Manulife Financial Corp (MFC) 2016 Q4 法說會逐字稿

Participants, please stand by. Your meeting is ready to begin. Please be advised that this conference is being recorded. Good afternoon and welcome to the Manulife Financial fourth quarter 2016 financial results conference call for today, Thursday, February 9, 2017. Your host for today will be Mr. Robert Veloso. Please go ahead, sir.

Thank you and good afternoon. Welcome to Manulife Bank's conference call for the fourth quarter of 2016. Our earnings release, statistical package and webcast slides for today's call are available on the Investor Relations section of our website at Manulife.com.

We will begin today's presentation with an overview of our fourth quarter and annual results by Donald Guloien, our President and Chief Executive Officer. Following Donald's remarks, Steve Roder, our Chief Financial Officer, will present the fourth quarter financial results, and Warren Thomson, our Chief Investment Officer, will conclude today's executive remarks with an update of our Investment Division.

After the prepared remarks, we will move to a question-and-answer portion of our call. When we reach the question-and-answer portion of our call, we would ask that each participant adhere to a limit of one or two questions and if you have any additional questions, please requeue as we will do our best to respond to all questions.

Before we start, please refer to slide 2 for a caution on our forward-looking statements and the note on the use of non-GAAP financial measures in this presentation. Note that certain material factors or assumptions are implied in making forward-looking statements and actual results may differ materially from those which are stated. This slide also indicates where to find more information on these topics and the factors that could cause actual results to differ materially from those stated.

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

Thank you, Robert. This morning we announced our 2016 financial results. For the full year, net income was CAD2.9 billion, an increase of 34% over the prior year despite the impact of adverse markets in the fourth quarter. As many of you know, the overall impact of higher rates is highly positive for our Company over the long-term, but the impact and changes in spreads, the slope of the curve and other factors had a significantly negative accounting impact on an otherwise highly positive quarter. We will be going through all of this in more detail later in the call.

We achieved particularly strong operating results ending the year with CAD4 billion in core earnings, an increase of 17% from the prior year and achieving the target for core earnings that we set back in 2012. In addition, each of our geographies delivered double-digit growth in core earnings this year and, despite a weaker start to the year, we generated nearly CAD200 million in investment gains. We generated strong topline growth in insurance sales and new business value in Asia and in our wealth and asset management business, we continued to generate positive net flows and we delivered record assets under management and administration of CAD977 billion.

On the basis of our strong operating results and our outlook for growth going forward, the Board approved an 11% increase to our dividend to CAD0.205 a share. This marks our fourth increase in three years for a cumulative increase of 58%. Last quarter we change the format of our call to allow time to explore our businesses and functions in a little bit more depth. To that end, this quarter, I've asked Warren Thomson to provide a more in-depth discussion of our investment gains and the direct impact of markets which I believe are top of mind today.

Next quarter, we're making further changes. We will be issuing earnings release on Wednesday evening at approximately 5:00 PM and we will be moving our call time to Thursday, 8:00 AM Eastern Standard Time. This is intended to allow investors and analysts in Asia and Europe a better opportunity to participate in our call. With that, I'll turn it over to Steve Roder who will review the highlights of our financial and operating results. And following Steve, Warren will make his remarks and then we will open the call to your questions. Thank you.

Thank you, Donald. Good afternoon, everyone. As Donald mentioned, we delivered strong operating results in 2016 and achieved the CAD4 billion core earnings target we set in 2012. While net income in the fourth quarter was adversely impacted by market-related factors, core earnings and sales growth continued to be favorable. In fact, most of our key performance indicators showed improvements for both the year and quarter. I will discuss some of the key drivers of our performance over the next few slides.

Turning to slide 8, we continue to demonstrate solid progress on core earnings. Core earnings of CAD1.3 billion in the fourth quarter increased by CAD428 million or 50% compared to the prior year. These results were driven by core investment gains of CAD180 million versus none in the prior year, a CAD142 million benefit from closing multiple tax years in the United States, strong new business and in-force growth in Asia, and the reduction in expected costs of macro hedges. And while we benefited this quarter from above run rate investment gains and a large tax item, even excluding these, we delivered solid double-digit growth.

The strong core earnings in the fourth quarter helped us achieve our CAD4 billion core earnings target for the year, which we set in 2012. Turning to slide 9, you can see that while core earnings was strong, they were largely offset by a CAD1.2 billion charge to the unfavorable impact of markets primarily the result of adverse movements in the interest rate yield curve along with equity market impacts. This quarter's spotlight presentation by Warren Thomson will provide some further details in context on this charge.

As Donald mentioned, while net income was adversely impacted by interest rates this quarter, the overall impact of higher rate is highly positive for our Company. We estimate the economic benefit from this quarter's higher rates to be roughly CAD2 billion over the longer term. This occurs through reduced potential adverse impacts of future URR charges, higher expected profit and interest on surplus assets and favorable impacts to new business.

In the quarter, we also incurred integration costs related to our recent acquisitions totaling CAD25 million and other items this quarter netted to a modest net gain. On slide 10 is our source of earnings. Expected profit on in-force increased 3% from the prior year on a constant currency basis primarily due to in-force business growth in Asia, partially offset by the steep decline in period start interest rates and the shift from macro to dynamic hedging in Asia made earlier in the year.

As a reminder, expected profit is calculated using the rates prevailing at the beginning of the quarter and treasury rates declined by over 50 basis points in the US and Canada over the prior year. It's also worth noting that given the rise in interest rates in the fourth quarter, expected profit should begin to reflect the benefit of higher rates in the first quarter of 2017.

The impact of new business improved versus the prior year quarter as higher sales volumes in Hong Kong and Other Asia were only partially offset by lower sales volumes in Japan. Earnings on surplus in the quarter reflects CAD140 million of charges excluded from core earnings, largely related to the impact of interest rate movements in the quarter. The earnings on surplus included in core earnings of CAD144 million is down from prior-year levels due to higher interest expenses from our recent issuances. This quarter incomes taxes benefited from charges originating from jurisdictions with higher tax rates, gains from lower tax jurisdictions and the closing of several tax years in the US.

On slide 11 you can see that both net and gross flows in our wealth and asset management businesses continue to be strong despite challenges in the US. In the fourth quarter, we delivered CAD6.1 billion of net inflows into our wealth and asset management businesses, our 28th consecutive quarter of positive inflows. Net flows were driven by strong inflows in our institutional advisory business and mutual fund sales in Asia and Canada. We did, however, experience outflows in the US in both mutual funds and pensions.

While mutual fund performance improved in the fourth quarter, the overall sales environment was challenged in 2016 by the underperformance of a few key funds earlier in the year, reduced appetite for actively managed solutions and the impending implementation of the Department of Labor's fiduciary rule. In pensions, we experienced some midmarket plan outflows that were unrelated to the business we acquired from New York Life. Gross flows of CAD38.2 billion were up 23% from the prior year quarter reflecting funding of key institutional advisory mandates in Asia and Canada, strong mutual fund sales in mainland China and record pension sales in Hong Kong, partially offset by a decline in the US related to the challenging mutual fund environment and the non-recurrence of a very large pension sale last year.

