Manulife Financial Corp (MFC) 2015 Q2 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon and welcome to the Manulife second-quarter 2015 financial results conference call for Thursday, August 6, 2015. Your host for today will be Mr. Robert Veloso. Please go ahead, sir.

Thank you and good afternoon. Welcome to Manulife's conference call to discuss our second-quarter 2015 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 remarks. We will then follow with a question-and-answer session.

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 Caution Regarding Forward-Looking Statements.

We have also included a Note to Users slide that sets out the performance and non-GAAP measures used in today's presentation.

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 as we will do 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, Robert. Good afternoon, everyone, and thank you for joining us today. This morning we announced our financial results for the second quarter of 2015, and indeed we had a strong quarter.

We continued to deliver robust sales growth in both wealth and asset management and life insurance. We grew our core earnings by 29% to CAD902 million and our assets under management and administration reached CAD883 billion. Core earnings were in fact higher than our expectations, but net income as a result of changes in interest rates were lower than expected.

On slide 5, we are showing some of the performance and strategic highlights. In Asia, we delivered another record quarter of insurance sales with strong growth in Japan, Hong Kong and Singapore. We doubled gross flows into our wealth and asset management businesses reflecting the success of new funds launched in mainland China as well as continued strong growth in Hong Kong.

In June, we became the first foreign invested joint venture life insurance company in mainland China license to sell mutual funds through our insurance agency force. This latest development helps differentiate us from our competitors in Asia and allows a more holistic approach to helping our customers with their financial needs.

In Canada, we generated solid individual insurance sales, we delivered strong wealth and asset management flows and we announced the addition of more than 800 automated banking machines across Canada to provide our customers with more convenient and economical access to their bank accounts. Our bank customers now have access to the second largest ABM network in Canada without paying convenience fees.

In the United States, we achieved our second-highest quarter of mutual fund gross flows. We successfully completed the acquisition of New York Life's Retirement Plan Services business and on July 2 we completed the related reinsurance transaction.

We acquired Guide Financial, and innovative software provider, which leverages behavioral finance and artificial intelligence to assist advisors and customers in making financial decisions. And we launched John Hancock Worldwide Investors, a platform focused on expanding our reach to non-US domiciled investors.

In terms of our global wealth and asset management businesses, we achieved CAD475 billion in assets under management and administration for our wealth and asset management businesses, lifting our total Company figure to CAD883 billion. And we generated CAD14.5 billion of net inflows including record flows from institutional clients driven by large institutional mandates.

Turning to slide 6 and the financial highlights for the second quarter. On the bottom line you can see core earnings were robust and they were in fact higher-than-expected, up CAD201 million from the prior year to CAD902 million. But net income of CAD600 million was lower than expected, as I say, as a result of changes in the interest rates having to do with the shape of the yield curve.

On the top line, we generated strong growth in both insurance sales and wealth and asset management net flows. Insurance sales grew 27% from the prior year. And net wealth and asset management flows of CAD14.5 billion were up CAD8.1 billion versus the second quarter of 2014. This represents our 22nd consecutive quarter of positive net flows.

Our strategy to grow our business through innovation and customer centricity is unfolding very well and we are confident that it will continue to yield results for our shareholders. With that I will turn it over to Steve Roder who will review our financial results and then open the call to your questions. Thank you.

Thank you, Donald, and good afternoon, everyone. Let's start on slide 8 where we summarize our financial performance for the second quarter of 2015. As you can see, most of our key performance indicators demonstrate positive trends.

Our strong core earnings demonstrate our continued execution on the key drivers of earnings growth, increasing scale in our wealth and asset management businesses, generating strong insurance growth in Asia, and delivering on our E&E initiatives.

Sales results were very robust with all divisions contributing to the success. And we also maintained a high degree of financial flexibility with prudently conservative capital levels and improved financial leverage. We were, however, impacted by the steepening of the yield curve which led to lower net income this quarter.

In the following slides I will spend time discussing our financial and business performance.

Turning to slide 9, core earnings continue to demonstrate solid progress, rising 29% compared to the prior year. This quarter's core earnings included a CAD37 million contribution from the recent acquisitions.

But excluding acquisitions core earnings were up a very strong 23% compared to last year driven by: higher fee income from higher asset levels in our wealth and asset management businesses; strong insurance sales in Asia; and the strengthening of the US dollar. This quarter we also benefited from higher than average realized gains on available for sale equities and a number of smaller items.

Let me take this opportunity to note that we view the magnitude of the available for sale equity gains and favorable smaller items to be unlikely to repeat to the same extent which we experienced this quarter. That said, investment-related experience included in core earnings this quarter was below the CAD100 million we target.

Turning to slide 10, second-quarter net income was negatively impacted by a charge from market-related factors, primarily the result of the steepening of the yield curve. You may recall that in the fourth quarter of 2014 net income benefited from the flattening of the yield curve. This quarter we saw the opposite happen, reversing out the previous gains.

This was partially offset by strong investment-related experience of CAD128 million, CAD51 million of which was included in quarter earnings and CAD77 million offset against the investment-related experience losses in the prior quarter.

On slide 11 is our source of earnings. Expected profit on in-force increased from the prior year period largely due to growth in fee income and lower DAC amortization on our legacy variable annuity business.

Additionally, the impact of lower interest rates was more than offset by the benefit of standardizing the methodology for attributing expected earnings on assets that support our provisions for adverse deviation.

New business strain improved due to higher insurance volumes and improved product mix in Asia, partly offset by higher non-deferrable acquisition costs in our wealth and asset management businesses.

Experience losses reflect the impact of the steepening of the yield curve and unfavorable policyholder experience, partially offset by favorable investment-related experience.

Management actions and changes in assumptions this quarter reflect the integration costs of recent acquisitions, changes in actuarial methods and assumptions, and the expected macro hedge costs, partially offset by gains from reinsurance recapture.

The Other category this quarter includes Standard Life's earnings and a number of smaller favorable items. And earnings on surplus benefited from higher than average realized gains on available for sale equities.

We had a tax credit this quarter reflecting a benefit from an increase in the Alberta statutory tax rate coupled with the mix of gains and losses in our various tax jurisdictions.

Turning to slide 12 and insurance sales. Insurance sales increased 27% from a year ago. This increase reflects very strong sales in Asia driven by record volumes in Japan and Asia Other, and double-digit growth in Hong Kong.

The benefits of product changes in retail insurance in Canada, coupled with higher large case Group Benefits sales, and modest growth in US life insurance sales.

The roll-out of Vitality in the US is progressing well and leading to a growing base of applications, however, we don't expect this to have a meaningful impact on sales until the second half of this year.

On slide 13, you can see the net and gross flows in our wealth and asset management businesses continue to be strong.

In the second quarter, net flows of CAD14.5 billion were up CAD8.1 billion from the previous year, while gross flows of CAD35 billion were up 74% reflecting a record quarter for Manulife Asset Management, including a significant new institutional mandate from a Canadian client; strong mutual fund flows in mainland China due to new fund launches and favorable investor sentiment and solid growth in Hong Kong pensions; continuing strong mutual fund net flows in the US; and solid gross flows and retention in Canadian mutual funds and group pensions.

