earnings call transcript - manulifepresentation operator good afternoon and welcome to the manulife...

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EDITED TRANSCRIPTMFC.TO - Q1 2012 Manulife Financial Corporation Earnings ConferenceCall

EVENT DATE/TIME: MAY 03, 2012 / 6:00PM GMT

OVERVIEW:

Co. reported 1Q12 net income of CAD1.2b.

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C O R P O R A T E P A R T I C I P A N T S

Anthony Ostler Manulife Financial Corporation - SVP of IR

Donald Guloien Manulife Financial Corporation - President and Chief Executive Officer

Michael Bell Manulife Financial Corporation - SEVP and Chief Financial Officer

Cindy Forbes Manulife Financial Corporation - EVP and Chief Actuary

Jim Boyle Manulife Financial Corporation - President, John Hancock Financial Services

Paul Rooney Manulife Financial Corporation - President and Chief Executive Officer, Manulife Canada

Bob Cook Manulife Financial Corporation - SEVP and General Manager Asia

C O N F E R E N C E C A L L P A R T I C I P A N T S

Steve Theriault BofA Merrill Lynch - Analyst

Robert Sedran CIBC World Markets - Analyst

Tom MacKinnon BMO Capital Markets - Analyst

Joanne Smith Scotia Capital - Analyst

Gabriel Dechaine Credit Suisse - Analyst

Peter Routledge National Bank Financial - Analyst

Doug Young TD Newcrest - Analyst

Michael Goldberg Dejardins Securities - Analyst

Darko Mihelic Cormark Securities - Analyst

P R E S E N T A T I O N

Operator

Good afternoon and welcome to the Manulife Q1 2012 financial results conference call for May 3, 2012. Your host for today will be Mr. AnthonyOstler. Mr. Ostler, please go ahead, sir.

Anthony Ostler - Manulife Financial Corporation - SVP of IR

Thank you, Dave, and good afternoon. Welcome to Manulife's conference call to discuss our first-quarter 2012 financial and operating results.Today's call will reference our earnings announcement, statistical package, and webcast slides which are available in the investor relations sectionof our website at Manulife.com.

As in prior quarters, our executives will be making some introductory comments.We will then follow with a question-and-answer session. Availableto answer questions about their businesses are the heads of Asia, the US, Canada, Investments, and general account investments.

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

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MAY 03, 2012 / 6:00PM, MFC.TO - Q1 2012 Manulife Financial Corporation Earnings Conference Call



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

Donald Guloien - Manulife Financial Corporation - President and Chief Executive Officer

Thank you, Anthony. Good afternoon, everyone, and thank you for joining us today. I am joined on the call today by our CFO, Michael Bell, as wellas several members of our senior management team including our US General Manager, Jim Boyle; our Canadian General Manager, Paul Rooney;our Asia General Manager, Bob Cook;Warren Thomson, our Chief Investment Officer; Scott Hartz, our Executive Vice President and General AccountInvestments; Cindy Forbes, our Chief Actuary; and Rahim Hirji, our Chief Risk Officer.

Also with us today is Steve Roder, who as we announced this morning, will be joining us as our new CFO.

This morning we announced our first-quarter 2012 financial results. We reported net income of CAD1.2 billion for the quarter which is up fromCAD985 million in the first quarter of 2011.

We entered 2012 with a very solid foundation for growth. Our first quarter reflects strong markets, positive hedging results, 35% higher insurancesales, and stronger underlying earnings relative to the fourth quarter of 2011.

The strength of our underlying earnings reflects our healthier business mix, the emphasis on wealth management insurance products with lessrisk, higher margins, and higher returns.

While we are very pleased with our results, the first quarter was not without its challenges. We experienced poor policyholder experience whichwe expect is largely a random fluctuation and mutual fund sales slightly lower than last year. That being said, we reported record funds undermanagement of CAD512 billion, which fuels current and future fee revenue.

In Asia, we delivered record insurance sales. This demonstrates among other things that investments in our brand and distribution are paying off.In Canada, our broad-based diversified financial services strategy has resulted in strong insurance sales led by record sales in our group benefitsbusiness. In the United States, we continue to leverage our distribution strengths to deliver solid insurance, mutual funds and 401(k) sales.

On the investment side, mutual funds managed by Manulife Asset Management received eight Lipper Awards and our general account assetperformance continued to be a strength of the Company.

In conclusion, I am pleased with our solid first-quarter results. Favorable markets, positive hedging results, strong insurance sales, and strongerunderlying earnings relative to the fourth quarter of 2011 all contributed.We believe these results will provide investors with a sense of the potentialfor our Company and where our strategy is leading us.

Before I turn things over to Michael Bell, I would like to say a few words. This is Mike's last quarterly earnings call and I want to give credit to Mikeand the team for improving the transparency and understandability of the finances of our Company.

As I mentioned, we are bringing in a new CFO, Steve Roder, who will continue to lead these improvements. Steve brings to Manulife 25 years ofexperience in public accounting and his integrity, values, professionalism and communications skills will ensure that our disclosure continues tobe of the highest quality.

In addition, Steve's deep understanding of the financial services market in Asia will be a key asset, given our heightened focus on the region. I'mlooking forward to working with Steve when he joins us formally at the beginning of June.

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Michael will be staying with us to ensure a smooth transition of responsibilities. Mike has helped guide Manulife through some of the mostchallenging times and I want to thank him for all of his considerable contributions.

With that, I will turn it over to Mike who will highlight our financial results and then open the call to your questions.Thank you.