For the full year, net flows were CAD15.3 billion and gross flows totaled CAD120 billion. Turning to slide 12 on insurance sales. Insurance sales in the fourth quarter increased 3% over the prior year, reflecting strong growth in mainland China, Singapore, Vietnam and the Philippines, partially offset by lower sales in Japan, Canada and the US. Full-year insurance sales increased 11% from 2015 to CAD4 billion.

On slide 13 is our new business value. In the fourth quarter, we delivered strong growth in new business value which increased 20% from a year ago to CAD367 million driven by continued growth in Asia. New business value margins in Asia were 37.5% in the fourth quarter, up 3.8 percentage points on a constant currency basis from the prior year, aided by improved scale driven by higher sales and product actions.

In 2016, new business value increased 22% to CAD1.2 billion, a new record. Turning to slide 14, our assets under management and administration, or AUMA, at the end of the fourth quarter were a record CAD977 billion up CAD42 billion or 6% from the prior year driven by investment returns and customer inflows. Our wealth and asset management businesses achieved AUMA of CAD544 billion, up CAD34 billion or 8% from the previous year, driven by similar factors.

So in conclusion, in 2016, Manulife achieved CAD4 billion in core earnings, up 17% from 2015 and achieving our 2016 target we set in 2012; delivered CAD2.9 billion in net income up 34% from the prior year; achieved solid topline growth in insurance sales overall and strong sales in Asia in particular; continued to generate net flows in our wealth and asset management businesses and raised the dividend, our third consecutive year of increases.

I'll now pass it onto Warren Thomson who will discuss our investment experience and direct market impact in more depth.

Thank you, Steve. Good afternoon, everyone. I'm pleased to provide you with a more in-depth update on our investment related experience and the impact of equity markets and interest rates on our results both historically and in the fourth quarter.

The reason I believe it is important to first discuss our investment experience is to reinforce why we believe that through the cycle, CAD400 million per annum of post-tax investment experience gains is an appropriate assumption for inclusion in core earnings. For the six quarters ending at the first quarter 2016 we experienced a tail event with respect to oil and gas prices quarters which adversely impacted our investment experience. However, in the three quarters since the first quarter of 2016, we have realized CAD537 million of post-tax investment experience gains which is well above our long-term through the cycle expectations.

I will start on slide 17 with some history of our investment related experience. You can see that the gains average CAD456 million over the past five years despite the significant losses in our oil and gas investments. Gains from fixed income reinvestment and positive credit experience have been strong and steady contributors and comprise roughly 75% of this average and more than the 80% of our CAD400 million per annum through the cycle expectation. Despite the impact of the global financial crisis and depressed oil and gas prices, our ALDA portfolio continued to perform well over the last 10 years, albeit modestly below our long-term assumptions.

We continue to have well diversified, high-quality investment portfolio, and as a result, we believe that the CAD400 million per year in investment related experience gains through the cycle remains a reasonable assumption. Turning to slide 18, I will now speak to our mark-to-market accounting impacts to highlight the extreme volatility that it introduced into our GAAP net income and, as a consequence, why core earnings is a better measure of the earning progression of our Company.

As Donald and Steve have highlighted, mark-to-market accounting had almost all elements move against us this quarter. This is in sharp contrast to the economic reality we face. The impact of the rising rates during the fourth quarter is estimated to be a CAD2 billion benefit for our Company over the long-term. On slide 18, we show some historical equity market and interest rate impacts. It clearly illustrates why we needed to hedge, given the volatility of the mark-to-market accounting introduced into our reported earnings after the financial crisis.

As you might recall, our dynamic program hedges Variable Annuity risk on a best estimate economic basis and our macro program hedges remaining equity market risk not covered by the dynamic program. We achieved our interest rate hedging targets in 2011 and equity market hedging targets in 2012. These hedging programs have significantly attenuated the impact of markets on our earnings and we continue to comprehensively manage our sensitivities within Board approved limits.

Turning to slide 19, you can see that while in any given year, equity market and interest rate impacts can be variable. The average net impact of markets over the five years since we achieved our hedging targets was a modest charge of CAD11 million post-tax. On slide 20, it's clear that looking at a breakdown and the total direct markets impact, you can see that each individual factor identified on the slide in any given year may appear as significant, but over the fullness of time, not only have the total impacts been modest, but each factor does not amount to much. This speaks to the effectiveness of our hedging programs as no material directional bias has emerged.

However, turning to slide 21, while the direct market impacts tend to offset over time, and often equity markets interest impacts are inversely related, quarterly variability can impact net income. On slide 21, I will detail what drove the fourth quarter's CAD1.2 billion net charge due to changes to the shape of the yield curve, swap in corporate spreads as well as equity markets. The primary driver of the charge was changes in the interest rate environment during the fourth quarter, consisting of changes in risk-free rates as well as corporate and swap spreads.

In the fourth quarter, we booked a CAD330 million charge due to the accounting mismatch that occurs when the yield curves steepens. For the full year, we reported a more modest charge of CAD53 million, primarily driven by a fall in Japanese interest rates. I will provide more color on this item on the next slide. During the quarter, corporate spreads continued to narrow which resulted in a decline in the reinvestment yields we assumed and the measurement of our policyholder liabilities.

The CAD275 million charge occurred in the fourth quarter is consistent with our sensitivity disclosures. During the quarter, spreads on 30 year forward starting swaps rose close to 10 basis points, resulting in a charge of CAD242 million consistent with our sensitivity disclosures. You will recall that we primarily use the 30 years swaps to hedge our interest rate exposure.

Realized losses on Available-For-Sale bonds in the Corporate segment were CAD142 million. Forecasting the amount of gains or losses that we are likely to realize in any given quarter is difficult as over the normal course of business we will roll over a portion of our AFS portfolio, which results in realized gains or losses. As of December 31, AFS bonds were carried with unrealized losses of CAD683 million. The CAD213 million charge related to equity markets was primarily driven by basis risk or fund tracking as accurately actively managed funds in our Variable Annuity programs underperformed the broad market indices we use to hedge our exposures.

In the lead up to the presidential election, many funds in our VA program were overweight cash and therefore underperformed the markets in the rally following the election. In addition, a significant portion of the funds underlying out Variable Annuity programs are income oriented and were further impacted by the sharp rise in interest rates.

On slide 22, I will provide you with some more color on risk-free or government bond rates. On the top left hand panel of the slide, you can see that while rates in the fourth quarter represented by the green line, were up sharply from the third quarter, represented by the grey dotted line, the US yield curve looked much like it did a year ago, represented by the red line.

