Manulife Financial's CEO Hosts Investor Day (Transcript)

| About: Manulife Financial (MFC)

Manulife Financial Corporation (NYSE:MFC)

November 15, 2012 10:00 am ET


Anthony G. Ostler - Senior Vice President of Investor Relations

Donald A. Guloien - Chief Executive Officer, President and Director

Cindy L. Forbes - Chief Actuary and Executive Vice President

Stephen Bernard Roder - Chief Financial Officer and Senior Executive Vice President

Robert Allen Cook - Senior Executive Vice President and General Manager of Asia

Paul L. Rooney - Chief Executive Officer of Manulife Canada Ltd. and President of Manulife Canada Ltd.

Craig Richard Bromley - Executive Vice President of Japan Operations and General Manager of Japan Operations

Warren Alfred Thomson - Senior Executive Vice President and Chief Investment Officer

Jean-Francois Michel Courville - President, Member of Management Committee, Chairman of Executive Committee, and Chief Executive Officer

Rahim Badrudin Hassanali Hirji - Chief Risk Officer and Executive Vice President


Tom MacKinnon - BMO Capital Markets Canada

Michael Goldberg - Desjardins Securities Inc., Research Division

Mario Mendonca - Canaccord Genuity, Research Division

Robert Sedran - CIBC World Markets Inc., Research Division

Peter D. Routledge - National Bank Financial, Inc., Research Division

Gabriel Dechaine - Crédit Suisse AG, Research Division

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Steve Theriault - BofA Merrill Lynch, Research Division

Ohad Lederer - Veritas Investment Research Corporation

Joseph Sirdevan

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Doug Young - TD Securities Equity Research

Anthony G. Ostler

All right. Good morning, everyone. Welcome to Manulife Financial's Investor Day 2012, where we will be presenting our strategic direction and financial targets. My name is Anthony Ostler, I am the Head of Investor Relations of Manulife Financial, and I'll be your emcee for today.

For those of you that regularly listen to our earnings calls, you'll be familiar with this next slide. On behalf of the speakers that follow, I wish to note that they will make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are applied in making forward statements, and actual results may differ materially from those expressed or implied. For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ from expectations, please consult the slide presentation for this event and webcast available on our website, as well as the securities filings referred to in the slide entitled, "Caution Regarding Forward-looking Statements".

We've also included a "Note to Users" slide that sets out the performance to non-GAAP measures used in today's presentation. It is there for your reference. Furthermore, I would like to note that for those of you in attendance today, we issued a press release this morning regarding our Investor Day and the financial targets that are to be presented today.

Turning to today's agenda. You will note that we have a comprehensive day with a target finish time of approximately 3:30 p.m. Our President and CEO, Mr. Donald Guloien, will start off the day, with a reflection of Manulife's significant repositioning over the last few years and will discuss our strategies for disciplined growth. Following this, our Chief Actuary, Cindy Forbes, will provide an actuarial and regulatory update. And Steve Roder, our CFO, will close the morning's formal presentation with Manulife's path to its updated 2016 financial targets.

In the afternoon session, there will be presentations from each of our business heads, Bob Cook, Paul Rooney, Craig Bromley, Warren Thomson and finally, J-F Courville. They will provide insight into their businesses and how their businesses are individually driving growth. A question-and-answer session will follow at the end of the morning and afternoon presentations.

We ask that participants withhold their questions until the Q&A sessions and to limit themselves to one or 2 questions in an effort to respond to as many questions as possible. When we reach the question-and-answer portion of the session, kindly raise your hand and wait for a microphone before proceeding with your question. Please state your name and company prior to asking your question.

Before we get started, I would like to make a few administrative announcements. Each of you should have a package at your place setting, which includes copies of today's presentation, as well as biographies of today's speakers.

For those joining us via webcast, this information is also available in the Investor Relations section of our website at In the case of emergency, fire exits are located at the back of the room and to the north side, leading to the rotunda. Washrooms are located through the back doors, and then to your left, just pass the elevators.

Finally, please turn your cellphones to silent or vibrate, if you have not done so already. We will pause for a one-hour lunch at approximately noon, and we ask that everyone be punctual returning to this room after lunch so that we can resume in a timely fashion at 1:00 p.m. I would ask that at the end of today's formal presentation, you take the time to fill out an evaluation of our Investor Day presentations. We will have hard copies and an electronic version will be e-mailed to you next week. Please assist us in continuing to improve our Investor Day by participating in the short survey. With that, I'd like to introduce Donald Guloien, our President and Chief Executive Officer. Donald?

Donald A. Guloien

Thank you, Anthony, and good morning, ladies and gentlemen, I'm looking forward to this day and, particularly, of conversing with you over lunch and in the question-and-answer sessions, as well as, of course, some of the prepared remarks. To our Chinese friends in the audience [Chinese].

My slides are going to open up with a little summary of the key messages that I hope you'll get out of today's presentations. Number one, that we have, in fact, accomplished our 2009 strategic objectives. Number two, that we are pursuing disciplined growth that will see the company to a very, very strong state in 2016, that we expect to see less volatile and far more sustainable earnings than the earnings of the past, and that we're now targeting $4 billion of core earnings and 13% ROE on core earnings in 2016 and a leverage ratio, that long-term, will come in around 25%.

I probably erred on the side of too much history, but I think it's important to revisit certain objectives by giving you some idea of credibility and our willingness to attain them going forward. When I took over as CEO in May of 2009, I set out 5 core objectives for the company. Number one was to re-balance products with unfavorable risk profiles; number two, to accelerate growth; number three, to systematically hedge to reduce earnings and capital volatility; four, to diversify our business mix; number five, to manage our capital appropriately; and number six, to actively manage and promote our brand. And I'm happy to report that we have done all of those things.

Take them in sequence, you know this story very well, but we are, in fact, very proud of the fact that we were one of the first companies to recognize the issues that bedeviled certain parts of our insurance and annuity markets around the world. So one of the first things we did was dramatically reduce or eliminate sales of things like variable annuities, Universal Life with No-Lapse Guarantees, booked value Fixed Deferred Annuities and Single Premium Deferred Annuities. And we substantially raised prices on both new and in-force long term care and many forms of guaranteed life insurance across the world. But you can't shrink a company to greatness. At the same time, we pressed on the accelerator to rapidly grow other parts of the business that showed more promise, in terms of the risk profile, they offer to the company and ultimately to our investors, their usage of capital and the narrow fan of outcomes in terms of what they can achieve for the company.

These are just some of your initiatives, Steve will be talking about these in more detail, as will our business heads later in the presentation. But we've made very, very substantial investments. Investing in our bancassurance relationships in Asia, investing in the expansion of our agency force throughout Asia, investing in wealth management capabilities through our TEDA acquisition and investing in wealth management throughout Asia.

In the Canadian division, we invested in Affinity markets through the acquisition of Pottruff & Smith. We invested our mutual fund distribution and manufacturing very, very significantly, and the results of that are showing up every quarter. We invested in AIC Funds and more recently, the Wellington West Financial Services. And we invested in a strain of rapid new business growth, particularly in the mutual fund business, that actually, with success, generates losses in the early years.

In our U.S. operation, we invested in next generation distribution and technology to enable us to participate in the larger-case 401(k) business. We already had a leadership position in the small-case market, we are moving upscale with a very significant administrative and distribution platform, and that was very, very expensive to put in place. We invested in mutual fund distribution and manufacturing capabilities and, again, we invested in a strain of rapid new business growth in wealth management products.

In our Corporate and Investment divisions, we invested in asset management platforms and distribution systems around the world, and we invested in a variety of very important infrastructure projects.

As a result of these investments and as a result of good execution, we will -- these things will substantially add to core earnings in 2013 and beyond, and create a much more sustainable, reliable and less volatile stream of earnings far beyond that.

We achieved our 2014 interest rate and equity market risk reduction targets, in fact, 2 years ahead of schedule. And this is a good and bad news story. The good news is, we reduced the volatility faster than we expected, as a result of markets being positive over certain parts of our journey. The bad news associated with that hedging has a cost, and it means that the cost associated with the hedging have accelerated faster. So that has had an impact, a negative impact on core earnings. But overall, it's a very positive story. We got there at targeted prices for execution and we got there 2 years earlier than expected. When I spoke to most of you back in 2009, we set these targets. People were wondering if we'd ever achieve them. The fact that we've achieved them 2 years ahead of target is, in fact, unassailable good news.

As you can see, the interest rate targets, the sensitivity has been reduced by 73%, from $2.2 billion per 100 basis point decline in interest rates, to close to $0.5 billion, and that is before taking into account the AFS bond offset that we have the ability to trigger should we need it.

In terms of equity market sensitivity -- sorry, if you can go back, and turn it -- on the right-hand side of that slide, as you can see, we've reduced 78% of the equity sensitivity, and we have again achieved our target of, 2014 goal, of 75%.

This next slide illustrates the earnings volatility that would be -- earning sensitivity that would be exhibited at any point in time, and it shows how, from first quarter -- second quarter of 2010 to the third quarter of 2012, how dramatically we have attenuated, both the upside and the downside associated with equity and interest rate risk.

As promised, we've diversified our business mix. We now have a very healthy 3-way balance in terms of the contribution to core earnings from Asia, Canada and the United States and as the right-hand side illustrates, a very nice balance of core earnings contribution from Wealth Management and Insurance.

In terms of our capital, it's in great shape. We are better reserved. That's the first defense. We have more stable capital, and then we have a much more conservatively calculated MCCSR ratio. And needless to say, we have lots of hedging in place. Manulife's capital ratio stands at 204% at the end of the third quarter of 2012. As we've mentioned many times before, that is equivalent of a much higher ratio if measured with the same yardstick and methodology as prior periods. We estimate that using the methodology that was in place 3 or 4 years ago, that capital ratio would be somewhere on the order of 40 percentage points higher. The outlook over 2013 to 2016 is for the ratio to steadily improve. The ratio still does not include adequate credit for hedging. And having achieved our hedging targets and extensive reserve strengthening, the MCCSR ratio does not need to be nearly as high as it was in the past.

We've invested in branding efforts around the world, in Canada, the United States and in Asia. And branding is now part, a fundamental part, of our marketing mix in all of those places. And I've said before, there's no sense in spending a lot of money in branding unless you're charging a premium price for your product. And we are in fact doing that.

2010, we set financial targets for 2015, consistent with the environment as we saw it at that time. And the goals were for net income, and I stress, net income, $4 billion in 2015, 13% return on equity and a long-term leverage ratio of 25%. And we did not attain those goals. We are not on track for achieving those goals. And why?

Now a lot of you in your write-ups, if you're an external buy side analyst or sell side analyst, they talk about the fact that the macroeconomic headwinds, and I think we've done injustice to ourselves in talking about macroeconomic headwinds as the principal reason, it is in fact one of the big reasons, but not the only reason. The reasons are lower interest rates; volatile equity markets; changes in the regulatory and accounting requirements which have forced us to add more capital; global economic uncertainty that has impact, not only on the bottom line, but in terms of top line sales; faster progress than expected on hedging that, while positive, resulted in significant impact on earnings; and significant basis changes over the last 4 years. In fact, Cindy will categorize them in detail, $5 billion after-tax in basis changes over the last 4 years. That has had a huge impact on earnings. Not only the first order impact, in terms of not missing the target in the year with the basis change, but obviously, by basis changes eroding the capital base are forcing the substitution of new forms of capital, adding to the capital burden of the company. We do not expect these factors to continue going on towards 2016. Although we cannot promise any one of these things, we do not expect that pattern to continue.

As a result, we've refreshed our core earnings target. It is now core earnings. We've listened to the analysts and investors, and what they want to understand is the underlying earnings capacity of the organization. They understand that earnings will be buffeted around the Insurance business by a variety of exogenous factors, what investors want to understand, is what is the earnings capacity and the price and we're shifting to a core earnings measure. The core earnings measure now, the goal is $4 billion in 2016, with a core ROE of 13% and a long-term leverage ratio. A number of you observed that it's a slightly different measure. Now we're measuring on core versus net income and it's quite true that if everything else were equal, you would expect core to be something lower -- something higher than net income as a result of certain fixed charges and so on. But as Steve Roder has so capably pointed out, our investment income is quite volatile and tends to be on the positive side if we included more in core earnings with respect to investment income, or if we have slightly positive equity markets or interest rates, a whole variety of reasons. The slight difference between core and net income is rather attributable relative to the volatility of those factors alone. So this is not leisure domain, accounting leisure domain, where we're shifting to core in order to make the target a little bit more achievable. We've been quite honest, that in our call in the second -- the last quarter call, I was right upfront in my remarks about saying it's not shifting forward a year, on average, probably shifting forward by something a little bit more than a year, because we're in fact shifting to a core earnings target.

Our businesses have very strong aspirational goals. In Asia, we want to build a premier pan-Asian insurance franchise that is well positioned to satisfy the protection and retirement needs of a fast-growing consumer base in that region. We want to grow a world-class asset management operation, worldwide, providing simple innovative investment solutions to retail and institutional investors, recognized globally for simple, effective asset allocation solutions to the retirement needs. We want to build a broad-based Canadian diversified financial services company that develops and delivers integrated solutions to address our customer protection and retirement needs. And we want to build a leading company in the United States that helps our American friends plan for their retirement, long-term care and estate planning needs.

