risk.

Now the business that has this risk in it, our VA business is not only growing in the United States but it's growing in Canada, we're exporting it around the world, and we see the day that the amounts of equity exposure that are going to accumulate are larger than we're comfortable with.

And so at the end of last year or during last year we told all of you that we were working on developing an internal hedging capability of our own where we'd have desks and measuring and monitoring the reporting and so on. And we started that program the fourth quarter of last year, I think, and ramped it up to, I think we were, in face amount we were doing about $3 billion of contracts. I think this quarter that's moved up to 3.3 or 3.5, modest growth. This is not a great quarter to ramp up your hedging simply because the volatility's so high and it costs you much more than it would in normal markets.

Again, these are exposures that are going to be discharged or satisfied over many--long periods of time. What we don't like is the asset or the exposure is aggregating to very important sums and we don't want to expose our company to unreasonable--to unreasonable risk. And we don't like the volatility. I mean, the accounting rules are such that with the mark to market of these things on a quarterly basis with greater precision, it introduces an element of volatility that frankly wasn't quite there a few years ago.

So we will probably be doing more hedging. We will be investigating other avenues to reduce our volatility and exposure, but it's not--it's very much on the front burner. We keep looking at this all the time.

Okay. Last question: the buy backs for the last two years have been quite large and looks like the M&A environment could change, but it looks like it's relatively inactive. Should we expect some similar type of buy back activity in the absence of acquisitions over the course of '08?

It's Peter. We never really provide any guidance on what we're going to do in the future, so we do have a program but we aren't going to comment on its anticipated case for an individual quarter or period.

Thank you.

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

Good afternoon. Peter, Dominic, whomever, I would have expected a dividend increase. It seemed like the last quarter was Q3. Either I didn't count this correctly or a decision was made.

No, you counted it correctly. We discussed it and felt that in view of the--and the situation changes almost daily, but at the time we had a review of this and the discussion it was felt that given the uncertainties in the marketplace, I mean, people were reporting tens of billions of losses everyday, that maybe we should just defer a decision on the dividend for the next opportunity.

Those are other people, not Manulife.

Well, but contagion, you know as well as I do, everybody's interconnected these days, and the story of Bear Stearns coming down not because of its obligations but because of all of its--how many hundreds of thousands of contracts that it had that would have been needed unwinding. So our concern is not so much what we have on our books or what we know about; but it's what we don't know about. If there were to be some unraveling of some kind, where would it stop?

Is $3 billion in excess capital still a good number?

Well, it depends how you--I wouldn't quarrel with that number.

It's not bad.

$0.02 increase on the dividend on 1.5 billion shares is $30 million.

Yes, we're not without cash. That's not the point.

That's why this is confusing.

Well, maybe we erred--we were too cautious.

Maybe. Okay, couple questions. On the C1 risk reserves, Doug I think was asking about them. Not to disclose C1 risk reserves now seems odd.

Well we haven't been doing that for I think it's probably a year.

Yes, but I care now.

The reason is it's totally formulaic. We feel it provides comfort but it's not something we can use in a particular quarter to offset other matters.

We did that once, you remember?

I remember it well.

You know, what's the point? No one cares that you've got these reserves; you can't use them when you do need them.

But reserves are down. The C1 reserves, the policy holder, the one that belongs-sorry,non-policy, the non-par rather; they're down 44% since 2004. That's a big move.

Simon's shaking his head.

We're not recognizing that reference.

Okay. Simon, in 2004 year-end the policy holder reserves were--this is the PfAD specifically associated with credit losses and actuary reserves with $3.5 billion. This is excludes the pass-through and the par business. That's right out of your annual report 2004. And then at the end of 2007 it was 1.991 billion.

Wasn't there some reclassification?

Yes. You're talking about the PfADs.

Right, the C1 risk reserves.

Yes, the PfADs related to C1. We have moved some of our C1 PfADs into--we classed them as interest rate risk PfAD C3 for market risk and such--have not released any overall level of PfADs. I think that number is also quite impacted by currency. The PfADs would have gone down on that risk because it would be higher credit profile in the U.S. that would have had C1 PfADs.

But Mario, you will appreciate, there's been no lightening up. The de-risking of the portfolio from a credit perspective has been enormous.

Right, but Don, we're heading into a different environment now. You said it yourself. It's down 44%.

If you have less risk assets you're going to have less reserves, so PAD as a function of reserves is going to make the PAD number be smaller.

Totally understand that.