It is important to keep in mind that business in Asia tends to be somewhat dependent on the performance of local financial markets, and therefore we expect to see quarter-to-quarter variability. And while recent markets in China have led to some of the second-quarter's strong inflows reversing in July, we are quite pleased with the overall outcome.

Moving to slide 14, other wealth sales more than doubled from a year ago, this increase reflects strong segregated fund sales in Canada including a significant contribution from Standard Life products, and very strong sales in Asia driven by expanded bank distribution of our single premium wealth accumulation products in Japan and robust growth in Singapore.

On slide 15 is our New Business Value. New Business Value increased 34% from a year ago largely driven by strong sales in Asia and an improved business mix. New business margins in Asia increased 27% from 24% in the prior year driven by a 6 percentage point improvement in Japan's new business margin.

Turning to slide 16. Our assets under management and administration at the end of the second quarter reached CAD883 billion, up CAD246 billion from the prior year quarter. The inclusion of the Canadian-based operations of Standard Life and the New York Life RPS business contributed CAD130 billion to the increase.

Our wealth and asset management businesses achieved assets under management and administration of CAD475 billion, up CAD80 billion excluding the recent acquisitions. Pensions, mutual funds and institutional asset management business lines all contributed to positive net inflows.

On slide 17, you can see our capital position and leverage. Our regulatory capital ratio of 236% decreased 9 percentage points from the prior quarter, reflecting net financing in the quarter and the completion of the New York Life RPS acquisition, which had a 4 point impact on MCCSR in the quarter, and a proportion of which will reverse with the third-quarter closing of the related reinsurance agreement.

We ended the quarter with a leverage ratio of 26.2%, down 40 basis points from the prior quarter and 200 basis points from the prior year. Of note, we have a further CAD1.7 billion of debt maturing in the third quarter.

Turning to slide 19 and our focus on the operating highlights of our divisions, we begin with the Asian division. Asia core earnings increased 23% on a constant currency basis driven by higher insurance volumes and improved new business mix, favorable policyholder experience and increased fee income from higher assets.

Insurance sales of $374 million increased 36% from the prior year, reflecting record sales in Japan due to continued success of corporate products and expansion into the retail MGA channel, Recent product launches in Hong Kong, and record sales in Asia Other driven by strong double-digit growth in all major markets.

Gross flows into our wealth and asset management businesses were $5.2 billion, more than double the prior year, reflecting new fund launches in mainland China combined with favorable market sentiment, robust pension sales in Hong Kong benefiting from a successful sales campaign, and new fund launches in Taiwan.

Turning to our Canadian divisions operating highlights on slide 20. Core earnings increased 31% over the prior year driven by contributions from the Standard Life acquisition of CAD36 million, higher fee income from higher assets, and the benefit of a reinsurance recapture partly offset by unfavorable policyholder experience.

Insurance sales of CAD166 million were up 28% from the prior year reflecting improved large case group benefit sales and strong retail insurance sales.

WAM gross flows of CAD3.9 billion increased 64% versus the second quarter in 2014, largely due to large case sales activity and the addition of Standard Life in our group retirement business and continued momentum in mutual funds. Excluding contributions from Standard Life products gross flows were up 26%.

Moving on to slide 21 and the highlights for the US division. Core earnings were $327 million, up 8% from the prior year, reflecting: lower DAC amortization on the variable annuity block; higher fee income from higher wealth assets; and a number of favorable policy related items; partly offset by unfavorable policyholder experience in JH Life.

Insurance sales in the quarter were $118 million, up 2% from the second quarter of 2014 reflecting growth in life insurance sales from the continued strength in our UL products, driven by enhancements made last year partly offset by lower LTC sales.

WAM gross flows of $11.1 billion increased 11% versus the prior year reflecting: retirement plan services gross flows which benefited from the New York Life acquisition and a 9% growth in gross flows into our small case offering as we are seeing the benefit of actions taken to improve competitiveness; and JH Investments achieved its second best quarter ever of gross flows, off only slightly from the prior year, which included a large institutional platform allocation.

Turning to slide 22 and the overview of our wealth and asset management businesses. Core earnings from these businesses increased 20% over the prior year driven by higher fee income from higher assets under management and administration, partly offset by higher non-deferrable acquisition costs.

Of note, we currently do not include contributions from Standard Life in any of our business line earnings. We're going through the process of aligning Standard Life's business with our consolidated business line reporting. And once this is established we will include the earnings from the pension and mutual fund business here.

Record assets under management and administration of CAD475 billion were up CAD189 billion from the prior year reflecting CAD109 billion in contributions from our recent acquisitions and positive net flows.

We achieved net flows of CAD14.5 billion in the quarter, more than double the prior year, largely due to record institutional net flows including a significant new mandate from a Canadian institutional client, and strong performance of our mutual fund businesses in all geographies.

So in conclusion, in the second quarter of 2015 we generated strong core earnings growth, achieved strong double-digit growth in insurance sales and gross flows, delivered net flows more than double the prior year, and reached CAD883 billion in assets under management and administration.

This concludes our prepared remarks. Operator, we will now open the call to questions.

(Operator Instructions). Steve Thierault, Bank of America Merrill Lynch.

Thanks very much, so a couple questions. If I could start with the wealth and asset management flows probably for Roy or maybe for Steve. Just looking at slide 19, you talked about the mainland China launches. From what I see on the right most chart on slide 19 it looks to me like it might be in the range of $3 billion in terms of the benefit from the fund launches. So just if you can talk a bit about the repeatability, the volatility, what we might expect going forward from here.

Yes, thanks, Steve. Let me start and then I will pass to Roy. So I think as I mentioned on the call, we obviously had very strong flows in the second quarter. And you will have seen that what has gone on in the market, as you would expect, we have had some outflows in the third quarter to date.

But overall it has in aggregate been a good experience for us. So we are feeling pretty good about that. But why don't I pass to Roy and see if he would like to give some more color around that.

Yes, thanks, Steve. Yes, I think that is pretty much what I would say. And I would just reiterate a couple of points. And that is that asset management business, not only in China but across most markets in Asia, are obviously very much driven by sentiment.

And we saw a strong first half to the year not only in China but many other markets across Asia. And that was also complemented by the launch of a whole lot of IPOs. And that certainly helped our business in quarter two.

Sentiment obviously has been impacted in a negative way in July and we have seen some outflows. But overall feel very happy with the movement of our business and gross flows in total.

Is there anything special about the fund launch relative to what looked like a few billion of net flows? So would you tell me that in a good environment you could see those -- that level of flows repeat in future quarters if the stars are aligned?

Kai, do you want to --?

Yes, so this is Kai Sotorp representing wealth and asset management. We were clearly -- overall I think we saw the franchise delivering results consistently across many markets and channels. And so, I think overall we are going to see a pretty robust continuation of the pipeline.