We also want to pursue operational excellence and efficiency in all that we do. We have a project underway that we call Organizational Redesign Project, designed to broaden the spans of control and reduce the number of layers in the organization.

The first step in that process, the appointment of Paul Rooney as our Chief Operating Officer, which was also announced this morning. Now the use of Chief Operating Officer is different in a variety of companies and, in fact, we've used it in the past in a slightly different way. In this instance, Paul's role will be -- to be responsible for our Corporate Strategy, Corporate Development, Capital Solutions, Human Resources, Branding & Communication, Information Services, Procurement, Global Resources and driving efficiency and effectiveness throughout the organization.

I have a lot of confidence in Paul. I expect that Paul, in this role, will be able to make 85% of the decisions in these areas without even consulting me. I will only be consulted on areas that involve very substantial change or great capital or other resource allocations. Paul will continue to oversee the Canadian Division, but a successor has been identified. He's a very capable person and will be announced shortly.

Steve Roder, of course, will continue to report to me. J-P Bisnaire will continue to report to me. Rahim Hirji will continue to report to me. The business heads, Bob Cook, the successor to Paul McPhee [ph] in Division, Craig Bromley in the United States and Warren Thomson in Investments, will continue to report to me, as will certain people like the internal auditor and other functional roles in the organization.

So the end message is growth with discipline. We expect this to result in $4 billion in core earnings in 2016, and you'll see measurable progress against those goals in the intervening years. Less volatile earnings, more sustainable earnings, a lower risk in the product suite, core ROE of 13% in 2016 and a leverage ratio of 25% over the long term and we intend to achieve all of those objectives. Thank you.

Cindy L. Forbes

Thank you, Donald, and good morning to everyone. Thank you for joining us today. My presentation this morning will cover an actuarial and regulatory update. And as part of this, I will touch on how our assumptions are set, and I'll outline the main components of our basis changes over the last number of years, including the impact of macroeconomic events, or climate, on our assumptions. I would like to emphasize that our annual review of our assumptions is very thorough. And as a result, I believe that our current reserves are our best view of our policyholder liabilities in the current economic environment. I will also provide some additional details on the progress we're making in terms of our LTC repricing, our premium approvals. And I will close with a high-level regulatory update.

So turning to Slide 3, first an overview of how we set our assumptions. Our reserve assumptions are based on both historic experience, as well as our outlook for future experience development. They include -- they are based on best estimate and they include a margin for uncertainty. Actual reserves reflect a long-term view of our expected experience from all contingencies, often 50 years or more into the future. Yes, obviously, it takes some time for experience to develop on very late durations of the policies. And as a result, actual judgment is required in setting those assumptions. We keep our assumptions current to our annual review of actuarial assumptions. We look at emerging experience, both our own and in the industry and emerging practices. We do in-depth experience studies every 3 years from material actuarial assumptions, and we look at experiences -- industry experience as well, where relevant and available.

In addition, the Actuarial Standards of Practice in Canada give guidance on the level of margins that we should hold for each assumption, each risk.

Turning to Slide 4, you will see -- probably to Slide 5. That explains how we looked at our experience, in terms of basis changes, over the last 4 years. We divided them up into 3 main categories of drivers. The first is the macroeconomic environment, which includes policy -- changes to policyholder assumptions, our long duration, long-term life insurance products, as well as variable annuities, updates to the Ultimate Reinvestment Rate, and updates to stochastic bonds and equity parameters that underlie the valuation of our variable annuity business.

We've also, as a second category, isolated the impact of changes to actuarial standards over this period, and that includes for the most recent basis change, the update to equity parameters for variable annuities.

And in the final category, we've isolated all the other changes to our assumptions over the last 4 years, which are a regular update.

Turning to Slide 5, you'll see our basis changes for the past 4 years. Each year, we go through an objective and unbiased process of setting our reserves and reviewing our assumptions. And just so as an example to give you some idea of what we've done in the -- what our assumptions are today, and what we've done in the past review. Well we looked at our U.S. variable annuity GMWB assumptions in the past review. We looked only at experience since the financial crisis, even though we don't have a lot of data since the financial crisis, because we thought that, that would give us the best view of where experience might go in the future. And on a basis with margins or on a padded basis, we now assume, post that review, that, for example, 96% of the policyholders utilize 96% of their available withdrawal benefit, so very close to 100%.

In addition, when we looked at our loss assumption for policies that are deep-in-the-money, we reduced that on a padded basis to 1% from over 2%, prior to the basis change. Again, a very conservative view of where lapses might be on those policies. We did compare our assumptions, post the basis change, to competitors in the U.S. And we found that our assumptions were at the conservative end of the range.

Another example is our ultimate lapse experience or assumptions on lapse-supported long-duration life insurance products in North America. And for these products, we generally have a lapse assumption, an ultimate lapse assumption of between 0% and 1%, again, at the conservative end of the range. I'd also note, if you look at the blue parts of those bars, which is the other experience review, that if you exclude the impact of the update that we did to LTC, morbidity, mortality and policyholder behavior assumptions, that that's a pretty natural outcome. Basically a release of $100 million of reserves post-tax over the last 4 years. I'd also note, it's also important to understand that our actuarial assumptions are reviewed every year by an external peer reviewer and actuarial reviewer, as well as being reviewed by our external auditors.

As you can see on the chart, the macroeconomic environment has impacted 4 years of annualized basis changes. The impact of the macroeconomic climate on assumptions is largely beyond our control, and over the past few years has resulted in nearly $5 billion of basis changes, post-tax, with updates to the Ultimate Reinvestment Rate, updates to variable annuity policyholder behavior assumptions and variable annuity stochastic parameters, accounting for nearly 90% of this impact.

Moving to Slide 6. I'm sure many of you want to know, in fact many of you have asked me, so are we done with basis changes? To address this question, I'd like to go back to the 3 categories of basis changes that have emerged. First, in regard to the macroeconomic impact, macroeconomic environment impact on assumptions, we clearly can't forecast what the macroeconomic climate is going to be in the future, with any degree of certainty and therefore, we can't really forecast what the impact will be on future experience development. In regard to actuarial standards, they do change. They are revised and amplified from time to time, and we try to flag these for you so that you're aware of potential changes in actuarial standards in Canada.

As we noted in our MD&A, the CIA is working on a research paper on bond calibration factors for variable annuities and they're also looking at writing a research paper on the volatility assumptions to be used for equity assumptions for variable annuities. We have also flagged that our reserves are sensitive or are based on alternative asset assumptions. We have done that, not because we know that anything is going to happen but simply because we know that there is quite a bit of conversation in the actuarial profession about that, those assumptions, as well as other reinvestment assumptions. But at this point, there's no further information that, or insight to provide.

Finally, as for other updates. Unless experience develops differently than we expect, we do not see material charges for the foreseeable future.

Then moving on to Long-Term Care. You can see the progress on the repricing of our long-term care in-force business. In 2010, we communicated that we would apply for material price increases on approximately 80% of our in-force business. The remaining 20% largely related to newer policies that have been priced with more updated assumptions. As you can see on the graph, approvals recently -- approvals received have been favorable to date, and we largely attribute that to the approach that we've taken in terms of giving alternatives to price increases to customers. And we have seen a number of our competitors follow our lead, in terms of increasing prices on LTC new business, as well as asking for premium increases on their in-force. We believe that the risk of not achieving our expected price increases on LTC to be minimal. We will, however, continue to assess emerging policyholder experience on this business.

Turning now to Slide 8, to the regulatory update. I'd like to talk about the positive dialogue we continue to have with OSFI and other prudential regulators. We engage in frequent and productive dialogue with our regulators around the world, in order to address the relevant regulatory and legislative challenges that could impact our future growth strategies. For instance, in Canada, the roadmap that was recently issued by OSFI is generally viewed as a constructive initiative, and includes a number of references in the document that were elements that we were hoping that OSFI would consider, namely, there's a clear statement to date, that life insurance companies are different from banks in terms of the regulatory approach. And that the industry, the life insurance industry, as a whole, is adequately capitalized.

Finally, it also references the fact that regulatory capital may be adjusted to remove inappropriate volatility, and that would be volatility that amplifies variations in risks that could be possibly created by changes in accounting standards.

Moving to the U.S. We were pleased to see a satisfactory resolution to Actuarial Guideline 38, and while John Hancock is still in the process of finalizing its implementation of AG 38, we feel that any additional reserves that are required are manageable and within our current capital plans, and not required -- to require additional capital to be downstreamed into the U.S.

Moving to Slide 9, in summary, the key takeaways from my presentation are: we review our assumptions for our reserves on an annual basis and we have a rigorous process of reviewing and setting those assumptions. The macroeconomic environment has had a material impact on the last 4 years of basis changes, and while we cannot predict the impact of the macroeconomic environment with certainty, we believe that our current reserves represent our best view in the current environment. Our long-term care repricing of in-force is unfolding well, and we are confident that the risk of not achieving our expected price increases is minimal. And we maintain positive dialogue with our global regulators. With that, I will pass it over to Steve Roder.

Stephen Bernard Roder

Thank you, Cindy, and good morning, everyone. I'm going to talk to you about 3 things. First of all, I just want to reflect back on the refreshed targets that Donald outlined in his presentation. Secondly, we want to talk about what we're doing to achieve those targets. And thirdly, I'd like to give you some high-level guidance as to how we believe we can get to those targets, the path to the -- in particular, to the $4 billion 2016 core earnings target.

So let's start off with a reflection, again, on the targets that Donald articulated. So we have refreshed our financial targets, and we're now looking to move to $4 billion of core earnings in 2016. And let's just reflect back again on core earnings. So when I joined the company in June this year, we had a debate about the merits of core earnings, and we quickly concluded to move to core earnings and take a lead in that respect. And we carried out a significant amount of research and diligence to make sure that we could give as clear a definition as we could of core earnings. And if you've read our Q3 release, you'll see a pretty detailed explanation of what we view to be core earnings. We look back over several periods and looked at every sort of item and questioned whether it was core or non-core and sought to define this as closely as we could. So this has been an attempt to, if you like, bring clarity and transparency to our financial statements and at the same time, facilitate the work of our analyst community in understanding our financial statements. And we've tried to take very much a down-the-middle approach to this definition, and we think we've succeeded in that. We're happy with what we've done. And if we come up with an item that we haven't captured in our analysis in due course, we'll call that out and clarify that in any further release we make. But I'd like to think that we thought about -- just about everything.

Having gone through that process, it made absolute sense to me, and to Donald and our executives, that our refreshed targets should be based around core earnings. So if you like, those 2 decisions were unrelated. The first was to move to core, but the second was, having done that, it just makes sense to use core as our basis of targeting our 2016 earnings.

Donald already mentioned, but let's restate it, we have a target of 13% ROE for 2016 and I'll show you a bit more granularity as we move through the deck. And we still retain our ambition to get back to 25% leverage over the longer term.

Let me just call out a couple of these assumptions, because they're important. First of all, we have assumed that the current interest rate forward curve prevails. That's our core assumption in our target forecast, if you like. And the second is, and we've outlined this on our Q3 call, we have chosen to include $200 million of investment gains in core earnings. Why $200 million, you may say. And my answer would be, "Yes, I could have gone from $180 million or $220 million," there's no particular magic to this. But if you look back over the last 20 quarters, on average, we've exceeded $80 million. So we have just factored in a margin of conservatism there. We're being completely transparent, in terms of what's in core and what isn't in core, and we hope that's helpful to people. Warren will talk about that more in his presentation this afternoon.

So let's move on and look at the forecast in a little bit more granularity. And here, you can see what we're expecting from our 3 divisions in terms of financial targets.

So Asia currently has a -- actually has a return on equity of about 20%. We're looking to increase that to 26%. The Canadian and U.S. divisions, respectively, we're looking to produce returns on equity of 14% and 12%. And you can see there that the 3 divisions are producing pretty balanced core earnings, so we still have a very desirable mix of geographic business.

You can also see there the core investment gains of $200 million which hopefully, based on previous history, we will surpass. But then the degree to which we surpass it will end up below core earnings, but will obviously contribute to net income. Of course, the overall company return on equity at 13%, and that takes into account net corporate costs and hedging costs, et cetera. So over the 5-year period, we want to get back to our 13% return on equity.

Let's just think about what are the drivers to that. And Donald's already talked to some extent about the core strategies and I'll talk again about those briefly. And this afternoon, you'll hear from all our divisional leaders, who will talk about their individual divisions and their drive to contribute to that core earnings target.

I also want to talk specifically about a couple of topics. One is the amount to which we have been investing in our business and continue to invest in our business. And then I also want to give you a bit more detail on the efficiency and effectiveness project, which we highlighted in our earnings release, and explain to you a little bit more about what we're doing.

So first of all, let's just reflect back on the 4 core strategies, and these have remained unchanged now for a considerable time despite turbulent times. These are -- these remain the strategies and that's great, everybody knows what the 4 strategies are. They don't change. There's no reason to course-correct, if you like, and we pursue these 4 strategies.

