Manulife Financial Corp (MFC) 2012 Q4 法說會逐字稿

All participants, thank you for standing by, your conference is ready to begin. Please be advised that this conference call is being recorded.

Good afternoon and welcome to the Manulife Financial Corporation 4Q 2012 and 2012 earnings conference call for Thursday, February 7, 2013. Your host for today will be as Ms. Anique Asher. Ms. Asher, please go ahead.

Thank you and good afternoon. Welcome to Manulife's conference call to discuss our fourth-quarter and full-year 2012 financial and operating results. Today's call will reference 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 questions about their businesses are the heads of our US, Canada investments and general account investments.

Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are implied in making forward-looking statements and actual results may differ materially from those expressed or implied.

For additional information about the material process 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 Caution 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 re-queue and we will do our best to respond to all questions. With that, I would like to turn it over to Donald Guloien, our President and Chief Executive Officer. Donald?

Thank you, Anique. Good afternoon, everyone, and thank you for joining us today. I'm joined on the call by our CFO, Steve Roder, as well as several members of our senior management team, including our Asia General Manager, Bob Cook; our US General Manager, Craig Bromley; our Canadian General Manager, Marianne Harrison; our Chief Operating Officer, Paul Rooney; our Chief Investment Officer, Warren Thomson; our Executive Vice President, General Account Investment, Scott Hartz; our Chief Actuary, Cindy Forbes; our Chief Risk Officer, Rahim Hirji; and our Treasurer and Head of Investor Relations, Steve Moore.

I'd like to start the call today with some highlights of the progress that we made on our strategic priorities in 2012. We continue to develop our Asian opportunity to the fullest, and in the past year we had record insurance sales of CAD1.4 billion and record wealth sales of CAD5.7 billion.

We expanded our distribution platform across the region securing and deepening strategically important distribution agreements with key partners in Japan and Indonesia, which contributed to record sales for the year.

We became the first foreign-owned life insurer to commence operations in Cambodia. And we achieved strong growth in our professional agency force in several key markets, ending the year with a record number of agents of over 53,000, representing an increase of more than 3,000 agents.

We also continue to grow our wealth and asset management businesses in Asia, Canada, and the United States. Manulife Asset Management added significant new institutional mandates totaling over CAD7.8 billion and gross fund flows of CAD33 billion into retail accounts. We ended 2012 with a total of 65 Four-and-Five Star Morningstar-rated funds, an increase of seven funds from 2011. In addition, we ended the year with an all-time record funds under management of CAD532 billion.

We continued to grow our balanced Canadian franchise, and in 2012 we led the market in group business sales for most of the year. We set records in group benefits, with sales of over CAD1 billion; Affinity Markets with sales of over CAD100 million; and Manulife Canada's Mutual Funds recorded deposits all of CAD2.1 billion and Assets Under Management of over CAD20 billion.

Manulife Bank reported record lending assets of CAD21 billion during 2012 and we expanded our distribution reach by welcoming new advisors, extending existing relationships, and enhancing support to our distribution partners.

In the United States, we continued to grow our higher ROE, lower risk businesses. We achieved record sales in retirement plan services of CAD6 billion and mutual fund deposits of CAD13 billion, which contributed to record Funds Under Management in both businesses of CAD72 billion and CAD42 billion respectively, a total of CAD114 billion in these two businesses alone.

Life insurance sales increased 12% over 2011, largely driven by innovative new product offerings with a more attractive risk/reward profile for our shareholders. And we had significant success in gaining additional state approvals for in-force price increases on our long-term care business, bringing our total now to 43 states.

These successes are the result of both good execution and the considerable investments that we have made in distribution and branding.

This morning we announced our fourth-quarter and full-year 2012 financial results. Let me share some of the highlights with you.

As you can see on the chart, we have enjoyed a positive progression in our earnings. In 2010 we had a loss of CAD1.7 billion, a small gain in 2011, and we ended 2012 with net income of CAD1.7 billion. Hopefully this bodes very well for future years.

The net income of CAD1.7 billion was achieved despite basis changes of CAD1.1 billion and goodwill charges of CAD200 million. Core earnings in 2012 were CAD2.2 billion, despite the increased expenses associated with additional hedging, specific investments in growth initiatives, and significant additional strain caused by lower interest rates. And finally, on the top line, we ended 2012 with record sales in both our wealth and our insurance businesses.

As you already know, we achieved our 2014 equity and interest rate hedging targets two years ahead of schedule and while this comes at a cost to both core earnings and net income, it substantially reduces the volatility in our earnings going forward.

After year-end we have taken advantage of robust Japanese equity markets to do further hedging and now all markets including Japan are hedged to target. From here on, we will be hedging on a strictly opportunistic basis in order to maintain our volatility within our target.

The capital ratio for MCCSR of our primary operating company was 211% at the end of 2012, a 7 point improved over the prior quarter. Movement in this ratio was further dampened by our significant hedging programs in place and is also estimated to increase by approximately 4 points on a pro forma basis on January 1 to 215% as a result of revisions to capital rules.

In conclusion, we are pleased with the progress we made in 2012. As we embark on 2013, I am confident that Manulife is very well positioned to deliver the disciplined and sustainable growth required to meet our 2016 objectives. With that, I turn the call over to our CFO, Steve Roder, who will highlight our financial results and then open the call to your questions. Thank you.

Thank you, Donald. Hello, everyone. Let's start on slide 6 where we indicate the financial highlights for the fourth quarter of 2012. In the fourth quarter, we reported net income attributed to shareholders of approximately CAD1.1 billion, up from a loss of CAD69 million in the fourth quarter of last year.

In terms of our operating performance, we reported core earnings of CAD537 million. We increased insurance sales by 49% and delivered an increase in wealth sales of 31% over the fourth quarter of 2011. And we generated new business embedded value of CAD245 million, an increase of 71% over the fourth quarter of 2011.