But we were helped pretty significantly by some major winds on the institutional side. And these kinds of tailwinds are not necessarily repeatable.

With respect to what is happening within Asia, I would say overall it was an unusual quarter in terms of the China activity and that is not something that is going to be likely repeated quarter on quarter. It was a very ebullient equity market.

But there are other parts of Asia that are now going to be firing, namely Japan, Singapore and Hong Kong which will, I think, offset that. And Roy it might comment a little bit further on that. But we have a very well diversified platform overall globally.

Okay. Second question, probably for Steve, on new business embedded value. You have had a nice buildup of Asia new business embedded value to the point where the majority of the CAD227 million of new business embedded value in Q2.

Can you talk a bit about the sustainability of the CAD140 million or so in Q2? Is there anything you see on the horizon that is obvious that is going to moderate from this level -- or moderate that measure from these levels? And can you talk a bit about that mix shift that you mentioned in Asia that was helpful from an NBEV perspective?

Okay, Steve, let me make a couple of general comments and then maybe Cindy may want to add some more to this. So first of all I would point out there is some seasonality in new business embedded value. So you have to be a little bit careful if you look at a quarter-to-quarter trend line. So that we do experience.

And I think it is probably fair to say that as an organization we have got a greater focus on new business embedded value now than we have probably had historically. And that goes hand-in-hand with the new disclosures that we have provided at Investor Day, etc.

So that is going to be good. And I think that has resulted to some of the improvements we have made and some of the focus we have had on implementing changes to products, etc. Let's see if Cindy has anything else she would like to add to that.

Well, I think you captured it, Steve. We will see variability in our new business embedded value quarter to quarter based on sales volumes and mix. But we are seeing good sales results from Asia.

We have over this quarter and we don't see any change in that. So I wouldn't say that we see anything that is going -- we don't see this quarter's NBEV for Asia as being inflated. I think Roy would like to add something.

I think that is right. I think our new business values benefited in Asia from the expansion of our distribution as well as new product launches. And we are expecting that that strong momentum will continue. So we feel very confident about that.

Would anyone take a stab at how much currency positively impacted the year-on-year comparison?

Yes, overall it was in the region of CAD60 million to CAD70 million.

Thanks for much.

Sorry, sorry, I'm talking about earnings not for new business embedded value. Are you talking about new business embedded value?

Exactly, yes.

Yes, unfortunately I don't have that number at the top of my head in terms of the currency impact. We can take that off-line and get back to you.

Sounds good, thank you.

Humphrey Lee, Dowling & Partners.

Just a question for Craig regarding the Department of Labor fiduciary. Last quarter you said you were kind of still looking through the proposal and don't expect any material impact. And we were just wondering, do you have any updated views on the proposal? And what the potential impact would be on John Hancock if the proposal were passed in the current form?

Yes, this is Craig, thank you for the question. Yes, so certain things have occurred since the last time we spoke. The comment period was concluded and I think we commented in a number of different ways, both individually as a Company through there a number of the industry associations with which we are members.

The commentary to the Department of Labor was pretty consistent I think if you look across the submissions. The general feeling from the industry is we support the principles involved here of protecting consumers, transparency, fairness, etc.

But are real concerned that some of the regulations may be unwieldy and may actually lead to a situation where actually advice for retiring Americans actually is reduced or is more difficult to deliver having sort of a counterintuitive effect than what the DOL is trying to achieve.

We believe that Department of Labor is certainly trying to get this right, i will listen to these comments and will come back with some balance to their proposals.

For our Company specifically and the impacts on us, we have taken a lot of steps in the last few years to really comply with all of the principles that the Department of Labor is trying to achieve. So you have heard a lot in some of our materials around fee levelization, transparency and fee reductions, etc.

And so we feel we are in a pretty good position to meet the spirit of what they are trying to achieve. However, if the advice industry is damaged in the United States because of regulations being applied inappropriately then obviously that has an impact on us. But we are pretty confident that we will get to the right answer here and the right balance for the Department of Labor.

Got it. And then maybe a question for Cindy. So I thought the annual assumption review the press release talked about potential net income impact could be up to CAD400 million. And then my understanding, since probably a good chunk of that is driven by the lapse assumption updates particularly in the US Life business.

Other than that, what are some other drivers that may kind of swing the impact in the quarter? And then specifically looking at last year's review, you kind of talk about potentially CAD200 million impact, but then it ended up there are some other moving parts that offset to a lower impact. So does the CAD400 million figured that was kind of referenced in the press release include any potential offsets?

Thank you, Humphrey, for the question. As you know, every year we go through this process of reviewing our actuarial assumptions and methods and we look at many, many different assumptions, over 100 this year. Some have a positive impact, some have a negative impact.

At this point the results are still preliminary. It would -- our estimate would include the impact of pluses and minuses that we anticipate. But the numbers can change, as they did last year, as we finalize our results moving forward from this point.

Other items that are being looked at, I mean I'm not going through the 100 obviously, that would be excessive. But the other ones that are being looked at this time would also be lapses on our Japanese business, annuitant mortality for US and Canada, some asset modeling refinements as well as our approach to modeling term conversions on our Canadian business.

Okay, got it. Thank you.

Gabriel Dechaine, Canaccord Genuity.

Just my first question here is on the policy -- not the policyholder experience, but the experience loss you had this quarter, nearly CAD600 million -- or over CAD600 million. If I back out the macro items and back the investment gains, I get to a non-macro policyholder experience loss of -- sorry experience lots of CAD300 million or so pretax.

Is that number accurate or in the ballpark? And it would really help if you could add this to your disclosure, some sort of breakdown of what that number is really and what it is comprised of be it mortality, morbidity, lapse -- all those usual items. Let's start with that.

Okay, so let me start that when and then maybe Cindy wants to add some color. So, no, that is not in the right ballpark, Gabriel, I am afraid. The answer is that the post-tax number is somewhat under CAD50 million.

It is actually very hard to triangulate back into the number, there is too many components. So the CAD50 million is largely what it is in North America, it's partly in the US, it's partly in Canada and why don't I ask Cindy to talk about the pieces of the CAD50 million.

Okay, thank you, Steve. So the -- as Steve said, the impact of policyholder experience this quarter was just under CAD50 million post-tax, partly due to experience in Group Benefits, some negative impact from the cost of specialty drugs, also LTD experience slightly worse than our expectations.

And in the US we saw a relatively neutral to positive impact from LTC, but offset by the US Life business, partly due to lapses, lower lapses on lapse sensitive business which we are addressing in this year's review of our assumptions.

And partly due to claims experience on our Life business. We had a large number of claims this quarter and one particularly large claim at 19 million. But the results on the Life side, the mortality result we see is just being within the normal variation that we would see quarter to quarter.

That is very helpful. It would be more helpful I guess in the future. Maybe I am just bad at math. But it is hard to get to that CAD50 million from what you disclosed in your financials. Maybe we can go over that off-line.