So the first is to develop our Asian opportunity to the fullest. And we've been doing that and we continue to expect to do that. But let me just call out a couple of things there. So in Asia, we have significantly added to our bancassurance footprint over the recent years. We highlighted the significant relationship that we built in Indonesia with Bank Danamon, but that's not the only one we have. We have a lot of very significant bank relationships, Bank of China in the Philippines, CITIC Bank in Hong Kong and a variety of other banks distributing our products. And this will continue to be a focus.

We also now have over 50,000 agents in the region. There's been significant investment in the agency force in recent years where opportunities arise. And we will continue to take advantage of opportunities as they arise to add to our agency, by hiring new teams, if they're available to us, and investing in new hires in particularly, in emerging markets. So if you look at Cambodia, for example, one of our new markets, we already have over 300 agents there. And Bob Cook, I'm sure, will talk about this more later on. But he was recounting the other day of the joy of paying our first claim in Cambodia. And in Cambodia, people aren't too sure about the insurance industry and they weren't sure if these companies would actually ever -- actually pay up come the day the claim arrived. But we paid our first claim and that actually attracted a lot of favorable press comment.

In the second core strategy, which is the growth of our Wealth and Asset Management business. We have, in the Canadian market, we've managed to grow our bank distribution very significantly and now over 40% of our new bank customers are buying other products, whether that's insurance products or wealth products. That's pretty significant.

We have, in the United States, we've invested very heavily, and Donald referred to this, but we've invested very heavily in the capabilities to move into the middle market, in the 401(k) market. So we've invested several million dollars in the necessary tools to enter that marketplace.

If you look at the Canadian franchise, we have been the market leader in defined contribution market now for 10 successive quarters, which is, again, pretty impressive. We also continue to invest in smaller acquisitions, bolt-on acquisitions, to our franchise and I'll talk a little bit about those in a moment.

In the United States, we have recently been named a Preferred Fund Family by Edward Jones. But this just underscores the strength of what we've been doing in the funds market. And we have been buying out resource -- investing in resource, whether it's related to manufacturing or distribution of mutual funds. In the life market, we've completely repositioned our product and we are currently #1 in the brokerage distribution sector. So we've been -- whilst the turbulent times have been here and we had to be very focused on hedging and risk management and making ourselves less sensitive, basically, to the turbulent times, we've actually been investing fairly significantly in a consistent manner. And I think it may have not necessarily been apparent to people. So let's talk a little bit more about some of the investments we've been making.

So we've actually made quite a few acquisitions, some of these were back in 2009, but some have continued more recently. And let's just refer to a couple of those. So we made the acquisition of the stake in the Manulife-TEDA joint venture in China. And you would have seen in our Q3 earnings statement that TEDA was a very significant contributor to our growth in Q3. At the same time, we continue to be opportunistic in making acquisitions, and that's happened to be the case, particularly in the Canadian market. And we made another successful acquisition this year with Wellington West. In new market opportunities, we continue to invest, so we have recently opened for business in the asset management space in Korea. And that's a market that's growing very quickly. It's growing at around 14% per year, so we're very excited to be there. It's not a market where we are in the insurance space, but we are there in the asset management space.

We talked a bit about Cambodia, so I won't repeat that. Canada, again, let's refer briefly to the private wealth initiative. So we've launched private wealth in Canada. This is a seamless product, if you like, where our customers are experiencing banking, investment management and advisory services in a seamless manner, and we've invested heavily in preparing for that initiative.

On the right-hand side, expanding in existing businesses. So the 401(k) chassis in the United States to take us to the mid-market, which was tens of millions of dollars investment would be an example. The bancassurance opportunities, and we continue to look for bancassurance opportunities in Asia, particularly. The agency expansion. So we now have 28,000 agents in Southeast Asia, that's up from 15,000 in 2008. So that's a very significant growth.

So those are just some indicators of the amount that we've been investing in the business at the same time as we've been incurring costs in hedging and adding to our ability to weather the storms in the marketplace.

Let's move on and talk a little bit about the efficiency and effectiveness initiative. And this initiative has huge momentum in our organization. It's becoming a way of life for us, if you like. But it's basically -- the way I look at it is, I think most larger organizations now and again needs to step back and look at themselves and say, "Can we just do some of this stuff better?" It's basically what this is about. And therefore, if you look on the right-hand side, perhaps it's easiest to describe it this way, but we have our 4 divisions: Asia, Canada, the United States and the Investment division. And we have 8 work streams, you can see on the bottom right. So they're -- basically, we've configured ourselves around 8 work streams of activity. And they are varied. You can see we have some that relate to functions that run across the organization, such as Finance or Human Resources. Some are a little -- a bit more specific, I guess, you could say. Procurement, how do we procure our goods and services, or Workplace, what's the best way to do with our workplace environment? Or in the case of Asia, we have a specific project looking to leverage best practice across the region in relation to the way we manage our agency. We are looking for significant cost savings out of this project. It's about efficiency but it's about effectiveness. And at the end of this, we anticipate that by the time we get to 2016, we will have significant cost savings delivered by being more efficient and more effective.

We've carried out a huge amount of fact-based analysis to formulate our plans, and that includes not just facts based on our own internal experiences and measures, but also a huge amount of analysis comparing ourselves and challenging ourselves in relation to our competitors. So the process has been very rigorous and is at the top of the agenda, if you like, in terms of the way forward for us as a management team. And the way we look at this is it's really an enabler, so we have our 4 growth strategies and this is really an enabler to help us succeed in relation to all those strategies as we go forward.

And as we go forward, over time, we will report on this in our usual releases. I'm anticipating we'd give an update on our progress every 6 months or so, but we will give you more specificity and more detail as we move through what is a very, very complex project.

Just to try and explain what it is we're trying to achieve, this is a graph I like quite a lot. On the vertical axis, you have business unit alignment and on the horizontal, you have functional alignment. So the concept here is, the way you build your organization, you can, if you wanted to, you could be very aligned with businesses in each jurisdiction, each individual business within a geography, they could each have their own function in every respect and basically, if you like, that the business unit is king. And that would put you right at the top left of this chart. On the other hand, you could say, well, I'm terribly sorry business units, but you don't have any functions at all, and we do everything in the center and we're going to do it one way and one way only. And if you don't happen to like it the way it is, well, tough, because we're just going to do it one way, and that would be putting you down on the bottom right of this chart.

At Manulife right now, we believe that we are towards the top left. We have typically got to where we are today by allowing -- we're giving it, if you like, our businesses, a huge amount of autonomy and allowing them to build for business alignment. And that's great and there's nothing wrong with that. But where we are today and given the scale and complexity of our organization, we just think we need to migrate towards the right, and we're not naïve enough to think that we can move horizontally and absolutely horizontally to the right. We think we can move horizontally and down a bit, and we want to end up in that top right-hand quadrant. That's our target, so we would have a high degree of functional alignment, but at the same time, providing a very good level of service to all our businesses wherever they may be.

And the blue boxes, perhaps they're not boxes, they're diamonds, which you can see scattered around, this is an independent view of where our competitors are. So we don't want to end up in that bottom right-hand box. We want to end up in the top right-hand box, and that's underpinning everything we're doing in relation to our efficiency and effectiveness initiative, and that's why it requires a significant amount of management time and input.

Let me give you a couple of examples of early wins we've had, if you like. One relates to the way we procure goods and services, so we discovered that typically, our Canadian business will be procuring in one hand and our U.S. business will be procuring in the other hand, and that's actually the appropriate. There's nothing particularly wrong about that. But there are occasions where we can procure together. And surprisingly, if you are bigger and stronger, you tend to get a better deal. So we've already had some very good successes here where we've effectively migrated a relationship in one jurisdiction to another and gone back and been able to renegotiate and get better terms across the whole of our North American franchise. So that would be just an example.

We're also being much more rigorous about the way we negotiate with our key suppliers. And basically, driving down costs of major supply through competitive tender processes and the like, and we have an absolute focus on this. And so travel would be an example of that, where it's surprising if you really focus on this and you give people exclusivity, or whatever, and you've enforced a discipliner in the organization, you can make some significant savings.

Let's briefly talk about another one, so this is in relation to Information Services. And Information Services is a big-spend category for us, so we're spending about $900 million a year on IS. And so not surprisingly, we need to have a focus on this. And we want to build world-class standards, but we really need to standardize our processes more. We want to optimize our infrastructure and accelerate our time to market. And we've already made a good start on this in terms of integrating desktop platforms across North America and starting to consolidate some data centers. We don't need to have as many data centers as we have. And we've also been renegotiating and optimizing some of our key IS supply contracts in relation to networks, software and market data services. So we have some very good wins there.

One thing I would just reflect back on, which I could have talked about earlier, was how do we organize ourselves? We have to question what do we do where. So it's not just a question of using the organizational redesign or design filter to enable our growth strategies. But what do we do where? And the way we think about that is to think about everything we do in 3 buckets, if you like. So there are things that are, if you like, dedicated business components, which are things that we need to do close to the business. So those would typically be advisory services, that functions offers to our businesses, often they'd be associated with direct interaction with the customer.

The second activity we have in our functions is the center of expertise. So we have some very deep skills in our organization. That could be in relation to something as interesting as international, financial reporting standards, for example. And -- but do we need to have those deep skills in every geography, or do we have a center of expertise that resides in a particular location? Some of our resources are concerned with, if you like, a transactional process where we will get benefits from scale activities and therefore, we should bring together as much as we can of those transactional processes in shared service centers. And we've done quite a lot of that over the years but we think we can do more. So these are the sorts of things we think about as we define what we want to look like as we move forward through this efficiency and effectiveness initiative.

Turning to the next slide. This is an attempt to show you how we expect to get from our current expected 2012, or I should say, annualized. This is an annualization, basically projecting the 3 quarters into 4 quarters. That would give us $2.2 million (sic) [$2.2 billion] of core, and how do we expect to get from there to $4 billion in 2016? So let's just talk about the individual components of that briefly.

So the blue component at the top is the earnings on growth in capital. So as we earn and we increase our capital, we expect to increase, not surprisingly, the earnings on surplus. So that's, if you like, a mathematical output. The second is the reduction of strain. We've been carrying out a lot of product repositioning and repricing, a significant amount of activity, particularly this year, in response to what's been happening in the markets. And we expect to be able to get strain benefits over the planned horizon. We'll also get benefits through acquisition expense efficiencies due to scale.

In the third quarter, and just to remind people, our strain ticked up a bit because we had an unusually low strain effectively in Q2. And we gave some guidance in the short term, and we'd expect strain at around $100 million. But we do expect to get that down over time. And part of our planning horizon, therefore, anticipates that we would get the strain to get down below that $100 million.

In relation to Insurance business growth, this is effectively the benefit of repricing and repositioning of all our products that we've been undertaking and all the investments we've been making in our Insurance business, and we do expect significant growth in the Insurance core earnings. However, in the planned period, the major contributor to our growth in core earnings, we anticipate, would be in the wealth space. We think this is going to be our largest contributor to growth. We are achieving significant scale and this is a scale game, and we're at that stage where we really believe that we will get scale benefits, which will produce operating leverage in our Wealth business, as we reap the benefits of the investments we've been making in manufacturing and in distribution in the wealth space.

So what do we look like in 2016 if we achieve that plan? I'll now show you the graphics here in terms of insurance and wealth and also by our major division. So the feature that you can take from this, I guess, on the left-hand side is that we do expect that Asia will be the engine of the growth in insurance. And we think that by 2016, approximately 60% of our insurance sales will come from Asia, a very significant proportion. On the other hand, on the right-hand side, you can see the wealth equation, and we believe that it's the United States that will be our biggest contributor to growth in wealth and that by 2016, almost 1/2 of our wealth sales would be in the U.S. So again, a very, very significant proportion given the scale -- the increased scale. So okay, 57% to 49%, but 49% of a much bigger pot, if you like.

In terms of new business embedded value, we expect to more than double that by 2016, but each division is contributing to that growth, as you can see in this graphic, and if you look on the right-hand side, the proportions are even more skewed to Asia, so you wouldn't expect the new business embedded value in Asia to match the new -- the insurance sales in Asia. But by this stage, we're looking at 51% of new business embedded value to be in Asia, which is very significant.

Another graphic, looking at core earnings. So core earnings, we continue to believe that core earnings will be roughly 55%-45%. So on 2012, we're looking at 54% Insurance, 46% Wealth, and we don't really see a change in that mix in core earnings over the period.

On the right-hand side, you can see the core earnings by division, and you can see that we continue to anticipate that our earnings will be pretty balanced, but with Asia taking a marginally larger share of the core earnings delivery.

So just to recap briefly. Core earnings growth, we've refreshed our objectives, and what are we doing to get there? Well, we're continuing to pursue our 4 growth strategies, and I've tried to demonstrate that we have been investing in those growth strategies in recent times, and we will continue to invest in those growth strategies. At the same time, we have the efficiency and effectiveness project, which I think is going to be a very significant benefit to us and will be a contributor to our growth and at the same time, will be an enabler to the achievement of our other growth strategies. And I tried to set out for you in the detail that I'm able to now -- the path that I see in how we will achieve our 2016 earnings target. So thank you for your patience. And we'd now like to move to the Q&A session of the morning. And if you have a question, please put your hand up and someone will no doubt deliver a microphone to you, and if you could give your name and the organization you represent and I'd be grateful if you could each limit yourself to 2 questions. Thank you.

