Manulife Financial Corp (MFC) 2011 Q2 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon and welcome to the Manulife Financial Q2 2011 financial results conference call for August 11, 2011. Your host for today will be Mr. Anthony Ostler. Mr. Ostler, please go ahead.

Thank you, Jenny, and good afternoon. Welcome to Manulife's conference call to discuss our second-quarter 2011 financial and operating results. Today's call references our earnings announcement, statistical package, and webcast slides which are available in the investor relations section of our website at Manulife.com.

As in prior quarters, our executives will be making some introductory comments. We will then follow with a question-and-answer session. Available to answer these questions about their businesses are the heads of Asia, Japan, the US, Canada, and General Account Investments.

Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied. For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ, please consult the slide presentation for this conference call and webcast available on our website, as well as the securities filings referred to in the slide entitled Cautionary Regarding Forward-looking Statements.

When we reach the question-and-answer portion of our conference call, we would ask each participant to adhere to a limit of one or two questions. If you have additional questions, please requeue, as we will be doing our best to respond to all questions.

With that, I would like to turn the call over to Donald Guloien, our President and Chief Executive Officer. Donald?

Thank you, Anthony. Good afternoon, everyone, and thank you for joining us today.

I am joined on the call today by our CFO Michael Bell, as well as several members of our senior management team including our US General Manager Jim Boyle; our Canadian General Manager Paul Rooney; our Asian General Manager, Bob Cook; our Japan General Manager Craig Bromley -- it's great to have you here, Craig; Scott Hartz for General Account Investments; Bev Margolian, our former Chief Risk Officer and our new Chief Strategy Officer; Cindy Forbes, our Chief Actuary; and Rahim Hirji, our new Chief Risk Officer.

Our second-quarter 2011 financial results were announced this morning. We are making excellent progress on a number of fronts.

We delivered strong underlying sales growth, including record sales in a number of our businesses. We expanded our distribution in Asia through both agency and bank channels, and we produced excellent investment results. I am very pleased with the progress we have made in executing our strategy.

Given the volatility of markets around the world, both during the quarter and particularly over the last two weeks, I am very pleased at both the amount and the effectiveness of our hedging to date, which is significantly dampening the impact of the decline in equity markets and interest rates on earnings and capital ratios.

Hedging does have a cost. But at times like these, it is clearly beneficial. It also allows investors to focus more and more on our core business, which is developing very positively.

In the second quarter, we had quarterly earnings of CAD490 million which is after the CAD370 million charge for changes in our fixed-income ultimate reinvestment rate assumptions that in the past normally occurred in the third quarter.

In terms of net income attributable to shareholders, excluding the direct impact of equity markets and interest rates, we delivered CAD929 million, over double that of last year. In fact, our US GAAP numbers are similar to those.

Our progress in the second quarter aligns perfectly with our strategic priorities. Namely, sales of wealth and insurance products targeted for growth were up 27% and 28%, respectively. We expanded and diversified our distribution in Asia, with several new, important bank distribution agreements.

In Canada, we generated record mutual fund sales, while in the US we delivered a 50% increase in mutual fund deposits, [$]3.5 billion for the quarter -- a nontrivial number.

We achieved a record CAD481 billion dollars in funds under management despite movements in currency and stock markets. Our hedging program successfully dampened the impact of the second quarter's lower equity markets and interest rates.

We reduced to CAD1.2 billion the sensitivity to a 100 basis point drop in interest rates; CAD600 million if you include 100% of the available-for-sale bond offset. This surpasses our 2012 year-end target and brings us to 90% of our year-end 2014 target of CAD1.1 billion.

Manulife's MCCSR ratio at 241%, our capital levels continue to be strong. We have also reduced our capital sensitivity to changes in interest rates.

Finally, we continue to offer a high-quality proposition to clients, with 27 new or enhanced products launched to the market. This includes an offshore Renminbi Bond Fund in Asia, Synergy in Canada, and Income Plus for Life with auto portfolio re-balancing feature in the United States.

In summary, our capital remains strong; our asset quality is superior; we are seeing strong underlying sales growth; and we delivered CAD929 million of net income attributable to shareholders, excluding the direct impacts of equity markets and interest rates.

I hope you agree that our strategy is delivering results that will position Manulife extremely well for future earnings growth and ROE expansion. With that I will turn it over to Michael Bell, who will highlight the financial results and then open the call to your questions. Thank you.

Thank you, Donald. Hello, everyone. Our second-quarter results demonstrated strong execution of our strategic priorities as we grew our targeted businesses and benefited from our reduced risk profile.

We continue to be ahead of our original timetable on reducing both interest rate and equity market sensitivities, and we took additional actions to further reduce our interest rate exposure in the second quarter.

Overall, we delivered net income of CAD490 million in the quarter, despite underperforming equity markets and a low interest rate environment. These results reflect our improved ability to mitigate much of the impact of the unfavorable financial markets.

MLI ended second quarter with a strong capital position, with an MCCSR ratio of 241%, which provides a substantial cushion against the risk of adverse market conditions, particularly in light of the expanded hedging.

In the second quarter, we also completed our annual update to our fixed-income ultimate reinvestment rate assumptions, referred to as the URR. This resulted in a CAD370 million charge to earnings, which I will discuss further in a few minutes. I would also note that we announced the sale of our Life Retro business, which is expected to release capital in the third quarter of 2011.

Turning to slide 7, you'll note that there were a number of notable items impacting the second-quarter after-tax earnings.

There was a CAD69 million net loss due to the direct impact of equity markets and interest rates declining in the quarter. This excludes the CAD370 million charge for the annual URR update caused by the current interest rate environment.

The direct impact of equity markets resulted in a loss of CAD148 million as we benefited substantially from the expanded hedging program relative to a year ago. The direct impact of changes in interest rates in the quarter generated a CAD79 million gain, as we benefited from favorable changes in both bond and swap spreads, as well as realized capital gains on the sale of our AFS bonds, and the favorable impact of additional de-risking actions taken in 2011.

Importantly, our second-quarter results benefited from our expanded hedging for both equity markets and interest rates.

As I mentioned, we took a CAD370 million charge in the second quarter for our annual update to the fixed-income URR. Our process to update the URR assumptions is formulaic, and uses the five- and 10-year rolling average government bond rates based upon the assumption that June 30, 2011, rates will be in place through June 30, 2012. Since rates had declined, this update represents a charge to earnings.

While the calculation of the reserve impact is complicated, process improvements that we have made over the last 12 months enabled us to estimate the impact of this annual update at this time, rather than waiting to include it in the annual basis changes scheduled for third quarter.

In addition, there was a CAD52 million loss for the VA liabilities that are dynamically hedged. We also noted that the expected cost of our current macro equity hedging program, based on long-term valuation assumptions, was approximately CAD104 million for the quarter.

We also recorded a gain of CAD123 million from the impact on policy liabilities related to activities to reduce our interest rate exposure. Additional investment-related gains amounted to CAD217 million from fixed-income trading activity, non-fixed-income investment performance, and a favorable change in our asset mix.

So overall, we are pleased with the benefit we have received in the second-quarter results from the de-risking actions that we have taken.

I will now move to slide 8, which is our source of earnings. Expected profit on in-force increased primarily as a result of increased fee income on higher assets under management. Experience gains were primarily driven by the impact of investment gains, partially offset by the impact of falling equity markets and lower interest rates, and a [$]25 million charge for unclaimed property in John Hancock Life.