Investment gains this quarter continue to be strong at CAD368 million, CAD50 million of which is included in core earnings. And we reported in-force embedded value of CAD38 billion as at December 31, 2012, an increase of CAD1.9 billion over the prior year.

Turning to slide 7, you will see our progress on core earnings for the quarter and for the year. Our fourth-quarter core earnings were CAD537 million, an increase of over CAD160 million from the same quarter a year ago. The main drivers of this relate to increased fee income on higher funds under management and a significant improvement in new business [strain] reflecting pricing actions and improved business mix in 2012.

Core earnings declined CAD19 million from the third quarter of 2012. I will talk in more detail regarding this on the next slide. Full-year core earnings for 2012 were CAD2.2 billion, in line with the prior year as improved new business stream, increased fee income, and a non-recurrence of property and casualty reinsurance claims were mostly offset by higher macro hedging costs and amortization of pension costs in addition to higher business developments and project-related expenses.

Fourth-quarter net income of CAD1.1 billion represents a significant improvement over the CAD69 million loss in the same quarter last year. For the full year, we recorded net income of CAD1.7 billion, a substantial improvement from CAD1.6 billion over last year's results.

On slide 8, you can see the core earnings in the fourth quarter of 2012 were lower than the third quarter of 2012, largely as a result of -- a decline in core earnings in Asia due to higher acquisition costs on increased wealth sales, higher insurance sales expenses, and systems costs.

The notional value of our macro hedging program increased in the quarter resulting in higher expected hedging costs. These items were partially offset by a release of excess property and casualty reinsurance provisions related to the Japan earthquake and tsunami which we included in the corporate segment, and modest improvements to core earnings in Canada and the US.

Turning to slide 9, you will note that the fourth quarter's reported income significantly benefited from CAD318 million of investment gains over and above the CAD50 million included in core earnings. Reported income also included CAD264 million in material and exceptional tax items related to prior years. We also benefited from a CAD100 million gain related to our hedged variable annuity guarantees.

Partially offsetting these benefits was an CAD87 million charge primarily due to model refinements relating to a valuation system conversion and a CAD57 million restructuring charge for severance related to the Company's organizational design project that we announced at Investor Day.

On slide 10 is our source of earnings. Expected profit on in-force increased 2% on a constant currency basis largely due to higher fee income partly offset by lower expected earnings on variable annuity businesses. New business strain increased as a result of the significant increase in wealth sales in the quarter, where we cannot defer acquisition expenses and a change in new business mix.

Experience gains reflect favorable investment and favorable annuity experience as well as the release of property and casualty reinsurance reserves, partly offset by experienced losses on the macro hedge program. Management actions and changes in assumptions largely reflect expected macro hedging costs and a systems conversion which refines the modeling of policy liabilities.

While total earnings on surplus for the fourth quarter was in line with the third quarter of 2012, core pre-tax earnings on surplus increased CAD33 million largely due to a release of tax-related interest provisions whereas non-core pre-tax earnings on surplus declined to CAD34 million.

Non-core earnings on surplus are primarily mark-to-market gains other than available-for-sale equities and seed money. Income taxes benefited from income earned in lower tax jurisdictions and the favorable impact of material and exceptional tax items.

Turning to slide 11, you will see that our total insurance sales for the fourth quarter were CAD929 million, up 49% over the fourth quarter of 2011. This was driven by Record Group Benefits sales in Canada, which were more than double prior year's levels; strong growth in Asia including record sales in Indonesia; and a double-digit improvement in US insurance sales reflective of successful new lower risk product offerings.

For the full year we reported record insurance sales of CAD3.3 billion with records set in a number of our businesses including strong contributions from most territories in Asia.

Turning to slide 12 and wealth sales, fourth-quarter wealth sales of CAD10.4 billion increased 31% from the fourth quarter of 2011 due to record mutual fund sales in Asia, Canada, and the US, and strong sales growth in our pension businesses in North America.

Partially offsetting the growth were lower sales of variable and fixed annuity products which is in line with our actions to restrict sales of these products. For the full year, wealth sales of CAD36 billion were up 4% from the prior year and represent a new record excluding the sale of variable annuities.

On slide 13, you can see that our strong business growth is also reflected in our premiums and deposits both on a quarterly and on an annual basis. For wealth products, fourth-quarter premiums and deposits of CAD17.5 billion increased 76% over the fourth quarter of 2011 and includes the closing of a substantial institutional mandate won by Manulife Asset Management and strong results in our mutual fund and pensions businesses.

Insurance Premiums and Deposits increased 18% in the fourth quarter to CAD6.6 billion, reflecting strong growth in Asia and group benefits in Canada. Premiums and deposits in 2012 were 14% higher than in 2011.

Turning to slide 14, you will see that the fourth quarter 2012 new business embedded value for insurance and wealth products increased 71% over the fourth quarter of 2011. We are very pleased with the fourth-quarter growth in our NBEV over the prior-year period as it demonstrates the successful execution of our strategy including the repositioning of our product mix and repricing.

This reaffirms that the profitability of our underlying new business continues to improve. On a full-year basis, total new business embedded value was slightly over CAD1 billion, an increase of 7% over the prior year, reflecting pricing actions on our insurance business, partially offset the higher cost of hedging for our VA business.

Turning to slide 15, we reported in force embedded value of CAD38 billion as at December 31, 2012, reflecting an approximate increase of CAD2 billion over the prior year. The increase was largely driven by interest on embedded value and the value of new business. Partially offsetting this increase was the impact of shareholder dividends and an unfavorable currency movement in the year due to the strengthening of the Canadian dollar versus the US dollar and the yen.

Turning our focus to the operating highlights of our divisions, beginning with the Asia division on slide 16. As discussed previously, core earnings for the Asian division declined from the third quarter to $182 million. Core earnings were impacted by a number of nonrecurring items in the fourth quarter.