Question-and-Answer Session

Tom MacKinnon - BMO Capital Markets Canada

It's Tom MacKinnon, BMO Capital. I know it's in the projection that the hedging costs are flat from annualized 2012 through the target of 2016, and I'm trying to figure out what underscores this? I mean, I guess, you do have a declining VA block, to some extent, what do we've got embedded there? Are there any, in terms of changing from macro to dynamic hedging? And then what would cause you to change that flat assumption? What would -- what could go wrong with respect to that?

Cindy L. Forbes

In terms of the hedging costs, the -- that's really a reflection of continuing to run at our current macro hedging level that's sort of consistent with what we're -- our cost today are on macro hedging. We've met our hedging targets for 2014, so that's why there isn't a ramp-up in terms of hedging costs. And in terms of a change from macro to dynamic, we wouldn't necessarily forecast that. I mean, that would depend a lot on what happens in the equity markets and interest rates going forward. So our 5-year plan wouldn't include an outlook that we'd be changing from macro to dynamic over that period of time.

Donald A. Guloien

But if interest rates were to improve or equity markets improve, that would provide the opportunity to shift from macro to dynamic hedging, would improve the outlook over what's shown there.

Cindy L. Forbes

Yes, that's a good point, Don. And so, since your mic wasn't on, just to make sure everyone heard, certainly, if you have a better economic environment in terms of interest rates and equity markets that would enable us to move business into the dynamic programs over that period of time.

Tom MacKinnon - BMO Capital Markets Canada

And then in terms of what could change, what would force you to abandon that flat expectation?

Cindy L. Forbes

I'm not sure, Tom, if I fully understand what you're -- the question.

Tom MacKinnon - BMO Capital Markets Canada

Is it just totally macro, totally macro, then?

Cindy L. Forbes

Yes, the macro costs are basically -- that hedging cost is basically the macro program and so...

Tom MacKinnon - BMO Capital Markets Canada

So a totally macro environment that would cause you to change that? Is it all just based on that? Is there anything else there? I guess, there's slippage in everything else, but maybe could you just give us a list of things that would cause that actual number to differ?

Cindy L. Forbes

Well, in the underlying earnings projection for the dynamic program, where you would see the cost of the dynamic program, we would just be using a normal expectation as to what we would see the cost of the dynamic program to be. So I think that's just embedded in the basic business projection. So it's not in that line. It's not in the hedging line.

Donald A. Guloien

Yet if you look at overall hedging costs, not just in that line -- can I -- is the mic on? If you look at overall hedging costs not within the line, the things that would cause those to deteriorate would be a decline in equity markets that would force us to put more hedges in place in order to maintain the exposure within the tolerances that we have established the targets. Increased volatility of the market could increase the tracking error of the hedging programs, fund performance, a variety of things. But on the other hand, less volatility in markets, better tracking performance, that we are getting better over time with the design of our hedging programs to match more closely with the underlying funds to higher interest rates or more buoyant equity markets, which allow us to switch from macro into dynamic. Those would all give us exposure to the upside.

Anthony G. Ostler

We have a question in the front, David Wei, I think? Michael Goldberg, sorry.

Michael Goldberg - Desjardins Securities Inc., Research Division

Michael Goldberg, Desjardins Securities. A question for Cindy. What percent of reserves did the 9 states represent that haven't yet approved the Long-Term Care price changes? And what would adequacy, either over or under, look like, if those -- if those remaining 9 states came in similar to the 41 states where you've got approval already? And then I have another question.

Cindy L. Forbes

Okay. Well, I can't directly answer your question about the 9 states, Michael, because we haven't -- we don't look at it that way, so I don't have the number to hand. In fact, we really haven't changed our assumptions with respect to the approvals, the premium approvals that we expect to get in our reserve since we did our initial basis change back in 2010. So we haven't adjusted any of our assumptions as we've gotten those approvals. We've just have waited to see how experience would emerge before we adjust our assumptions. It would be fair to say that the -- certainly, the 41 that we've received is the bulk of what we would have, more than the majority by far, of what we would have in terms of expectation. But in terms of breaking it down by state, like what's the remaining premium increase, we really haven't looked at that in terms of what the impact is on the reserve.

Michael Goldberg - Desjardins Securities Inc., Research Division

Or maybe to put it another way, the 41 states that have come in, using the assumption that you made, are they coming in above or below that assumption?

Cindy L. Forbes

They're coming in above. The states that have come in are coming in above and we would really expect that really, over time, although reserves obviously would have some margins built into them because they're required to, but in terms of your best estimate expectation, you would expect that you would get the vast majority of those premium increases, because they're justified on an actuarial basis, and the approval process is based upon demonstrating that you've got an actual to expected loss that you need to recover. So our best estimate expectation is that we would get the vast majority of those premium increases.

Donald A. Guloien

Well, Michael, there's a very delicate balance here. I think you're get at a positive and, I guess, I appreciate that in respect of what -- we have a legal right to 100% of the premium increases that we've asked for. There shouldn't be a political process. We have a legal right to it, so long as we could substantiate the need for those changes based on experience. We have done that. We have done that entirely to the satisfaction of all the states that have approved. However, Cindy in making her reserve judgments a couple of years ago, had to make some judgment, a wild ass guess, frankly, and put in allowance for some states not going along. We don't want to give any incentives to states to not going along. You can appreciate that from a business perspective, because we have a legal right to this, and it's a political bit of an issue. But we are entirely satisfied with the way those reserves were set in the beginning. We are very, very pleased with the progress that we have to date, and, I guess, we will declare a success when we've got 100% of the rate increases, not some proportion of the rate increases minus some predetermined slippage, in which case, that will be positive news at some future point in time. But we don't want to give any incentive to a state to not give us approval when we have a legal right to approval. But you can understand, these are elected officials, in some cases, or appointees of elected officials. We don't want to do anything that would feed their desire to have their state treat it differently than the other 49 states in the union.

Michael Goldberg - Desjardins Securities Inc., Research Division

Okay. My other question is for Steve Roder. Can we get numbers for the composition of the $1.8 billion increase in earnings that you show in Slide 12? And following from that, what are the margin implications of your Slides 13 and 14? Does overall margin go up? And if it does, is it due to mix, or is it due to change in margin by line or by geography?

Stephen Bernard Roder

Mike, thank you for the question. I'm not in a position to give you more granularity in terms of data on those slides right now. If you want to talk about is it margin or is it mix, it's actually a combination of all the above and it depends which geography and business unit you look at. So we are expecting improvement in margin in certain geographies. We've been through significant repricing activity and repositioning activity. On the other hand, some of this is about business volume growth, and we expect that to emerge in core earnings during the period. So it's extremely hard to generalize in the answer, it's a combination of all the above.

Anthony G. Ostler

Okay, so we're working our way around the room, we've got lots of time. Any questions in this section here? Is that Mario at the back?

Mario Mendonca - Canaccord Genuity, Research Division

Mario Mendonca, Canaccord Genuity. It's fairly clear that all the steps the company has taken over the years, that had the negative effect on your core earnings power, emerged because you were trying to strengthen capital or maybe reduce the sensitivity to your capital ratio from changes in the macro factors. So when we look at your capital ratio now at 204%, it's important to have a lot of confidence that there aren't any real important steps the company has to take now to strengthen that capital ratio, and while 204%, and I appreciate all the comments you made around the capital, and how it's stronger than it was in the past because of all the hedging, using your own disclosure, you can see that a 10%, 15%, 20% move in markets is entirely plausible in this environment. It could put you at an MCCSR approaching 190%, so some comfort from the company that -- the old way of looking at a 200% MCCSR doesn't apply anymore, that you're entirely comfortable with something like 190%, or would you have to take action?

Donald A. Guloien

Well, Mario, it's a good question, there's no bright line. And I -- all I can tell you, that I think it's endemic in the remarks that Steve made and Cindy made and I made. Is there's a great degree of comfort, I think, on the part of us and the board and the regulators in the quality of our capital ratio relative to the amount of other risk mitigation activities that we have taken. Let me remind you and you know this well, but for the whole audience, the first line of defense for policyholders is reserves. We've added billions of dollars to reserves. Manulife has added the equivalent of $8.5 billion of capital for interest rate movements alone. It's very, very substantial, as well as reserve changes that Cindy pointed out, for other macro factors not having to do with interest rates, for things like morbidity, for the slope of the life insurance, mortality and for policyholder behavior changes. Very, very substantial hardening of base reserves. Number two is there's changes that have taken place, subtle changes year-by-year, in the calculation of those capital ratios, that we don't do a comparison, it's impossible to do a comparison. But if you add them up would be something on the order of 40 percentage points that have sort of leaked in over time, various changes to the way the MCCSR is calculated, or the way we've organized ourselves with respect to the merger of our U.S. subsidiaries and so on. It had other benefits but made the capital ratio look lower than it would otherwise be, 40 percentage points there. And then, last but not least, of course is all the hedging activities, as well as the product de-risking activities, selling a whole different product line of products with a much narrower fan of outcomes in terms of the risk exposure. Those things that make you much more comfortable operating at lower ratio. There never has been a bright line. We've always said it was a matter of judgment, but there is increasing acceptance that people can operate in Canada at lower capital ratios, if they've done all the things that we have done and feel pretty comfortable.

Mario Mendonca - Canaccord Genuity, Research Division

You think the rating agencies share that view, that something about -- at around 200% or below is acceptable right now?

Donald A. Guloien

I think they increasingly understand it. Some really good pieces put out by Standard & Poor's and Fitch and they talk about, they clearly get the Canadian accounting system and regulatory system, and understand the mark-to-market, which makes us different than other systems in the world and understand that the greater volatility and the relatively lower capital ratios, as printed, mean different things in different countries. So yes, I think the -- certainly, the major rating agencies certainly do get it.

Mario Mendonca - Canaccord Genuity, Research Division

And my second question then is for Cindy. You said that you wouldn't expect any significant reserve charges, and I'm referring to things outside of macro factors here. As long as experience emerges as not materially different from what you expected, now could you have made that same claim 2 years ago, at an Investor Day like this, that as long as the experience doesn't emerge different from what you expected, you don't expect any large charges?

Cindy L. Forbes

It's a very good question, Mario. And it's kind of the same kind of question I usually ask when people make statements like that. So the -- I think that -- I guess, 2 years ago, I would have been in my role for not very long, a few months actually. So I think 2 years ago, my confidence in making any claim like that would have been quite a bit less. I don't even know if I would have made the claim, because I would have just gotten through one basis change and it takes a while to understand the business. Over the past 2 years, we've gone through a lot of experience reviews that I've seen myself. And so I believe that, yes, 2 years ago, I probably wouldn't have said the same thing. Today, having looked at many of the blocks of business and gone through many of the assumption reviews, I do feel more confident. But that doesn't say that there still can't be surprises. There can always be surprises. When you look at an area and you -- that you haven't before and you discover that experience is different, and it hasn't shown up. We do monitor our claims, gains and losses, for example, on our quarterly SOE, and we look at it at much granularity than we disclose publicly. But that doesn't mean experience deviations may not make a material difference in terms of the source of earnings analysis. And so you can discover surprises when you go and do an in-depth study. But I would say I'm much more confident today than I was 2 years ago.

Mario Mendonca - Canaccord Genuity, Research Division

And then just to round that out, you referred to 96% utilization rates in your withdraw benefit. Could you us a sense if that one's -- is it plausible that could go to 98%, 99%? Are these plausible changes?

Cindy L. Forbes

Yes, it's always plausible. I think 96% puts us at the conservative end of what companies are using in the United States. I think that the impact of moving from 98% and upwards is not all that great relative to 100%. So again, I feel relatively comfortable with that assumption in terms of its, I guess, sustainability, but you could...

Mario Mendonca - Canaccord Genuity, Research Division

You're at 96% now, you said?

Cindy L. Forbes

Yes, 96%.

Mario Mendonca - Canaccord Genuity, Research Division

Would the charge be enormous going from 96% to 98%? Is that what you're saying that it wouldn't be?

Cindy L. Forbes

No, it would not be.

Anthony G. Ostler

And so on this side, Robert Sedran? Or, sorry.