Next question is about the investment gain. So we have got two quarters in a row where you are coming in below the CAD100 million quarterly run rate requirement. And I will acknowledge that that is not great, but you have also had a good track record over the longer period. So I am not going to lose too much sleep over it.

But the one thing that I am getting a bit concerned about is I guess the oil and gas component of the -- of that line item and another fair value mark-to-market loss. With oil prices pulling back again this quarter is this going to be a recurring issue that we see throughout the rest of the year potentially?

Or alternatively if it is possible to start making investments in the space -- in the oil and gas space while prices are low and maybe sellers get desperate, could we start to see big gains as you PV your expected returns in that asset class which are probably different than they are today over cash returns? That might be a positive outcome actually.

Okay, let me start off with that one and then I will pass to Scott to talk about the oil and gas. So first of all, it is not actually correct to say that the performance this quarter was less than CAD100 million, it was actually CAD128 million, CAD51 million of which is taken in core and CAD77 million of which is taken outside of core. And the CAD77 million is taken to offset the CAD77 million loss in the first quarter.

So at CAD128 million we made what we wanted to -- we made our expectation this quarter, if you like, and it is very much kind of in line with our (multiple speakers) for the year, okay.

So we have got -- on a run rate basis though, you are correct, that we have got a bit to do to get to the CAD400 million for the year. Whether we do or not who knows, let's see how we go. But we know we have something to do there. But at least this quarter we have strong gains and we are back to form you could say.

On the oil and gas, the issue -- I would emphasize we base our valuations on independent third-party appraisals. And they may make use of some moderation of volatility in the curve. And so that may account for why there may be some short-term difference between that and the headline market prices. But then why don't I pass to Scott and he can give you more color.

Sure, thank you, Steve. First, I would mention that the CAD128 million, as Steve alluded to, was a good result for the quarter despite a continuing loss in our oil and gas. And so, it points to the diversification of the portfolio and the power of that diversification. So we felt pretty good about that result.

Now the oil and gas itself has been declining for a few quarters a row here and it is ultimately obviously the price deck that determines that. And what is more important than the spot price which everyone focuses on is the price five years out. And the second quarter that did come down a bit.

And then as Steve mentioned, it is our appraisers who determine what prices to use to value these. And most appraisers will use a little bit less volatile price deck so their prices have been a bit higher than the forward market. And so they brought that down somewhat this quarter leading to a little bigger loss than maybe the forwards would have implied.

And so, going forward what will happen there, it is obviously a function of where the prices go. We may have the appraisers continue to bring prices down a little bit, but they have adjusted most of the way.

And so, the good news is that prices are low here and I think there is a lot of room to the upside given where we would expect supply and demand forces to come out in the longer run. Obviously quarter to quarter it is very hard to predict.

Would we like to add in this price environment? We absolutely would and we are continually looking. We have made some very small additions, but really where we are seeing that buyers and sellers are a bit a part in this environment.

There has not yet been enough stress on the sellers to really get them to sell properties at what we consider fair value. So we are keeping our powder a bit dry here but continuing to look for opportunities and think those may be coming particularly as hedges that producers had on start to roll off and the banks' patience starts to wear thin. So, yes, that may be a story for upcoming quarters.

Is that going to be more in the US or Canada do you think? Because I keep hearing about those hedges rolling off. I am not an oil and gas guy, but I have heard that from a few sources. And just wondering how impactful that can be and geographically where you are going to be making these investments?

You know, we look both sides of the border. Our major operations are in Canada, so that is maybe a little more of our focus. But we are looking on both sides of the border.

And Gabriel, that also tells you something when people aren't willing to sell at what the forward curve implies. That tells you why appraisers and other people would have a different view of the price of the commodity going forward, right. And as Scott said, very thin trading at the long end of the curve, so it is not very indicative, right.

Okay. Thank you for that clarification. And if you can follow up on my calculation on non-macro experienced losses that would be very helpful. Thanks.

By the way, I've got an answer first question that Steve had on new business value on a constant currency basis in Asia. And the answer is that it was up year on year by 57%. And if you want the details you can find it on page 17 of the statistical information pack. Okay, so we will take the next question, operator. Thank you.

Robert Sedran, CIBC.

I think I have got a basic one. So I am hopeful there is an easy answer to it. But can you explain to me why the steepening yield curve is that large of a negative for Manulife?

Okay, so I will start and I'm going to pass to Scott again. So as we mentioned in the preliminary remarks, this is basically a reversal of what happened in the fourth quarter of 2014. And it is basically a difference between the accounting and the economic impacts related to our hedging program.

So as the yield curve steepens it is beneficial for us, but we have an immediate impact of taking a loss on the mark-to-market valuation of instruments within the hedging program. And we had the opposite when the yield curve flattened in Q4. So that is my headline summary and Scott can probably give you some more color.

Sure. And I guess I would start by saying it is one of the main reasons we define core is that there is always going to be some volatility to our net income results through the interest rates moving around. And it is very hard to give a rule of thumb of what will happen as we have businesses in many different markets. And there is lots of points on the yield curve.

But it is true that a steepening is largely bad for us from an accounting perspective, but positive on an economic basis. And the main reason for that is that in the accounting regime there is this ultimate reinvestment rate that I think you are all familiar with that sort of dampens the impact of long-term rate moves.

And so, beyond 30 years there is not much impact in the current quarter to us from an accounting perspective of the move in rates. And yet, as you know, our businesses are very long and we have lots of cash flows beyond 30 years on the liability side that are hard to invest for. There aren't many cash instruments or derivative instruments that go out beyond 30 years.

As a consequence our hedging program is designed to help sort of manage both the accounting and the economics and we want to do some hedging of those longer dated cash flows. So we push a lot of our cash instruments out 30 years, our derivatives are largely targeted to the 30-year point to help hedge some of those longer cash flows.

But since from an accounting perspective it is more a function of what is going on in the first 30 years. It looks like we have too much too long a duration at the 30-year point and hence we have a sensitivity when the 30-year point goes up relative to the other points in the yield curve from an accounting perspective.

But from an economic perspective it is a good thing for us. And so, the loss you saw in the second quarter, as Steve mentioned, it is just a reversal of what happened in the fourth quarter last year. And in fact that loss will come back to us in the future.

So, we can thank the accountants, I suppose, for the counterintuitive movement in the earnings. But the underlying economics then remain quite positive. So to the extent you have a charge this is an accounting issue that comes up front, and then over time you will get that back because the economics are quite positive of a steepening curve?

That is exactly right. We are very happy -- we are very happy with how yields moved in the second quarter despite the accounting results.

Okay, so I guess I was confused for a reason. Okay and then just (multiple speakers).

(Laughter) -- a good reason, the accountants have worked hard to make this inscrutable.