Michael Bell - Manulife Financial Corporation - SEVP and Chief Financial Officer

Thank you, Donald. Hello, everyone. Donald, I really appreciate your warm comments. I want to emphasize to all of you that it has been a realprivilege and an honor to be the CFO of our great Company for the last three years. I have thoroughly enjoyed working with our team here atManulife and have also appreciated my relationship with everyone in the investment community and I am confident that Steve is a great executiveand that our Company is in strong hands.

Now let's discuss the first-quarter results. For the first quarter of 2012, we earned net income of CAD1.2 billion and that compares to a small lossthat we reported in the fourth quarter of 2011. Importantly, our first-quarter underlying earnings reflected the benefits of our balanced productand business mix and sequential improvements in new business strain and fee income relative to the fourth quarter of 2011.

The quarter also benefited from favorable equity markets partially offset by changes in interest-rate spreads and there were a number of othernotable items totaling CAD592 million which I will discuss further in a few minutes.

We ended the quarter with MLI's MCCSR at 225%.We view this capital level as strong particularly in light of our expanded hedging programs.Thiscapital ratio benefited from strong first-quarter earnings and the capital issuances that we did earlier in the quarter.

Turning to slide 7, you will note there were a number of notable items included in the first quarter's net income. The favorable impact of equitymarkets was mostly offset by the unfavorable impact of changes in interest rates, particularly the change in spreads.The net direct impact of equitymarket and interest-rate movements in the first quarter was an after-tax gain of CAD75 million.

There was a gain of CAD223 million primarily related to favorable tracking error for the variable annuity block that is dynamically hedged.

In the first quarter, we also had investment-related gains that amounted to CAD243 million including an CAD82 million gain related to our activitiesto further reduce our interest-rate exposures. The impact on policy liabilities resulting from changes to the variable annuity product featuresgenerated CAD122 million gain.We also reported small gains from a change in the tax rate in Japan and some actuarial updates.

The quarter's results include a CAD66 million charge for unfavorable policyholder experience and this was primarily related to claims experiencein the Canadian and US insurance businesses.

Slide 8 is our Source of Earnings. The increase in expected profit on in-force includes the benefit of higher-than-expected -- fee income due tohigher funds under management. It also includes larger releases of provisions for adverse deviations and growth in our P&C reinsurance business.

The impact of new business benefited primarily from improved business volumes, the impact of higher interest rates, and improved new businessexpenses. Experience gains include favorable investment gains and segregated fund experience, partly offset by unfavorable changes to interestrate spreads, losses on macro hedges, and unfavorable policyholder experience.

Earnings on Surplus decreased sequentially, reflecting market value changes on held-for-trading fixed income assets and volatility related to hedgeaccounting. Income taxes includes the benefits of the tax rate change in Japan and gains in low tax jurisdictions.

On slide 9, you will see our insurance sales. In the first quarter of 2012, we delivered record insurance sales of CAD823 million and this was up 35%versus the first quarter of 2011 on a constant currency basis.

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In Asia, we also set a record for insurance sales with strong growth in almost all of our countries. In Canada, first-quarter sales of insurance werestrong, driven by record sales for Group Benefits and Affinity Markets.

In the US, insurance sales were 3% lower than the prior year. Importantly, though, life insurance sales were up 28% after excluding the moreinterest-rate-sensitive products. So overall, we are very pleased with our sales of insurance products.

Turning to slide 10, first-quarter 2012 sales of wealth products increased relative to the fourth quarter to CAD8.7 billion despite turbulent investmentmarkets. Asia wealth sales grew 7% versus a year ago driven by the recent launch of an Australian dollar fixed annuity product in Japan and thesingle premium unit linked sales in Indonesia.

In Canada, wealth sales declined 5% as the competitive environment and continued low interest rates adversely impacted investment productsales.This more than offset very strong sales in the group retirement business.

In the US, wealth sales were down 12% due to the impact of turbulent market conditions on mutual funds and our actions to limit annuity sales.Importantly in the US, Retirement Plan Services sales grew 11% contributing to our record 401(k) funds under management. And John HancockFunds, while down versus prior year, increased 29% versus the fourth quarter of 2011. So overall, we are generally pleased with our nonguaranteedwealth sales.

On slide 11, you can see the total Company premiums and deposits for insurance and wealth products. Insurance premiums and deposits for thefirst quarter were largely in line with the prior year, with 23% growth in Asia largely offset by a decrease in reinsurance reflecting the sale of ourlife retro business to Pac Life in 2011. Excluding the life retro sale, insurance premiums and deposits increased 3% versus the first quarter of 2011.

Wealth premiums and deposits declined 6% as increases in Japan fixed annuities and North American pension businesses were more than offsetby the impact of lower mutual fund results.

Turning now to slide 12, you can see that we achieved a record CAD512 billion of funds under management.This represented strong growth fromeach of our operating divisions.

Slide 13 demonstrates that our investment portfolio continues to be high quality and well diversified. We continue to view this as a Companystrength.

Turning to slide 14, you will see that our strong underwriting discipline contributed to a net credit experience gain for the first quarter and we arepleased that our credit results remain strong.

Moving on now to slide 15, this slide summarizes our capital position for MLI. Our capital ratio for our main operating company was 225% at theend of the first quarter.The ratio benefited from strong earnings and the capital raises that we did earlier in the first quarter.

We continue to believe that we have a substantial buffer versus our policy obligations particularly in light of our significant provisions for adversedeviation and our increased hedging.