Donald A. Guloien

I'm going to jump in here, it's just -- because you're at different levels, Mario has a lot of knowledge, remember, not everybody does. We have roughly $180 -- $150 billion of reserves, and actually that is a present value of much bigger numbers, right? Because that reflects not only the present value calculation, but the fact that premiums are coming into the future. So the actual of what we pay out in the future is multiples of that number. When you make small changes in assumptions, they produce very large dollar results and under the Canadian method, that is all done at 1 quarter or if there's reason to believe it has to be done sooner then off-quarter. What typically happens in life insurance companies is a long list, and the CFO of one of our other Canadian companies once described this even better than I'm going to do, and he said, "I've got a long list without a page." And if you take the absolute value of that, it would be billions of dollars, in fact it runs on several pages. Any one of them are hundreds of millions. At the end of the day, it kind of nets to a small number, thank goodness. We are not trying to drive it to a net result. I ask Cindy to call them as she sees them coming over the plate, just as a good umpire would, and not force balance. But there's another approach where we can sort of sit and look at all the positives and negatives and try to get them to net. If you do that consistently and there's a shortage, that leads you to a bad place. But we will never make a promise that these numbers will disappear or that they will be small, but we have gone through very thoroughly, as Cindy has indicated, with all the assumptions, to try and make them as appropriate as they possibly can. And I think you can see from her remarks, there's a high degree of comfort. But that gives -- should give you no comfort that there won't be time in the next 10 or 20 years when a significant basis change could occur, because she's dealing with a big stream of liabilities out there and she is not being directed to net those out to a small number. She is directed to call them as she sees them come across the plate.

Cindy L. Forbes

Right and for further clarity, Mario's question was in regard to experience development. It doesn't mean he was asking about the impact of macroeconomic changes and that sort of thing. So...

Anthony G. Ostler

So we're going to go to this side of the room over here.

Robert Sedran - CIBC World Markets Inc., Research Division

Rob Sedran, CIBC. Just a couple of points of clarification and then one question. The leverage ratio target, the long-term leverage ratio, am I to take it that that's not a 2016 target?

Stephen Bernard Roder

No, it's not. It's a long-term target.

Donald A. Guloien

Yes. We expect to be close to that, but not achieve it within the 2016 timeframe.

Robert Sedran - CIBC World Markets Inc., Research Division

And then in terms of that Slide 12, I can appreciate that you don't want to give too much granularity on there. But it does look, to the extent it's drawn to scale, it does look fairly linear in terms of the 16% compound average growth rate that it would imply. Should we assume that linearity in terms of the coming years is what you're planning for or at least targeting?

Stephen Bernard Roder

It looks fairly linear, but in fact, if you look at it closely, it's not quite linear. It does accelerate a little bit past the immediate short-term, and some of that is due to the impact of the efficiency and effectiveness initiative, which I don't expect to give rise to net gains of any significance in 2013, only modestly in 2014, but would be quite a significant contributor net in 2015 and 2016. So that will be the difference. So there is some acceleration towards the end. That's probably about as far as I can say.

Robert Sedran - CIBC World Markets Inc., Research Division

Okay. And then just in terms of the actual question, I'd like to gauge the sensitivity of the equity market assumption to these targets because I noticed that the green bar is the largest one, and so a lot of the growth is coming from the wealth management side. I can appreciate that you're assuming the long-term average return on the equity markets. But if we were not to get that, I mean, if we just continue to churn, we go higher, we go lower and we land somewhere around today, in terms of the S&P 500, where would that $4 billion target look like? Like how sensitive are we to that equity market assumption in terms of hitting the $4 billion?

Stephen Bernard Roder

I don't have the data to answer that question, but we would be significantly sensitive to that. I mean, we baked equity market growth assumptions into our plan. So there'd be a first-order impact, that's for sure. I think, perhaps just as significantly, will be the second order impact because we're looking for growth in wealth management, which would be distribution of -- manufacturing and distribution of mutual fund products. And we need at least some confidence in the markets to drive demand for that. Now that's not to say that it's all about equity markets. And in fact, we've seen a switch from a preference for equity funds to fixed income in Asia, for example, which no one would have expected that 2 years ago. So I think, yes, there would be a sensitivity of the first order. But equally, there would be -- if we have flat equity markets for 5 years, we'd have some second-order impacts, which I think we should place as much weight on, frankly.

Anthony G. Ostler

All right. So we'll move our way back across the room so that Peter Routledge up here in the front.

Peter D. Routledge - National Bank Financial, Inc., Research Division

Peter Routledge from National Bank Financial. Just a question on the ROE targets after 2016. If I were to allocate the macro hedge geographically or by division, my back of the envelope suggests that your U.S. ROE in 2016 might be around 10%, maybe a little lower. That means it's probably going to earn less than your cost of equity. And that's just the way it is, and that's just the environment we're in. I suspect divesting the U.S. via a spinout or a sale is probably not very likely, but can you use reinsurance transactions, not to transform the ROE, but at least to lower the amount of capital you have against that and lower the drag from the U.S.?

Stephen Bernard Roder

Right. So there's some -- all kinds of complexities and reasons as to the concept of spinning off the U.S. business or whatever. The U.S. business has pivoted very significantly in the last 2 or 3 years. If you look at the product that's being offered now, it's very different from what it was 3 years ago, as you know, Peter, I think. And we're very pleased with how it's developing in our chosen business line, so that's all good. On the other hand, you're correct. The return on equity is below the average of the group as a whole, if you like. And if we were to allocate the hedging costs, then again, you're correct, that would reduce the target 2016 ROE. So I think you're absolutely correct to say those things. We have to look at the opportunities that might be available to us to reduce or to improve our ROE or reduce our capital that we have to allocate to that business. And we have, in fact, executed some reinsurance transactions. We continue to look at those. We continue to look at other opportunities that might be out there for how we deal with our VA business, et cetera. We'll continue to explore all those options. Some of them are more practical than others. Some of them, the pricing hasn't been attractive to us to execute anything, but we will continue to look at all those options. And that will be a process that I don't see coming to an end. It's a business-as-usual kind of thing for us right now.

Peter D. Routledge - National Bank Financial, Inc., Research Division

If the transaction resulted in a onetime hit to earnings, I mean, from a headline perspective, that might not be flattering. But it released material capital, you'd do it? That's the question. Would you do it? Take the initial hit and go?

Donald A. Guloien

Yes. I think we've been active as anybody in looking at alternatives for dealing with that block of business. If something that would create a onetime hit to earnings, that would not be reason to discard it from consideration. What you wouldn't want to do though, you wouldn't want to take a onetime hit to earnings and deny your shareholders the right to earn that back many times over in the future because the [indiscernible] reserving standard is so conservative that you would have denied them the right to the things that they've paid for in the future plus, and you've got to get this, have the risk that the liability if the worst happens comes back. So if Peter Routledge Reinsurance Inc., you capitalize the company, sell your house, put it all in there, you buy it off me for an attractive priceless, let's say we don't take an earnings hit. Let's say we just give you all the future earnings on the block that investors have paid for. And then you weren't able to make the claims, that policy was sold by Manulife, a strong company. There's a very big risk that it comes back to us. That is something I don't want to do. So no, the impact and the short-term impact, I think we have shown our propensity to do the right thing in the short term if it's to the benefit of our shareholders. And if we -- all it meant was taking a hit one-time only and it would be beneficial in terms of reducing capital to shareholders, and they would get the appropriate return on their capital, I'd be all in favor of doing it. But I won't do something that happens to look good in the short-term but could come back to haunt us at a later date. We have a structure with many of our liabilities in the States, some that were guaranteed directly by the parent, some that were issued out of the parent, and later subsidiarized into the U.S. subsidiaries. But in many cases, there will be connections that will bring them back to the parent, plus there is the implied promise that when you buy from a quality company like Manulife, what does that mean. We have investigated a lot of these alternatives. If we saw one, we would have executed it -- that made sense, we would have executed it.

Anthony G. Ostler

Great. So we move over to this direction, to Gabriel Dechaine here.

Gabriel Dechaine - Crédit Suisse AG, Research Division

Right. Just on the MCCSR again, looking at it the other way, if things go well and the way you talk about your capital and the confidence in it, and let's say your MCCSR crosses the 210 mark or something of that nature, would you feel confident enough to start looking at debt repayments, something to accelerate the earnings on surplus trajectory that's in your outlook?

Stephen Bernard Roder

Well, I think what you're alluding to, I guess, is correct, which is that we said we want to get our leverage back down to 25%. So our first priority, if you like, is to earn our way back into that. If we can earn our way back into a 25% leverage ratio, then we'll be happy. That's not going to happen overnight. We need to achieve our 2016 plan and accrete those earnings and drive down to the 25%. If we can get to that level, then we can start to think about what happens next. But I don't think that's even a discussion at this stage until we get down to 25% leverage.

Gabriel Dechaine - Crédit Suisse AG, Research Division

Okay, so debt reduction is not at all on the horizon?

Stephen Bernard Roder

No. It's -- we will get there, we hope, by earning our way to that.

Gabriel Dechaine - Crédit Suisse AG, Research Division

Okay. And second question was for Cindy. Back to the -- you gave a few data points on the assumptions you've strengthened on the VA block. I guess what a lot of investors have an issue with is not getting a full picture of what risks are inherent in your VA block, which particular segments are causing you grief. You gave the 96% utilization rate. Is that on the whole block that you're assuming that? Or is it just for the deep-in-the-money business? Could you -- in the 1% lapse rate assumption for deep-in-the-money, how big of a component is that in your VA book? And is there another source of strengthening required for stuff that's not as deep-in-the-money? I'm just kind of flustered by that.

Cindy L. Forbes

Okay. So for clarity, the assumption review that we did on the VA this year was for the U.S. GMWB block. So it is a full review of that block in terms of policyholder behavior. But it didn't look at other blocks of business. So we have business in Canada, the U.S, we have some death benefits guarantees in the U.S. as well that we didn't look at as well, it's a small block of income benefits that we've looked at in the recent past, but we didn't look at in 2012. So in terms of your question on the assumption review that we did this year and what it covered and whether or not we looked at just deep-in-the-money or the full block, we looked at all of the GMWB business, so the 96% is for all of the business, deep-in-the-money or not. And the 1% lapse rate I referred to is without that whole block and it is for policies that are deep-in-the-money in terms of a reduced lapse rate for deep-in-the-money policies.

Gabriel Dechaine - Crédit Suisse AG, Research Division

How big is the deep-in-the-money component? And the other stuff that's not deep-in-the-money, you didn't reduce the lapse assumptions?

Cindy L. Forbes

We changed it. So we looked at our whole lapse assumptions, we implemented -- we always had a dynamic lapse assumption for our VA business in the U.S., but we made it 2-sided. So we increased the lapse rates for policies that are out of the money, which is more conservative because you're assuming the ones that are going to give you fees in excess of their benefits lapse faster. And we reduced lapses for deep-in-the-money products and we adjusted our whole dynamic formula to better fit the experience that we were seeing. So we adjusted lapses across the board for all policies.

Gabriel Dechaine - Crédit Suisse AG, Research Division

Have you considered putting up a chart that shows a lot of the -- like where the trend has been going for lapses or new pricing? It's not like it's competitive information, like you're using your pricing assumption, because you're not selling as much anymore?

Cindy L. Forbes

That's a good point. You're right. We're not selling in the U.S., and so we could share more information on what we've assumed in terms of the lapse assumptions. I didn't want to be too technical.

Anthony G. Ostler

We're working away around. We got lots of time. Back right corner there.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Joanne Smith, Scotia Capital. Two questions. First question is with respect to the E&E project. If you're not going to give us a total expense reduction target, can you at least provide us with regions where you're going to see the most benefit from that?

Donald A. Guloien

Well, Joanne, I guess, we put a lot of work in this, but I guess I'm not fond of throwing out numbers without a lot of analysis and evidence and confidence that we can deliver them. And that's the reason we're being a little bit careful there. I think you will see more disclosure on what we intend to do with E&E as we progress closer. I think I can answer your question quite generally, and say, it will be pretty evenly distributed around the world in terms of some of the initiatives because as Steve indicated, what we're trying to do is leverage in the areas of common need across the world, and that would be a big part of the saving, plus the notion of increasing span to control, reducing layers in the organization will be something that's across the world. However, in terms of absolute expenditures, you should expect that Asia will continue to increase its expenditures because we're growing so fast there. So I think the impact it might have that would -- the apparent impact would show up perhaps greatest in the United States, to a lesser extent, Canada, and then not show up as much in Asia because you would have this offset of people being added to service the increasing volumes of our business and savings in other areas. And the net of that is probably the increase in expenses or most certainly be an increase in expenses, but much more efficiency going forward. So what we're trying to do in Asia is actually contain the rate of growth by leveraging the fixed cost infrastructure and in other places it's reducing.

Stephen Bernard Roder

Just to add to that, it's not all about headcount, if you like, at all. It's -- there's a lot of stuff in this project, so there's some very significant savings to come out of things like some of the stuff I articulated. So procurement would be one, renegotiation of contractual arrangements using global scale, global buying power, or however you want to articulate it, would be another. And so some of those things are a little bit difficult to kind of allocate. There's quite a component in there of those sorts of activities.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Okay. And my second question is a follow-up to an earlier question with respect to the VA block. And that is, if we looked at where your block is in terms of vintage and where it is in the money. Maybe it would be helpful for us to understand how long it would take before that deep-in-the-money business would be out of the money. And so maybe it might be helpful for you to provide a chart that shows what type of market returns you would need in order to get that deep-in-the-money business back in the block or something that would help us to figure out where the light at the end of the tunnel is with respect to this, and we can stop worrying about basis changes associated with the VA block.