Where would we be without them, right? Just a quick follow-up question if I may on the issue of the Chinese mutual fund or the mutual fund sales in China. Have you noticed any spillover potentially outside of China into some of the surrounding regions in terms of investor sentiment and sales trajectory? Is this a fairly confined issue that may lead to some sales volatility but not really any earnings volatility?

We have not seen any contagion effect at all. And China is a pretty insular market and it actually doesn't really function according to many of the open-market principles that we see elsewhere. So if you looked at Hong Kong, Hong Kong remained much more muted in its response, even in terms of the H-shares.

And we have seen no adverse impact in terms of launches or net new flows either. So both from a valuation and flow point of view, there hasn't been a spillover effect.

Thank you.

Meny Grauman, Cormark Securities.

My question is about Manulife Bank. You referenced 800 branded ATMs, and I'm just wondering what the strategic rationale is specifically for doing some like this right now? I note that you talk about ongoing competitive pressures in the residential mortgage market. Is this in some way an attempt to kind of address the competitive position for Manulife Bank?

So it is Marianne Harrison speaking. Yes, it is to address some of the competitive positioning, and it is also to address our strategy in terms of trying to be more customer focused and making it easier for people to do business with us. Now they can get at some of these ATMs without having to pay the extra cost.

So it is good from a customer perspective and I think it is good from a competitive perspective, because it really adds to the exchange which we are a part of as well.

Do you expect to see sort of an impact to earnings anytime soon or is this a much longer kind of process?

No, I would say that this is a much longer process. Really it is for the benefit of our customers and trying to make it easier for them to do business with us. And I think it does add a lot from a customer experience perspective.

Thanks for that. And just a second question on the US. You talked about extending Vitality to indexed UL products. On the subject of indexed UL product, I've been reading about changes -- regulatory changes impacting those products and I am wondering what your view of those changes will be on sales there.

It's Craig, I am not aware of the changes you are referring to. Who is suggesting the changes? We can look into it and get back to you.

It is a Wall Street Journal article talking about some of the changes in disclosure on these indexed UL products in the US coming as early as September 1.

Okay. Well, I am not aware of it, so obviously we don't have a view on it or an opinion on it. So thank you for the heads up and I will check back with my folks to make sure that we understand the implications.

Okay, thank you.

Sumit Malhotra, Scotia Capital.

First for Steve and going back to the reconciliation from the reported results to the core number. You mentioned off the top that the Company had a tax benefit as far as the reported result is concerned.

I don't think we can do it with the disclosure we see, so I am hoping you can help me. What do you believe the core tax rate to be for Manulife this quarter? And how should we think about that number from a runway perspective?

Thanks, Sumit. Well first of all, the tax -- the overall tax rate this quarter was very favorable because we got a tax credit in relation to the change in tax rate in Alberta, and that was an increase in the tax rate which, again, is slightly counterintuitive from an IFRS point of view.

But what it actually does is increases the value of our deferred tax asset. So tax rates go up and we get the win. That is accounting for you. So, on an ongoing basis the tax rate depends on the mix of earnings in our various jurisdictions. And it can be quite volatile depending on where we are earning in any particular quarter.

And I think I would give it -- I find it hard to give you any firm guidance on that. But typically the rule of thumb number we tend to use is around 20%. But it can be pretty volatile.

So, on a reported basis you have a benefit. Is it the same on a core basis in your estimation? Or did some of these experience items feature favorable taxation?

No. The change in tax rate in Alberta falls within our definition of non-core. So that was pulled out of core.

As was referenced before, maybe -- I don't know if it is possible to go down this road, but having an idea on pretax and after-tax on some of these extraordinary items I think would be helpful for all of us. But we will talk about that another time.

Moving over to Kai and the wealth and asset segment. We have got this new disclosure now so gives us a few more questions to ask. We talked at the Investor Day about the trend in EBITDA margins. And you have given us numbers back to 2013.

It certainly seemed like in 2014 we had a decent sized expansion in the margins of this business. The asset growth has continued at a good clip, the margins have stabilized. So I will stop there, maybe get your thoughts.

I know there is a lot of moving parts in terms of acquisitions and other factors that are coming into play. But what do you think is required to get the EBITDA margins moving higher again as we saw last year and what are some of the initiatives that you have underway?

Right. Okay, so let me just have one comment off the top and then I will pass it to Kai to talk about the strategy going forward to increase the margins.

I think one key factor this quarter is the inclusion of New York life, so I think it had a dampening effect on the margin. And so, that is a bit of an explanation as to why that trend line didn't continue in quite the same way. But I will leave it there and I will pass to Kai to talk about what he is doing in terms of margin expansion.

So we have been historically very concentrated in our earnings stream and retirement services businesses. And over the past three, four years have been emphasizing the growth in mutual funds which come in at a higher earnings and a higher margin.

And the quality of those trend lines are very positive both in the US and Canada and Asia. So that is one aspect which is the change of mix and the emphasis of a higher margin mutual fund business.

Secondly, what we are doing is we are growing the institutional book which, although it has a lower fee base than for example mutual funds, it does offer a countercyclical effect on the positive side. Both contribute to a larger base of assets against which we can get better operating efficiencies.

Now the next dimension as I think mentioned at Investor Day, we are in the process of globalizing our infrastructure and operational backbone. That is going to take a period of time because we have historically operated the various countries rather independently from one another.

We started with doing so in Asia, we consolidated all the operating companies under one leadership back in December. And obviously we are going to try and leverage the stronger capabilities that we have with the larger base of assets that you see in core markets like the US.

But moves like that, and you know this from looking at other asset management companies, do take a period of time. They don't happen over a simple couple of quarters, they tend to be multi-year in effect. And so I will see the two factors both in terms of top line, improved mix, plus the efficiency gains to start materializing over the next 12 to 18 to 24 months.

So that's the details. Now let me ask you the number. Where do think you can get this margin to over that period?

I think we indicated at the Investor Day what we believed we could deliver.

Yes, well, we talked about over a period of time getting to 30% to 35%. But I think Kai basically said look, if you look at the best-in-class or whatever that means, but if you look at the best-in-class you will see people at 40% or higher.

But on the other hand, we have a variety of types of business in various jurisdictions. So for us to get to that sort of level would take a lot longer. But over the plan horizon our ambition was to get to that sort of 30% to 35% number. I think Craig wanted to add something. No? We have dealt with it.

I wanted to address the index UL, but if you were finished with this question.

I will stop there. Sorry, guys.

Are you okay with that?

Yes, that is fine with me. Thanks for your time.

So just on the indexed UL question that was previously posited. This is going back quite a ways, which is why it wasn't really fresh in my mind.

The NAIC was looking to tighten up some of the illustration rules around indexed UL in the US. They asked for the American Council of Life Insurers, the ACLI, to opine on how best do that and some time ago we provided that response.

The NAIC adopted a new regulation around those illustrations and it is really about how aggressive your illustrative rate can be around equity returns for these products.

We were -- the guidelines that came out are very consistent with what we had submitted and we are already in compliance with those guidelines. So there is really not any impact on our business. Does that answer the question?