Turning to slide 16, as we have previously announced, we have achieved our year-end 2014 goal for interest-rate risk reduction. We also addedmodestly to our equity hedging in the quarter and are close to our year-end 2014 goal for equity market risk reduction. We have hedged 66% to74% of the estimated current earning sensitivity for equity markets and we are very proud of the positive result that our hedging programs arehaving on our business.

On slide 17, you will see some of the potential future impacts of changes in the interest-rate environment. As we have discussed before, Canadianaccounting standards require us to recognize these impacts in our financial results faster than under US GAAP.

I will now address two topics listed here on slide 18 which may be on investors' minds.

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The first is regarding the impact of the newly published Canadian Institute of Actuaries Segregated Fund Calibration Standards. In February 2012,the Canadian Institute of Actuaries published new equity calibration parameters for guaranteed variable annuity and segregated funds. The newstandards would apply to both the determination of actuarial liabilities and to the calculation of required capital.They are expected to be adoptedby the Actuarial Standards Board of the Canadian Institute of Actuaries and required for valuation of policyholder liabilities on or after October 15,2012.

Our current estimate based upon equity markets and interest rates at the end of this quarter is that it could result in a charge to earnings ofapproximately CAD250 million to CAD300 million and a total reduction in annualized MCCSR ratio of 6 points. The MCCSR reduction would likelybe 2 points upon implementation and 4 points would likely be amortized over time.

These amounts are estimates only and will be updated for future market conditions. We would expect to reflect this change as part of the annualreview of Actuarial Methods and Assumptions in the third quarter of this year as long as they are fully adopted by the Actuarial Standards Board.

The second topic is our outlook for the update of our fixed income ultimate reinvestment rates or URR. Our current estimate based on interest ratesat the end of this quarter is that the update to the fixed income URRs could result in a charge that could range between approximately CAD700million and CAD800 million.We expect to make this update to the fixed income URRs in the second quarter of 2012, consistent with our timing in2011.

I would remind you that this amount is an estimate only and the actual amount will be based on updated information as of June 30, 2012.

So by way of summary, in the first quarter of 2012, Manulife delivered earnings of CAD1.2 billion. Importantly, we strengthened our underlyingearnings relative to the fourth quarter of 2011. We also grew our insurance sales to record levels. We achieved record funds under managementand reduced new business strain through improved business mix and lower new business expenses.

In conclusion, we are very pleased with our performance here in the first quarter.This now concludes our prepared remarks. Operator, we will nowopen the call to Q&A.

Q U E S T I O N S A N D A N S W E R S

Operator

Thank you, Mr. Bell. (Operator Instructions). Steve Theriault, Bank of America Merrill Lynch.

Steve Theriault - BofA Merrill Lynch - Analyst

Thank you. I have a question for Mike and a question for Cindy, please, starting with Michael, I think. Just trying to get a sense of the drivers of thedecline in strain and the sustainability. So maybe is there any way you can split out the decline, the sequential decline between higher in quarterinterest rates and the impact of repricing? I guess what I am getting at is if rates remain where they are today, being lower quarter to date relativeto Q1, can we realistically expect strain to be sustainable at Q1 levels?

And then for Cindy, if we go back to 2009, you took an CAD800 million charge with respect to lapse assumptions. I think about CAD500 million ofthat was attributable to the US and Japanese VA business. If memory serves, at that point I think you took the lapse assumption down to 1% againif memory serves and I think the message was that that was pretty low and conservative. So just a couple things there.

Is your review for Q3 really just a concern for the US business or is it the VA business broadly? And I know you are reluctant to provide an estimatehere because you are early on in the process but I'm trying to get a bit of a sense as to the order of magnitude for instance if you took that lapserate down to zero, what would that imply in terms of a worst case? Thank you.

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Steve, it's Mike. I will start and then hand it to Cindy. In terms of the new business strain, first just to recap, the new business strain improvedsignificantly relative to Q4 2011 and that was anticipated and it was really driven, as you noted, by a handful of factors not the least of which is theimportance of the price increases that we implemented in 2011. And obviously the slight increase in interest rates in first quarter was helpful aswell.

Rather than trying to disaggregate the quarter-over-quarter change, which I think would be fraught with imprecision, I think the more importantquestion that I will answer is what do we anticipate in terms of strain going forward? We do anticipate as long as rates are flat with the end of thequarter for the remainder of the year, we do anticipate continued improvement in new business strain over the course of the year. And that isdriven by a couple of important factors particularly for the US business and the Canadian business.

The first factor is the price increases that we've put into effect. That drove some of the improvement in first quarter of 2012 but it will drive evenmore of the improvement again based on constant interest rates in the remaining quarters of the year. So we would expect to get additional upliftfrom those price increases.

And the other change would be the product mix. As we have been selling more of the next generation of products, we expect lower strain in bothCanada and US and we would anticipate seeing a boost on that in second quarter and also some additional boost in Q3 as the sales convert overto the new product.

So at the end of the day not only do I believe that -- again, assuming interest rates are flat, obviously if interest rates drop, that's another matter.But assuming flat interest rates, I would anticipate that the strain will actually improve further relative to Q1 as opposed to revert back if you willto Q4.

The only other factor that I would note for completeness is the volumes. Obviously we benefited from some of the volume improvement relativeto the new business expenses. That is always a wild card in terms of implementing rate increases but at this point, our anticipation is that net-netthat would be a positive.

And then just before I turn it over to Cindy, I would just add, Steve, on the VA lapses again I really suggest that you not overreact to the disclosure.Again at the end of the day, the basis changes in third quarter will likely have a number of items, both positive and negative. Again, it would beearly to try to gauge what that list is going to look like or what the impact is. Cindy, do you want to add?