Sales results for the fourth quarter continue to be very robust. Fourth-quarter wealth sales in Asia more than doubled prior-year levels fueled by the successful launch of the Strategic Income Fund in Japan, record sales in Indonesia, and the successful start of the Employee Choice arrangement in Hong Kong.

Insurance sales increased 20% over the fourth quarter of 2011, driven by record sales in Indonesia and increasing term sales in Japan ahead of pricing increases. Total annualized premium equivalents, excluding variable annuities, increased 46% versus the fourth quarter of 2011 driven by strong wealth sales.

Total weighted premium income, excluding variable annuities, grew 42% versus the fourth quarter of 2011 due to sales growth and persistency. For the full year, Asia Division had record insurance sales and wealth sales, excluding variable annuities.

On slide 17 you will see our Canadian division operating highlights. Our Canadian division generated core earnings of CAD233 million in the fourth quarter of 2012, up 2% from the prior quarter. Insurance sales of CAD399 million in the fourth quarter were more than doubled in the fourth quarter of 2011 largely due to record sales and group benefits.

In terms of wealth performance in the quarter, record mutual funds and strong Group Retirement Solutions sales were more than offset by actions taken to moderate variable annuity sales.

Our Group businesses in Canada continue to lead the industry. The Group Benefits annual sales of over CAD1 billion is an industry record and our Group Retirement Solutions have led the industry in defined contribution sales for 11 consecutive quarters.

Manulife Bank also achieved record assets in the quarter, exceeding CAD21 billion. In terms of full-year performance, Canadian division more than doubled insurance sales in 2012, but wealth sales were down 7% versus the prior year, largely reflecting actions to moderate variable annuity sales.

Moving on to slide 18 are the highlights for the US division, which generated $297 million of core earnings in the fourth quarter of 2012, up 3% from the prior quarter. Fourth-quarter wealth sales of $5.9 billion represented an increase of 31% from the fourth quarter of 2011 despite a 78% decrease in annuity sales over the same period.

The increase in wealth sales reflected record mutual funds and retirement plan services sales. Fourth-quarter insurance sales increased 13% from the same period of 2011 largely due to strong sales of successful new life product offerings.

Wealth sales for the full year increased 3%, but were impacted by the decline in annuity sales. Life insurance sales increased 12% on a full-year basis, reflective of price increases and a focus on new products with more favorable risk characteristics.

Turning to slide 19, Funds under Management reached another all-time record of CAD532 billion as at December 31, 2012, driven by positive net policyholder cash flows and strong investment experience.

Slide 20 demonstrates that our investment portfolio continues to be high quality and well diversified. We continue to view this as a group strength.

Slide 21 speaks to the impact of net credit experience on fourth quarter 2012 earnings. We had positive credit experience in the quarter largely due to credit recoveries.

Slide 22 summarizes our equity market and interest-rate risk sensitivities, which continue to be ahead of our 2014 risk reduction goals. In the fourth quarter we further reduced our equity market sensitivity by adding CAD250 million of TOPIX futures notional value to our macro hedging program and approximately CAD700 million of guarantee value to our dynamic hedging program.

Slide 23 summarizes our capital position for the Manufacturers Life Insurance Company. We ended the quarter with a capital ratio for our main operating company at 211%, an improvement of 7 points over the third quarter of 2012. The improvement in our capital position reflects strong earnings in the fourth quarter; the reinsurance of a portion of the Japanese life business; and a CAD200 million preferred share issuance executed during the quarter.

You will note that we expect a number of changes to materialize in the first quarter of 2013, reflective of the 2013 OSFI MCCSR guidelines. First, an estimated positive impact of 4 points due to amendments to lapse risk capital requirements. And second, the phase-in over eight quarters of the changes related to IAS19R regarding pension obligations. These changes will reduce MLI's MCCSR ratio by 1 point by March 31, 2013 and by a further 4 points by the end of 2014.

Turning to slide 24, I will now address to topics which may be on the minds of our shareholders. The first topic is with regards to strain and expectations going forward. A major contributor to strain this quarter was our substantial increase in sales. Approximately half of the increase in strain over the third quarter can be attributed to the increased wealth sales in the fourth quarter.

As you know, upfront acquisition costs for mutual funds or pension sales are not deferred. We expect that we will continue to see higher wealth strain as we continue to grow this business. The remainder of the increase in strain is largely attributed to changes in product mix in JH Life, which we expect will return to more normal levels on a go-forward basis.

The second topic is with regard to outlook for our equity hedging program. Our objective is to maintain our equity risk within our target levels and continue to hedge opportunistically. In January, we added another CAD250 million notional of TOPIX hedges on an opportunistic basis. We have now hedged over 80% of our underlying exposure to the TOPIX index.

On slide 25, in summary, in 2012 we made substantive progress against our strategic priorities. We enjoyed positive progression in earnings since 2010 and improved 2012 net income by CAD1.6 billion as compared to 2011. We delivered core earnings of CAD2.2 billion in line with 2011. We generated record annual insurance and wealth sales in 2012.

We ended the year with MLI's MCCSR ratio at 211%, a 7 point improvement over third quarter 2012. We reported record of funds under management of CAD532 billion and we achieved our 2014 hedging targets more than two years ahead of schedule. This concludes our compared remarks. Operator, we will now open the call to questions.

(Operator Instructions). Peter Routledge, National Bank Financial.

Thanks for taking our questions. A couple questions just on Asia. First of all, in Indonesia, that looks to me like there was a loss for the quarter. Maybe you could explain what's driving that.

Yes, Steve here. Indonesia, you may be aware, interest rates declined very substantially in the quarter. The decline was something in the region of 60 basis points and so that loss in Q4 in Indonesia is very much attributable to the direct impact of interest rates.

So just on that, is that -- I mean, yes, I did notice that about the Indonesian 10-year rates. Are we sort of in a cycle of URR charges every third or fourth quarter in that country?