The exception of this is Japan which you can see on the bottom left panel whereby rates ended the year substantially lower, albeit up from the third quarter. The lower rates in Japan were the primary driver of the full year CAD53 million charge related to risk-free rates. In the fourth quarter, we recognized a charge of CAD330 million related to the steepening of the yield curve for risk-free rates. While the steepening of the yield curve is certainly favorable to Manulife over the long-term, the current period impact on our net income was negative due to an accounting mismatch.

The reason for this accounting mismatch occurred is highlighted on the right panel. First, we hold long-duration interest rate derivatives to offset the long-term impacts of changes in interest rates. At the end of the quarter, we value these derivatives based on the current market value with reference to long rates. Since the yield curve steepened, the value of these hedges declined in value. At the same time, our policy liabilities also declined due to the steepening yield curve, but the decrease in the value of our liabilities was more modest as the valuation of our policy liabilities are based on actuarial interest rate models in accordance with Canadian actuarial standards and are not fully aligned to the changes in current market interest rates the way interest rate derivatives are.

Consequently, while assets and liabilities both rise or fall with the changes in interest rates, a nonparallel shift in rates will lead to changes in asset and liability values of differing magnitudes. This concludes our prepared remarks. Operator, we will now open the call to questions related to our fourth quarter and full-year results.

(Operator Instructions) John Aiken, Barclays.

Good afternoon. Warren, I'm not going to debate the CAD400 million investment gains in terms of core, but -- because you do illustrate that that is a longer-term run rate that you have been able to exceed, but -- so my question is more for Steve. On this front, has there been any discussion about removing the CAD400 million in terms of the core? First off to bring it more in line with the disclosures of some of your peers? But secondly, as we saw this year, putting that cap in may have actually exacerbated some of the volatility in the core earnings. Has there been any discussion around that front in terms of relieving the cap?

Thanks, John. The answer to that is no. We thought long and hard about it when we articulated the definition of core earnings in the first place and there were various approaches one could take, and they all had beneficial and adverse attributes you could say, and on balance, we think we selected the right one, and we don't want to change the core earnings definition too often, so the answer is no.

Okay, thanks. I'll requeue.

Steve Theriault, Dundee Capital.

Thanks very much. Good afternoon, everyone. A couple questions, the first one I think is for Kai. The WAM margin took a step lower this year. You've talked, maybe not today, but through part of 2016 about the business mix and the drag from expenses in recent quarters, so maybe you could just talk to, is it still realistic going back to -- I think your last investor session, is it still realistic to get to a mid-30% margin? How long does that take and how big a drag are expenses or have they been on the margin and as the expense program works its way through, should that also create a bit of lift in the margin? Anything you can get us on outlook there would be great.

Sure. So we want to be a little cautious in terms of how we project the outlook, but directionally we would see scale benefits continue to accrue, they are being offset somewhat by the strategic investments we're making in infrastructure as well as in the acquisitions we made. So that's probably going to take about 12 to 18 months to cascade through the P&Ls that you are looking at.

At that point I think we start seeing the benefits of those investments coming through. The second thing that's impacted us a little bit have obviously has been higher fee compression in the industry as a result of sales mix shifting towards passives but we think we have a good response to that in the sense that we have, in our RPS and GRS businesses, very strong economic dynamics that are not dependent on the fee basis of the content in the funds.

On the institutional mutual funds side, we have a product mix that actually is in higher margin, absolute return and outcome oriented strategies. We think that's going to be insulated from a large measure of the fee compression. So, while I can't tell you -- I cannot tell you exactly how and when the cascading of scalability will come through, we still think 30% to 35% ranges is the appropriate long-term target.

Okay, that's helpful. And as -- after the 12 to 18 month period on the expense side, you would expect to see at least some life from that coming through, right?

That is correct.

Yes, okay. Thanks for that. And second question for one of the Steves, looking at policyholder experience through the year was negative in each quarter for 2016. If I'm adding them up right, it looks like about CAD160 million if I add all four quarters together, so maybe one of you could just speak to the biggest drivers of that this year. Any sort of outlook you could provide? Are you starting to get more comfortable that the experience may turn in the other direction?

It wasn't lost on me as I was looking through the press release that as we went through mortality, morbidity and some of the others, it's been pretty consistently negative. So any reason to get more positive on that through 2017?

Sure, it's Steve Finch here; I'll take that one. So, the Q4 charge on policyholder experience was CAD43 million post-tax and that was a little bit better than the prior year and a little bit worse than Q3. For the quarter, we saw unfavorable claims experience in the U.S. life insurance business. That was really earlier in the year we had seen some losses there primarily from large claims, which can be anomalies due to the very large policy sizes that we write, but for Q4 we saw higher count in terms of number of claims coming through, which has not been the trend.

Relative -- for the whole year, what we have seen is improved policyholder experience in the second half of 2016, primarily because we updated our long-term care assumptions in Q3 and we talked last quarter about a CAD35 million post-tax ongoing benefit from that change. For the full year, we did see somewhat improved experience over 2015. So we -- since we made the LTC basis change, we are roughly neutral in long-term care experience, which I think have had been the biggest concern out there.

Hard to predict the future experience going forward. The only other thing I'd highlight is we continue to see favorable claims experience in Canada and in several geographies in Asia.

Okay, I may follow-up but I may take that off-line. Thanks very much.

Seth Weiss, Bank of America Merrill Lynch.

Hi, good afternoon. Thanks for taking the question. Warren, I wanted to get your outlook, specifically for real estate in Timberland, which makes up more than half of your ALDA portfolio and those asset classes could have some pressure under higher interest rates so just wanted to get a sense of your outlook for those two categories and how this may impact your outlook for CAD400 million of normalized investment gains next year.

I think you're well aware that we actually don't provide forward-looking statements with respect to our earnings, but in terms of the environment, I think I can make sort of a general observation. Obviously in a rising interest rate environment, asset classes are valued on the basis of discounted cash flows like from a cap rate perspective such as timberland and real estate, I think in a rising rate environment will have some shorter-term pressure.

I think the really important thing to understand is to why we select all the asset classes we do and that's because they actually ultimately provide inflation protection relative to a conventional fixed income instrument. So while in the short-term there may be an impact on the valuation of that real estate or timberland, in the fullness of time you'd expect that inflation in the commodity price or the increase in rents to actually provide you for higher income which in turn will ultimately be capped at that higher rate and ultimately lead to a higher value. So again there will be some to's and fro's, but this is the reason why we talk about our investment experience, we talk about it through this cycle and when we talk about the cycle, we're thinking like over a 20 year period how do things perform and we would fully expect over that time frame the real asset classes that give us protection to inflation, etc., will in fact perform well for us.

Okay, great. So you wouldn't say there is any rule of thumb in terms of interest rates and the impact on cap rates that would have on sort of the more near-term impacts of those holdings?