Cindy Forbes - Manulife Financial Corporation - EVP and Chief Actuary

Thanks, Mike. Steve, it's Cindy. In terms of the scope of this year's review, we are focused on the US. It's where we have the bulk of our experience,so that is the scope of our review this year.We are looking at experience both before the financial crisis and after the financial crisis.

In terms of the 2009 (inaudible) again, I think that may be the 1% that you are referring to maybe wasn't related to VA but rather to the UniversalLife alternate loss rates, so there's not much you can do in extrapolating from that data point.

Steve Theriault - BofA Merrill Lynch - Analyst

Okay, I'm (technical difficulty) that's it for me.Thanks very much.

Operator

Robert Sedran, CIBC.

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Robert Sedran - CIBC World Markets - Analyst

Good afternoon. A question on capital to start, I guess. Considering that sensitivities have come down so far and you're pretty at your 2014 targets,can you help us understand what kind of number you are managing towards in terms of an MCCSR ratio? 225% is a very different ratio today thanit would've been, say, 18 months ago and yet you still did a fair bit of issuance during the quarter. I know there's some redemptions coming up.

I guess what I'm trying to figure out is how much flexibility you have in terms of deployment and whether you consider drawing that down in anacquisition scenario?


Robert, it's Mike. I will start and see if Donald wants to add. First, I appreciate your comments. They are on the money that a 225% is a very stronglevel particularly in light of the substantial hedging and you're absolutely right, 225% today is a lot stronger than 225% two years ago before thebig increase in hedging.You are also right that the issuances that we did we also did that in light of the possibility of redemptions going forward.

And so again, I would not try to characterize it as managing to a specific number. I think it is multifaceted as opposed to trying to manage it to aspecific number.

And in terms of acquisition capacity, as we have said before, for smaller acquisitions that made economic and strategic sense, we believe that wecould fund that with existing resources. For large ones, it would likely require external capital. And again, I would not try to put a specific numberon it but those guidelines remain unchanged.

Donald, do you want to add?


You know, based on our economic capital models, one could infer that if we operated at a ratio of something like 150, we would be operating --you know, the credit quality equivalent roughly to a AA company.That's at 150. 225%, we are obviously substantially above that.

You know, we are a conservative run organization and we have got very conservative regulations here in Canada. We don't frankly know wherethey're going to go in the next few years and we are going to err on the conservative side until such time as there is greater clarity but we sleeppretty easy at night with the capital ratio that we've got now and a capital ratio below that.

But again, we don't know with perfect clarity where capital rules are going. They are not only changing here in Canada. This is not a uniquelyCanadian phenomenon but I'm sure most of you are following the Solvency II, Solvency Modernization in the United States. It's a moving feastwhere they're going internationally, so it's pretty tricky to determine. So we're going to err on the conservative side for the next little while.


Okay, just a quick follow-up question on the adverse policyholder experience this quarter, the CAD66 million. If I recall correctly, you did build themortality reserve last year in the United States which I would have thought would have increased the capacity to absorb some of the negativeexperience. So did that move not go far enough or is this a different business and experienced it?

And Donald's comments seemed to indicate that he was reasonably comfortable that it wasn't a recurring problem. I'm just curious what givesyou that comfort?

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Robert, I will start and see if Jim Boyle wants to add. You are absolutely right, we did strengthen the mortality assumptions. Now you may recallthat we actually changed to the slope of the curve in terms of the mortality assumptions last year as part of the basis change. We were actuallyrunning better than anticipated in the early durations. It's the later durations that were running higher. So again, the shape of the curve can alsoplay an impact. It was not all one way.

Again our view, we have looked at that and it is early to conclude but everything we see would suggest that it is an aberration and again, this isgoing to bounce around quarter-to-quarter.We would not view this as indicative of a new, more permanent problem but obviously it's somethingthat we felt like it was significant enough to note as a notable item.

Let me see if Jim wants to add.

Jim Boyle - Manulife Financial Corporation - President, John Hancock Financial Services

I think that is a pretty solid answer, Mike. All I would add is its Life and LTC and in LTC, we did the major basis change a few years ago. We still feelcomfortable with the assumptions there. I think you will recall that in the fourth quarter we had a claims gain in long-term care. This quarter wehad a slight loss but a loss that was not inconsistent with losses we have had in the last few quarters. So there is some lumpiness that we see there.

On the Life side, we saw a slightly larger number this quarter.We had a lot of death claims and it's very hard to predict how death claims are goingto come in. But we suspect they're going to revert to more normal levels. So insurance companies periodically do see a lot of claims in one quarteron life and we did this quarter. So again, we are not overly concerned at this point.The business is generally operating as we expected.


Thank you.

Operator

Tom MacKinnon, BMO Capital.

Tom MacKinnon - BMO Capital Markets - Analyst

Thanks very much. Good afternoon, everyone. I just want to take this question on capital a little further here. If we look at the MCCSR at MLI rightnow, 225, but you've got some headwinds coming up. You've got the hybrid redemption coming up, the CIA calibration, URR and I guess as weget into the first part of next year, you're going to have the IAS 19 adjustment.

All these things even excluding phase in of the CIA calibration would be over 20 points or about 20 points on the MCCSR of MLI. So what are youthinking? How should we think about this? What kind of levers would you have? Just some of your thoughts around that.


Sure. Tom, it's Mike. I will start. Again, I think regarding the known headwinds, I think your list is a fair one. In our view as we look at our bestestimates, best current estimates of each of those items is that in aggregate those items would be manageable in terms of the capital impact.