No, I don't believe so. I think the other impact in Indonesia was also we had very, very strong sales in Indonesia, so apart from the interest-rate factor; there is also a strain issue in Indonesia this quarter.

And Japan just had a blowout quarter in terms of mutual fund sales and the fixed annuity products, the Australian dollar product. What explains that boom in sales?

Well, we have found a product that the Japanese market seems to particularly like, which is a strategic income fund. We have some fresh management in Japan that's taken a fresh look at what's available in our investment division locker and they liked the look of this product and they were successful in securing some excellent distribution of that product through one of the major banks in particular, but also more broadly than that, and that product has really taken off in Q4.

And in fact we are feeling very good about that. At the same time, the Australian dollar product has continued to trade or sell particularly well in addition to that. So it would appear that Japanese consumer is increasingly interested in non-yen denominated assets.

Does that worry you at all in terms of tail risk?

Bob?

I think the Japanese consumers are very familiar with taking a variety of different kinds of currency risk and they manage that risk in their overall asset allocation, which predominantly remains extremely safe and extremely yen-oriented being deposits in Japanese banks.

So they are not -- they're just getting diversification and they're not shorting their own country?

No, the vast majority -- Japanese hold a huge amount in cash deposits, and they are seeking to diversify. What this really speaks to, which Steve identified, is the strength of the Japanese wealth management market, the huge amount of savings. It's all sitting in cash. And when you have a good product, good distribution alignment, you can sell a lot.

Those sales continued past the end of the quarter. This product we just launched at the start of December, we sold 800 million to date of this. We are selling it all around the world in great numbers, not just Japan, but it's a unique offering in Japan and it has performed extremely well.

Thanks for taking my question.

Mario Mendonca, Canaccord Genuity.

Good afternoon. One sort of detailed question. Steve, the runoff business, essentially which I think is just US annuity business; first is it appropriate to say that that's the only business that's in runoff? If so, could you talk about what the core earnings were from that business alone in 2012?

Mario, great question. I can't give you that information now. The business that you describe is indeed one of our major runoff businesses, but it's not the only one. There will be others around the group. As we go forward, we are looking at whether we can improve the disclosures in relation to that. It's a work in progress at the moment.

So just for the business as a whole then, maybe not that particular business, could you give us maybe a ballpark percentage of what your total earnings were in 2012, that may have come from that collection of runoff businesses?

Mario, when they talk about runoff, we are not selling the new business, for instance, the variable annuity. We -- Steve doesn't want to isolate variable annuity because we've also cut back very significantly the sales of no lapse guarantee, universal life in the United States. We've also cut back very significantly in long-term care sales.

Now to argue your point, the earnings from those things will not disappear for a very long period of time, nor will the capital allocated to them, right? We allocate a lot of capital to them, so this continues for a very long period of time.

I can tell you that I will be safely retired and doing all kinds of different things before there's any significant diminution of products coming from those lines of businesses. They go for a very long period of time, which gives us lots of time to build up the earnings stream from other businesses, which is exactly what our business plan revolves around.

Okay, just perhaps related, then, the core result was up about 3% year-over-year -- or 2012 versus 2011, the core earnings about 3%. Now to get to your CAD4 billion -- and this is where the non-core comes in -- or the non-runoff business comes in.

To get to the CAD4 billion it does imply a rather meaningful acceleration in that earnings growth over the next four years. Is there anything you can give us on maybe the cost-cutting initiatives that are in place that make that connect CAD4 billion a little bit more -- maybe a little more probable?

Well, it's a component but it's not the major component, by far. We have invested a heck of a lot in the businesses, you can see the growth. I mean, when you see new business embedded value in the quarter up 70%, the other investments that have been made -- I mean, Steve is quite open where we missed on courts generally because we've made investments in the future. That is all [reaping] exactly what we wanted to have happen, which is increased sales for the right kind of products that had better margins.

Mario, I think the other thing I would say is that I don't think anything has changed significantly or materially even from the Investor Day. So the fact that we had a narrow miss on core this quarter, but we frankly had a very, very strong quarter on sales and also on new business embedded value, we are exactly where we were at November Investor Day in terms of our forward-looking plan -- ambitions, if you like. In fact I would say I am probably rather encouraged because of the strength of the new business embedded value.

So maybe perhaps new business embedded value and the strength of your wealth sales, those are the things you would point me to in saying you still feel good about that CAD4 billion?

And the strength of the insurance sales, of the products that have now been repriced and de-risked for the benefit of our shareholders, so all of those things.

I think the other thing, Mario, the question around the expense project, that is continuing on target. There's a lot of momentum in it. We are very happy with where we are going. You will have seen we took a restructuring charge this quarter which has to do with the organizational redesign aspects of that and no reason to change our expectations around any of that at this time.

Okay, thank you very much for all the help there. Thanks.

Gabriel Dechaine, Credit Suisse.

Good afternoon. Just a bit of a follow-up on Mario's questions there. I guess if we are supposed to be looking at sales more intently as an indication of your future profitability, can you put it into context like the earnings emergence from the sales that we are seeing today will come in x number of years, hopefully shorter than what it would have been in the old days for Manulife? Is there a way to kind of give some timing on that? And I've got a follow-up.

I think that's a difficult question to answer succinctly because it depends on the nature of the products each product has its own profile of earnings emergence. And also -- I mean the accounting is also different. So we made the point in relation to mutual funds for example we can't defer the upfront costs in relation to mutual funds and pensions.

So we have some strain in the quarter related to these outstanding sales results and in relation to mutual funds, but that will pay dividends in future as we have earnings from funds under management, and the quantum of those will depend on what happens in the markets.

In relation to the Life products, well, some of those continue to be products that will give us earnings over a very long period of time. But I would just ask Cindy if she wants to add anything further on that and whether Life is particularly different from what it was three or four years ago.