It was a previous questioner -- that was Meny's question. So this is Sumit. And he will let us know if it didn't. I think, operator, we can take the next question, thanks.

Peter Routledge, National Bank Financial.

I'm going to ask a bit of a softball question. I've been looking at your net flows in your new disclosure -- your net wealth management flows in your new disclosure. And I can't help but notice just consistently positive net flows.

And I am wondering why your -- or why Manulife, particularly in the US, is able to get positive net flows. So we have seen some peers struggle with that. Outside of management competence, which I'm sure is part of the story, what is it about your client base or your distribution model that is driving this?

So this is Kai for wealth and I will turn it over then to Craig, he can talk specifically in the US.

We have a unique model because it is a combination of internal capabilities and an open architecture. And the open architecture allows you to be much more responsive to market trends and we have launched a lot of new products that have actually have been in the sweet spot of demand.

That has been one reason we have been able to have a positive momentum. I will turn it over to Craig who can then talk specifically about some of the products we have had greater success with.

Yes. So, I think there is a number of different aspects to the success and I thank you for noting it. It is I think over 15 quarters now I think of net -- positive net flows, which is a pretty good record of consistency. A lot of folks bounce in and out positive negative flows.

There are probably -- product is a big part of this. The way we sort of structure ourselves is we are kind of advisors to our distributors in terms of all aspects of risk-adjusted returns in the products that we sell.

So we have a very large group that is kind of a gatekeeper group within our own Company that interacts very well with professional buyers of the distributors that are making model allocations and recommendations. I think that is, as Kai indicated, probably the biggest driver.

And the second is there are a number of distributors yet that have not really caught on to this story. And as we basically go through one by one of the major distributors in the United States and explain to them our model and how powerful it is and how successful some of their competitors have been in terms of distributing these types of products, we are gaining traction in these new distributors.

So, we think we still have a ways to go. The model is very robust in terms of new product offerings and there are -- continue to be opportunities to get market share within the distribution partners that we currently have and that we are targeting. So it is a great story.

I'm going to jump in here, it is Donald. I think Kai was being a little too modest. I mean he talked about the open architecture, which is certainly part of the ingredients for success, but also the performance of our internal managers has been nothing short of extraordinary.

We now have 101 four and five star rated Morningstar funds. When I ran investments it was a big deal if we got a CAD1 billion mandate from somebody. Now that is a very regular occurrence and there has been a number of them that are multiples of that and even greater.

So they are simply on a roll and it is not one or two products, it is across a whole range of supplemented by some of the very best offerings from competitive asset managers which is the open architecture.

Some peers have sort of claimed strong active management results as well and they all explain maybe net flows by saying well, there is this huge demand for passive and active management has not been a demand. So within your net positive flows is there a distinct weighting towards passive or is it -- how does it compare to active (multiple speakers)?

So to date in the flows it has not been the case although we have just launched a new smart beta line up with DFA. But historically the emphasis has all been on active. There have been a couple of key things that we have done however that is different than some of our peers.

Our colleagues in the US were early on on the bandwagon of liquid alternatives. And we did launch a global asset return strategy that was in the sweet spot of the demand for clients to have greater certainty around outcomes and better risk control on the downside.

And that has been one key trend next to the passive trend that has taken away from traditional fundamental active. And that has been one very robust reason for the positive flows.

Yes, I think just to add to that, I mean what we -- I think the differentiated sort of Alpha, true Alpha investing, active investing will always be a powerful product offering. Beta is taking its share, passive is taking its share when there isn't true differentiation. And I think that is a big advantage for us as we truly have differentiated Alpha.

And just a quick one for Steve. Any update how you will account for the DBS payment?

No real update. We are still waiting for the smoke to come out of the chimney or whatever from the Big Four accounting firms that are getting their heads around how to account for these major bancassurance transactions.

But we are optimistic that we will end up with a more favorable out turn than the worst-case that we portrayed which would have meant a 10 point hit to MCCSR. We think there is a good chance we'll get a better result than that. I would hope to have clarity on this at the end of Q3.

Okay, thanks for your answers.

Doug Young, Desjardins Capital.

Hopefully these are a few quick ones. The first one just along the Canadian reinsurance recapture, I am just wondering if you quantified what the earnings impact was and what the -- if at all what the MCCSR impact was. Was that just related to a group insurance business that you reinsured back in the crisis?

It is Steve. The reinsurance recapture we referred to this quarter was immaterial, which is why we didn't spike it out in that way. And it had a negligible impact on MCCSR.

So no material impact on earnings, no material impact on MCCSR?

No, it was just part of the -- of our overall few that our earnings were a little bit frothy this quarter. We had one or two small items of that sort which were not sufficiently material to be regarded as non-core.

And what is your definition of materiality? Is it CAD10 million and below or --?

You probably are aware I had a long history in a Big Four accounting firm and I could probably go on for hours on the subject of materiality. None of us will be any the wiser. So CAD10 million would not be regarded as material.

Yes, okay. And then just on the oil and gas loss. Did you quantify what the impact was? And then I know in Q1 built into the investment results there was some timing item that was more impactful. And I am wondering whether that has spilled over and actually had a positive impact this quarter. Just looking for some details on that.

Sure, sure, it's Scott. Yes the impact on the second quarter was a CAD125 million loss on our oil and gas. And I think there was a thought that there might be some catch up in the second quarter as we got statements in from some of our GPs after the end of the first quarter, which is maybe yet another reason it was maybe a little higher than you would expect. But I think we are fairly caught up on that, I don't really expect any more timing issues going forward.

Okay. And then just lastly. The -- [I don't follow this] but the E&E initiative just looking for maybe a quick update. And I know that some -- I think you mentioned previously that you thought a net benefit for 2015 was going to be CAD300 million pretax, don't think that has changed. But can you quantify or talk about what came through in the second quarter? Thanks.

It is Paul Rooney here. Good afternoon. E&E effort continues to progress as we wanted. We are on track to hit all of our objectives including the CAD400 million of savings out into 2016.

The good news is this is also funding a lot of our growth initiatives and we are reinvesting some of this in new capabilities. We don't have a number that we could share with you on the impact on one quarter.

Okay. Great, thank you.

Dan Bergman, UBS.

I was hoping you could provide a little more color on how the Standard Life acquisition is performing so far relative to your expectation. And any update on how that integration is progressing.

Well, yes, just very quickly and I will just pass to Marianne after that. Essentially from a financials point of view we are progressing in line with our expectations. The earnings in the quarter were actually slightly ahead of what we expected and we were successful in getting the approval to integrate the businesses from July 1. So all good news, but Marianne can probably give you some more color on that.

Yes. As far as the integration is going, we are very pleased with how it has been proceeding. We have done a lot in terms of integrating the people side of things and to a certain extent, or maybe even ahead of schedule in terms of where we thought we might be at this point in time.

Now we are very focused on product as well as systems conversions. So that is where we are going to be spending most of our time going forward. We talked about doing some rationalization of mutual funds in the fall which we will do, but we are quite pleased with the lineup that we are seeing on the seg fund business as well.