Management actions include the URR charge and the expected cost of the macro equity hedging program. These were partially offset by the realized capital gains on our AFS surplus bonds.

I would now like to walk through the demonstrable progress that we have made against our five strategic priorities. On slide 10, I'll start with our good results driving profitable growth with strong insurance sales.

Sales of our targeted insurance products grew by 28% over second quarter of 2010, on a constant currency basis. Our Asia Division delivered strong sales growth, with second-quarter sales up 42%. This was driven by a 35% increase in the ASEAN region and a 67% increase in Japan.

In the ASEAN region, record sales in Vietnam and the Philippines were driven by strong growth in our agency sales forces. Japan's sales were strong in the second quarter, but are expected to slow in the third quarter as we have re-priced our whole life insurance product.

In Canada, insurance sales were up 7%, primarily driven by the Group Benefits and Affinity businesses. In the US, we are pleased with our 21% sales growth for the targeted life insurance products, as we have replaced the majority of the No-Lapse Guarantee UL sales with products with less interest rate risk.

So overall, we did a very good job growing sales of the insurance products that we have targeted for growth.

Turning to slide 11, sales of our targeted wealth products for the quarter grew by 27% over a year ago. We generated strong growth across all three of our geographic divisions.

In Asia, sales increased 59% compared to the same period in the prior year. In Canada, individual wealth management sales increased 22%, driven by record mutual fund sales, which more than doubled, and strong growth in both the InvestmentPlus product and the Manulife Bank. In the US, John Hancock Mutual Funds had another strong quarter for sales, with a 50% increase over the second quarter of 2010.

While 401(k) sales were down in the second quarter, we have a record level of proposal activity, which is an encouraging sign for the second half of 2011. So overall, we are pleased with our substantial increase in non-guaranteed wealth sales.

Improving ROE is another one of our strategic priorities. As shown on slide 12, we continue to change our business mix in order to improve our long-term ROE outlook and risk profile.

Products that we have targeted for growth have increased at double-digit rates compared to second-quarter 2010, while the premiums and deposits for the products not targeted for growth are down relative to a year ago. As we discussed at our 2010 investor day, changing the mix of our business is an important priority, and we are pleased with our progress to date.

Moving to Risk Management, you can see on slide 13 that we are still ahead of our original timetable for reducing equity market sensitivity, with 60% to 66% of underlying earnings sensitivity now hedged. As of June 30, our estimated earnings sensitivity to a 10% equity market decline was CAD490 million to CAD590 million.

On slide 14, you will see that we also continue to be ahead of our original timetable to reduce our interest rate sensitivity. We continued our de-risking activities in the second quarter. We executed additional forward starting swaps, and we purchased long-duration bonds to increase the duration of our assets backing policy liabilities.

We've decreased our estimated sensitivity to a 100 basis point decline to CAD1.2 billion dollars, surpassing our year-end 2012 target and bringing us to within 10% of our year-end 2014 target of CAD1.1 billion. Including the 100% of the AFS bond offset, our estimated sensitivity is now at June 30 CAD600 million.

Moving to slide 15, as I noted earlier, interest rate changes in the second quarter resulted in a net gain of CAD79 million. In the second quarter, favorable changes in spreads contributed to earnings.

Specifically, corporate spreads increased based on our own investable universe, while swap spreads declined further. Both of these spread changes increased second-quarter earnings.

In addition, we realized a gain of CAD107 million on the sale of AFS bonds. As we have discussed, we intend to use AFS gains to offset some of the impact of lower treasury rates. While we realized most of these gains late in the quarter, most of them were realized before rates increased during the last week of June; so we also benefited from the timing of these sales.

Our de-risking activities in 2011 also reduced our sensitivity to the decline in treasury rates. So overall, we feel good that the impact of the interest rate change in the quarter was much more favorable than it would have been a year ago, before the additional de-risking.

Slide 16 demonstrates that our investment portfolio continues to be high quality and well diversified. Our invested assets are highly diversified by geography and sector, with limited exposure to the high-risk areas noted on the slide. We continue to view our investment management as a significant competitive advantage.

The next slide demonstrates the success of our continued investment discipline. You can see that second-quarter credit charges were in line with the long-term assumptions, even with the turbulent financial market conditions. We view this as a good result.

Moving now to slide 18, this slide summarizes our capital position for MLI. As of June 30, MLI reported an MCCSR ratio of 241%. Combined with the actions that we have taken to reduce our market exposures, our strong capital position represents a substantial buffer.

Our completion of a third-party reinsurance agreement for our Canadian business increased our ratio by 6 points in the second quarter. A decrease of 4 points resulted from the continued phase-in of the adoption of IFRS and the change in the MCCSR guidelines for affiliate reinsurance.

Subsequent to quarter-end, we announced the sale of our Life Retro business to Pacific Life, who is based in the United States. Although the Life Retro business is profitable, it does not have a growth profile that is acceptable to us.

I would also note that, as a result of more restrictive Canadian regulatory requirements for this business, a non-Canadian buyer such as PacLife could operate this business with less capital. We expect this transaction to close in the third quarter of 2011 and generate an after-tax gain of approximately CAD275 million, and increase the MCCSR ratio for MLI by approximately 6 points.

Finally, we continue to offer a high-quality value proposition to our clients. Slide 19 highlights a number of new product and service enhancements, and the awards that we received in the second quarter.

Now turning to slide 20, I will now answer four questions that may be on investors' minds. The first is -- what is the status of the Long-Term Care in-force price increases?

While it is still early in the cycle, we continue to feel positive about our progress so far with the states, and their review and approval processes of our in-force rate increases. Rate increases are progressing well, and we now have approvals from 20 states for our retail business. The retail business represents the majority of the financial impact of the total Long-Term Care business.

As a result, while it is still early in the cycle, we continue to feel comfortable with our estimates and timetable that we developed when we calculated the reserve strengthening at the third quarter of 2010. And we are pleased with the progress we are making.

The second question is -- why did we update our fixed-income ultimate reinvestment rate assumptions in the second quarter, rather than in the third quarter as part of the annual basis changes?

First, as I discussed earlier, we made our annual update to the URR assumptions in the second quarter, and it resulted in a CAD370 million after-tax charge.

Our process to update the fixed-income URR assumptions is formulaic and uses the five- and 10-year rolling average government bond rates. We assume that the June 30, 2011, rates will remain in place for the next four quarters.

So while the calculation of the reserve impact is complicated, process improvements that we have made over the last 12 months enabled us to estimate the impact of this annual update at this time, rather than waiting and including the update based upon June 30 interest rates at the third quarter.

The third question relates to the annual review of the actuarial methods and assumptions that will take place in the third quarter of 2011. As noted, we expect to complete our annual review of all actuarial methods and assumptions in the third quarter.

I'd ask you note that we are reviewing CAD162 billion of actuarial liabilities, many of which have very long durations. As we have discussed before, there is a lot of judgment required in this process.

While we are not done with our analysis and cannot currently reasonably estimate the aggregate impact of the additional basis changes in the third quarter, early work suggests that our US mortality table updates when completed may result in a charge which would have a material impact on third-quarter 2011 earnings. Preliminary indications are that this charge could be up to [$]700 million after-tax.