Well, again, it can happen an impact but if you'll recall in my slides where we talk specifically about investment gains, more than 75% of the gains that we've realized have come from fixed income reinvestment and credit spreads, not the ALDA asset classes. And as I noted it's more than 80% of the CAD400 million we're targeting, so we really look for a modest contribution there and while timberland and Oil and Gas, again, we talk about the diversified portfolio, may be facing headwinds in this moving to slightly higher interest rate environment. We have probably got a tailwind in our oil and gas portfolio based on the depressed commodity prices we've just come through so we do expect to see the benefits of portfolio diversification to come through and that isn't that the primary driver by any means of our overall investment experience gains that we expect to achieve.

Seth, the other -- Donald here -- the other point I'd make in addition to Warren's points is it depends on what's causing interest rates to go up and if interest rates are going up because of increased inflationary expectations you are therefore expecting rents to go up and the value of buildings to go up long-term. The replacement value and so on. So that is exactly what is causing the rise in interest rates is inflation -- increasing inflationary expectations.

That's helpful, and if I could just sneak one quick one on wealth management and the flow story there. Obviously, sort of a tale of two cities there with the US facing some pressure and Asia having some pretty strong quarter on flows. What's the margin profile thinking about maybe Asia pension, China money markets and then US mutual funds? Just as we think of the ins and outs of the flow dynamics.

Well, this is Steve here; let me have a first go at that and maybe Warren will want to add to that. It's probably fair to say that typically the margins available to us in Asia would be higher, although having said that, we get scale, more scale benefits in North America. That's the kind of trade-off. So some of what we're doing with the infrastructure project is to try to make sure that we really do get those scale benefits across the group as a whole rather than in some respects, if you like, looking at the business on a more fragmented basis.

So, the US has obviously been subject to greater pressure around the shift to passive and that's been part of the effects, but we haven't seen compression or changes in margin on the fund side itself around active product, and while they're are somewhat lower in Asia they are not materially lower so we have pretty high margin picture across the geographies. And, frankly, I think what's more important, if you look at the wealth and asset management model, the diversification of our business speaks to the inherent strengths of the business so that whatever we're experiencing -- one side has been actually positively countered on the other.

I don't think that we have any systemic issues in the US, quite frankly. I think we have a great product set, it's come under some degree of performance pressure in the first half of 2016, which most funds recovered in the second half, so I don't think that you can draw any really big trendlines per se, but maybe, Craig, you want to add a little bit more on this.

Sure, it's Craig. I would say the US business I would agree with Kai is -- does not have systemic challenges. I mean the shift to passive is a reality but we are very well positioned, I think, to deal with that. I don't think you should probably look at an on an individual quarter because they can get a little bit lumpy, but definitely for the year, we have seen a decline in our net flows, and there is a couple reasons for that, I guess.

One on the mutual fund side. Kai alluded to some performance challenges which have largely turned around, which makes me feel somewhat positive and one other factor I should mention is, on the RPS side, we're actually quite bullish things are going quite well. Part of the reason why that doesn't show up so much is that as part of the New York Life, we had some plans that we expected to leave before 2016 which actually hung on to 2016, which we actually didn't pay for, as part of the deal, so we just collected extra fees for some period of time, and it was really a timing issue. They ended up leaving in 2016.

So overall, I am positive going into 2017 on both sides of the business. Although the track record we had in the John Hancock Investments, the mutual fund side, was very exceptional. The amount of net sales that we had to grow sales was way beyond any kind of industry norm, so you have to probably temper that a little bit given that our business is becoming larger and more mature. But we are quite positive going forward.

Great. Thanks so much.

Meny Grauman, Cormark Securities.

Hi, good afternoon. Just wanted to know if you could help us better understand the levers that you have to adjust sensitivity to direct equity and fixed income moves. What I mean by that is how much discretion do you have to change around those sensitivities and, I guess more specifically, when would you choose to use those levers? Under what circumstances would you decide to make a more dramatic change to those sensitivities?

Hi, it's Warren here. Our approach basically to our hedging programs, we have actually Board established limits for a whole host of parameters that we run all our hedging programs through it, it's equity markets or interest rates and subcomponents thereof. Those levels were set back when we first entered the financial crisis. We're trying to get to our end hedging targets in 2012 and that's what we continue to manage the Company to and those are set in reference to what we expect our normal quarterly earnings to be and what do we think our tolerable limits on each of the risks we face.

Now if you look at what we've done in our hedging programs over time, they've become increasingly both sophisticated and effective in terms of how we approach -- our very first step in hedging equity exposure was simply through our macro hedging program where we loaded on equity futures. We migrated off of that onto our dynamic hedging program and our dynamic hedging program we initially mainly used equity futures. Today, we largely hedge with options.

In our interest rate hedging program we've got a variety of instruments that we've evolved to, we try to get ourselves with less exposure to forward starting swaps to remove that swap risk. So I think what you're looking at two is a program that is continuously focusing on how we can actually improve the effectiveness and decrease the noise in our earnings. The reality is that when you wind up with some differences such as we had this quarter, where there is a difference in how the asset and the liability are measured, based on mark-to-market type impacts, that kind of difference is very difficult in terms of the market.

I mean the hedging instruments that we had available to us in the market performed exactly as you would expect but there is nonetheless this accounting differential. So, overall, I think, like I say, you can expect from us over time to continuously monitor. We do watch to see if there is any kind of systemic or emerging risk that aren't evolving in the manner that we would otherwise expect, but based on, like I said, we think the programs we have in place are highly effective in achieving the results we hoped for.

I don't want to belabor the point but I'm just trying to understand. If you move into a quarter like we just saw where you see a dramatic US election, different things are happening, what's the reason why you don't take a more proactive approach? Is it just cost or practically it's just not possible? I'm just trying to get a better sense of that specifically.

Yes, Meny; Donald here. That's a really good question. We constantly have the trade-off of are we going to manage to the underlying economics and therefore suffer a little bit more volatility in reported net income or constrain the volatility of net income at a cost to the real underlying economics. And it's a real trade-off and what we try and do is maximize the economics subject to the volatility and net income, not being excessive.

Now what we have happen in the fourth quarter, is an example of what can happen; it shouldn't happen that frequently, but it can happen and anybody who owns Manulife should know that the probability of that happening is -- I don't know what the exact probability is right now and it probably wouldn't be proper to disclose it, but it's going to happen from time to time. But the underlying economics are being preserved.

So let me give you a real-life example of that, an easy one to follow, is on anything that has equity exposure, like Variable Annuities, for instance, or we're -- if equities were backing a long-term insurance product, for instance, if the market fall 10%, we take the hit not only of 10% but more than that because we have to reset the pads on the product. Now that is an uneconomic adjustment. If you are running a hedge fund and the market went down 10%, you would take a 10% hit. We would take a hit bigger than 10% because we have to restore the pads, so the question is, what would you do? If you wanted to hedge away the risk, would you hedge away the economics, which is a 10% decline or would you hedge away say 15% in my illustrative example which would preserve the accounting result.