We are looking at Standard Life seg funds compared to ours and trying to see what we want to do and we hope to have a better idea on that in Q2 of next year. But things are progressing quite well. We have been very pleased with the talent that we have seen from an employee perspective. And so far things have been going very well.

Great, thank you. And then maybe switching over a little bit to the life insurance side. I believe you said there isn't expected to be any major impact on sales in the new Vitality life insurance product until the second half of this year.

But now that we are a little further along in the product launch I wanted to see if you had any updated thoughts on how the launch and market reaction are going so far. And any updated thoughts as well on maybe the magnitude of near- or medium-term build from these products.

Yes, this is Craig, I will take that one. So it has only been actually a few months since we launched this. So I don't think we are too far into the process just yet. We expect this to be a build over time.

We are -- we have a whole bunch of different initiatives going sort of on parallel tracks to expand the impact of Vitality on the insurance sales. So for instance we are continuing to add it to new products. So we have only -- we had it on two, now have got it on three. We will continue to add it to each of the products in our portfolio over the course of the next year.

Additionally, not all states have approved the product as yet. So we will continue to get state approvals and that is product by product. So as we get -- put it on to a new product, then we have to get the approvals for it.

And then we are looking at extending it to older ages, we are looking at different ways that we can sell this product. I think the really exciting thing though is that the reception that we have received from both the public and our distribution is fantastic in terms of the concept and where this is going to take insurance.

It is going to take some time to have all the sales and the reality meet the expectations of how this is going to revolutionize insurance. But we are pretty confident based on the reactions we have received that that will indeed occur.

Very helpful, thank you.

Mario Mendonca, TD Securities.

First a quick question on the appraisals. Scott, how would you characterize the difference between where the independent appraisals are on oil and gas with where oil and gas is today or the futures are today?

So you are just talking about the price deck that they use --.

Right, how far are you --.

Valuations relative to the forward curve.

Right.

Yes, and I would say -- so they are above. It is not like the appraiser we use is above and no one else is. I think virtually all, if not all, the appraisers use a higher forward deck.

And part of the reason for that is the forward curve, you get out past a year or two and there is really very little volume there. It is unlike the forward curve for interest rates where you can execute in size. And I would always be an advocate for using the forward curve for interest rates.

But for various commodities including oil and gas it gets very thinly traded, it is not reliable, it can get pushed around a lot by a few trades. And so that is the reason they're above. And out at the five-year points, between CAD5 and CAD10 above is sort of the range as to where they are.

Above where it is today?

Above where the forward -- so the forward curve is -- it is an upward slope. And if WTI is currently a little below [$50], five years out the forward curve would be a little above [$60] and then appraisers would be a little above that.

Okay, I follow you. And then a question for Cindy, and it relates to the lapse support issues in the US. What I am getting at here is for as long as I have been around life insurance this issue has been here -- the issue of lapse supported, lapse supported policies and how the insurance industry as a whole has struggled to get that lapse assumption low enough.

So the nature of the question is this -- once you take -- make that adjustment this quarter or Q3 2015, will you have lowered the lapse assumption to a level where it wouldn't be realistic to expect any further experience losses related to the lapse issue?

Thank you, Mario, for the question. It is Cindy. Well, every time we do our assumption review we look at the experience that has evolved since the last time we evaluated an assumption.

When we last looked at our US lapse experience on insurance it was 2012. The experience that we are looking at on our lapse supported business is largely on business written in the 2000s. So at that point we had somewhere between 4 and 10 years of experience. Now we have got 3 years more.

We are reflecting what we are seeing and reducing lapses on lapse supported business. But there is always a possibility that you could see further deterioration or as you get experience in later durations that you see policy holder behavior that is different than what you have protected out now. So I think that possibility always exists.

We have brought our lapse assumptions down for the -- for our lapse supported business it ranges, but many of them are between 0.25% to 0.50% to 1%. There are some that are higher. So we have brought them down quite a bit. They are quite low, but it would still have an impact if we saw even lower lapses.

That is helpful. And then a question I would like to direct directly to Donald Guloien. And it goes to the points that both Gabriel and Sumit were making on the experience gains and losses and trying to understand the tax rate on a core basis.

Without that information the core number that you have provided is starting to lose a little bit of its credibility. And so the question to you directly is, do you expect to eventually provide a core like these experience gains and losses on a pretax basis and after-tax basis?

The comments when people are trying to triangulate and getting answers that are so wrong because the use of the imprecise tax rate that you can't figure out, that doesn't make me very happy. I am going to be cautious though in not guaranteeing a solution to it. I would like you to have as much visibility.

And as you have written up very well in a complementary way about our core, the fact that we do take experience gains in to our core measure very explicitly. But if you are coming to the wrong conclusion about how much the experience losses or gains can be, we obviously have to help you some more.

So I don't know what all the issues are in providing a more detailed reconciliation. But we will take that to heart. I have already made some notes based on the questions and we would like to have as much transparency as you could possibly have. We have nothing to hide here (multiple speakers).

And until such time as we do give you a reconciliation that allows you to figure it out, you should keep asking the question every quarter and say exactly how much were they, Steve, because we are having trouble computing it. And he will give you the answer. What I would hope we would have a better answer than that.

Because to be clear, when Gabriel offered a CAD300 million number for the experience losses in the quarter on a core basis that is the number I came up with as well. Because we are all sort of going about it the same way. So, yes, rather than sending us down such a wrong path it would be better to just have the disclosure.

Yes. No, I would say it is right. As Steve said, it is the tax rate that is bouncing around.

For sure.

When that is in the reconciling item that can be a big number. So we will find a better way to help you through that.

And then finally, on the -- I think it was -- it is amusing to sort of point at accounting and say accounting leads to weird results and it does. And I'm referring specifically to the CAD600-million-plus loss related to a steepening yield curve.

But if accounting drives a large enough loss it can have a real economic impact insofar as it affects your capital. So the nature of the question is this, is there a possibility that this approach to hedging, these large hedge positions that you put on these forward starting swaps could create an accounting loss large enough that it could have a material effect on your capital?

Yes, hi, it is Scott, Mario. Yes, clearly that is right. We can wave away accounting but if it gets big enough it becomes a problem for capital and that is not good. So we certainly do stress testing around that and so forth.

What I would tell you is that it was a particularly large shock this quarter. And part of it was the low level of yields we had going in. If they yield curve continues to steepen in a higher rate environment it is not going to have nearly as big an impact.

So we certainly take that to heart, we do a lot of stress testing around it and I don't think we are that concerned that you could have the yield curve moving in a way that becomes an issue for capital.

But to be clear, the yield curve only steepened by about 30 basis points, comparing the 30 to the five-year. Is your point that it was on such a low base to start with that that 30 basis points is meaningful, is that the point?

That is correct.

Thank you.

And a substantial -- as you well know, a substantial amount of it is already reversed, right.