Mario, we set those--the environment, we set those with respect to long-term default rates. The operative thing would be the fact that below investment grade bonds have gone from over 6% to under 4% of our portfolio.

For what it's worth, not disclosing it is uncomfortable.

To be clear, we have not changed any of our practices.

But, they're down 44% in a couple of years, clearly they've been released someplace else, so yes, of course it matters. We can agree to disagree. I just think it's totally inappropriate.

I take it back, Mario, the reserves are set exactly the same way. The PADs that we had if you go back enough time was a PAD we thought was available for credit losses in a particular period. The investment community disabused us of that notion and as consequence there's been a re-categorization of some of the PADs. But the credit reserve levels are formulaic based on the risk and the risk has gone down because we have less weaker credits. FX has had an impact and we've changed the formula not at all.

And Mario, one last thing, I think is fair to say, we're very proud of disclosing our PfADs. I think we're the only company that does it. And you can see going back over a number of years and the progression in that PfAD that as a percentage of our expecteds is higher now than it ever was before. I think 18.4% and it used to be, we thought we were super-padded at 15. We're clearly not drawing down on the overall aggregate. Now they move around between components is I think what you're hearing.

Precisely, and I appreciate that. Your point to the conservatism of the reserves and telling us that the PfADs are 18% that used to be 15.3% a couple of years ago, but if you were to take the Company's total reserves or PfADs as a percentage of anything really, whether you take for example, PfADs to total assets or earnings to PfADs, there's so many different ways you can look at it, that the PfAD number as a percentage of a variety of other things rather than just a percentage of the total reserve is actually a lot lower now than it has been in the last years.

We'd love you to ask some of our competitors some information and compare us.

Frankly, I would disagree with you there.

I would take issue with that as well. I think that any relevant metric that you would come up with that measures risk, the PAD levels have not gone down.

Okay. Well I mean I'll be happy to forward it to you. Can we just touch on a couple of other things? Tom's question on the $94 million, that confuses me too because there were years, certainly 2001, 2002, when markets were much, much worse than this, and I've been around this company since it was $18 or $16 pre-split and I don't remember ever seeing anything like this.

Well, there's two things, right? Our businesses has grown and we got a new accounting standard now. We used to, I think, true-up these things once a year, whatever it was.

You go back five years ago that's true.

It wrapped up an entire review of the basis of all of the different reserves. And plus, the size of these books now are bigger. So all that combined is what's giving us--

That was a great point though, the fact that it was done at the end of the year when other reserve adjustments were made would have essentially, not masked it, but would have cushioned it somewhat. Is that a fair statement?

No, he's talking about the $94.

Yes.

Yes, but you're quite right. We would look it, first of all not on a spot quarterly basis, but once a year; and you're quite right there it would be offsetting items that would have mitigated. As well, if you take the kind of moves we saw in one quarter and annualize it, those would be extraordinary.

Oh sure. So accounting played a role in this a little bit, I think.

Oh, absolutely.

And then finally--

And that's a key point. We've been saying for quite a while that there's more volatility under this presentation methodology and we didn't see much of it because things sort of offset, but the fact is the accounting is more volatile.

Right, I understand that. There's a little bit more rigor from certain constituents now. I can appreciate all that.

One final thing though, on the private placements, Don, a question for you: how do you feel about those? That's a big number.

Those are largely private debt in companies that are very solid companies. Some of them are public issuers. There's extremely high quality portfolio. Our experience has been that we've been through a bad part of the cycle with it, that the recovery rates are actually better than those than non-public bonds because you can take control of the entity. We have had companies that find themselves in difficulty, but our recovery rates have been uniformly quite high. So we like them. They offer better covenants typically than public bonds. So I consider that to be a very solid portfolio.

I would echo that. That's a portfolio that we review very carefully and regularly and it's performing extremely nicely.

And I'm sorry, there's just one other thing. With respect to the equity markets and the $94 million again, did the nature of the decline in the equity markets, this time around it being financial services in the U.S. and Canada, exposure to that I know the Company really likes, Manulife likes that type of exposure, rather than tech and telecom that we saw in 2001-2002; did the nature of the decline in equities and where it happened have any effect?

No, it's a mark to market on the portfolio. It essentially, you know, almost 100% pass-through--what falls is immaterial whether it's a tech stock or a--

I guess what I'm getting at is does Manulife have more exposure to the financial side?

We're not far from the index in many ways and so we didn't have any particular mix difference towards financial service equities.

Okay, so it sounds like accounting mostly then.

Yes, I think that's accurate.