We try and, where we can, manage to the economics and therefore would hedge 10 and take the rest through net income. And I think you would agree that is long-term profit maximizing, but then we have to apply a screen and say, okay but how much total risk in net income would our shareholders tolerate? And we try and contain that within the risk pockets. So that's the general parameters. There is generally nothing we can do to further constrain the volatility of net income without having an economic cost. And we think shareholders want us to manage over the long-term, so therefore, we are prepared to sustain a certain amount of volatility in order to maintain the maximum economics for our shareholders.

Thank you very much.

Humphrey Lee, Dowling & Partners.

Good afternoon and thank you for taking my question. Related to the capital infusion in Asia, my understanding is largely in Hong Kong but can you size the amount of capital infusion and also if interest rates were to improve in Hong Kong, how should we think about the release of the capital from high interest rate?

Yes, Humphrey; it's Steve here. Yes, the Asia infusion issue was very much to do with Hong Kong. As you know, the Hong Kong some say regime is pretty basic. It's proudly based on a 1960s UK regime, yet to be updated. At some states stage it will get updated but it's very sensitive to prevailing interest rates. The average in, we know here in Canada is nothing like that in Hong Kong and so in the early part of the year, with interest rates under severe pressure, we were faced with those -- that requirement to infuse into Hong Kong.

As the year passed by, things improved a bit and in fact toward the end of the year, we were able to take some back out again, and as we go forward we would hope that we see that continuing trend.

And, in terms of the size of the infusion, can you by any chance provide any kind of (inaudible) ranges?

No, I wouldn't really want to go into that level of detail. In general, we'd like to think that over the cycle we should be able to remit something like 50% of earnings out of Asia but we will see ebbs and flows in that, particularly because of the Hong Kong regime as it is prevailing today.

Okay, that's helpful. And then just regarding to your comments about the rising rates in this quarter helped the underlying economics by CAD2 billion, how should we think about the emergence of those benefits to come through from a financial statements perspective?

Yes, it's Steve Finch; I'll take that one. So, Steve Roder mentioned roughly CAD2 billion economic impact and we see that coming through over the long-term. What we should start to see emerge in Q1, one, we should see an increase in our earnings on in-force, on our insurance businesses because the earnings on in-force is based on the quarter's start interest rates and those have now risen. We saw a positive benefit in our new business gains in Q4 of roughly CAD30 million post-tax. Now those will continue for some period of time. It's hard to say how markets might adjust and how long that might persist, but we would expect this to persist through parts of next year.

Over the long-term, we will also see higher interest on surplus that will emerge into core earnings over time, and the final one that Steve mentioned was the beneficial impact on the ultimate reinvestment rate, so that increase in rates alleviates the potential for future URR charges that would go through net income. Those are the primary factors.

And then for the CAD2 billion or roughly CAD2 billion of benefits, do you assume any kind of risk of potential competing your way about the industry as the outlook for interest rate getting better?

I'm sorry. Could you repeat the question?

Yes, so like given the high interest rate, there is a risk for, I guess, the competitors or the broader industry competing relaxing on some of the interest rate assumptions or try to get better pricing in order to attract strong sales, so how should we think about the risk of the -- the benefit of rising interest rates being compete away within the industry?

Yes, so that would probably -- that would really impact our new business margins. I think you've seen across multiple geographies that we been fairly quick to react to declining interest rates by repricing, changing our products. What we've typically found is that ourselves and others will be less quick to react as rates rise but it's difficult to predict how that will emerge over time, but definitely the benefit to new business is positive both from a margin and I think from the attractiveness of our products.

Got it. Thank you.

Sumit Malhotra, Scotia capital.

Thanks, good afternoon. I want to pick up on that last point to start. The CAD2 billion number, first off, does that only contemplate the movement in bond yields that you've seen during Q4? And -- I don't know how fine a point you want to put on this -- but what is the exact timeframe are you looking at in giving us that CAD2 billion? What's the present value calculation that you've done in providing that number?

Yes, so it is marginal impact of rates moving in Q4 versus where we stood at Q3, and remember that URR piece is pressure that the Company was facing, that the URR rate, which we talked about before, had become higher than what the long-term interest rates were. So having the long-term interest rates rise avoids those future charges coming in. That would come in over quite a long period of time. That is the most significant benefit. The other ones I mentioned in terms of what we're seeing more immediately is the new business gains and then the increase in the expected profit on in-force.

That's the rub, right? The URR you just took a 10 basis points strengthening three months ago and I believe the cost of that was CAD300 million so we know the sensitivity, but as you pointed out, this thing is averaged over a long period of time and you would need to see rates at this level or materially higher to stem the charges that are required. I would imagine, from where we stand right now you are contemplating URR charges again in 2017 and 2018 based even on where rates are now. Isn't that correct?

Well, in -- the charge that we took in 2016 was anticipating the change that we expect to occur in 2017, and just to give you some comfort, where the rates have moved to, at the end of the year, in the US, which is our largest exposure, our URR for the long-term rate is 3.2%. 30 year treasuries were 3.05% to 3.10%, so we're getting quite close. The Canadian rates are still materially below the URR assumption.

So just to wrap this up and I'll move to something else, based on the moving US rates, which is the largest component, your potential sensitivity now to a URR change of 10 basis points would be lower than what you took in Q3. Is that fair to say based on the movement in US rates?

Yes, it's fair to say. We haven't given a specific number because there is judgment involved.

Okay, we've got some time to come back to that one. Maybe another issue that's been topical in the last few months, maybe again today for the market, has been the issue of tax rates in the US. Over the last couple of years you've given us a look at your core tax rate across your geographies and when I look at the US in particular -- so we've had -- you've given us eight quarters. We've had a couple of bumps in the road. I think this quarter you had some tax benefits that you talked about in the US, but ballparking it, you've been averaging around 25%. Probably for Steve Roder, early days on this topic but from where your position in the US sits, would you expect a material benefit to the tax rate for Manulife in the US if the new administration is going to put through some changes in that regard?

Thanks, Sumit. So maybe first of all, we're watching closely to see what prevails in the US, and there is obviously some expectation of changes in the tax regime. First of all, there are two things we need to think about. The first is the impact on our ongoing effective tax rate, if you like, and we've done a sensitivity calculation on that so we think that a 1% reduction in the US tax rate is worth ongoing for us something like CAD15 million per annum, that is. And so that's the first thing.

So, we are keenly awaiting whatever may happen there. And then the other thing to note is if such a reduction were to occur, there is also a potential one-off charge because the value of our deferred tax assets declines because the amount of taxes they will save, if you like, is reduced. And the one-off charge, the sensitivity to 1% is about CAD60 million, so net-net it's positive for us, but a decline in tax rates, we could expect to have a one-off charge and then an ongoing benefit, but net positive.

That 1% reduction, is that from the statutory US rate or is that relative to Manulife US tax rate? Because your tax rate as we -- I'm sorry if we're getting too much into it here --.