Thank you, Steve. Gabriel, it's Cindy. No, our Life sales would have the same earnings trajectory and pattern that they would have had a few years ago. So there would be no change.

Gabriel, I think the new business embedded value number is important here, it's not just the sales but it's also the margin that's attached to those sales. And so the strength of that number is -- for me personally is the number I'm probably most pleased with in the quarter.

Absolutely, the margin -- and I'm glad you got there, Steve. The margin is much higher on them and the downside risk has been significantly attenuated in the products that we were selling in the past, both of which is a huge benefit to shareholders.

Okay, my follow-up is similar, but more focused on Asia, so if Bob or Steve want to take this one. I see the strain coming as a negative for the second quarter in a row; you had a strong level of sales, but in Q2 a high volume of sales triggered a big gain.

So I'm just wondering if there's something fundamentally shifting in the mix of the sales in Asia, maybe commission levels are going up in Indonesia, for example. And then relatedly there's like costs that you are investing in systems and branding. Is that going to be dialing back this year so that we start seeing the earnings coming out of Asia? Because we've seen the top line for a while now but not so much the earnings.

Okay, let me start on that and then I will hand off to Bob. Maybe he can give you some more color. So first of all, the strain issues this quarter were largely in Japan and Indonesia and do reflect some very significant insurance and wealth sales. But the wealth sales in particular gives us an immediate strain problem. So going forward we are thinking about how we can give investors better transparency over our strain data and we will be working on that, so that's one aspect.

You referred specifically to the branding issue. The branding that we noted in our release was very largely related to what was going on in the Hong Kong market. You may be aware that on December 1 this year basically employees were given the choice of where to take their Mandatory Provident Fund business and we have been a very substantial winner from that.

And unfortunately the costs of the branding do not qualify for deferral, so we had to take a certain amount on the chin on that. However, the assets that are now under our management in that space have increased as a consequence and will benefit future income. But I will stop there and I will pass off to Bob and see what else he would like to tell you.

I guess I would add that in the appendix slides that you have, you can see an eight-quarter history of core earnings from Asia. And clearly the fourth quarter was an outlier and our expectation going forward is for a run rate that more reflects the other seven quarters of history that you see there.

Steve is correct that the product mix is the reason why in some quarters last year you saw new business gains and in the last two quarters you saw new business strain. With the decline in interest rates around the region, the number of products in the portfolio that produced new business gains is significantly reduced over what it was historically.

So I don't think we are going to see those kind of results in the future. And in Q4 we had a particular surge in sales and a product in Japan that produces strain where sales increased prior to a planned repricing of the product.

On the expense side, there will always be some portion of our branding expenses that are more heavily concentrated in Q4 for tactical marketing reasons. But as Steve said, that was exacerbated this year because of the member choice launch in Hong Kong. And I think that will help some there.

Thank you.

Tom MacKinnon, BMO Capital Markets.

Thanks very much, just a couple questions. The reinsuring of the portion of the insurance business in Japan, obviously it helped the MCCSR, but you can't get something for nothing. So there's got to be some impact on future core earnings, if you will, in that segment, or is there? And what would that be?

Tom, absolutely right, there's no free lunch, right? So it benefited our MCCSR ratio by about 2.5% and we've probably given up about CAD9 million of annual income on that I think, Cindy?

That's correct, Steve.

And what was driving the decision to -- it looks like you got a release from the provision for the Japan tsunami of CAD44 million and that was offset by an increase in provision for Sandy of CAD6 million. So there is CAD38 million of kind of one timer sitting in that core, if you will, this quarter. Is that correct?

Yes, that is correct. I'll just start off with the tsunami and then just talk about the sort of core impact. So you are correct, we set up provisions in relation to the cost of claims in relation to the Japanese tsunami and earthquake. Our assessment now based on the information that we have is that we can -- we should appropriately release those provisions. We can see how those claims are developing.

And at the same time we set up a small provision in relation to Sandy. We still think that by large we will not be impacted by Sandy because the estimates of the insured loss on an industry basis still mean that the vast majority of our exposures are not triggered. And so there is a net benefit there.

If you look at the core, this is one of the items within core of a one-off nature this quarter; this is one of the beneficial ones. Bob has talked about some of the others that go in the opposite direction.

I would say in the big picture, we have probably got pretty much a breakeven on the one-offs this quarter and the real sort of quarter-on-quarter core story, if you like, in terms of why core has increased it's strain. So it's a strain story and it's associated with the very strong sales quarter we had.

And the credit experience gain of CAD26 million, that's in the core as well?

No, that's in --

That's not in the core?

That's not in core.

Okay, good.

That's in investment gains.

Okay --

Remember we capped those at CAD50 million a quarter.

Okay, that is included then. That is not investment gain, these are credit experience gains, but that's included in that -- (multiple speakers) okay, got it, thanks very much for that.

It's part of the 368 and we had recovery this quarter which relates to provisions set up.

And the restructuring charges, we had some last year that were kind of not -- that were not included in core. And then there's some more that are a lot higher this quarter. But when do they -- when do those stop and I'm just trying to get a feel for (multiple speakers)?

Okay, I'm not sure about last year, Tom, to be frank. And I'm just looking to see if anyone else remembers that. Oh US, sorry, it was Q4 2000 and --?

Sorry, last quarter. Not last year, last quarter.

Last quarter, okay. Let's deal with the current challenge, so the current charge is related to the organizational redesign aspects. This is basically us reducing the number of layers in our organization to make it more efficient and nimble and also widening span of control. And as a consequence of that, we have some people who have left the organization. These are the costs associated with that.

And we've basically taken a charge that takes into consideration what we have already done and what we are expecting to do over the coming, say, two or three months. Now I'm not saying that's the end of it, there may be some bits and pieces as we go forward, as we get further into the E&E project and we start to get some infrastructural redesign executed, I'm not sure what else will come along.