While we have generally experienced mortality gains in our recent earnings in the US, including this quarter, some of the emerging trends are subtle, as we are seeing different experiences depending upon the block of business. For example, a large portion of the potential mortality reserve strengthening is for the acquired John Hancock permanent life business. Losses on this block started to emerge recently, and we are updating the underlying mortality tables to reflect this emerging older-age, older-duration experience.

On other US life business we are seeing different experience depending upon the duration of that business. So for example, in early policy durations, claims experience has been and continues to be more favorable than what we have priced for. This has been generating mortality experience gains. However, we are seeing losses on later duration business and at older attained ages. The potential reserve strengthening reflects these results.

The result of potential updates to the mortality tables is that the total lifetime claim costs from issue are not changing materially. So as such, we don't expect the updates to cause material changes in the prices that we charge in the market. In aggregate, we expect the basis change impact for US mortality to be negative to earnings in the third quarter.

Beyond mortality, work is continuing on the review of other actuarial assumptions. We would expect the other impacts to include both positive and negative adjustments. The work is expected to be completed in the third quarter, and the actual impact could differ from these early indications.

Our fourth question is around the market movements since June 30, 2011. A considerable amount of financial market volatility has occurred since the end of second quarter. The lower equity markets and interest rates will obviously have an impact if they remain at those levels through September 30.

But due to our considerable hedging progress in the past year, we are much better positioned. Nevertheless, without additional hedging actions, a decline in equity markets and interest rates would likely increase our earnings sensitivities in the third quarter.

I would also note that the volatility in the reported results should remind all of us that mark-to-market accounting regimes are often not the most suitable for long-term illiquid businesses like insurance. Given what has happened in the past two months, we are particularly pleased that we accelerated our hedging over the past year.

So in summary, we are pleased with our progress as we continue to execute our strategic plan to grow targeted businesses while we reduce our risk profile. We achieved record funds under management in the second quarter and delivered record sales in a number of key businesses. We took further actions to reduce our equity market and interest rate sensitivities and remain ahead of our original timetable. This progress enabled us to mitigate the impact of the underperforming equity markets and low interest rates in the second quarter.

Our strong capital levels, combined with the actions that we have taken to reduce our market exposures, represent a substantial cushion relative to financial market volatility. We accrued the impact of the change in the fixed-income URR assumptions this quarter, which was mostly offset by our investment gains.

We delivered CAD929 million dollars of earnings, excluding the direct impact of equity markets and interest rates. Our Life Retro sale is expected to close in third quarter and is expected to contribute CAD275 million after-tax in third-quarter earnings and 6 points to MLI's MCCSR ratio.

We also expect to complete our annual basis changes in the third quarter and to take a charge for the changes in our US mortality assumptions. So overall I am encouraged by our progress against our strategic plan and the momentum that we are gathering.

This now concludes our prepared remarks. Operator, we will now open the call to Q&A.

(Operator Instructions) Mario Mendonca, Canaccord Genuity.

Good afternoon. Question first on the URR, Michael. It was applied at June 30, so that Canadian long-term bond, the benchmark, the prescribed rate that OSFI has that life insurance companies use, at the end of June was something like 3.5% if not more. But right now it stands at about 3%, so it has moved down pretty significantly since you did your URR work.

When you -- are you going to update that in Q3 2011 to take into account the drop? If you are, or if you had waited until Q3, how big would the URR charge have been relative to that CAD370 million that you actually took?

Mario, it's Mike, I will start and see if Cindy wants to add. I would first point out that our standard practice now for the last several years has been to use the June 30 rate, so that is not a change. We have pegged this URR update off of the June 30 rates now for -- certainly since I have been in the job.

In addition, we continue the practice of assuming that June 30 rate is in place for the next 12 months, so through June 30, 2012 when we would expect to update it again. As a result, I would not expect that we would have to update the URR again later in 2011. And therefore I would expect that the next update would be 2012.

Now obviously, as you correctly point out, rates have dropped since June 30. And even more importantly, because the URR is based on a 10-year weighted average, with the last five years being double-weighted, and the fact that higher interest rates years are falling out of that rolling average and now being replaced by lower interest rates, I would expect if rates stay where they are that we would have another charge that would likely be bigger than CAD370 million at June 30 of 2012.

But to answer your question, I would not expect another adjustment here at 2011.

My second question -- thank you, that was very clear for me. The second question relates to another important assumption. The market performance assumptions used in the US, Canada, they are different from what is in Asia. Presumably -- or Japan, specifically, the 6% in Japan versus the 10% and 9% in Canada -- in the US and Canada, respectively.

First, why would Japan's be so much lower? I think I know the reason for this; it's because that is what history has shown us. I guess the related question is -- how much more weak S&P performance -- and it seems like we're looking at the same S&P level now that we have since over the last decade. How much weaker does it have to be before you determine that that 10% in the US and 9% in Canada isn't an appropriate long-term assumption anymore?

Okay. Again, Mario, I will start and see if Cindy wants to add. First, you are absolutely right. We do have a very standard process in terms of looking at historical equity market returns by geography.

You are absolutely right that historically the returns in Japan have been lower than in North America. I would also note the interest rate environment during that period has also tended to be lower in Japan as well during that period.

In terms of looking at it, we look at it every year. Also I am aware that the Canadian Institute of Actuaries is also looking at how those parameters are set.

At what point, if markets were negative, would that have to be updated? Again, certainly would not expect it to be a 2011 item. I don't know, Cindy, if you want to add anything.

I would agree, I wouldn't expect it to be 2011. We review the assumption every year, and we do follow the guidance from the CIA in determining that assumption.

So just how many years of data really go into it then? Is it like 40 years, then?

Since 1956, generally.

I see. Thank you very much.

Andre Hardy, RBC Capital Markets.

Thank you. Michael, in your prepared remarks, you talked about the sensitivity to movements in rates and equities probably rising in the face of further declines in rates and equities since Q3 started. Do you have a rough estimate of the magnitude of the change if the quarter ended today?

Sure, Andre. Well, first of all I would point out that there are a bunch of different moving parts here. So almost by definition anything I give you needs to be viewed directionally, not precisely.

But, round numbers, the sensitivity could increase by round numbers perhaps 20%, given the drop in equity markets and in interest rates. By the way, that is one of the reasons that we wanted to get ahead of our targets so that we don't then feel compelled to rush out and hedge a lot more at the bottom to make sure that we hit the year-end 2012 and ultimately the year-end 2014 targets.

But I want to repeat my caution, Andre. The basis changes, for example, could change those sensitivities. As we do things like update lapse assumptions, that can change the sensitivities. And also, obviously, management actions could further reduce those sensitivities. So -- but please view the 20% as a directional number.

No; and thank you for being willing to share that. Just to be clear, you are talking about 20% for rates and for equities?

Yes, that's approximately right. I don't know, Bev, if you'd -- Bev is nodding yes. Yes, about 20%.

It is an indicative number only.

Understandable. Thank you very much.

Robert Sedran, CIBC.

Good afternoon. I just to follow-up on the issue of interest rates. I am thinking more from the perspective of what the current rate environment means to a core number. In other words, not so much what it means to reserves quarter in, quarter out; but how does this affect the sources of earnings?

Like does it -- how much of a weight, how much of a headwind is it on earnings on surplus, on expected profit, on strain? Is there any risk to the actual core numbers being -- facing some headwinds here in the next year if rates do stay as low as they look like they are going to stay?