That's true, yes, that's the statutory rate. That's based on the statutory rate, yes.

Because it seems like right now your tax rate in the US is much lower than the statutory rate; that's an accurate statement, correct?

It has been lower than the statutory rate and it is right now, yes.

All right. We can follow up on this as things progress. Thanks for your time.

Doug Young, Desjardins Securities.

Hi, good afternoon. A lot of my questions have been asked and answered but maybe, Roy, new business gain in Asia was up 52% year-over-year. Just trying to get a little color on -- was there anything unusual in there? How much of that related to volume? Was there a margin pick up? Just trying to get a sense of sustainability and then I just have another follow-up on Asia.

Yes, so thanks for the question. You're right, new business value and new business margin has improved in 2016 over 2015. That's been a deliberate focus of the franchise. There are several drivers really facilitating that outcome. We're obviously seeing the benefits of the DBS partnership; 2016 was the first full year of our DBS partnership. A foundational year, and obviously one where we built a lot of connectivity into the DBS systems and 36 product launches which gives us some significant scale in Singapore and great diversification across our markets in Asia. So that was certainly a driver of scale and ultimately new business value both from a margin as well as from an absolute perspective.

Other growth came actually across the geographies. China, Philippines, Indonesia, Vietnam, Cambodia all grew sales in excess of 28% and the drivers there were, as you say, scale benefits. Which were facilitated through productivity of our agency force as well as greater growth coming out of our exclusive bank partnerships. We've got six exclusive bank partnerships across Asia-Pac that give us access to 17 million customers, so we're really getting those partnerships to work better.

On the margin side, we've focused our product sales towards higher value margin products, more regular premium protection products. So that's also been a driver of value for us as well, but the scale benefits there are certainly a big part of the new business story for us.

And then just a second part, looking forward, obviously, with the DBS deal, I believe the first part of the plan was to replicate what Aviva did from a product perspective and I believe the second part is really to broaden out into better margin products through the DBS partnership. I'm just -- do I have that correct? And I think the second gear is when we were thinking of focusing in that. Can you talk a little bit about what the opportunity there is?

Yes, I think you hit it right on the head. The first part of our launch was -- you're exactly right about really replicating the product suite that DBS was used to with their previous partner and just creating a seamless integration so that we didn't lose sales momentum and we're really pleased with how that went. So really good progress there. We did launch new products in 2016 that were incremental to what the bank had previously, but our focus at the backend of 2016 and certainly a big part of the focus for 2017 is around continuing that product shift towards more protection product which is obviously higher margin for us.

Where we are still very happy with the margins that we were able to extract or gain in 2016, in fact, if you look at -- we don't disclose DBS or Singapore separately, but if you look at Other Asia, our new business value margin for the full year was 25.1%; that's up eight percentage points on the prior year, so we did get good growth in margin. But, you're right, the second half of 2016 and certainly 2017 is about improving margin further and that's going to come not just through continuing our story on growth and scale but also through continuing to shift product more towards protection which is completely aligned to the bank's desire to meet the needs of the customers across its full spectrum of needs.

Perfect, thank you.

Paul Holden, CIBC.

Thank you. Good afternoon. Want to go back to the discussion on the CAD2 billion of potential incremental earnings related to rates and try to separate, if we can, the amount related to URR assumption and downside protection there versus the other factors you highlighted which I would view as the real upside versus the CAD4 billion core earnings you just produced in 2016. Is there a way we can segment those two?

Yes, it is Steve here again, and you hit it right that the URR is avoiding net income charges; the other pieces are incremental to core earnings and, very crudely I would say that URR is -- it is the majority, two-thirds to three quarters of the amount.

Okay, that's helpful. Thank you. And then just one other question, so over all, obviously, it's a very positive quarter, however at least relative to my expectations, expected profit wasn't as good as what we've seen in prior quarters this year, if we look at an on a year-over-year growth rate. So just wondering if you can quickly highlight some of the points on why the growth in expected profit was a little bit softer than what we've seen earlier this year.

Yes, if you look at the statistical information package in the -- I'm looking at the source of earnings excluding our wealth and asset management, which is the focus on our insurance and Other Wealth, if you look quarterly, we do tend to have some variability in our expected profit on in-force, so I think it's more important to look at the trends on an annual basis. And if you look at the annual growth was 11%, and that's where we are seeing some of the growth in Asia that Roy was talking about; it comes through that line.

The other place that the Asia growth comes in is if you look at the full year basis, the significant dollar and percentage increase in new business gains; that's the other place that the Asia growth comes through, so it's both lines and that is really the biggest driver of our earnings on in-force along with some currency benefit in 2016.

Okay, thank you.

Mario Mendonca, TD Securities.

Good afternoon. Could we focus on capital? I would like to focus my two questions on capital. First, Donald and Warren, your comments about long-term, looking at things over the long-term like the actual hits to reported earnings over the long-term, that's an appropriate way to do it. I get that and I think your long-term investors would agree. But where that logic breaks down is if we revisit what happened during the crisis and specifically what I'm getting at here is capital ratios are not calculated over a five-year averages, they are calculated quarterly. So are you very confident that the capital ratios could withstand the volatility created by these -- this accounting regime?

Yes, Mario, that's a great question, and we can't say absolutely if we went through another 100 and 200 year event that there is no problem, but we do a lot of scenario testing and very robust negative scenarios and we feel pretty comfortable. We hold capital well above what the regulator would prescribe. You're aware of that. How much of a buffer is always a matter of judgment, but that's one of the reasons -- people talk about why wouldn't you buy back stock or buy something totally internally financed and it's to keep that buffer for that very reason.

Our experience is, even through the great financial crisis, we had exceptionally large exposures on both Long-Term Care, basically not sufficient reserves for the policyholder behavior and, remember the whole Variable Annuity book was not hedged going into that crisis, right? So those things, we priced more appropriately for the experience on Long-Term Care. We've hedged interest rates and we've had most of the equity risk, so we're in a much better position in terms of those than we were back then.

I feel very comfortable, our Board feels comfortable, but it depends on what scenario you throw at it and that is something we -- sometimes we get accused on these calls of being a little too conservative and how much capital we steward and is precisely for those reasons because our job is to maximize the ROE, subject to, subject to never having to do a down round equity financing, right? And that's what you want us to do. So that's the calculus we're looking at all the time.

Yes, the reason I asked the question is, we had this move in rates this quarter and the -- it resulted in essentially all the earnings going away in a given quarter and I just would not have expected that given everything the Company has done to try to limit the interest rate and equity market sensitivity. It wouldn't have counted on something like that and that's why --.

Well, Mario, you're 100% right. The way I look at it is, we had essentially six components of roughly equivalent magnitude and each one of those are like switches. They could be negative, neutral or positive. All switches went negative this quarter and I'm not going to tell you that the probability is equally -- that's a fairly complex observation; you wouldn't trust me anyway, but that's an unusual event.