I think in 2013 if you take E&E and all the redesign together, for the 2013 accounting year, I suspect the whole thing will be pretty neutral because we need to invest in some of these E&E projects and also because we won't get the full-year benefit of some of the organizational redesign work that we've been doing.

But it will add to future years.

Yes, so by the end of next year we should be able to articulate....

But the benefit would be in core and the cost would be outside of core. Is that the way you're going to disclose it?

Yes.

Perfect.

Because the benefit is like an annuity, it will recur year over year. Remember, the purpose of core is to demonstrate the earnings capacity of the Company once you pay the one-time cost of reducing cost. That's a gift that keeps on giving in terms of its contribution to earnings. Absolutely appropriate. You wouldn't have us keep that in the core 20 years from now.

All right.

The purpose is to make it understandable.

Okay, thanks.

Joanne Smith, Scotia Capital.

Yes, good afternoon. I just thought I would go back to Japan for a minute. And you talked about the fact that you have this very good new mutual fund, the strategic income fund that's being very well-received in the market there. You also talked about the Aussie dollar fixed annuity product. Can you tell me how much of your -- of the volume that you have seen in terms of the growth is being driven through banks?

I will just ask Bob to answer that one.

Yes, I would say of the total wealth sales, 80% is coming from banks and the balance from securities firms. Of the mutual fund itself it's almost all coming from banks.

Okay, how do you moderate the amount of volume that you are getting there so that the Aussie dollar fixed annuity price doesn't become disproportionately large relative to the other products that you are selling in Japan?

The way that I am thinking about it, some other companies were talking earlier today about you need to be very careful about the bank channel because a lot of volume can come in in a very short period of time. And so some other companies moderate that volume via pricing mechanisms.

Yes, we would set our pricing on a regular basis, too. It accounted for as I say maybe 20% of our total wealth sales in Japan. So it's not a huge chunk of the sales that you are seeing there. And we would monitor our competitive position constantly so that we don't get swamped by business at a low margin.

Okay, great. Thank you. And also the other question that I had with respect to the strain. I know that this is probably not something that you could readily answer, but maybe you could help us think about what level of normalized strain, assuming that these types of volumes that you reported in the fourth quarter are not necessarily sustainable?

Let's just say that the 40% / 30% growth in insurance and wealth sales modulates -- moderates to something like 15% or 20%. The $146 million in new business strain, how do we think about that number and where that goes from here?

Joanne, the biggest determinant of that is what happens to interest rates. As Steve said earlier, the combination of high sales with interest rates dropping in Indonesia, I mean anytime that happens we will have strain show up. The most important part though to understand is the way our valuation works is once we've taken that strain, the future profit emergence is just like any other product, right.

So we take all the adjustment in the first year and that will produce a stream of earnings just as good as any other product in the future assuming conditions of course don't change. So anytime you have a rapid downward movement in interest rates you can expect an increase in strain.

The other aspect that Steve touched on earlier, which is we talked about the mutual fund business and it's a really good example of it, where it isn't necessarily negative in the first year, but it certainly doesn't contribute much because of the up-front costs.

But in all subsequent years it will produce a very substantial benefit, which is why everyone who looks at that business looks at it on an EBITDA basis. We don't do it because it's not a significant part of our accounts, but you can rest assured with the kind of volumes that we are generating we are generating a big storehouse of future earnings.

Okay, I guess maybe we can attempt it in a different fashion. The new business embedded value is certainly indicative of the future profits of the business. So did we talk about -- maybe somebody else asked this in a little bit different way. Have we talked about how that new business embedded value emerges into earnings over time?

Joanne, this is Cindy. We don't normally talk about that, so I can't give you an answer on the call today in terms of how you would see earnings emerge from new business embedded value. But I think that you can -- there's nothing about the business we are writing today that would be different than what that was written in the past, so I wouldn't expect a huge change in the emergence of earnings. Maybe slightly different because of the volume of mutual funds.

One is the fact they have better margins, right?

And they have better margins, yes.

So I think it is better than the past because the risk...

Well, it's higher but not the timing, sorry. I wasn't very clear. The timing wouldn't be much different, obviously higher because of the higher margins.

Okay, I get that. Thank you very much.

Darko Mihelic, Cormark Securities.

Thank you, just two real simple questions. The first is, Steve, after all is said and done here, should we expect anything different with respect to your tax rate on a go-forward basis? And secondly, I just want to understand -- and sorry to circle back on strain, but rates went lower in Indonesia and Japan and it's causing some strain. Am I also to understand then that you are really not considering any pricing action whatsoever in Asia?

Let me start off with the first one, Darko. Regarding the tax rate, no, we don't expect any particular change to our tax rate. I think we have given an indication previously of what we would regard as a normalized average effective tax rate for us. Although every quarter it's different because it depends where the earnings emerge, but no, there's no fundamental change there.

Regarding the repricing, we have actually carried out a significant amount of repricing activity, but maybe Bob would like to comment some more.

Just to clarify, the increased strain in Japan was the result of kind of the last round of sales of a product that has now been repriced.

Okay, and Indonesia, it didn't sound like there was any contemplation there of any changes in pricing there. Is that correct?

Well, in Indonesia, there's kind of an ongoing plan for gradual repricing of the portfolio in recognition that we really don't expect interest rates to go back up in Indonesia given the ongoing strong performance of the economy of that country.

But rate dropped about 60 basis points, so anytime you have a sudden drop, you are going to end up with an increase in strain. But again, the earnings profile of the future is as good as any other product.

I guess what I am also trying to dig around on is your sales numbers look great and maybe perhaps part of that could be that you are pricing relatively aggressively versus competitors in Asia and I just want to get a sense of whether or not you are kind of holding back on some price increases to just keep the sales numbers coming in.