Donald A. Guloien

I think, conceptually, that is an excellent idea. And I think Gabriel's comments earlier where -- this is not really a part of our competitive arsenal, so why not give a fair amount of disclosure. We have reason to believe, as Cindy said, the assumptions we're making are certainly relative to peers are conservative. And I guess I'd be all in favor of trying to display as much granularity as reasonable to help shareholders understand that there's probably significant upside in this actually going forward rather than downside. The amount of reserves in capital that we hold against these liabilities is absolutely enormous. In fact, as you know, we and other companies have looked at options. The amount of capital and reserves you're holding against these liabilities is so enormous that if we gave the policyholders the full sum of money that they'll be owed at some point in the future, that might be a better deal for shareholders. We have not yet found a mechanism for doing that effectively. Others have experimented with some things. We're watching that with great interest to see whether or not they can get the right result. But it shows you how significant the amount of capital reserves and the size of this risk are, which is one of the reasons why, going back to a former question, is why we're not anxious to give it away to someone else, especially if paid to do that. That one is not in your interest necessarily.

Cindy L. Forbes

So just in terms of showing how much the equity markets would have to produce or return to take the money -- the business back to being in the money, I'm not sure if that really gives -- I mean, we're happy to share more granularity as Donald said, but I'm not sure that, that really gives you a sense for whether or not you got exposure to future basis changes or not. And as Donald said, we hold an enormous amount of reserves in capital against these liabilities. In fact, our reserves of capital are well in excess of the net amount at risk under these contracts today. But as we said, there can be changes to the macroeconomic environment, and there can be changes to actuarial standards. So despite the fact that we hold what looks to be an enormous amount of capital and reserves against these liabilities, that it doesn't mean it can't change to become more adverse.

Anthony G. Ostler

All right. So we're going to the middle section here. So Steve Theriault, looks like in the front there.

Steve Theriault - BofA Merrill Lynch, Research Division

A couple of numbers questions and then a question on interest rates. First question, on the numbers side, where does the MCCSR model out to, to 2016? And the second one, for Cindy, you gave us some great numbers on lapse rates across a number of products. Can you tell us where you're at with your lapse rate on long-term care and how that compares to peers?

Stephen Bernard Roder

I think on the MCCSR, we can't give that. But what we can say is we're projecting significant earnings out. We have previously given guidance on the URR, so you need to factor that in as well. But net-net, assuming there are no other changes to regulation, et cetera, we'd expect the MCCSR to gradually improve over the planning period.

Steve Theriault - BofA Merrill Lynch, Research Division

So if we just use straightforward math, we should be able to [indiscernible].

Stephen Bernard Roder

Yes. I think it's -- yes, that's not an unreasonable thing to do.

Cindy L. Forbes

And Steve, the last part of your question was how are LTC lapses are comparing to what? Sorry.

Steve Theriault - BofA Merrill Lynch, Research Division

Compared to the industry.

Cindy L. Forbes

Not sure that I can answer that. Consistent. Mary Ann is telling me that our lapses are consistent with the industry for LTC. No, no -- sorry, lower than 1%. Our assumptions are lower. I thought his question was relative to -- okay, sorry. So lower than 1% for the ultimate lapse rate for LTC and consistent with the industry.

Donald A. Guloien

And we had a question on the quarterly call some time ago, I can't remember how many quarters back, but I'm not if I got the answer to this question, but what's the lapse rates we assume on no-lapse guarantee products. And I think Simon gave the answer it was like 0.5%. They can range up to 1% in some instances, but tends around 0.5%. And I remember the person asking the question said thanks and hung up, and I don't think people realize that, that is a really low rate, which means that we're being extremely conservative on that assumption as well.

Steve Theriault - BofA Merrill Lynch, Research Division

And then I wanted to ask on interest rates, similar to Rob's question. Can you quantify how sensitive the $4 billion target is to flat rates out to 2016? And I noticed that you used the June 30 forward curve in terms of your assumptions. What -- why not use the September curve and what sort of rise in rates does that imply?

Stephen Bernard Roder

Well, Cindy may want to add to this, but I don't have that data here. The reason for using the June curve is simply one of the planning process, if you like, which is very rigorous, started back in June, ran through several months, various reviews and iterations and a comprehensive executive and board process. So we have just chosen to use June, we haven't gone through the process of updating it, and I don't have the data. But Cindy, do you want to add at all?

Cindy L. Forbes

I don't have with me sort of the impact of rates of lower -- of flat rates. But I would say that the curves at the end of June were relatively flat, and therefore the impact of flat rates relative to what we have in our projections, while it would have an impact, would not be as -- be that material.

Steve Theriault - BofA Merrill Lynch, Research Division

Less material than the equity return assumptions?

Cindy L. Forbes


Donald A. Guloien

Yes, far less material, because the forward curve is very flat right now. So it basically bakes in pretty much flat rates. So if they just stay flat over the planning horizon, it's a very modest impact. Whereas if equity markets don't increase at all, that would have a much more substantial impact.

Anthony G. Ostler

So we're moving to this area. Anyone in this area have a question? Or we can go back over here. So quick question here at the front here.

Ohad Lederer - Veritas Investment Research Corporation

Ohad Lederer, Veritas Investment Research. I just want to touch on a topic that Cindy mentioned earlier. The last couple of quarterly releases have included some discussion or language around the prospect of lowering the reinvestment returns assumes for non-fixed income. The verbal discussion around that reiterated this morning was that there's nothing in the pipeline. So with those 2 messages, which are very different, the written one and the verbal one, against the backdrop of falling cap rates on almost every asset class, how are we supposed to look at our long-term plan to 2016 and not think that there's going to be 100 or 200 basis points of lower non-fixed income return assumptions?

Cindy L. Forbes

Okay. Well, the written disclosure talks about the fact that our reserves and past earnings are sensitive to the returns on alternative assets. It doesn't actually say anything about the outlook for them. The comment this morning, I didn't say -- what I did say was that the reinvestment rates used in actual reserves has been a topic of conversation amongst the profession. But that there's nothing at this point in time that -- no additional information I can give you. I don't have any additional information that I can provide on what the profession might decide to do when the profession might decide to do something. In terms of our assumptions, we do review, as part of the annual basis change that we just went through. We reviewed all of our asset assumptions. We do base our asset assumptions for alternative assets based upon what our investment desk believe they can put deals out today out. So we market verify it in terms of the returns that we believe we can invest that today. We also, even today, are subject to an education note that the Canadian Institute of Actuaries put out a couple of years ago that we have to ensure that our end-to-end return -- that our returns that we assume are no greater than the end-to-end returns on external benchmarks, relevant external benchmarks. So certainly, if market performance is poor going forward, that end-to-end return will diminish. So it could have an impact on our assumptions going forward. There could be changes in actuarial standards of practice, that could be either beneficial or not beneficial. But at this point in time, there really isn't any information that -- on what direction the standards might go in, to share.

Anthony G. Ostler

So we have a question over here.

Joseph Sirdevan

This is Joe Sirdevan with Galibier Capital. Just a couple of quick questions. The first is more of a stock question. In your numbers out to 2016, do you contemplate any change to share count or to dividend policy? And if you don't, beyond 2016, once the long-term leverage ratio has been reached, what -- can you give us some guidance there on those 2 elements? And the second question is more on things that you can control as opposed to -- so more of the middle income statement. Is there any further guidance you can give us with respect to the cost cutting assumptions you're making in the forecast?

Donald A. Guloien

Sure, I'll deal with the first one. There's no assumption with respect to share count, although we do have a DRIP program that adds marginally to the share count. Being the person who -- the first thing you did as you took over CEO, cut the dividend in half, there's nothing I would like to do more than to increase dividends, and we'll get to that stage. I can't predict when we'll get there, but we'll get there. And again, there's nothing I'd love to do more than that. The cost cutting, we're not going to be very specific at today's meeting. Again, it's -- we want to get more confident of what the numbers that we have and where they're coming from. It will be a substantial improvement to the company in terms of the effectiveness and competitiveness of our product offerings long term and in terms of the impact it will have in 2016. But it's not a number that's going to -- relative to other things that we have, are going to change the dial. We haven't made some heroic assumption that we're going to save $2 billion of expenses, and it represents half of that number out there, so you don't have to worry about that. But it's a significant thing. We aren't the type of people that throw numbers without having a lot of confidence in them, and we're going to do that very appropriately. We also -- there's no apparent fat in the organization. And I guess I have looked -- when I was on the other side of the table, looked down my nose at companies that sort of announced all of a sudden I'm going to lay off 10,000 people. And they get a 1 or 2 day bump on the stock price and the CEO looks like a hero, and people get more contemplative and say, "Wait a minute. If that guy could cut 10,000 jobs just at the stroke of pen, why didn't he do it earlier? What is going to be the revenue impact and other things?" So what we're doing is we're doing very thoughtfully, analyzing jobs, analyzing structures, analyzing the use of technology, in some cases, increasing cost because we've underinvested in technology, quite frankly. Increasing costs in some areas that will have -- won't have -- it will dampen that growth in earnings that Steve described earlier, but making very appropriate long-term investments for the benefit of the shareholder and get more efficient down the road. And so there's a whole variety of initiatives there that we expect will contribute every year. But depending on the pace of investment, things like technology, could slow down the realization of the benefits from other areas.

Stephen Bernard Roder

Yes, just to add a little bit to that. I think, just to give some guidance, which I gave earlier, but articulate that again. I don't think you'll see a material impact from this program in 2013, because I think you have to spend to save kind of thing. So I think, net-net, it won't be particularly material. It may be on a gross basis. You may see some disclosure, but I think net basis, you won't see anything particularly material in 2013. I think we can start to see some net benefit in 2014 and then more significantly in '15 and '16. On the leverage question, frankly, at the moment, the long-term target is to get the leverage down to 25%. I think we said earlier on, we don't quite get there in 2016, so we tend -- we've been wanting to get to that and then think about what's next. But at the moment our target is 25%, and there's no change to that.

Anthony G. Ostler

So I think we've got one back there.

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Andre Hardy from RBC Capital Markets. On Slide 4 of your presentation, Steve, just want to clarify this, $30 billion of allocated equity, that's how much you think you need to allocate at the time, given year business mix? Or that's how much you're likely to have given your forecast in core earnings, and I'm guessing URR charges and accounting changes in Q1?

Stephen Bernard Roder

The $30 billion in Corporate & Other, is that -- sorry, Mario, is that -- oh, the $30 billion in allocated equity. Sorry, Andre, sorry, sorry, not Mario. I can't see you at the -- you've got a spotlight behind you. But anyway, the $30 billion on Slide 4, which I've just found -- I'm sorry, can you repeat the question?

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Yes. So is that how much equity you think you'll have based on your core earnings forecast? And that's minus URR and minus the Q1 accounting changes, I guess?

Stephen Bernard Roder

Yes, exactly. So basically, it's mathematically derived from the earnings and the anticipated URR and preferred dividend, et cetera. And the other component in there would be the -- what we hope to be incremental gains over and above what we included in core based on historic experience, but yes.

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Perfect. So my question is, ultimately, let's say there's something that happens to non-core earnings that's good and you have $32 billion of equity or something happens that's bad and you have $28 billion of equity. What happens? Do earnings move? Or -- and consequently, the ROE is better or worse? Or you will need the extra capital? If you -- let me say it differently. If $30 billion is how much capital you think you need and something bad happens to equity, then your earnings go down. If something good happens to equity, then your earnings hopefully go up. But what I'm trying to understand is the dynamic from an ROE perspective, if the capital winds up being different from what you're forecasting.

Stephen Bernard Roder

Okay. So well, you can look at it in various ways. I mean, the first thing I would say is that if we have excess capital, we need to deploy it appropriately and deploy it in a way that is of benefit to our shareholders. And we've been able to do that, and we have plans as to how we deploy our equity. Have we been constrained in terms of how we invest our equity? I'd say not to my knowledge and certainly not since I've been in the organization. So I suppose you should look at it in both of those ways. If we had a situation where we had significantly excess capital, what do we do about that? Well, that's a problem I'd like to have one day. First of all, we said we want to earn our way into the 25% leverage. If we had significantly excess capital, then I guess we might end up having a debate about debt repayment. It's not one we've had so far. To the earlier question, it's not one we've had.

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Let me be a little more direct, Stephen. If something happens outside of your control and all of the sudden you have $28 billion of equity, do you need to go raise $2 billion of debt to maintain an MCCSR that's appropriate, and therefore, your core earnings are negatively impacted?

Stephen Bernard Roder

If you go out to 2016, we have a very significant level of confidence in our MCCSR ratio, very significant.

Anthony G. Ostler

The next turn is Doug Young. Unfortunately, this will be our last set of questions before lunch break. Doug's over here in the middle here.

Doug Young - TD Securities Equity Research

I guess first question, Donald. Just on Slide 7, you show how your earnings sensitivity to equity markets and interest rates have come down quite steadily, and that's given you part of the reason why you're so comfortable with your regulatory capital ratio. I guess at the same time, your sensitivity to credit spreads, swap spreads, NFI have increased. And so I'm trying to get a sense of is that increased sensitivity on that side less of a concern when you think about capital, and if so, why that might be.