Now I can't tell you if it's one in 100 or -- and it's certainly not one in 5 but it was an unusual quarter to have all of those things go negative. We had swap spreads and credit spreads coming in; one is positive, one is negative. They both went in the negative direction, but they both came in -- or sorry, went in opposite directions and both negative (multiple speakers) --.

So the message is, there is no way you would run your Company on the potential that all six switches turned negative at once? Like that's just not the way to run a business is what you are telling me?

Absolutely, but as you know, when you look at the bell curve associated with this, the probability distribution is -- the risk of having a positive 500 or a negative 500 is much greater than a positive billion or a negative 1 billion and 100 is like a walk in the park. But just look back, at Warren's presentation, that was a really good one, which shows you that over the fullness of time, and it doesn't take -- you don't have to look over the full five years, in 2013 and 2014, remember, we had gone to core earnings and people were saying you are being way too conservative with your core earnings.

Look at the net income. We've produced 3.3 billion one year and people kind of ignored it. Well, that's when all the switches went the other way and remember we were very careful to tell people don't put any stake in this because this is more likely to turn the other direction than it is to continue or grow at 15%. Because we're honest people, and this is one of those -- to tell you the truth, I won't lose any sleep over this; this is going to happen some percentage of the time. It's not going to happen every quarter, every second quarter, every third or every fourth quarter, but it can happen from time to time.

I think the logic is perfect as long as capital never comes into question, so let me just --.

Steve, you want to --?

Mario, can I just add a couple (multiple speakers) --?

Yes, please.

So first of all, also important to bear in mind that the increase in interest rates had a highly beneficial effect on the required capital, so in fact the impact of interest rates, which impacted earnings and therefore was a negative against expectations on the MCCSR was pretty much offset by the impact on required capital. And the reason why the solvency ratio may have been lower the year end -- it was actually the bottom of the range of expectations, but just about on the range, was we also finished or finalized the Standard Chartered arrangement, so we needed to finance that, and so that will be one thing. And we also have some redemptions in Q4, so net-net, the interest rate impact was pretty neutral, actually.

Okay. My second question relates to LICAT so I know the end of January is come and gone; I know that the life companies have all had to submit their first test to run to OSFI using 2015 data at a HoldCo level, so I understand that's been done. But what would be helpful to understand is what have you learned from that LICAT submission, and specifically does it affect anything in so far as the products you sell and the assets you use to support those products? Do you -- is there anything like a change?

Yes, Mario; it's Steve here. I think the whole LICAT thing still has to be finely calibrated. The ink is still wet on the paper. We continue to have intense dialogue, as does the industry, with OSFI. The statements from OSFI continue to be consistent. We believe we have strong capital; they believe that the industry has adequate capital, etc., and there is still a long way to go in this particular game.

We expect them to issue their paper probably in May and then we'll all be working away to test it, make sure the calibration is right and we hope to be able to be more helpful later in the year, but right now, we don't really have much to add.

And really, Mario, in really broad terms, though, you're talking strategically about products, it's in the direction we're going anyway. Long-term guaranteed products, whether it's LICAT, Solvency II, you name it, regulatory regimes I haven't met yet, they are all going in the direction of penalizing the delivery of long-term guaranteed products and we've been moving away from that about as aggressively as one can.

Excessive guarantees on variable annuities and things like that are going to get caught up in it. We carry more capital than most companies in Canada because we carry things like all the risk and so on. That will be calibrated in there, but we're not going to be getting out of that business because it is the most intelligent match for the long lives that we do have.

So if you're thinking of really macro changes, does it make something we're doing infeasible? No, it's absolutely in keeping with the strategic direction of the Company, growing Asia where the life products are by and large more and more are adjustable, growing wealth management and, by the way, has better margins, growing wealth management across-the-board, and pulling back on offering excessive guarantees. I don't know anybody who can invest to guarantee a 6% return over a 75 year time horizon. That's hard to do, with or without a capital regime; that's really hard to offer that kind of guarantee.

You addressed exactly what I was getting at, the ALDA and the long-term, so thank you for that.

Tom MacKinnon, BMO Capital Markets.

Yes, thanks. One last question about the ROE optimization program. I think several quarters ago you had earmarked some liabilities that would perhaps be looked at in terms of optimizing their ROE and freeing up some capital, so wondering how discussions with respect to that are coming along.

Yes, Tom; it's Steve. So, look, we continue to have a very strong focus on ROE, ROE expansion, shareholder value creation is the first thing to mention, and we have had various discussions with various counterparties about potential transactions. We haven't gotten to a place where we have chosen to transact on anything so far; that's not to say that we won't. These things are not straightforward. And we'll see how we go into the future. And things can change over time as markets change and that could change the dynamic of the conversation as well, so there's nothing to really concretely update you on today. But the focus on ROE and ROE expansion is very much in our -- top of the agenda.

Okay, and then one quick follow-up. Just with respect to Japan, looks like the -- just in the quarter, the new business value fell quarter over quarter. Not sure how much that was driven by sales or interest rates. Over the year the APE fell, insurance sales were on a constant currency basis, kind of down in the fourth quarter versus the fourth quarter last year. So maybe a little bit about the environment there and if you are seeing any more encouraging signs now that rates have moved up in that -- in Japan?

Hi, Tom; Roy here. As you know, Japan is obviously a challenging market with interest rates moving in the way that they have. We saw at the end of the year 30 bond rates down by about 58 basis points on the prior year so that's obviously had a big impact on our business and, quite frankly, the industry. Low interest rates are not uncommon in Japan, so this is something that where we are used to dealing with and we've been very disciplined and deliberate around making sure that we make product changes to deal with those interest rate changes and that's affected sales but we been able to keep margin high through that. In fact, our new business value margin for Japan year-on-year, full year, grew by 17% despite interest rate movements that went quite adversely for us.

In the quarter itself, we did see sales down by about 13% and there are several factors there. It's the product changes that I mentioned which has had an impact and that's something that we anticipated. The other big impact for us is that when you compare us -- our performance in Q4 to the prior year, it's a little bit distorted because in Q4 of 2015, we had an exceptional quarter. In fact, our sales growth in Q4 of 2015 was 50% up on the prior year, so we're also suffering from a year-on-year comparison perspective the success of the fourth quarter and 2015, at least from a comparative perspective.

But, in general, what I would say is that it is a challenging market. Interest rates have obviously been a big headwind. We have been very disciplined around making product changes that deal with that, we focus on new business value margin and earnings and I'm really pleased with the shift that we've made towards protection and away from, for example, whole life yen product to foreign currency denominated products where the margins are much better and where we haven't suffered as significantly from interest rate reductions.

Okay, thank you.

Nick Stogdill, Credit Suisse.

Hi, good afternoon. Just a quick numbers question from me. On the Corporate segment line this quarter, if we adjust for the tax benefits looks like there was a bit of a step up in the corporate loss this quarter and I know if you add in severance costs, some ongoing investments I was just hoping to get your outlook for 2017 on that line and if there was anything one time in that number this quarter?