No, to the contrary. I think we have shown a pattern not only in Asia but in North America as you know as a matter of fact leading the pack in terms of raising prices. The notion of strain, most of the companies in Asia report strictly on an embedded value basis, so that's all the attention they do. And some of our competitors have been quite a bit slower to react to lower rates than we have. So no, we are very committed to maintaining adequate margins on the products.

Okay, thanks very much.

John Aiken, Barclays Capital.

Good afternoon. In your disclosures we saw the impact that foreign exchange had on embedded value and you can back into it from -- on the expected profit from in-force. I have to assume that a lot of this has to do with the depreciation of the Japanese yen.

So with the continued appreciation of the Canadian dollar against the yen, particularly since year-end, how does this shade your outlook for being able to achieve the financial goals in 2016 given the fact that Japan continues to be a major contributor to the Asian earnings?

John, I will deal with the second part of your question. It is a relatively small impact in terms of 2016 earnings, one that's entirely manageable in fact with the increase in sales in Japan and other places expected to wash out. In terms of how it impacted the quarter, I'll turn it over Steve.

Yes, there was no material impact in the fourth quarter regarding the Japanese yen. Regarding the outlook, as you know, John, we don't hedge the foreign exchange-based future income streams. We don't think that's what our shareholders want us to do, so we will have wins and losses depending on how the Canadian dollar moves against other currencies.

But the US dollar and the Japanese yen in particular. They were -- therefore given the decline in the Japanese yen year to date right now we could probably expect a minor negative on that in Q1 as things stand. Having said that I think it pales in comparison to what happens in relation to the equity markets and our sales activity there. We don't see it as a major factor.

Great, thank you very much.

Michael Goldberg, Desjardins Securities.

Thanks. I would like to get back to the runoff variable annuity I guess in the states. Don, you said that earnings are going to continue to emerge here for years into the future. But could there be a time when it's run off to an extent that it's worth selling the remaining contracts or is it so blended in with the rest of the US wealth business that there isn't any infrastructure expense issue to be considered?

Yes, it's a good question, Michael. It runs off gradually over time with lots of advance notice and so on. As we said before, you know, when we repriced especially with a very conservative basis the Canadian reserving applied to it, there are likely very substantial gains on this business going into the future.

That's not to say that end to end it's been a great experience. But after having bolstered reserves and done all the things we have done, we would like our shareholders to get the benefits of that, having raised capital and done all the things that we have done to support that business to get the benefit when the earnings emerge is very substantial.

The other part of your question, in terms of its relation to the other business, you are absolutely right. That business was sold out of Manulife companies in some cases with capital maintenance agreements and so on. So if one did want to sell it, it would actually be a more complicated transaction trying to disentangle it from the rest of the business and you can imagine all kinds of implications.

But the real core story here is that there's a lot of profitability that is deferred into the future and I would hate to deny shareholders the benefit of getting those earnings that they so justly deserve. And this business is very, very well provided for and a very, very high likelihood of returning both earnings and capital to their benefit in the future, so I'm not anxious to sell it.

I was just trying to see if it was possible by selling it to accelerate the realization of that value.

No, you're right, but you'd give up a stream of profits associated with it. And in an extreme situation, yes, one could sell those businesses. We've seen indications of that other places and that can be done, but in our opinion that is not in the interests of shareholders.

It's also -- we have to be aware of the policyholder implication. We sell a lot of things through distribution channels in the United States who sell a variety of our products. They sell life insurance, they sell 401(k) products, they sell mutual funds for us.

And for us to announce that one portion of business that they had sold in the past that we no longer want to be associated with the guarantees associated with those, so we are passing those guarantees to another organization, especially if it wasn't as well-capitalized as we are. They bought it from us. They bought it from us in the first instance. They look to us to be their provider on a whole range of products.

It is an issue that would have to be dealt with with our distributors if we were to do that. So for all those reasons, the sale of variable annuities, we've had our challenges with it, but it's well provided for. And it has also provided us with a great platform to sell all the other things that we are selling currently through those same channels of distribution.

On the long-term care in the US you're now up to 43 states that approved the rate increases on the in-force business. Are you in a position where you can say anything now about your -- about how you feel about the strengthening that you did some time ago of your reserves and your pad as to whether it was too much, too little, or just right?

That's pretty definitive. And as you look at the pad, I mean people know it, it's a number with a certain number of digits with it, and to say it's just right would be a strong statement. But we are very, very comfortable with what we have taken -- the reserving action.

We are also very pleased -- this is our right, our legal right to increase prices if experience justifies them. And we are very pleased that 43 states have agreed with us that what we're asking for is reasonable and provided for by the legislation. It makes you feel good about the long-term care, the ability to do that.

We're still watching the experience on the existing block and it hasn't been so favorable. Now it's not a big issue, it's not something that has us concerned. But before we would release anything, we'd want to make sure we got it exactly right. And I guess quite frankly I would rather have the next price increases from all the states, not just 43, from all the states before we would be sure about what the right number is going forward.

Okay, and I guess the one other question I had is on the total of CAD368 million of gains, as you said, there's CAD26 million of credit and then two other components are yield enhancement and origination of alternate investments. And as you know, I kind of think of the origination of the alternate investments as being an ongoing fairly unique item for Manulife.

Is there any way that you can break out the remaining -- the remainder between the yield enhancement and origination of alternative investments in the gains?

Michael, maybe I should explain the process, because I think this is one that has the capacity to sort of confuse a lot of people and what are these gains? And I think you understand this better than most. I know that for a fact. But when the premiums come in we price against a long-term return. And let me just use a fun number, I will say 5%. So we assume that we are going to invest in a blended investment that will produce 5%. And that's strictly a hypothetical number.

When the cash flows start coming in, unfortunately we don't have investments ready to go. The ideal world would be a premium comes in and we have an investment available that very second to match it off and we will be able to achieve our target yield.