Sure. So Robert, it's Mike. Certainly it would be a negative headwind on both interest on surplus as well as new business strain. With the caveat that obviously if interest rates stayed down for a material period a time we would expect to increase new business prices. So ideally that new business strain would be somewhat temporary.

But in a short period of time, since there is always a time lag in terms of implementing price increases, it would increase strain and decrease interest on surplus. I don't think at this point I would try to get into quantifying a number.

The markets have been moving so much week to week, that is something we could look at, some additional disclosure on it at third quarter. But I would rather not try to speculate on the size of that.

Robert, I want to emphasize what Mike said about pricing action. I think certainly the outlook in the United States leaves me a little bit more optimistic that other companies will follow the lead we have in raising the price for interest-sensitive products that have guarantees. I mean the more it looks like this is going to be a longer-term phenomenon forces for people to realize that they have to come to grips with it.

With the mark-to-market that we have under Canadian accounting regime, we have been penalized early and more heavily than many of our US peers. I think the more it looks like this is not a permanent state but a semipermanent state, it's going to force people to take more pricing action.

Thanks, Don. Just Michael, a quick numbers follow-up. How big was the benefit from alternative investments in the earnings on the surplus this quarter?

It wasn't huge. The NFI impacting IOS in the quarter. I would say, Robert, less than CAD20 million.

Okay, thank you.

Tom MacKinnon, BMO Capital Markets.

Thanks very much. Good afternoon. I've got two questions.

The first is back in the fall of 2010, when you gave your 2015 objectives, I think it was for somewhere around CAD4 billion by 2015 and a 13% ROE, sort of translated more in like an 8% CAGR growth in earnings. You said that was essentially based on interest rates being generally flat from September 30, 2010, levels and equity markets up 8% annually -- I guess 10% with dividends -- from where we were on September 30, 2010.

So now we are about nearly a year through this process here. I would say the interest rates haven't really moved that much. In fact, I think when you did this thing the US 10-year was 2.50% and it's about 2.30% now; and the US 30-year was 3.70% and it's not that much different from that right now.

And the S&P 500 is up 3%. You thought it would be up 8% pre-dividend.

So I am wondering. Okay, we are through -- we are not quite a year through this process when you laid out these objectives. Do you have anything to say that your forecast has changed? You have hedged a lot faster, but how are we to look at that forecast given what has happened over the last 10 months or so?

Sure. Tom, as always I appreciate your thoughtful questions. So first, let me state the obvious. You are absolutely right that with the lower interest rates and the equity markets since the investor day underperforming our long-term assumption, those do both represent mild headwinds to that 2015 outlook.

The 10-year is only about 20 points lower than what it was when you did that forecast.

That's right, yes, that is why I say mild headwinds.

(inaudible) almost to there? Yes, okay.

And actually just for completeness, I will add a couple of other headwinds that you didn't mention. We now obviously have had these two reinsurance transactions, the reinsurance transaction in Canada which we did in second quarter which increased our MCCSR but has a cost to it. And we also have now sold our Life Retro business which also increases the MCCSR in third quarter but again has a lost earnings impact to it.

And then the basis change for third-quarter 2011 also represents a headwind, given that that will mean lower interest on surplus because we had counted on those earnings accumulating for surplus.

I think a couple good news elements, Tom, that lead me to conclude that it would be too early certainly to materially change those assumptions. Number one is, as I said at the investor day, we did consciously build in contingency into the 2015 outlook for exactly these kinds of things. If you're going to project five years out, there are going to be some things that go the other way.

That is why we had contingency. I am confident at this point that we have certainly not absorbed that full contingency even though these things, as you said, are headwinds.

The other point really more importantly in terms of long-term shareholder value is that the changes that we have been making in terms of the mix of business and really our business fundamentals, I would suggest all-in are modestly better than we had anticipated at the investor day. The change in the mix in particular has happened faster than we had anticipated, and the growth in the targeted products has been very positive.

Then last but certainly not least is Long-Term Care. Again, it is early; but certainly if you had asked me at the investor day what our record would be in terms of getting price increases, I would have certainly guessed something less optimistic than twenty. So I think there are some reasons to be positive as well.

Okay. Thanks for that. Just a follow-up question with respect to the reserve hit for -- related to US mortality upcoming in the third quarter. I guess the Canadian Institute of Actuaries is looking at allowing mortality improvement into the reserves.

Yes.

Are you going to allow any mortality improvement into your reserves? To what extent -- I assume that would have to be some sort of benefit with respect to the individual life business. Has that been -- is that one of the basis changes you will look at in the third quarter?

Tom, it will certainly be part of the basis changes that we will be looking at for third quarter. It actually has a mix of positive and negative impacts depending upon the specific product line.

So, as an example, mortality improvement would be a negative for Long-Term Care. On the other hand obviously morbidity improvement would be a positive, a favorable for Long-Term Care.

As you noted it would be a favorable for the US life business, the Canadian life business. Again, that will all be part of the third-quarter basis change.

Okay, thank you.

Michael Goldberg, Desjardins Securities.

Thanks. I had a couple of questions also. I will start with a number question. You've previously provided the amount of available-for-sale equities backing surplus that you have. Can you tell me what it is now?

Michael, it's approximately CAD2 billion.

So it is down from about CAD2.2 billion?

Yes, round numbers, yes.

Okay. Also on the mortality assumption change that is coming in the United States, can you give us a little bit of color as to what you think may be behind the weaker than expected experience there? Could there have been any anti-selection?

Yes, Michael, it's Mike. I don't think it is a result of anti-selection. Again, it is a complicated issue, but it is isolated at this point to the US bloc.

Now maybe just step back and give you some more context here. We are reporting mortality gains in the US life bloc. For example this quarter, I think it was approximately [$]30 million pretax of mortality gains.

The subtlety, though, is looking at the results by duration. The early duration life insurance business, so the business that is still clearly in the select period from an underwriting standpoint, has been very favorable, which suggests that we have had very good underwriting discipline those, that that mortality has been running better than the pricing and the reserving assumptions.

So we would view that as a good thing and really the opposite of anti-selection. Unfortunately what we are seeing is as the select period wears off and as the insured bloc gets to older attained ages and older durations, that mortality experience is running worse.

Obviously this is a series of actuarial judgments. We are not yet done. But I felt like it was important to disclose that this is an emerging issue. We don't have it calculated down to the number yet, but it is an emerging issue and therefore we felt like it was important to disclose.

Thank you.

Peter Routledge, National Bank Financial.

Yes, thanks. Just a question on your capitalization. Given where equity markets and interest rates are, we can conclude your MCCSR will be a fair bit lower next quarter. Then you do have this reserve increase for mortality risk.

I am wondering; how do your stakeholders look at your capitalization in light of this? Both OSFI and rating agencies, is there any reason to think they might look a little differently at your MCCSR in light of now really your third year of reserve increases for policyholder behavior?

Well, Peter, first of all a couple comments here. Obviously we feel very good about our capital position at June 30 at 241%, that is a very strong level.

To date, it is obviously early in the quarter, but to date our current view is that the coming bad news from the basis change, coupled with the impact on financial markets thus far in third quarter should be manageable. Now, obviously if financial markets got worse or if there was other bad news, we might have to revisit that. But to date we feel like the situation is manageable.

Now obviously, if the market continued to have negative performance in terms of interest rates and equity markets, it could cause us to rethink, for example, the pace at which we reduce our financial leverage.