Yes, it's Steve here. One or two things cropping up on that line, so we did have some severance costs within core earnings and fourth quarter 2016. We took some reorganization costs outside of core for major programs that were publicly announced, but there were redundancies of severances elsewhere that were taken in core. So that explains the fair piece of it.

We've also continued to be spending on the WAM infrastructure product in particular, we call it the GO project, global optimization project. There has been quite a lot of project expense in there. Those have been the main sorts of things, so I think -- I guess you've characterized those more of a one-off nature rather than a quarter to quarter nature, although subject to the fact that the GO project will continue on for some considerable time, as Kai mentioned earlier on.

Okay, thank you.

Linda Sun-Mattison, Bernstein.

Hello. I have a question regarding Asia and a question just to clarify the CAD2 billion net economic benefit. The first one is regarding Asia. Now if I look at your Hong Kong margin has improved a lot in 2016. Now the margin looks very similar to AIA which, of course, is much bigger than you in Hong Kong, so I'm trying to understand how sustainable this Q4 number 6 to 8.8 new business margin is going into in 2017 and 2018 and also for other market margin expanded very, very strongly. Understood that is probably from scale and partially from product mix and do you see the Other Asia margin to go up further and whether you have a target to hit so -- yes, that would be very helpful if you could help me understand.

Thanks, Linda; Roy here. So let me cover Hong Kong first. I think you're starting comment is right. Obviously, we've got a tremendous business in Hong Kong that delivers exceptional margin and absolute NBV which is very strong. Again, we focus very much on NBV and NBV margin and we've made a lot of changes to our product mix in Hong Kong to sustain continuous growth in margin and absolute NBV and that includes the DBS partnership that I mentioned earlier. We obviously get a big benefit of the DBS partnership in Singapore, but DBS also have a significant presence in Hong Kong, and that's aided our sales growth, and the scale benefits that come from that, which improve margin are not insignificant.

And again, we really offer a diverse range of products in the Hong Kong business through protection of time and wealth accumulation type products and that goes from our most popular products of participating whole life to critical illness protection as well as medical protection. So that mix is something that we're going to continue to focus on. We also get the benefit in Hong Kong of having a significant presence in the MPF market and -- actually in Q4 we moved from the number two position in terms of scheme sponsor to number one so it's something that we're very proud of; and it's a big focus of our business there.

So I think, in summary, the Hong Kong business is a very significant business for us and we're delighted with the progress. We continue to diversify our presence there and we expect that that will continue through 2017 and beyond. In terms of other Asia, I referenced this a little bit earlier in the conversation but we've seen good NBV margin improvement in Other Asia. Again, 25.1% is our NBV margin for that collection of countries and that's up eight percentage points on the prior year.

DBS is certainly helping with that but we are getting more scale and we are getting significant benefit from the focus on our mix towards protection. So that's really again going to be a continuing story for us as we really focus on returns and value generation. Does that cover your question, Linda?

Yes, because I'm looking at the quarter on quarter trends, just look at Q4, the curve is quite steep, positive curve and also I noticed that the (inaudible) agent number headcount grow 13% year-over-year, normally these agents will become more and more productive especially with you adopting a more kind of Premier agent approach. So if I am to see this agent produce more, normally agent channel is much higher margin because you can control the product better. Can I see this 29%? I'm looking at the quarter number -- 29% in Other Asia going up further in 2017?

Well, that's our objective, obviously, to improve margin and absolute NBV and you're absolutely right, agency obviously continues to be a very significant distribution channel for us. We're growing absolute number of agents, but to your point, we're more focused on the professionalism of our agency force and we really strive to have the most productive agency and we've got a program called Mission Extraordinary. It's about improving the professionalism of our agency and we think that's a key differentiator for us and that includes the way we recruit agents but also the way we certify, train them and also the tools that we give them.

We've launched (inaudible) which is our technology platform, to our agents which allows them to straight through process the policy sales that they make which is obviously a huge productivity improvement for them but a much better customer experience as well. So, you are absolutely right; that focus will continue in 2017 and we are obviously working on the goal of improving -- continuing to improve margins and absolute NBV generated from that.

Thank you, Roy. And my other question just very quickly on the CAD2 billion, I think mentioned for the economic benefit to come through over the longer-term but we should be able to see some benefit through the P&L from Q1 2017. Now my question on this one is, which region am I going to see this benefit? I assume its North America; is that right?

It's Steve here. In terms of where we saw the benefit in Q4, the marginal impact of higher rates on new business gains, that was in Asia, a little bit in the US and Canada. And then earnings on in-force, we're expecting CAD10 million to CAD15 million per quarter and we are expecting that would be more heavily weighted to North America; that's where more of the guaranteed liabilities are.

Thank you very much.

Darko Mihelic, RBC Capital Markets.

Hi, thank you. I'll try and be brief. The question is for Marianne in Canada. Your (inaudible) strain number has been a very good band, I would say or a very predictable band for the last eight quarters but there's potentially some pricing changes happening. Can you give us an idea of what your outlook is for sales and strain in 2017?

Yes, I guess I would say that in the fourth quarter some of our sales were a little elevated on the retail side because of the tax exempt rule changes that were coming through so we said saw a bit of a fire sale happening there. We did increase prices just before the fire sale actually started and we, looking forward, probably will be increasing prices further as we move into 2017. So that will impact some of our sales and that really is on the long guaranteed products that Donald was talking about earlier.

And this DNA bill that's in the House, is that expected to have an impact as well?

It's hard to say. It's looking very positive that the genetic testing laws are going to pass. On the life insurance side we think that that will be longer to impact, things like critical illness of course we're watching very closely in terms of the implications that might have.

Thank you. And one last question for Steve, I understand that you may be looking at some possible transactions for balance sheet optimization. I think when you originally talked about it, it was CAD15 billion of reserves you had identified. Is there any chance you've actually increased the size and the scope of balance sheet optimization?

Yes, I think it -- I am the Steve you want, I think. We've got too many Steves. Well, I guess the point I would make is the balance sheet optimization project is really part of the overall shareholder value creation project which runs across the entire balance sheet of the Company in a sense because we want to be always examining the businesses we own and how we can improve those where we don't feel that we have a satisfactory return, etc. So I hesitate to describe it as based around a particular dollar figure or dollar amount to make it greater or whatever. It's more of a philosophy that runs through the organization rather than a prescriptive or based on a small portfolio in a sense.

I think the number you are quoting is probably where we are talking about just the first piece of work we did where we looked at a smallish number of portfolios, but we look at multiple portfolios beyond that. So the scope of the -- of our radar screen, if you like, is much wider than that.

Oh, okay, I see. Thank you.

Thank you. There are no further questions registered at this time. I will turn the meeting back over to Mr. Veloso.

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