Donald A. Guloien

Yes, it is. It's much more a balanced approach to risk taking. I'm not going to be really concerned about the sensitivity to credit spread, although it's something that we have to manage. We think we can deal with that pretty effectively in the deployment of our assets, but it is an exposure that we will certainly have in the short term. And the NFI assumptions, yes, we have to talk about those in our disclosure. We assume a fair amount of NFI, both in what we've got employed right now and the assumption in the future because there is a relative lack of long-term assets available to defease our liabilities. However, the approach we have taken to them historically is a reasonable one. We have quite consistently outperformed the gross expectations that are used in the valuation. So when Cindy does a valuation, she does 2 things. Number one, she establishes what we might make on an asset class, right, gross. And then she takes off a provision for adverse deviation and says, "Well, bad things can happen." So she substracts that down to a lower number. That actually ends up making the NFI in the valuation look much closer to something like a long-term fixed income return. We have not only outperformed that padded result, but we have outperformed the growth result, which is one of the reasons why we have continuous or a very good track record of investment results. And when you look at the padded number, which is the number that's ultimately used in the valuation. So you say you feel that the valuation is strong. That looks pretty similar to what a lot of you would expect, just straight old fixed income to earn over a reasonable period of time, maybe not at the current moment, but at sometime in the future. We also compare those overall valuation rates to those used in other parts of the world and are pretty satisfied that the overall valuation rate is pretty conservative. So yes, we have an exposure to NFI. If all heads point, if a bunch of people around the world, all jumped into non-fixed income assets because they were so disappointed with the returns on fixed income, yes, that would diminish one's ability to earn those results in the NFI universe. But we are monitoring that very closely. And while we think there is some risk there, it's not one that keeps me awake at night.

Doug Young - TD Securities Equity Research

Can you quantify those NFI returns and what that spread is and what on average it has been?

Donald A. Guloien

That does get into a competitive area. I mean, there's a lot of data available on how people have earned on real estate, on oil and gas, on timber, on other things that we do. The fact is, we actually help others invest in those things through our investment division. And if there's any customers out there that want to give us $50 million or $100 million like many institutions do, we're happy to take it. But you can get that data. I don't think it would be smart for us to publish what we're actually earning on those things. I think what you should take comfort from is, number one, the overall valuation rates that Cindy uses, and there's a lot of granularity in our annual report, and I'd argue probably more than any other company that I'm aware of. And the fact that we have consistently outperformed the assumptions used in the NFI, plus Cindy has some very reasonable governance practices that govern how much of NFI finds its way into the valuation.

Doug Young - TD Securities Equity Research

And then I guess lastly, just on, Cindy, the Long-Term Care Insurance. It seems that you're comfortable with the reserves that you hold, yet I think we've had 2 quarters in a row for policyholder experience around Long-Term Care Insurance. So I'm trying to get a sense of what you see in that experience that is not concerning.

Cindy L. Forbes

Well, the reserves are -- I'm comfortable with the reserves because of our performance on the premium increases, in part. In terms of the policyholder behavior the last couple of quarters, when we did our basis change in 2010, we did factor in some small element from the current economic environment where we expected as the economy improves that claims losses would -- or claims rates would diminish somewhat. And we also expected to get, over time, some benefit from changes in our claims practices. And it's still early in terms of the macroeconomic environment or the economy in the U.S. is still at a point where it would be premature to expect those assumptions to have been realized. Also, when we did the 2010 basis change, we were fitting our assumptions to a large block of business and many different businesses or groups of businesses within that, some of which were even acquired by Hancock before we acquired Hancock. And some of the fit may not -- business by business, may not have been, in hindsight, as close as we would have liked, and so that is partly also contributing to what we see as emerging experience. But when we do our review of LTC in 2013, we'll look at all of those elements, and I believe we'll find that our reserves are adequate.

Anthony G. Ostler

So thank you, everyone, for the questions. That brings us to our lunch break. We'll be reconvening in 1 hour at 1:00. Lunch is going to be held across the hall in the [indiscernible] Room just behind you here, which is where some of you may have had coffee this morning. We encourage you to meet and speak with our executives during the lunch hour, and we look forward to more questions this afternoon. Thank you, everyone.


Anthony G. Ostler

If everyone can have their seats, please. We're going to recommence.

Okay. Welcome back, everyone. I hope you enjoyed some lunch and had an opportunity to meet and speak with our executives. With that, I'd like now to introduce you to Robert Cook. Bob is our, Head of our Asia Division.

Robert Allen Cook

Thank you very much, Anthony. Good afternoon, everyone. The theme of my presentation, as you can see, is "Delivering now, with more still to come". I guess the 4 messages that I want to leave you with today is that first of all, Manulife has already a very strong franchise in Asia, but one that will get bigger.

Secondly, although we talk a lot about headwinds, when we talk about macroeconomic conditions, when it comes to demographic conditions in Asia, they are definitely a very strong tailwind for our business. I'll talk to you about our strategy, I'll talk to you about how we are executing on that strategy, by highlighting a few case studies from various countries in which we operate in Asia. But I guess I would like to remind many of you in the audience, based on some of the questions that the team has received over the lunch time period, that just a few weeks ago, we held a full Asia Investor Day in Hong Kong. So about 5 hours worth of presentations and Q&A, and the webcast of both the presentations and the Q&A periods are still archived on our Investor Relations site. And I would encourage those of you who are interested in the Manulife Asia story, if you were not able to attend, to certainly take the time to listen to those presentations, and I think it will give you a lot more detail about our story in Asia.

As Donald said this morning, our vision, the first plank in the company's 4-tier strategy, is to build a premier pan-Asian life insurance franchise. And in doing so, you can see the expectations for the financial results on the right-hand side of the slide. We're going to deliver over $1.5 billion of earnings at the end of the planning period here. We're going to widen our margins and the scale of our business to deliver a 26% core return on allocated equity. We're going to do that by doubling the size of our insurance business over that period of time. We're going to quadruple the size of our wealth business over that period of time. We're going to double our funds under management, and we will participate in the company's efficiency and effectiveness program.

In terms of the "delivering now" part of my theme today, this slide shows you that Manulife Asia already contributes materially to the global results of the company. Fully half of the company's insurance sales come from Asia now. That's up from just 20%, 5 years ago. We're about 1/3 of the company's bottom line, up from about 18% or 19% just 5 years ago.

We are building a leading pan-Asian platform. Our strategy is to have a diversified business platform in Asia. Unlike some of our competitors who may concentrate on Northern Asia or others who concentrate in Southeast Asia, we believe in the benefits of a diversified business platform in Asia as we do in the rest of the world.

We have a very significant business in Japan. It's the second biggest insurance market in the world. And as we highlighted very strongly at the Asia Investor Day, some of you may have the misconception of Japan as a big, sleepy, slow-growth, mature market. And I think if that's your impression, I would strongly encourage you to listen to the Japan presentation from our Asia Investor Day, where we outlined how we are pursuing a strategy of segmenting that giant market and identifying the growth segments, either the growth channels or the growth customer segments or the growth product segments, in that country and have built a growth business. Yes, a growth business in Japan.

Our insurance business has quadrupled in size over the last 3 years in Japan, and our strategies have a lot of runway going forward to continue very rapid growth.

Our oldest business in Asia is our Hong Kong business. One in 5 people in Hong Kong are already our customers, and we have a very diversified business there.

We've now started disclosing to you our third biggest business in Asia, which is our Indonesia business, a business that is about 25 years old now and also is diversified into a range of businesses, life insurance, group insurance, pensions and mutual funds and so on through the various countries in which we operate in Asia.

There are 3 big drivers of growth that are driving Manulife Asia. First is the rapid growth in the middle class. There will be over 1 billion people move into the middle-class in Asia over the next 10 years. A billion people become potential customers of Manulife Asia over the course of the next decade.

Asia continues to be a part of the world where in many, many of the countries in which we operate in, there is a very low penetration for either insurance and/or wealth management products. And so the opportunity exists for companies to rapidly increase those penetration rates.

And finally, the changing demographics in many markets, the rapidly aging markets. People are kind of very familiar with the Japan story of being a rapidly aging country. But Hong Kong, 20 years from now, will be as old as China -- as Japan is today. And China, as a result of the one-child policy, is one of the most rapidly aging countries in Asia. And those provide opportunities for us to further diversify our business into different kinds of retirement products and health products, the kinds of things where we can leverage some of the expertise that Manulife has developed in North America and transfer that technical knowledge to Asia and grow new businesses in Asia going forward.

There are no new strategies to talk about today. Our strategy has been clear and consistent in the full 6 years that I've operated in Asia. The left-hand side of the slide outlines our basic organic growth strategy. And it's really just 3 tiers to that strategy. First is on the distribution side. We're trying to pursue multiple channels of distribution, continuing to grow our core agency business, but diversify into bank and independent channels of distribution.

On the product side, historically, Manulife in Asia has been primarily a protection company. But we are, again, trying to diversify into being a balanced protection and wealth management company.

And finally, we're investing in promoting and developing the Manulife brand as an asset that our distributors can use as we build our businesses in Asia. We have specific business models that then elaborate on this kind of umbrella strategy to deliver competitive advantage in each of the countries in which we operate.

I'm not going to cover the details of that in the short presentation this afternoon, but again, I would refer to you that there are over 5 hours of presentations on our website from the Asia Investor Day that are all up-to-date. They're only about 6 weeks old, and I would encourage you to listen to that.

On the right-hand side of this slide, it shows that we are also open to non-organic opportunities to grow our business, either through business expansion, new market entry or acquisition.

The initiatives, the priorities that we have to implement these strategies are kind of documented on this page. In terms of our distribution strategy, we plan to double the size of our agency force over the next 5 years after having doubled it in the last 5. We're going to continue to build out a network of significant bank partners and pursue independent channels of distribution in the countries in which they exist.

On the wealth side, we're going to significantly expand our mutual fund sales in collaboration with our colleagues at Manulife Asset Management, and we're going to leverage the capabilities that Manulife has around the world in the pension business to take advantage of an emerging opportunity for retirement solutions in Asia. And we're going to continue the work that we've started over the last 3 years in very innovative brand-building programs throughout Asia.

This slide documents some of the success that we've been having in expanding our distribution. I guess the first thing I would highlight is, you see in the dark green part of the circle that our agency business, which used to be 70% of our business, is now 50% of our business. So our dependency on this channel has reduced. But it's importance to us has not reduced. 50% of a $1.2 billion pie is still bigger than 70% of the $600 million pie 3 years ago. So we are continuing to invest and develop and grow our agency channel. But at the same time, we're trying to grow the other channels. You see in the kind of brownish part of the pie, the increase in the independent channel, which frankly, is mostly coming from our Japan business. But also, I want to highlight the orange piece of the pie, which is the bancassurance side. In terms of its share of our business, it's doubled from 8% to 16%. But remember that the pie has also doubled in size over this time period. So actually, the amount of business that Manulife sources through banks in Asia has quadrupled over the last 3 years.

I said I would talk about a few case studies in how we are achieving the growth and the implementation of our strategies, and the first one I want to talk about is the growth in our agency channel in the Southeast Asia part of our network. You can see we've grown it at a compound growth rate of over 20% in the last few years. Well, you see some of the particular success stories: Vietnam, almost 30% growth rate over the last 3 years; Philippines, over 30% in the last 3 years. We're doing this by moving out of some of the capital cities into some of the second-tier, third-tier cities in the countries. We're doing it by attracting experienced agents from other companies to come and join the Manulife system, which has a reputation and track record of developing more professional agents who are more productive and can deliver better solutions to their clients.

My case study on the bank business is Indonesia. You can see on the graph, a lot of this is done through a wide range of banking relationships. We have up to 15 bank relationships in Indonesia over this period of time, but as you would have heard in many announcements over the course of the last few quarters, we're especially proud of the exclusive long-term deal that we struck with one of the largest and most professional banks in Indonesia, Bank Danamon. And you can see on the right-hand part of the graph, the immediate impact that, that relationship is having on our sales results in an already successful bancassurance business in Indonesia. I guess over the long term, our long-term goal is we really are investing a lot of time and effort and resources to ensuring that this Bank Danamon deal works, because the long game for us is to use this as a case study when other bank opportunities come up across the region, to be able to point to a success sorry, a very powerful success story, to convince others to partner with Manulife in growing this business in the future.

On the wealth side, probably the biggest part of our strategy is growing our mutual fund businesses throughout Asia. We're starting from a small base, but the growth rate has been very dramatic at 60% compound for the last few years. And we expect growth rate, if not at that rate, at a very high rate, to continue over the next few years. And again, as I mentioned earlier, we're not doing this on our own. We're doing this in partnership with Manulife Asset Management. And as J-F will talk about in his presentation at the end of this afternoon's session, it is a -- there's a very, very large team of investment professionals on the ground in all the countries in which we operate in Asia that we work with to deliver the kinds of products that our customers need in Asia.

Another case study from the wealth side is on the pension side. About a decade ago, my predecessors in Asia made a very bold decision to enter the defined contribution business in Hong Kong when the government created that industry. No one thought insurance companies could succeed in this business. Everyone assumed that the banks would dominate this business. But we were, by leveraging the expertise that Manulife has in the defined contribution business in Canada and the 401(k) business in the United States, we were able to take that expertise and build the #2 MPF pension business in Hong Kong over that period of time, second only to HSBC.