We have been letting debt mature as opposed to refinancing it. We just had CAD550 million of sub-debt mature in February. So we could rethink some of those options.

At this point I don't feel any particular pressure from outside stakeholders to take action. But again, it is something obviously we always work on contingency plans around.

Thanks, one more --

Donald here, I want to interject a little bit, also, just some perspective. Everything Mike said was very good.

I'd just add that 241% now is different than 241% years ago, although we didn't have that level of MCCSR, because we have a huge chunk hedged, both interest rates and equities.

Let me remind you on equity hedging, we are at 90% now of our 2014 targets. And the hedging is working extremely well. It has been tested; I get daily reports through the financial crisis of the last couple of weeks. The hedging is working not perfectly, but relative to my expectations close to flawlessly.

So, 241%, which is a really high ratio if you are totally unhedged, 241% and hedged is a very comfortable position. In fact, you have heard us say it before. It is a little bit abstract, but if the S&P went to zero and the TSX went to zero and the Nikkei went to zero, we would still have no problem paying off our claims. That is an amazing statement.

Now, obviously other things would happen, but that is an amazing statement of the quality of reserves and capital and hedging that this Company has in place. So, all that has me -- and you can probably hear it a little bit in my voice; we actually get no explicit credit for hedging right now. So, you know again the 241% --

On the MCCSR?

On the MCCSR, but it has a huge dampening impact on the earnings and obviously the risk that our policyholders would have. And that has to be recognized by regulators and rating agencies.

Okay. Just, Michael, I am gathering from your statements the Long-Term Care repricing is going well. Would you revise your assumptions about repricing this year, or is that something you need to wait a little longer for?

Yes, Peter, I think it is highly unlikely that we would revise those assumptions this year. Never say never; and obviously we will make all of those decisions at third quarter.

But we are in this for the long haul, and I would anticipate that it would likely not be until at least next year before we would be able to make those kinds of updates.

Okay, thank you.

Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. A couple of questions. First, a question on new business embedded value generation versus sales, where I think I must be missing something.

So if I look in the slide deck, sales of insurance and wealth in targeted businesses for growth is up 27%, 28%. But when I look at page 4 of the supplemental new business embedded value generation it is down 22% for insurance and up just 6% for wealth.

So does this have to do with the fact that maybe a lot of the growth is in Asia and somehow that makes a difference, the nature of the products sold? I imagine maybe currency could potentially be part of that.

Could you help me understand the linkage or the lack of linkage there?

Sure, and Steve, it's Mike. It is somewhat of an apples-to-oranges comparison because we have had some changes in the formula that we use to calculate new business embedded value. Specifically we are now using spot interest rates at the end of the quarter; in prior years, we had used the prior year planning assumption.

We have updated other assumptions. So I don't think the new business embedded value is really apples-to-apples versus prior years.

I do think that if you compare it say to first quarter or at least -- let me say it this way. Maybe going forward I would expect it to establish a more reasonable baseline. But by in particular changing it to the spot interest rates, it is not really very useful to compare it to historical numbers.

There's a variety of different practices of calculating new business embedded value. I guess the one that is most prominent and the one we used historically was to assume that interest rates revert back to the pricing assumptions. Given that everything else that we do is using more current interest rate projections, we are doing that with our new business embedded value as well.

It's in this day and age a more conservative way of looking at it, but we think more appropriate, more consistent with the way we do other financial reporting.

Great, and if you were looking quarter over quarter, one of the things that distorts the comparison in sales versus new business embedded value is the fact that many of the P&C retrocessionaire business is renewed in the first quarter. But it doesn't show up in our sales numbers, so that is one of the reasons why you are seeing an impact (inaudible) relationship quarter over quarter that doesn't look -- isn't what you might expect.

Then also in Japan we saw a lot of sales growth in Japan. But now that we update our interest rates and spreads every quarter, interest rates were down and spreads were down; and that offset the impact of the increased sales in Japan.

Great, thanks. That's helpful. One more I think quick one. I think I noticed -- probably for Mike as well. I think I noticed in the slide deck a note that you unwound CAD100 million of Canadian hedges in the quarter. I guess I am surprised by that given that the market was pretty choppy except maybe in the first week or so of the quarter.

So can you talk a little bit about what led to that unwinding. Was there an associated rotation into the dynamic hedging program as a result? Is there opportunity to do more of this, or is door fairly closed given what we have seen quarter to date?

Yes, I will answer that one; Don here. The TSX was way up. We don't want to get in a position of overhedge, where if a market goes up it costs us earnings. That would be rather hard to explain to investors.

So we will be rebalancing. The intention is to increase the overall hedge. Again, we are getting very close. We're at about 90% of our 2014 targets.

But that is what it was all about. We certainly don't ever want to get in a position where in a legal entity -- and we run these across a variety of legal entities -- or in respect of a specific index that we get overhedged.

You actually did put your finger right on it, and that is we also look at the interaction of our dynamic hedges and our macro hedges. At the time there was some serious consideration of a new cohort going into the dynamic hedging program, so that was also taken into account.

It was a pretty small adjustment, actually CAD100 million. We have, I think as of today, something like CAD14 billion of hedges in place. CAD100 million against that is a rather immaterial number.

Thanks very much, Don.

Doug Young, TD Newcrest.

Hi, just first question on the US mortality charge for Q3, Michael. What product was that related to? Is that the No-Lapse Guarantee? Is that the whole life product?

Sure, Doug, it's Mike. First of all, over half of the preliminary estimate is the legacy acquired John Hancock permanent business. So again this is business that we acquired back seven years ago when we bought that business.

Again what we are seeing is that the late-age mortality on that old bloc is running higher than the late-age assumptions. So that is the majority at this point of the preliminary estimate that we are talking about here.

Having said that -- and again, Cindy can add here -- the phenomenon that I described earlier, Doug, where the early-duration mortality is running better than the pricing assumptions, better than the reserving assumptions, and likely reflects even better underwriting discipline than we had assumed -- that has tended to be across the bulk of the life insurance business that we have written since the Hancock acquisition in 2004.

And again, the flip side is the emerging late mortality as the positive selection impact wears off, is in fact reasonably broad-based. Cindy, would you add?

Good answer.

Okay. The second one, just related to the US 401(k) business, Jim, I guess. I know you have been pushing into the midmarket. I know Q1 sales have been weak. Q2 sales have been weak. And listening to competitors it's obviously a very popular market that people are moving into.

Can you talk a little bit about the competitive trends. And I know you have talked about sales growth of 20% in that; is that a realistic assumption from where you stand?

Yes, thanks, Doug. The first half of the year our sales were off our expectations. We did see a heightened competitive universe, for sure. Many of our competitors as you mentioned find this an attractive space.

I would tell you that the latest numbers we are seeing as we closed the quarter and as we look forward for the second half of the year are quite positive. Our assets under management are at record levels. The proposals that we have currently in the pipeline at the end of the quarter are at record levels for us.

The conversion of those proposals in the months of July and so far in August have been quite positive, and our sales are trending favorably. So short story, very competitive market in the first half; our fundamentals are really good as we ended the quarter; and we are feeling much better about the second half.

So you think you can hit 20% sales growth?

You know, there is a lot of factors involved there, particularly the economy, growth in jobs, development of new businesses and new plans. I think if you had asked me that before the market three weeks ago, I would have had a different answer than I have today. We need some help from the economy as well.

Thank you.

Darko Mihelic, Cormark Securities.