Right. Already in Q3, I understand that. I am not as quick to discount accounting as others might be.

Yes, no, because accounting can become real in the end. That is why we talk about net and core, they both count.

Thank you.

Tom MacKinnon, BMO Capital Markets.

I have got a question, but just a follow on to that. If you ever did get credit for hedging the fact that you are using these forward starting swaps to hedge, would it not -- how does that play into not impacting capital or impacting capital?

Tom, it is Cindy. The forward starting swaps we are referring to are on the general accounts and those are already included in our calculation of reserves because they are part of the assets that back our liabilities.

And so, you could say that we have credit for those forward starting swaps. The issue on credit for hedging relates to the variable annuity business versus the general account.

Okay. But none of the hedges that lead into this accounting noise are associated with hedges on the variable annuity business?

No, they are not.

Okay, that is the question I guess that would need to be asked first then. When everybody is getting all excited about the net flows -- I was looking at the net flows with respect to pensions business that had been negative in two -- three of the last four quarters.

Now you have got Standard Life in here now as well and New York Life in here as well too. So maybe you can elaborate as to what is leading to the negative net flows in pensions and what jurisdiction they might be coming in?

Tom this is Kai and then I will turn it over to Craig. The -- I mean the competitive threshold in retirement and pension business is increasing pretty markedly. And all of the pressures around DOL and their requirements for separation of revenue streams and transparency and disclosure and also exercise of fiduciary responsibility is causing quite a large shift, particularly in the United States.

And that is why a number of years ago we started trying to diversify our asset mix and bring on board the mutual funds business more. So a lot of the -- a lot of what is going on can be really attributed to what is happening in the US, I will kind of let Craig speak to it.

Yes, so, Tom we have been in negative asset flows in the US pension business for a number of quarters. I guess the -- and it comes from two directions. There has been a little bit more churn in the industry because of what Kai aligned, I think plan sponsors taking a hard look at their fees and making sure that the in-force pricing is the same as new business pricing.

I think the whole industry is adjusting or has adjusted to that such that those kind of churn numbers should probably start to reduce.

The second point is that we haven't had very strong gross sales. So our sales have been down the last two years, so I think we sort of peaked in 2012. And the good news on that one is that that has actually now turned around. So as of this quarter, forget about New York Life and what addition that will have to our business, our gross sales are now heading in the right direction.

So we think that between those two we will end up in a situation where we get out of this net flow, negative net flow situation and then that is really on our core business. And then the TRS business is -- it's going to have a different impact on our net flows in that it is very lumpy.

So you will have some quarters where we take in a big plan and other quarters where a big plan leaves. And that is going to put some noise into what I would call more of a gradual trend that was trending down and now is trending back up.

So for this quarter I will certainly tell you what is going on with the core business and the TRS business, which is the New York Life business, sort of separately. We may have to do that continuously to really give you enough information to assess the business, but we haven't really come to any conclusions on how long we will keep separate disclosure.

So, it is a good observation, Tom. The answer is pretty clear, we have not had great sales and we have had some outflows, but that is turning around and we are seeing a much more positive picture looking forward.

Do you think having a fully -- an offer now that works for midsize groups as well, do you think that would help improve the situation here?

Yes, so having -- we see revenue synergies by having a broader line up. And this -- we now have a lineup that actually goes up to large-scale sales. But there are distribution synergies and I think that will be helpful.

In terms of actually the near-term impact of what this has had on us, it's been probably been somewhat negative in that for both our core business from John Hancock and the New York Life business, I think there was a little bit of hesitation in the market to say what is going to happen here.

But that is sort of clearing out and we actually have some very strong sales on both sides of the ledger. And as we are able to take the New York Life platform and bring it down scale a little bit into what we would more categorize as the mid-market sort of [CAD 5 million] and up from where they are which is sort of mid-high, we think we will see even additional sales synergies and a better picture for net flows. So it is a good observation.

Thank you.

Darko Mehelic, RBC Capital Markets.

Steve I just wanted to clarify the comment you made at the very beginning of the call with respect to the AFS gains that are included in core as being relatively high. And then you pointed to core investment gains as being around CAD51 million-ish.

So net-net, or the long and short of it I guess is what I'm asking is should I think of the earnings and surplus as being inflated by about CAD50 million this quarter, would that be the way I should think of it?

Okay, Darko, I think you may have got to the right answer but I am not sure you got there by the right route. Sorry about that.

But okay, so starting with the -- so there are really two separate things here. One is the AFS gains that form part of core earnings, they do not form part of investment experience gains. And what we are seeing is that this quarter we would say that they were probably about CAD20 million higher than the run rate that we would expect.

And in addition to that, we had another CAD20 million to CAD30 million of other items that we think means that our overall run rate core earnings this quarter may be a bit frothy by the tune of maybe CAD40 million, CAD40 million to CAD50 million. So that is the core earnings point.

And the investment experience gains is really entirely separate to that and there was an aggregate of CAD128 million this quarter compared with the aggregate amount of CAD100 million that we would like to bake into core earnings but we couldn't because we have to have the sufficient cumulative gains to get us there.

Okay, so I understand that. And then I guess the question then still was back to the CAD20 million of AFS. I understand that would be in earnings and surplus. I'm just looking for the geography. In the CAD20 million to CAD30 million of others, would that also be in earnings and surplus?

Yes, well no -- no, it is part of core earnings but it is not part of investment experience gains. That is not in earnings and surplus, no.

Not earnings and surplus.

No.

Okay, all right. That is the clarification I needed. Thank you very much.

We are trying to avoid aggressively giving guidance. But we also want to be clear with people that CAD902 million was a very good result and greater than what we would have expected and Steve has given you a pretty good sense of the quantum.

Okay, thanks a lot again. Cheers.

Humphrey Lee, Dowling & Partners.

Just a quick follow-up on the mutual funds in China. Can you talk about the kind of fund offering? Are these more focusing on the A shares in China or are they more broadly or globally focused? Just want to get a sense of like what the (inaudible) over there.

Yes, I think Kai is going to take that one.

Yes, so look, the market in China is dominated by banks and banks are very much in the load game, as you know. So a lot of it is a play of getting on top of the bandwagon of what is really hot and there was a much of margin lending against that.

And so, it was predominantly equity-based funds that had load shares driving a lot of commission revenue for the banks. Is that answering your question?

I guess just kind of the investment focus, are they equities (multiple speakers)?

They were equities.

(Multiple speakers).

Asia funds, that is what I meant.

Okay, all right. Thanks.

It was equities. Now I might as well just address also that one of the things that we saw as a result of having these recent fund launches is a positive outcome for us was that the pressure relative to redemptions that ensued as a result of market correction for us was not a big issue because most of these funds had still not been heavily invested, they were largely in cash.

So the outcomes for investors actually were pretty favorable in the sense that we had not invested into the markets and those funds did not suffer the downturn that the rest of the market did.

Thank you for the color.

There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Veloso.

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