What tends to happen though is the cash flows will come in and we park it in treasuries for the time being or cash in some cases and wait for the right investment opportunity. That may take 30 days. That could take two months. It could take three months. It could take a year to find the right investments that will achieve our target mix.

What happens is when we bring in the cash flow we take a hit to earnings, either a loss or a reduction in the amount of earnings that we would assume. And then we find the right assets to bring up to our target mix, we get the benefit of it at that time. That's mainly what that reflects is us putting to use.

In our -- we said it before on the call in many occasions that we are sitting on way more treasuries than we would like to have. People have complimented us on our safe credit mix and we've tried to say but that isn't where we want to be. We would rather have that money put to use in our target asset mix and in the fourth quarter we were able to do that in considerable measure and that was what contributed to the earnings.

Okay. You didn't answer my question, Don.

Yes, how much of it came from that?

How much came from yield enhancement versus origination of alternative investments? Because I know the credit is CAD26 million.

Michael, it's Scott Hartz. We don't actually have a terrific attribution of that the way we calculate it, so I would be a little reluctant to give you a number. We are working on doing that.

But I would just reemphasize Donald's point that over the longer term the alternative assets -- we have a certain mix and you wouldn't expect in the long-term those gains to be repeatable. Some quarters we will originate -- we will have good originations, some quarters we won't, so there will be positives and negatives there.

But as far as an attribution goes, it's a little difficult the way we calculate it to back out an attribution. It really is how the whole mix of assets you put on the books -- very diverse as your reserve assumptions. To break out by component is a bit difficult.

That's why we cap, Michael, in the core earnings calculation the number at CAD50 million somewhat arbitrarily because we don't want people taking that CAD360 million and multiplying by 4 to annualize, because we are being very clear with people. That was an exceptional quarter. That is not likely a repeatable event.

I mean it will happen sometime in the future, who knows when, but it might be a long time before the number gets that big. And I know you like -- you believe that we have superior investing capability, you would like to figure out what the more repeatable portion is and break that down and I'm telling you that's very difficult to do.

Okay, my last question concerns John Hancock Retirement Plan Services. And you noted that there was a departure of a key competitor that benefited your sales this quarter. How much was the benefit and I guess this is just a one-time item?

This is Craig Bromley. The RPS business had higher sales, yes, in part because of the transaction involving our competitor. But in general there is more movement in the market right now due to greater disclosure of fees.

So figuring out exactly how much is related to the transaction and how much is related to sort of a general movement in the industry is very difficult. But I would say that we expect this kind of high sales volume to actually continue as the industry continues to basically re-look at all their plans and change providers. So I wouldn't expect a big drop-off or anything like that in sales.

Michael, I guess I'd add to that we've invested a huge amount in trying to develop the capability to take that 401(k) business upscale into bigger case sizes. And you should expect and hold us accountable for Showing increasing 401(k) sales every quarter going into the future.

Sumit Malhotra, Macquarie Capital Markets.

Good afternoon. Two quick numbers questions, please. First off, just to return to the investment gains, Don, you said it -- that you chose the CAD50 million number somewhat arbitrarily. And if I -- in terms of including it in core. And if I look back at this line over the past couple years, it's consistently been higher than that number. So maybe this is more for Steve.

Under what circumstances would you consider increasing the amount of investment gains that you include in the core calculation? And the second part of that is, correct me if I'm wrong, but the investment gains were obviously being used as somewhat of an offset to the interest-rate sensitivity. With that having come down substantially, are you effectively of the view that the realization of the gains is going to be lower going forward?

I'll let Steve handle the first one. I think what he will do is tell you how we derive the CAD50 million based on historical observation and not a lot more than that. But the second one I am not understanding it at all. There's no offset there against interest-rate impacts. Could you help us with that second part of the question?

It's Scott, sorry. I think there is a component -- when we derisked, which we did largely in 2010 and 2011, we were able to release pads when we derisked the interest-rate risk we were able to release pads and that went into investment gains, so it was a component.

When you look back over the past three years, the gains have been very high. A component not so much in this past year but in the prior two years has been due to the derisking of the interest-rate and that surely will not continue going forward because we're very comfortable with where we are there.

Just on the first question, we got the CAD50 million by averaging the gains from the first quarter of 2007 and that average came in at CAD80 million. And we wanted to ensure that whatever we entered in core earnings was included conservatively relative to that. So Donald's reference to the subjectivity around that was we chose CAD50 million, we could have chosen CAD60 million, but it's CAD50 million.

In terms of will we change that going forward, no, absolutely not until we have very significant different evidence upon which to make such change, I think it would be inappropriate to do that.

And the second one, the last question is around the use of reinsurance. You mentioned the reinsurance in Japan this quarter and I believe you had a similar move in the US a couple of quarters back. With the MCCSR now comfortably above 210%, could you give me an idea, is the use of reinsurance in 2013 likely to be limited by Manulife now that the capital seems to be in very good shape?

Well, I think we'll continue to look for opportunities where we believe that the net benefit to shareholders makes such a transaction appropriate. So if we can get a pickup in our MCCSR ratio and the amount of earnings we give up is tolerable to us and the effective cost of the transaction is therefore desirable then we are open-minded to doing more of that. But we have nothing on the blocks at this moment. But that's not to say we won't have similar small transactions of that nature going forward.

And you should not assume that the only motivation for doing reinsurance transactions is the capital relief. In fact, the biggest transaction that we executed in 2012 was designed to release us from a risk, it's not one that's on everybody's mind right now, but we talked before about the way these [SPDA] blocks work and they can be very, very difficult in a time of rapidly rising interest rates.

Again, that is not something that people see happening in the next 12 months, but when it happens we may not get a lot of notice of that. So we would just as soon not have that risk because it's not a good risk/reward profile for investors.

Thanks for your time.

Thank you. There are no further questions registered at this time. I would like to return the meeting back over to Ms. Asher.

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

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