Hi, thank you. My first question is for Michael and I just want to go back to the question that Mario asked about assumptions regarding equity markets and such. I just want to cover off all the bases with respect to the upcoming basis changes.

In effect, I'm just wondering about stuff like market volatility parameters. I think it was last year that you increased the volatility assumptions that you use for your variable annuities.

And also as well perhaps non-fixed-income assets; what about stuff like oil and gas and so on, and assumptions regarding those returns?

Okay. Darko, it's Mike, I will start. First in terms of the basis changes I really want to emphasize we are not done yet. So we do have a significant amount of work still to do over the next 60 days or so to review those assumptions with our outside auditor, with a peer reviewer, etc.

So we do have a lot of work, and therefore I can't be just super-definitive on all these comments. At this point I think it is unlikely that we would have a material change to either the VA volatility assumption that we have updated the last couple of years or the non-fixed-income return assumptions.

Again, I am cognizant of the fact, though, that the Canadian Institute of Actuaries is looking at the volatility parameter along with the other VA assumptions. So again, Cindy is probably closer to it -- I am sure she is closer to it than I am in terms of the timing of all that. So that is something out on the horizon, but I think unlikely to be an impact this year.

On the NFI, I'd just remind you that, first, NFI has been a great part of our portfolio. It is a great diversifier for us. We believe that having that kind of diversification with NFI plus the bonds actually reduces our overall risk profile at the same time it helps our long-term returns.

It also truly is a core competency for our organization and a competitive advantage. I would also point out, as we talked at the investor day, that if you look at the last five years or you look at the last 10 years, we have actually outperformed our long-term assumptions. Therefore again, this would seem to be a funny time to reduce those.

So again at this point I don't think that those would be coming. But again we will obviously make final decisions at third quarter.

Most of our experience gains over the past five years have come from outperforming those assumptions. It would be kind of hard to justify making them lower. But anyway --

Okay. Thanks for that. As an aside, I would say that in your annual report for the last two years it seems as though they have underperformed. But fair enough.

Markets have been tough.

Yes; fair enough. My other question is for Don Guloien. Your hedging is far ahead of schedule and you speak rather glowingly of its effectiveness. Which is good, but at the end of the day, I guess my question is -- even if you hit your targets, it still leaves an awful lot of risk appetite on the table.

I am wondering if you maybe perhaps going into Q3 or going into Q4 you would actually consider increasing the amount that you would be willing to hedge?

Yes, Darko, that's an excellent question and there is -- I would be willing to hedge more. I'm afraid I'm going to get into a little bit of technical area but it is necessary.

We never aimed to go to 100%; and I don't think anybody who is rational would, because there are certain things that will create volatility that you wouldn't want us to hedge if you are a rational investor.

What I mean to say there is, for instance, provisions for adverse deviation, all the PfADs you talk about. When our actuaries take their best guess of when people are going to die or cash out or do whatever it is to claim their benefits down the road, they come up with a best estimate. And then as you know we test them against a more conservative set of assumptions and it gives rise to a thing called a PfAD.

You would not want us to hedge to the PfADs, because that is not what we expect. That is a provision for adverse deviation. That is saying things could go wrong. You wouldn't want us to hedge to that, right?

I think I can convince anybody that that would be economically wrong to hedge to a padded result. You would hedge to what you reasonably think is going to happen.

If you don't hedge to the padded result, when markets go down you have to add to your pads, and the pads aren't covered by the equity market movement. That will give rise to an accounting loss.

But it would be really, really scary and I think improper to have us take hedging to eliminate that accounting loss when it is not a real economic exposure. I have tried to say that it is a pretty complicated concept.

So you wouldn't want us to go to 100%. I think it would be a real mistake if we ever announced to you that we have hedged so much that, regardless of whether markets go up or down, our earnings won't -- or capital won't move.

You know, the targets we set were reasonable. They seemed like very challenging targets at the time we set them. That's an indication it took us -- we thought it would take us four or five years to get there.

The good news is with the way the market rallied last year and the early part of this year, we took advantage of that. And we hedged another bunch in Japan just before this market fall.

That approach has served us well. But there is no religious belief here that suggests that once we get to the target we will stop.

We will relook at it then; but we are not going to go so far as to hedge 100% of it. And we are certainly not going to hedge pads which would be not our best guess of what the real liability is -- if that makes any sense.

Okay, thanks very much.

Gabriel Dechaine, Credit Suisse.

Good afternoon. Just on the Long-Term Care repricing initiative, let's just say you stopped here, and no other states out of the 30 remaining would approve any rate increases. What would be the approximate size of the reserve increase that would be required?

My second question is on management actions in the current quarter. You talk about the changes and sensitivity to interest rates going up and all that, and not ignoring potential management actions. Is this an environment where you can still go out on the curve and get the benefits of tighter ALM matching? Or does it not make sense to be doing that right now?

Sure, well, so first, Gabriel, on your hypothetical negative scenario, I don't think it would be a real good idea to precisely answer that question. Suffice to say it would be over CAD1 billion; but I would rather not go into more detail than that on what that impact would be.

I see no evidence that that outcome is going to take place. We have had good discussions with nearly all of the states. So I think your hypothetical is overly negative. So let me just leave it at that.

Gabriel, maybe we haven't made this one clear, but we are getting some very big influential states. If anything, this should snowball in our favor.

Now we are not trying to set up unrealistic expectations. We're just trying to tell you the facts. But the fact is when you get very pivotal states with very influential commissioners saying we've reviewed this thing, it is more that have to explain why they haven't approved it than why they have.

All right. It was kind of a backdoor way to ask if any big states out of the 20 have approved.

We have, yes. We got some very significant states.

Okay.

Then on your question -- are there additional management actions that we could take to further lengthen the duration of the assets? Could we do more equity hedging?

The answer on both of those is yes. Of course we could do that.

Again there is a little bit of an element here of being concerned about locking in at the bottom. I guess based on the experience over the last two years I am not sure anybody knows what the bottom means.

But so those are available to us and again it is something that we will consider; but I repeat the comment from earlier. One of the reasons that we got ahead of our original timetable is that in anticipation of a quarter like this that we wouldn't feel obligated to run out and potentially hedge more at the bottom.

Right, no; that was more of -- I know you can. I was more asking about have you post-quarter sold some AFS bonds or tightened (inaudible)

A very small amount. But again at this point that would still be -- doing something material would be more of a decision that we would make over the next 45 days.

Okay, thank you.

It's funny. People seem to be talking about the quarter like it's over in terms of -- I think we have come through a stunning time, but I tend to be resolute.

I think this is -- I am talking macro here, nothing to do with Manulife. But the market reaction to what is going on in the United States is a gross overreaction. The challenges in Europe are real. But the budgetary crisis and the debt ceiling in the United States is overblown for political reality TV.

It's going to resolve itself one way or another. You can write that down. People are asking Mike on the call here, and it's a reasonable question to ask is -- where would you be in terms of your sensitivities to market disruptions based on where the market is today? Well, it depends.

When he gave his answer he gave a conservative answer. The market is up, what, about 5% today. It is a different answer than what he would have given today already.

I can guarantee one thing. The market is not going to close where it is today at the end of the quarter. It will be higher or it will be lower.

I clearly have a bias, and I am the one who is pushing all the hedging, right? We are getting the hedging done so that we don't have to talk about this as much.