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Now having said all of that, as we've talked about before, Tom, we do remain vigilant in terms of the downside risk management and as we'vetalked about many times before, we do believe that we have other good options to improve the capital ratio if markets for example were reasonablypoor later this year.

One example that we've talked about publicly before is doing additional reinsurance transactions.We completed a favorable one in 2011.We thinkthere are other options in a similar category that could help us in 2012.

So early to be definitive but it's fair to say that number one, the items that you listed out we are very cognizant of and we don't have perfectestimates, but we believe within the range of our current estimates that that capital impact is manageable. And then if other things go bump inthe night, we believe we have other options like reinsurance to be able to keep our capital ratios at strong levels.


Okay, if you ever did come to the position where you were able to get credit for hedging, how we think of that in terms of what -- how should muchof that is weighing down that MLI MCCSR right now?


Yes,Tom, that is an important question and first, I think that's likely to be a couple years before we have clarity in that, so I think that is not somethingthat I would count on helping our ratio here in 2012/2013. Obviously I would love it and I think it would be very fair if we did get credit sooner thanthat, but it's not something that we are counting on in the near term.


I think, Tom, in fairness to our regulators, I think it's time for our industry to come together to make a suggestion to the regulators on what creditshould be.You know, they are not saying that they would adopt it but I think we've got a lot of discussions back and forth and I think maybe that'sthe way to break the logjam is for us to put forward some suggestions with some of our peers as to how the credit might operate and OSFI cantake that or leave it. But I think that would be a constructive suggestion.The fact of the matter is as you are well aware, the risk complexion of ourCompany has changed very significantly as a result of the hedging and we do not get -- we get relief in that it doesn't add to our capital credit orcapital charge. In fact, under certain conditions that will no longer be true. In fact, the more hedging we do, the more required capital to be added,which is totally counterintuitive.

So it's time for us to make some proposals to the regulators how that ought to be done. I think Mike is right, though, it's probably going to be afair bit of time in digestion on their part and the industry's part before we will have agreement there.


Thank you.

Operator

Joanne Smith, Scotia Capital.

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Joanne Smith - Scotia Capital - Analyst

I just wanted to follow up on that question and then I have a separate question. I guess the point of the question that Tom asked that wasn'tanswered was how much is the current cost of hedging weighing your MCCSR down?

The second question is related to the policyholder experience in the quarter related to the Canadian disability business, and I have been listeningto a lot of conference calls this quarter and there has been a lot of talk about disability and how it has been developing poorly. So I was justwondering how you get that level of comfort that this was a one-time blip? Thanks.


Joanne, it's Mike. I will start. First, in terms of how much is it weighing down our MCCSR, I am not trying to evade either your question or Tom'squestion. I am not sure what we would compare it to.We are certainly not going to go back to an unhedged world, so I'm not sure of the relevanceof trying to spike out and disaggregate the hedging specifically as a near-term pressure point on the MCCSR.

I think the main point is that we are not counting on any benefit from -- in terms of a change in the capital rules or change in the framework oranything like that from OSFI when we say to Tom that we are comfortable with our capital levels and we think the known headwinds are likelymanageable.

On the LTD piece, again I will start and see if Paul wants to add. Number one, it's not lost on us that the increase in LTD claims and the lower claimtermination rates have been an industry phenomenon. In fact, arguably our experience was better than the experience of the industry really forabout the last six quarters or so.We were a positive outlier and I think that goes to show the strong execution of Paul's team in terms of managingthis business.

In terms of why we think it is manageable, number one, we have been in this business for a long period of time. I think we know how to manageit. Number two, it is annually repricable, so again, we have an opportunity to increase rates as accounts renew if we think it's a more permanentphenomenon. Let me see if Paul wants to add.

Paul Rooney - Manulife Financial Corporation - President and Chief Executive Officer, Manulife Canada

Yes, it's Paul here. There's really two things you need to think about. One is lower interest rates, so when we get claims today in this lower interestenvironment, we have to hold a larger LTD reserve for those future benefit payments that we would be making, so that is a phenomenon that werecognize and have increased prices for and the price increases will be implemented as renewals come up with our clients over the next 12 to 18months.

So that -- as long as interest rates stay where they are now, that should take care of itself.

The other piece is incidence.We don't think this is a trend yet but again if it is and we conclude that it is we will price it into the products and againas Mike said, they are annually repricable, so there's no systemic in-force block issues here.


You don't have any two-year or three-year guarantees?

Paul Rooney - Manulife Financial Corporation - President and Chief Executive Officer, Manulife Canada

No, these are all annual repricable group products.We don't have anything of that nature -- material.

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Great, thanks.

Operator

Gabriel Dechaine, Credit Suisse.

Gabriel Dechaine - Credit Suisse - Analyst

Good afternoon, just one more question on the capital and just to try to tie in your comments about us taking into consideration your capital inthe context of the significantly reduced earnings sensitivity. When I look at Manulife, I think of 220 MCCSR being kind of your target. Is that toohigh or are you willing to target something lower now given the reduction to your earnings sensitivities?

Then on the lapse assumption strengthening for VA, in 2009, as Steve Theriault mentioned earlier, you had some reserve strengthening. Last yearas well I think about CAD400 million and it sounds like in 2010. Can you tell me how much VA lapse assumptions strengthening has been tied tothe US VA block over the last three or four years?

And since this seems to be a recurring issue, would we have to assume that it could be quite large to kind of put it to rest, for lack of a better term?


Okay, I will start and then I will see if Cindy wants to add.

First on your question on capital, I would not try to pin it to a specific number. It has never been a specific number. I don't anticipate any time inthe near future that it would be pegged to a specific number. I think it's based on a whole number of different factors.