Mario, we had a great quarter, just look at those sales numbers, those net flows.

I know.

...the growth in the business base.

But the stock's off 5%, so obviously people are saying something's wrong with Manulife.

I don't think anything's wrong with Manulife; I think that people are misunderstanding the strength of the quarter. If equity markets had not moved to the same degree, we would have had a blowout quarter.

We're also forgetting--

I mean you've got incredible volatility in these markets. Should the market--if we struck the number today, we'd probably recover more than $150 million of that. So that would be a $400 million swing just because of market movements.

But investors hate that volatility and that's not something we've had from Manulife before.

We would strongly encourage that you make your views known about how terrible this volatility is in trying to assess the value of a company.

Mario, I'll give you credit, you predicted that volatility when you wrote that paper in the summer of--a year and a half ago anticipating 3855, right?

I thought it would be messy. I just thought Manulife would find a way around it.

We have to follow the same rules as everybody else.

Thank you.

Operator is that it?

We have two more question, sir. The next question is from Eric Berg from Lehman Brothers.

We gave Mario 10 questions.

Hi. Actually, that was going to be my first point. Would it be possible, just in the interest of having all the participants in the call benefit from hearing everyone's questions to--this is just a suggestion, to adhere to what I think was your suggestion that we limit people to two questions?

That's fair, Eric. We just got carried away there.

Okay, not a problem at all. It's been going on throughout the call, but I appreciate your working with us on it.

My first question takes us all the way back to the question on credit spreads. While I certainly understand that credit spreads--pardon me, that yields rose in the quarter, investment opportunities improved. They improved for everyone. Everyone's operating essentially in the same fixed income world, so it just strikes me again as curious that your major competitor across town went on and on about the impact of credit spreads depressing its earnings operated in the same environment as you were and it wasn't meaningful for Manulife. Can we elaborate a little bit on how that could be?

I guess it depends where you are when you go into the widening, Eric. If you're holding huge amounts of cash in short-term bonds, you benefit from credit spreads widening. I can't comment on the other company but I can tell you we have deployed serious amounts of cash.

And we'll deploy more as we re-price our assets when they mature. I mean this is a gradual thing. We might have re-priced a little more than our competitor because of the cash situation.

Okay, and then just my second question relates to--I'm just going to ask Peter to repeat it and answer or explain a little bit more. The provision on page 36 of the supplement that deals with asset quality, $80 million pre-tax, again Peter, one more time, how does that relate to and why does that number differ from the 31 and 20 discussed in your handout today?

I can speak to that, Eric. There's basically two subtractions. One of them is that item, the $80 million item is provisions plus impairments, which includes about $25 million of equity impairments, so Peter's taking that out. The second part is there is a PGAAP recovery for things that were written down prior to the acquisition, written down by John Hancock prior to the acquisition which doesn't flow through that account, so he's taking that amount out because it is a legitimate recovery.

The last item is 4 and 1 million in respect of two categories of par exposure that are not for the shareholders' account and so you'd have an exact reconciliation.

Okay. I'll follow up off line with him. Thank you very much.

Thank you.

Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead. Mr. Goldberg, your line is open.

Thanks.

Dominic, you said that financial turbulence hasn't affected insurance companies, at least not yet. In your speech this morning you expressed reservations about derivatives and financial innovation. Are you surprised that insurance companies haven't been more affected and can you elaborate on your concerns about derivatives and innovation?

Well, am I surprised that insurance companies--I guess that no, I'm not. I wouldn't have expected that the insurance companies would have been at the bleeding edge of some of these activities remembering where they started with basic mortgage products that then got packaged and so on.

With respect to my comments about the hedge funds and derivatives markets, it's really very simple. I mean, we have, because of a whole--all kinds of developments in our markets, a level of inter-connectedness now that never existed before, and so you can have participants who pose a degree of systemic risk that wasn't there 10 years ago or more. I mean you couldn't have a player in a hedge fund, some of them are bigger than many of our banks.

And my point is very simple: If these activities pose a systemic risk where at the end society generally or the taxpayer is going to have to come and pay the bill, doesn't it stand to reason that they should be subject to some oversight? Doesn't mean a straight jacket, but, should someone be allowed to lever themselves 200 to 1? Yes, but he shouldn't be allowed to lever himself 200 to 1? Yes. But he shouldn't be allowed to lever himself 200 to 1 if a consequence of his bet going wrong is that the whole system implodes. And that's the point.

Fair enough. Thank you.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Gorgi.

Thank you, operator, and thank you everyone for joining us on this call.

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