But if it is not totally obvious yet, we are sleeping pretty easy at night with the amount that we have got hedged and with the volatility that we have.

I'm just jaded, Don.

Yes. No, it's not to be jaded, with some of the silliness that is going on around the world.

All right. Thank you very much.

Heather Takahashi, Fortress Investment.

Hi, guys. Just a quick question. Since we have been on the call there was a headline over the wire about a magnitude 6 earthquake in Japan. So I am just wondering; given your experience with the March earthquake or maybe your own stress testing, if you have any sense of the materiality of this?

That's actually -- I hate to say it -- but by Japanese standards, pretty modest.

This is Craig Bromley. We tend to have those every couple of weeks, but --

Okay, so no big deal?

But I will certainly look at it when I leave this meeting. But in general I've been probably in 50 earthquakes in my time in Japan, and the next time in Japan it will probably be another 50. So it is a regular occurrence and something that the Japanese deal with stoically.

Okay, great. Then my other question was on the mortality table charge. I am just wondering if you have a sense of whether there are any multiplicative effects with that. For example, will it make you any more or less sensitive, for example, to changes in interest rate assumptions?

Yes, Heather, those second-order impacts are work that we still have to do here over the next 60 days. So the short answer is there are impacts on any number of other reserve factors, which is again why this -- it makes it as complicated as it does to finalize the calculation.

Again, what we did when we put out the comments not expected to exceed CAD700 million, it was trying to estimate those other second-order impacts as well. But I don't -- again that work is complicated and ends up having several nuances in its own right.

Okay, great. Thanks.

Joanne Smith, Scotia Capital.

Good afternoon. I can't believe there are actually questions left, but I do have a couple. The change in the URR, I believe when you changed it back in the third quarter of 2010, the new assumption was about 4% in Canada and 3.7% in the US. Can you tell me what the new URR is now?

Cindy, do you happen to know that? I don't have that memorized. The new URR assumptions in Canada and US?

They're 3.70% in Canada and 3.90% in the US at the long end.

Okay. Second question is, when I look at your results I see that there was obviously a favorable tax impact. So if we were to normalize the effective tax rate, it is quite difficult from the outside because of all of the noise from 2010; and we have only got one quarter behind us prior to this one.

So when I look at the normalized effective tax rate, what kind of guidance would you give us?

Yes, Joanne, we have looked at that several times. In fact if you go back a couple years, we did talk about that on some analyst calls.

You are exactly right; it bounces around quarter to quarter. And it bounces around for a number of different reasons, for example, the geography where we have earnings versus we have hits plays havoc with it.

Round numbers, when we have looked at this, we tend to get to a long-term effective tax rate in the -- call it 22% to 25% kind of range. But you are absolutely right; in any given quarter it can bounce in strange directions.

I believe -- Lynda can correct me here. But I believe that if you back out, for example, the URR impact, I believe the effective tax rate would be something like 21%. Because the effective tax rate on the basis change is in the mid-30s -- on the URR is in the mid-30s; and again if you back that out you get to about 21%.

Okay, and I'm sorry, I just had to slip one last one in. When I am looking at your US operations and the earnings, especially the U.S. Insurance earnings, they were really good looking at the sources of earnings tables and taking out the non-core items. And since you don't disclose the sources of earnings on a business line basis, could you tell us where you saw the most improvement in the quarter?

Yes, again, we probably could go off-line to talk about some of the specific details, Joanne, but broadly speaking we are benefiting from the higher assets under management, so the higher fee income. That is certainly true in the US it fell.

We have also been benefiting from the new business strain improvement from the higher prices on the insurance products in the US. Let me see if Jim Boyle or Cindy want to add here.

Hey, Joanne. Thanks for the question on the Life. Yes, that is the way we show source of earnings as you know includes both Life and Long-Term Care. We have made great progress year-over-year as you can see in the impact of new business; that is a reflection of the price increases coming through and our managing expenses well relative to the sales volume.

This quarter in particular, if you look at experience gains there were $240 million of experience gains. Those were primarily investment related, some of those were realized gains (inaudible) sales of certain fixed-income investments that we shifted over to non-fixed-income investments.

So the core earnings continue to do well. We are doing a nice job on new business stain, and this quarter particularly we had some nice investment gains on the experience side.

Okay, thank you, Jim.

Sumit Malhotra, Macquarie.

Good afternoon. For Michael Bell on Long-Term Care. Last quarter, you told us the approvals you had received were from 15 states. This quarter it is up to 20. Just to go about it the other way, have there been any states in which your request to increase the pricing have been turned down?

At this point, there is no state where the file is closed. So, at this point we still have an opportunity in those other 30 states.

There was a mention here, and this is my second question on the same topic. There was a mention that some of the states are quite sizable.

So of the 20 states in which you have been approved, in which the pricing has been approved, would you be able to tell us what proportion of your in-force that represents? Where do you think -- it doesn't sound like it's going to be a Q3 2011 issue; but where do you think that number has to get to before you can start thinking about releasing some of the reserves that you added for that business?

I would really prefer to not go into quite that level of detail. Again, Donald was absolutely right. There have been some material states out there that are in the 20 that we have got approval. So there are some very large states that are in the 30 that we don't have yet. So I really would rather not get into percentages at this point.

In terms of the timing, again, I am sure this is something that we will look at on an ongoing basis. Again at this point, barring some major change, I think it would be unlikely that we would see any impact in the long-term assumptions until at the very earliest third-quarter 2012.

But it is something -- again, I will report on this I am sure every quarter. I am sure we will get seven more questions every quarter on this topic. The most important thing to note is that we are really pleased with our progress. We are doing well; and a real credit to Marianne Harrison and her team.

Okay. So to the extent you're going to update us on the number of states, it seems like you have done that in the first two quarters of this year. Perhaps the next step is the magnitude of your business, and maybe we can get an idea of whether this is going to be a benefit to you for 2012.

Yes, at some point, I am sure we will provide some additional detail on that.

Thanks for your time.

Michael Goldberg, Desjardins Securities.

Thank you. Don, can you elaborate on the big picture for Manulife? Of the challenges that you described, for example in Europe -- and I know you have no operations there. But the challenge in Europe as you also described as real.

And also your comment that US companies haven't really fully reacted to the low level of interest rates. How does this ultimately impact Manulife in terms of competitive position and opportunities that may develop for the Company?

Well, thank you, Michael. Yes, I am actually very optimistic. I like to think long-term in sort of five-year cycles. I think we have got the capital, we have got the hedging in place, we are keeping our powder dry.

As we said before, if rates stay where they are we are pretty much provided for where things are. Michael talked about the URR headwind; but it is pretty minor relative to what other people would go through, right?

For those of you on the call who don't know what we are talking about, USGAAP. People basically lock in their pricing assumptions until they go into loss recognition status and have to update it. Canadian GAAP forces people to mark it to market on a quarterly basis.

I mean the latter has been very painful with the low interest rates. Last year at this time we took a CAD2 billion charge for low interest rates. But it leaves us in good stead for dealing with the future.

I think Europe is going to go on sale. It is one of the reasons why I am not anxious to spend anything right now, it is to get into a position to take advantage of the opportunities that present themselves down the road.

It doesn't necessarily mean that we would enter Europe. But it possibly means that European companies would be forced to sell some of their subsidiaries elsewhere in the world.

So, we have very conservatively provided for reasonable expectations of what can happen and the worst that can happen. And I think from here it is likely to get better for us.