Obviously the expanded hedging gives us a lot more cushion than what we had before.The cushion for example relative to 150% regulatory levelis substantially higher now than it has been anytime in the recent past because of all the hedging.We can withstand significant declines in equitymarkets and interest rates as a result of that hedging.

So to answer your question very bluntly, my view is that 220 is too conservative of a target given the hedging and I'm not going to give you analternative number but I think 220 is too ultraconservative even for a conservative management team like ours.


So would you be comfortable running at 210 for awhile?


I really would rather not try to pin down to a certain number because again, I think it would be a number of different factors.What else did we seeon the horizon? What other storm clouds do we see? Do we see bright sun or do we see storm clouds? Again, I really wouldn't try to pin it to anumber but I certainly think 220 is too conservative.

On the variable annuities and maybe I should've said this in the prepared remarks, I really would suggest, Gabriel, that you not again overreact tothe disclosure. Really what we are signaling here is that we see some early evidence of some unfavorable post-crisis experience here and we have

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been operating with the notion under a principle that as soon as we see any kind of bad news we think it's important to note it. And again, this isrelatively immature experience post-crisis. It is not in line with the experience that we saw pre-crisis and the question is how much credibility togive the lower lapse rate that we have seen more recently?

Is it predictive for the future? Is it an aberration? Again, if we simply gave it equal weighting with the pre-crisis experience we would say it is no bigdeal. So again, it's early to draw any conclusions. We are just signaling that again the post-crisis lapse rate has not been as favorable as what ourlong-term assumptions would be.

Let me see what Cindy would like to add.


Thanks, Mike. So I would echo all your comments in terms of the disclosure around the review. We are just trying to follow through on giving youa signal and we're looking at experience and early indications (technical difficulty) are storm clouds and that kind of thing.

Prior basis changes as I've said in the past, there are a lot of different policyholder behavior assumptions embedded in the valuations and so thoseprior basis changes would have been looking at one aspect or one walk of business, say Canada.

I don't have with me a breakdown of prior basis changes by country. So that is something that we would have to take off-line.


You were breaking in and out a bit there.


Sorry, I guess I moved the microphone a little bit away. So we would -- in terms of the prior basis changes by line and by country for VAs, I don'thave that with me but -- so we would have to take that off-line.


It was a portion of CAD800 million in '09, a portion of CAD600 million in 2010 and CAD400 million and some in 2011 but those are somewhatdifferent than what you are seeing now, the causes for those -- (multiple speakers)


There are -- we would have adjusted different aspects of our lapse in policyholder behavior assumptions. We would have looked at Japan forexample. Some of that would have been Canada. There would have been last year on the US block, we looked at the ultimate lapse rate post thesurrender charge period, so there were different aspects that we looked at at different points in time based on the emerging experience.


What is the -- can you even pinpoint the subtlety that you are looking at today or you are seeing today?

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This time what we are looking at is specifically what was the experience before the financial crisis and after the financial crisis. As Mike said, wereally are looking at whether or not -- what credibility we should give the post-crisis experience.


Okay, thank you.


Donald here. It doesn't make any of us very happy. We are I guess less afraid than most to open -- reopen those assumptions and make sure wegot them right as new experience emerges. And under US GAAP, you wouldn't reopen those assumptions.

You know, there's no panic here. There's no suggestion that some -- we have had analysts in the past talk about scenarios that would scare a lotof people on the phone. There's no suggestion that that is happening but you also have to figure out how long after the crisis do things reboundmore to normal levels and that's what Cindy and the team are trying to figure out.


All right.

Operator

Peter Routledge, National Bank Financial.

Peter Routledge - National Bank Financial - Analyst

Thank you, just a couple questions about Asia. First, I'm just looking at expected profit in Asia, it was a very strong quarter this quarter and thebroader take away on expected profit is it's nice, monetizing -- trending upwards.

So I guess the first question is how does that growth break out -- growth in sort of expected profit or maybe core business break out across Japan,other Asia, and Hong Kong? What are underlying earnings growth rates in those three segments? Ballpark numbers?


Peter, it's Mike.We don't have that. I just literally didn't bring those pieces of paper with me here to this call.


Are you flatlining in Japan and then other Asia is taking off quite strongly? I'm just trying to get a sense of how powerful the other Asia growthstory is.

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Again rather than us try and speculate and potentially get it wrong, Peter, let us figure out how to follow back up with you and perhaps get someadditional information out in the public domain.


Okay, the other question is just around acquisition speculation. You hired a CFO with a very strong Asian background so that's probably going tofuel it even more.

But given just capital will be -- even as strong as your balance sheet is, capital as measured by the regulators will be constrained. Leverage fromManulife is probably higher than you would want it to be in the normal course environment. Do you really have to acquire in Asia? Why not justrule that out and focus on organic growth?


Well, Peter, we're not going to go too far down the speculation because we are trying to steer clear of being too specific on M&A possibilities fora whole number of reasons.

But I guess all I can say is we are in the deal flow. There are properties that we would see from time to time that are highly attractive and that webid on. We certainly get a small fraction of the ones that we pursue because we are very disciplined bidders. But there are properties that areattractive but we are also mindful at what the multiples our stock is trading at and what can happen.

I guess we also assess that if we saw a really attractive deal that there are pools of capital that we would access. There's a lot of support for us. Wehave had a good track record in executing acquisitions. Those are all very general comments, quite specifically, and I think what shareholders cantake away as an absolute promise is that we will be disciplined in any process that we would get involved in and we never fall in love with a deal.