Meanwhile, our operating plan, strategic plan is unfolding exactly as it should, with minor hiccups here and there; we have talked about those very openly.

But as Tom MacKinnon question indicated, we laid out a five-year plan. We feel very confident that we will achieve the five-year plan, if anything maybe a little earlier than our original expectation. Our ability to hedge is way better than what we imagined at that time.

So what is going to happen? We are delivering the operating earnings or the normalized earnings, whatever you want to call them. We are delivering the core earnings for the enterprise. And at the same time we are reducing the capital markets volatility that causes variance from those.

We are building some very good businesses based on a nice balanced mix of business, right? Not just one product driving it, but a whole variety of products. And we have pulled back very significantly on products that give rise to excessive risks of any nature, including most recently in some of the Japanese products.

So we got a very nice healthy, balanced mix. We are growing very nicely across the board, hedging in place, and really nice earnings progression. I am feeling very good.

As tumult emerges in the world -- I hate to be a harbinger of bad news anywhere -- but I think we're going to be in a position to take advantage of it. That is not in the next six months. I think I made a mistake in a couple calls ago; people asked about excess capital. We said we had some, and then that created some expectation that we were going to buy something in the next six weeks. That is wholly unrealistic.

We are aware of a number opportunities. But the biggest calculus we have is -- will they be cheaper somewhere down the road? And in some cases they will be, and Manulife will be progressively stronger. So I am feeling pretty good.

Thank you.

Joanne Smith, Scotia Capital.

Just one follow-up and this is for Don and I guess Jim. When the Fed made its statement the other day about long-term interest rates staying -- or interest rates staying very, very low at least until midyear 2013 that implied obviously a very weak economic environment in the US. I remember when we went through the last recession and what happened to sales for life insurance products, and it wasn't very good.

So can you tell me how this is different? If you think it is at all. Or how you would expect that type of a scenario would play out on, number one, your sales expectation in the US, and then the grander plan for the five-year goal.

Well, I guess our experience was not too bad in that period in terms of what we were selling. It's not to say we weren't affected by the economy. But, Joanne, I think the biggest parameter that affects our sales, quite frankly -- I hope Jim would agree with me -- is where we choose to cut back based on risk profile.

We are not having any problems selling product right now. We could sell unlimited amounts if we were willing to take the risk that other companies seem to be doing. So it is not a matter that we are worried about chasing sales.

On the macro picture of the economy, I think the Fed is reacting appropriately. The bickering in Congress, the immature bickering between the extremes of both parties caused a huge amount of unease and caused people to question whether the US government can get it together to come on a plan that would deal with some of the challenges. The challenges are eminently solvable through a number of initiatives.

I think the Fed did the right thing, but the Fed left itself also the window to get out of the way. I think given that the United States government is funded short, the last thing they want is inflation to get out of control. Because if rates take off and go up too rapidly that will hurt the US Treasury a great deal.

So I think the Fed clearly acted appropriately to put some salve on the panic that was taking place. But this is a solvable problem. The United States has the capacity to solve this issue.

Canada went through it 20 years ago, and we did novel things like tax people through a value-added tax and cut back on spending and did all the obvious things. And guess what? Our economy is in pretty good shape today through the foresight of some of those people.

The United States if you talk to the people that are part of the Gang of Six, so-called Gang of Six, that bipartisan group or Alan Simpson, they have all got recipes for how this thing can be done in a bipartisan way.

At the end of the day the United States will do the right things and solve the problems. So I think this is a very, very considerable overreaction, but probably one that was necessary to get people to look in the mirror and do what they need to do.

Don, I am talking more broadly about the economy. Every economic indicator that has been reported over the last month has been worse than expected. I am talking beyond the bickering that is going on in that ridiculous place called Washington. I am talking about -- we have had a real slowdown in the US and people are worried.

Yes, people are worried but one of the reasons for the slowdown is really good news. The last thing you want to have happen -- I mean if you talk to central bankers anywhere, the real risk of cheap money is that people go back to their old ways of doing things.

And God bless the American people, they are deleveraging. Now, that means those of you -- and I am not saying you are, Joanne. But those who are looking for a sugar-high, have things bounce back, and everybody show up in the Best Buy stores cramming the doors trying to buy as many TV sets as they can because they can borrow money at no cost -- that is the thing that would really scare the living daylights out of me.

What has happened in the United States is that from the consumer right to the businesses, that they have taken a very prudent approach and they are deleveraging. They are paying down their credit card debt because, yes, they are really scared.

That means that the recovery is going to be a little bit longer in coming. But I think it is exactly what we want to have happen, and I am not alone in that view. If you talk to Mark Carney I think he would tell you the exact same thing. That is why I have described it as the ideal is like the profile of a contact lens.

The people who are disappointed are largely disappointed because their expectations were too high. When housing starts coming out, people say -- housing isn't coming back. That is the last thing you want to have happen right now. What you want to do is clear the inventory.

You don't want new houses built. You want people in the construction industry to realize that they are not going to be building 7,000-square-foot homes in Arizona and making a really good living and moving on to other parts of the economy. That is going to be really tough for them, and I feel for them as individuals.

But that is what needs to happen. You need to clear the inventory of existing housing stock before housing prices will go up. And the best sign is to see housing inventory reducing, not again a sugar high of housing starts going up.

So I know I sound a bit like a central banker, because I listen to those guys; and this is exactly what you want to happen. The other thing that people seem to be losing picture of when they look at the US economy is the health of the balance sheets of American corporations, which have never been stronger. Scott Hartz would be calling up everybody twice a day saying, will you please borrow more money from us?

You have got Apple Computer, a computer company, sitting on $90 billion of cash. That is maybe an extreme example; but there is a lot of very healthy companies out there.

So when people get upset about the US economy, recognize that the consumer is doing the right thing in deleveraging. Businesses have massively deleveraged. All they need is some sign of confidence that the leadership in Washington will do the right thing and not do something silly, and people will actually start building plants again and getting back to business.

Jim, do you disagree with that?

Joanne, I would approach it from more of a tactical perspective than Donald's strategic answer. To give you some comfort, tactically we have been dealing with a very difficult economy here since 2007 in the United States. We have been able to reposition and reprice our products; and we have demonstrated positive momentum on virtually every measure across all of our businesses.

We don't have wild expectations for growth in the United States. We sure hope that they are going to come; but we have, I think, demonstrated the ability to manage and pivot to the environment -- particularly a negative environment.

So our customers out there obviously are feeling the effects and there is some fear in the marketplace. Some of our products tend to be attractive to people who are in a fearful state of mind.

I feel confident that we have done a good job managing in a difficult environment, and we will be able to continue to manage and hold share and execute well relative to our peers even if a difficult environment continues.

Joanne, if I had stood up with Jim at our investor day and said we predict a very turbulent stock market, interest rates, a fight over the debt ceiling, and everything else that has gone on in the last little while -- but notwithstanding that we are going to sell [$]7 billion of mutual funds over the first-half 2011 in the United States, you guys would have laughed us off the stage. That is exactly what we did, so we are very proud of it.

Thanks for the extended answer, both of you.

Thank you. There are no further questions registered. I would now like to turn the meeting back over to Mr. Ostler.

Thank you, Jenny. We will be available after the call if there any follow-up questions. Have a good afternoon, everyone.

Thank you. This concludes today's conference call. Please disconnect your lines and thank you for your participation.