We stay disciplined right to the very end and you are absolutely right, organic growth is the best way to grow but we don't mind supplementingthat by acquisitions, where they make really good sense for shareholders.


Would it be fair to sort of just to think of the acquisitions you might do as smaller bolt-on digestible from a leverage or capital perspective or couldyou have a transformational deal in Asia?


Well, we are doing so well in Asia it is hard to imagine something being transformational other than the one that has been heavily rumored fromsome years ago, which was AIA, and I refuse to comment on that one specifically. But that would have been -- I don't know if transformational isthe word but pretty exciting and it was at different prices than the stock is trading -- their stock is trading now, that's for sure.

You know, we have a very complete business in Asia, so it's not like we have to do anything. That's the wonderful advantage that helps you staydisciplined is when you don't have to do anything, you don't have to pay a strategic premium. Having said that, we are anxious to add to ourfranchises in Asia and we are happy to look at transactions that could make sense.

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Thank you very much.

Bob Cook - Manulife Financial Corporation - SEVP and General Manager Asia

Peter, it's Bob Cook.The answer to your first question is about half the growth is coming from Japan and half is coming from Southeast Asia.


Thank you.

Operator

Doug Young,TD Securities.

Doug Young - TD Newcrest - Analyst

Just I guess back on the capital, just on page 22, you talked on the bottom paragraph a lot about new capital rules and I just want to hopefully diga little bit further into it, Michael or Donald.

But it sounds like and correct me if I'm wrong that new capital rules are probably not coming until 2016 that they are going to be more applicableto the hold co as everybody had thought. And it sounds like you don't think it's going to be an even playing field across the insurers in Canada. DoI have that right?

And can you talk a little bit, give us details or even generalities in terms of some of the discussions that you are having around this topic and whenwe would get more detail around the new capital rules?


Sure, Doug, it's Mike. I will start. First, I'd emphasize there is a lot of uncertainty in this area. There just is not yet clarity based upon what OSFI hassaid publicly or even more private discussions around what the new rulebook is going to look like. So our best estimate at this point is that newrules would likely go into effect for 2016 but again more specificity than that would be speculative.

The concern that we have for example around the level playing field I would put into two buckets. Number one, at least based on what we've seento date it does appear that OSFI is moving faster for example than their counterparts in the US. And our concern of course would be that our USbusiness ends up being governed by both Canadian and insurance standards and in some sense the tougher of the two in any given time periodversus the US competitors that don't have that. So we have that concern around the level playing field.

The other issue around the hold co is that it's not clear what kind of OSFI rules there would be for non-Canadian hold cos or even for non-insurancecompany hold cos like Great West. Are they going to expect somebody like a Munich RE to publish a Munich Re hold co MCCSR? We don't knowbut the point is it's not clear to us that it will be a level playing field and that's why I say the lack of specific clarity at this point we view as a riskfactor and again, one of those known unknowns.

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Just to follow-up on that, is this -- this also has to do with the use of double leverage and correct me if I'm wrong but I do believe there is somedouble leverage in your structure and is that something that OSFI may try to remove to some degree?


Doug, I've got to tell you, I find that term to be a horrible injustice. I would not characterize it as double leverage. Since you are referring to thesenior debt that we have issued in the hold co, again, our view is that that is very, very similar and should not get different treatment than sub debtissued at the hold co because it's in the same place in the overall pecking order. It's still completely subordinate to all of the policyholder obligationsfor example in the operating company.

But having said that, the concern that we have around potential hold co capital ratios is that they don't give any credit for senior debt at the holdco, but they do give credit for sub debt at the hold co for companies like ourselves who have a long history of issuing senior debt.We view that aschanging the rules after the game is played and again, not a level playing field versus starting over and making the rules a level playing field goingforward.


Okay, just the second is -- I know you say not to overreact around the US VA policyholder lapse experience but I guess it is frustrating to know thatthere is more coming in the US and I guess the fact that you've mentioned it would suggest that it's probably material enough so CAD200 millionto CAD300 million. And I am just trying to get a better sense of what really -- is there anything else that has changed here? And can you talk maybeabout what the lapse rate was pre-crisis and what your lapse assumptions are now and maybe give a little bit of color?


Okay, Doug, a couple things. First, as I said earlier, there are likely to be a number of items as part of the basis change and I would anticipate thatthere will be pluses and minuses. This just happens to be one of those potential minuses that we had enough data that our view was that it wasimportant to get that out on the table. Our rule of thumb is if we are concerned about it, we need to put it out in the public domain.

I would not put any kind of number on it, so just to be clear, the hypothetical range you gave was your range, not ours. I would certainly not try toput it out there. And in terms of what has changed, it really goes back to what Cindy said earlier and what I said earlier. It is immature data but theimmature data post crisis would suggest that lapses are lower than what they were for similar in the money policies pre-crisis. And, the questionis is that a harbinger of a new long-term trend where people hold onto these products because they felt a lot of insecurity during the crisis or isthis a temporary phenomenon and once people see the S&P back at 1500 or something, they revert to more normal pre-crisis behavior?

We don't know and that's exactly the judgment that Cindy and her team will be working on in conjunction with the business units over the nextsix months as part of all of the basis changes.

So that's why we just suggest not to overreact, but we just felt like it was good disclosure. Again, we have worked hard to do that over the lastthree years and it's now an important part of our culture. Let me see if Cindy wants to add.


Thanks, Mike.The only thing I would add is that we are also looking at part of the same pre-, post-crisis review.We will also be looking at withdrawalbenefit utilization and looking at the trend on that so that's the other aspect in addition to lapse that we're looking at in terms of pre-crisis andpost-crisis.

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Can you give numbers like what was the lapse rates pre and post and what you're assumption is?


Doug, I would rather wait until we have completed more of the analysis. Again, we would end up giving you partial data.You would try to extrapolate,you would probably draw conclusions that would not be necessarily on the mark. Just let us do our job and we will give you as strong an updateas we can next quarter.


Okay, thank you.

Operator

Michael Goldberg, Desjardins Securities.

Michael Goldberg - Dejardins Securities - Analyst

Thanks, a couple of questions actually looking at the value added. So I noticed that you restated your protection VNB historically but I also see thatfor the latest quarter, the amount is up very dramatically from recent prior periods and it's also up year-over-year.

So can you remind us for the reason for the restatement and also the reason for the strength in the latest quarter?

I will just give my second question, which is related.Where do you think you have the greatest potential for growth in value-added from sales overthe next one to two years in terms of products and markets?


Okay, Michael, it's Cindy. I'll start with the first question in terms of the reason for the restatement as well as the reason for the very good newbusiness embedded value result for the first quarter.

In terms of the restatement, that is a practice that we have followed in prior years as well. It really just restates prior-year new business embeddedvalue for the changes that we made in terms of the discount rates for new business this year so that you have comparable year-over-year newbusiness embedded value numbers to look at. And that restatement is -- that change in the discount rate is the same as what we would've reflectedin our in force embedded value that we published at the end of the year. So it's just bringing those all into alignment and giving you numbersyear-over-year that you can look at.

In terms of the Q1 results, largely you may remember from last year that in Q1 and Q2 and particularly in Q1, a lot of our P&C treaties, our reinsurancetreaties are renewed in the first quarter and some in the second quarter and they add to new business embedded value but they don't -- are notreflected in our sales numbers. And that's about half of the increase or maybe a little bit more than half of the increase is due to that and theremainder of the increase is compared to fourth quarter 2011 and is due just to increased business volumes largely.

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In terms of where the future goes, I guess there are many people around the table who could chime in on that, but certainly we would see Asiacontributing heavily to growth in new business embedded value in the future. But as well, Canada and the US would also be contributing to newbusiness embedded value growth in the future. I don't know if Jim, Bob, or Paul want to say anything.

Operator

Darko Mihelic, Cormark Securities.

Darko Mihelic - Cormark Securities - Analyst

Sorry, I think I was just waiting there to see if there was any further follow-up before I asked my question.


No, there isn't.


Okay, all right, thank you. I also wanted to ask a question on sales and one of the things that you highlight in the report is the 16% growth in contractand agents in Asia as part of the reason for the growth.What are you targeting for this year in terms of growth of agents?

And how should we extrapolate -- presumably if you had grown your agent force by 16%, that many of them may not actually be hitting their stridein terms of sales power. So the question there is what are we looking for in terms of overall growth in Asia in terms of sales and agents? Thanks.


It's Bob Cook here. I think we have over the last four or five years have achieved roughly that or of the 15% growth rate. So it may be slightly higheror slightly lower in any year but building that distribution capacity is a core part of our strategy going forward. And we are seeing great successalready this year continuing in places like Indonesia and the Philippines and Vietnam. So we would expect that to continue going forward.

The second part of your question is that future sales growth is in many respects a function of the ability to build distribution capacity in the currentperiod, so some of the sales success that we've had in the first quarter was the result of the recruiting success that we had last year. And so if wecan continue that this year, that will be a good advanced signal of our ability to deliver continued sales growth in the years ahead.


Just a quick follow-up on that. The strain is actually positive in Asia in this quarter by a fairly large amount. Do you expect, and given Michael'scommentary that strain is likely to improve in future periods if interest rates stay flat, what is driving that in Asia? I would have thought that perhapscompetition would step in here and cause strain to actually at some point actually turn negative for Asia.


Darko, it's Mike. Just before Bob answers that, I want to be clear, my comments earlier were specifically around North America.That we expect newbusiness strain to improve in both US and Canada in Q2, Q3 and Q4 here in 2012. I specifically cited North America, not Asia.

Again, I will let Bob start in terms of Asia. I may have a comment as well.

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I think part of Mike's earlier answer, though, that does apply to the Asia results is changes in product mix. Basically as we have been dealing withcertain product lines that have greater interest rate risk, we've been shifting it to other products that have essentially a lower strain such as unit-linkedproducts in Southeast Asia as well as the success we have had selling fixed annuities in Japan is again a low -- has contributed to the improvementin the strain numbers in Asia.


It's Mike.The only other point I would add, we did see a significant uptick in cancer sales in Japan which were very helpful. Again, I would not takethat as the new run rate given some of the tax law changes over there, so that contributed in first quarter.We will probably see some contributionalthough a little lower contribution in Q2 and then probably some step down in the second half of the year.

So once again, Asia is more moving parts where I would expect -- pluses and minuses, whereas I would expect both Canada and US the strain toimprove in the quarters relative to Q1.


Okay, great. That's very helpful and one of these days I'd love to sit down with anybody over there to help me understand how much sales helpfuture earnings.Thank you very much.

Operator

(Operator Instructions). Joanne Smith, Scotia Capital.


My follow-up question was already asked.Thank you very much.

Operator

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

Anthony Ostler - Manulife Financial Corporation - SVP of IR

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

Operator

Thank you.The conference is now ended. Please disconnect your lines at this time.Thank you for your participation.

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earnings call transcript - manulifepresentation operator good afternoon and welcome to the manulife...

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