This is a business that has been a little bit flat over the last few years in anticipation of a major regulatory change that took place in this industry on the 1st of November of this year. It's a concept called -- what they call Employee Choice in Hong Kong, which will allow employees to move their contributions into their pension to the supplier of their choice. Obviously, for something that only started 2 weeks ago, we don't have any data. But we are optimistic about our ability to take advantage of this regulatory change because of the power of using our agency system of over 5,000 agents in Hong Kong to tell the Manulife story and convince people they should move their contributions to Manulife.

This slide just shows you a few of the kind of innovative things that we're doing to try to build -- to try to build our brand across Asia. To be frank with you, there are some of our competitors who do spend more money than we do. And so what we're trying to do is find some more creative ways of spending money. So we don't spend most of our money on television ads, which soak up a lot of money, quite frankly. But you see a lot of outdoor kind of things. You see the taxis there in Singapore. For a few-week period of time last year, a lot of people thought Manulife was a taxi company in Singapore, we had so many taxis with our brand on there. But certainly, in terms of building name awareness, which is the first step in executing any kind of brand strategy, it was an extremely powerful tactic. You see other things like wrapping the mass transit trains in Bangkok and other kinds of programs. We're trying to -- if we can't outspend our competitors, at least not at this stage of our development, we are trying to outthink them.

In terms of some of the things in the non-organic part of our strategy, we do look at new market entry as a possibility for growth. And this year we entered Cambodia, our 11th country in Asia. We're the first 100% owned foreign company in Cambodia, a very fast process as a result of some very efficient government relations work and the support of the Canadian government. And we're starting off fast. We started that company at the end of June. We have over 300 agents and 50 staff now, and it's the beginning of a good news story for Manulife.

In the fourth quarter, we'll be starting a new pension business. Fourth quarter of this year, we're starting a new pension business in Malaysia. It's a government initiative to encourage voluntary savings for retirement. They invited us to apply. We became 1 of only 8 companies who were given a license to participate in this business. We were invited based on the experience that the regulator in Asia was aware of, in terms of our success in building our business in Hong Kong. And they wanted that knowledge and technology transfer into Malaysia. And that's why they invited us to participate in this program.

Acquisitions have been a part of our growth in the past. Manulife-TEDA is our Asset Management company in China. We also acquired an asset management company in Taiwan a few years ago. Not blockbuster, game-changing kind of deals, tactical kind of deals, but you can see the impact that a cleverly timed and appropriately priced tactical deal can have, where those 2 deals alone now are delivering over 1/2 of the mutual fund sales that we have in Asia.

Looking forward, we will continue to look for those kind of non-organic opportunities. We'll continue to look at acquisitions in Asia. But I think those of you who have been following newspaper reports over the course of the summer know that we will continue to be very disciplined. We already have a good business in Asia. We're not desperate to overpay for an acquisition, but the opportunities will be there for us at the right price in the future. We will continue to look at new countries. I continue to study and not act yet, study, Korea and India. I know you guys have heard me tell that story for a couple of years now. We're also looking at other countries in Asia. We are looking at Myanmar. I don't know if that's going to be a short-term or a long-term kind of strategy, but a lot of companies are looking at that. And we continue to look for those kind of opportunities.

And I think on the products side, in addition to talking to you about protection and about wealth management, I think in the future, I am going to talk to you more and more about health because I think as the demographic changes that I talked about come to fruition, I think the opportunities for us in the health space will become more real.

What is the outcome of these strategies? Well, the outcome of these strategies will be that we will double our insurance sales. We will quadruple our wealth sales. We will double our funds under management. In doing so, we will deliver more than $1.5 billion of core earnings in 2016 and a core earnings return on allocated equity of over 26%.

We will continue to make key investments in growing our business. Our Asia business is self-funding for organic growth. We don't require capital to be sent from the parent company to fund our growth. In fact, we pay dividends to the parent. And many of our competitors who are building Asia strategies struggle with the idea of either funding their growth internally or paying dividends back to the parents, and we are doing both.

So I guess in summary, first of all, just again, I'd like to thank you all for joining us today in the room and online. We very much appreciate your time, and hope that we've kind of given you, even in a short period of time, some useful insight into Manulife Asia.

But you know the backdrop for everything that I said today goes back to that point about the rise of the middle class in Asia. It is something that Mackenzie in a recent publication recently called the biggest growth opportunity in the history of capitalism. All of my presentation today ties back to that opportunity. The story for Manulife Asia is essentially that very few financial services companies are as well positioned as us to exploit the trends currently underway in the region.

To summarize that story, there's kind of 3 points I want to make. First is that Manulife has been in Asia since 1897. We have one of the longest continuing operations in Asia of any international insurance company. So we really feel that we have the very deep roots in Asia and an unsurpassed understanding of the markets and the customers and their needs.

Secondly, we're one of only a handful of companies with that true pan-Asian presence, a growth strategy across all of our 11 markets. And this brings many advantages, not just the ability to leverage strengths across markets, such as transferring our expertise in pensions from Hong Kong to the new and rapidly expanding markets of Southeast Asia.

The third point that I want to repeat is that ours is not just a promise of future growth in the long distant future. We are delivering rapid growth now. In the last 5 years, we've grown our contribution to Manulife's global insurance sales from 20% to 1/2. We're contributing 1/3 of the company's bottom line. In the last 5 years, we've doubled the size of our agency force. Over that same period of time, we have massively expanded our nontraditional channels, whose share of our insurance channels has grown from 8% to 50%.

We've built up an enviable distribution network across the region, including in China, where we have a national presence across 50 cities and 13 provinces. And in Southeast Asia, where we have access to a combined population of 500 million people, people whose GDP per capita exceeds that in India, which is again a market a lot of people talk about.

We have demonstrated our ability to leverage our presence by securing notable strategic alliances, such as our partnership with Bank Danamon and our China-North America alliance with Bank of China, one of the world's 10 largest banks.

And finally, we built an asset management network across 9 countries in the region. We are present on the ground, in all of Greater China. And that sets us apart from 99% of the other 1,500 asset managers in Asia who lack that presence. This gives us an incalculable advantage over most of our rivals, as we build our Wealth Management business.

We're very proud of our recent record. But as you've heard today, we have the opportunity and we have the intention to go much farther.

Manulife is very ambitious in Asia. It's an ambitious -- ambition that is fueled by a long heritage in the region and inspired by the magnitude of the opportunity before us. One of the reasons we feel so passionate about our opportunity in Asia is that it speaks directly to who we are as an organization, as set out in our global vision statement, to be the most professional financial services organization in the world. I believe that over the coming period, Manulife Asia will equip the company to make a reality of that vision to a scale and an extent never previously seen in our 125-year history. We have an exciting journey ahead, and I hope after what you've heard today, that many more of you will come along with us.

It's been a pleasure sharing the Manulife Asia story with you. Thank you for listening.

Paul L. Rooney

Good afternoon, ladies and gentlemen. Bob, thank you for that rousing introduction. I'm very pleased to be here this afternoon and share what I think is one of the most exciting stories in the Manulife complex, and that's the Canadian Division. This is our home country. This is a country where we've flourished very successfully and one in which we have great plans to continue to grow and succeed.

In terms of where we are today, we are the largest life insurance-based company in Canada. We have 3 major competitors in this country. And largely, I would say, there are always little pieces in terms of what's going on in the Canadian marketplace. But largely, you can think of the Canadian marketplace as a pretty rational place these days, where as economic conditions change, that we make adjustments to our products and services, in light of the economic realities. And we see most, if not all, of our competitors following suit. That gives me a lot of confidence, not only in our ability to succeed in this marketplace and to differentiate ourselves in this marketplace but also to drive reasonable shareholder returns, as we do not see any serious irrational competitors in the marketplace.

What are we setting out to do? The key messages that I'm going to start and finish with is we want to continue to build a broad-based financial services company. We don't think it's sufficient in Canada to simply be a life insurance company or a mutual fund company. We need to be a broad-based financial services company. We will continue to add and bolt on opportunities to strengthen our ability to deliver on that aspiration. We have a strong and growing bank. We have a strong and growing mutual fund complex. We're going to stay in the segregated fund business but in a very different way. We're obviously going to stay in the life and living benefits businesses, as well as institutional businesses like group benefits and group pensions. No one has the broadest array -- this broad array of successful businesses in Canada, and we plan on leveraging that at every opportunity.

We continue to take a very disciplined approach to managing risk, and we have been able to continue to do that. We are well within our tolerance of all of our equity and interest rate risks. And we continue to take a very disciplined approach to repricing our products as appropriate for the current economic conditions.

We're going to be focusing more on higher-return, lower-capital businesses. You've seen some of that shift already. You'll continue to see that out of the Canadian Division, I have some slides on that later.

We have a very large in-force block, and I've been pushing a theme of cross-selling and collaboration for the last several years in the Canadian Division. We have currently 28 projects and initiatives working across boundaries within the Canadian Division. And I'm going to show you some slides as to where some of those -- a few of those are bearing some real fruit. And with that, I'll turn it over -- move it over to the earnings snapshot.

If you look at our core earnings, I think Mario already cornered me at lunch. And he thought that was a little aggressive in terms of our core earnings, and it is. And as someone wise once told me, when you're leaving a job, set unreasonable expectations for your successor, it's the way to ensure your legacy. And that's not at all what's happening here.

Our 2012 numbers are temporarily depressed. There's 3 main things that are causing the $800 million annualized number for 2012, and they're all nonrecurring items. So when you add those back, you'll see that the compound annual growth in our earnings is much more reasonable going out to 2016.

And the 3 things are new business strain in our life business as interest rates have fallen sequentially over the last 1.5 years. We have been trying to play catch-up with our -- with the repricing of our long-tail guaranteed life insurance business. And every time we reprice, then the market follows. Rates fall again, we have to reprice. Rates fall again, we have to reprice. We've been following that trend now. We've had 3 major price increases in that business, and we're getting close to the finish line there to the point where going into 2013, we will have largely wrestled the new business strain issue to the ground in the life business in Canada.

Secondly, we had in the first half of the year, some large mortality claims, large-case life claims that we don't expect to recur and they haven't in the second half of the year, as well as we had some weak long-term disability business claims experience in the first half of the year that has not recurred in the second half of the year.

And lastly, we have some modest expense gap challenges in 2012, that through management actions and E&E will be eradicated through the cycle.

The combination of those 3 items is about $120 million to $140 million drag to our 2012 earnings. If you add that back, you'll see a much more reasonable compound annual growth rate for this business.

This is an important slide because this is really core to our strategy, and that's leveraging our customer base and really becoming that broad-based financial services player. As I said, we have over 28 initiatives working across these boundaries to leverage this. And I guess the message I'd like to leave you, when you have this broad a customer base and as you continue to add and cross-sell to these clients, they become stickier clients, they become lifelong clients. And that is a key focus of ours in the Canadian Division, and we have many projects and many successful projects across the business that are doing just that.

But also retaining these clients. We have a number of initiatives across every business unit looking to increase our retention of these clients. And small improvements in retention can have huge economic impact down the road when you have 7 million clients that you're trying to serve. Keeping them is as valuable as acquiring new customers. And in many cases, more valuable. And of course, we'll be developing new and innovative products to deepen our relationship with these clients.

This is in summary talks about how we're going to achieve our growth. We're going to target maintaining share in our Group Benefits business, in our Individual Insurance business and in our Segregated Fund businesses, but in very different ways. In the Group Benefits business, we have a tremendous success in the large end of the market, and we're going to grow more rapidly in the small end of the market, where we don't enjoy as much share.

On the Individual Insurance side, we're going to be moving away and have been moving away from long-tail guaranteed insurance which a has lower ROE. And moving to the mid-market and to the shorter-tail adjustable products, where we can enjoy higher margins and where we share more of the risk with our customers.

And in the Segregated Funds base, don't think of that as just GMWB. That is low-risk, segregated fund products, where you have 75% guarantees in the product that only pay out on death. There are lots of other ways you can play in this market besides just the GMWB market. We've significantly de-risked and repriced in this area, but we will continue to have this as part of our portfolio going forward.

Where we are going to be pursuing focused growth is in Manulife Bank, in our Mutual Fund business, in our Group Retirement Solutions, Affinity Markets and the small end of the Group Benefits business, all of which have been growing very rapidly and still enjoy a lot of promise.

And of course, we're going to continue to focus on risk and diversifying our customer base, our product mix and leveraging our in-force, as well as more and more, you'll see from us more branding and much more direct-to-consumer. We've had some good success in direct-to-consumer, and we're going to continue to focus on that as another distribution channel for our products and services.

So let's talk about some of these pieces. We've always had very strong share in the group benefits market, and that will continue. 2012 was a bit of an aberration. We had one incredibly large sale in the group benefits area. If you back that out, we're still #1 in market share in 2012, but not quite as dramatically as the chart would suggest, the dark green part of the chart would suggest.

But where we're really focusing is on the higher-margin small end of the market, the small employer market. 2 years ago, we had about a 15% share at the small end of the market. Today, we're almost up to a 20% share. We put a dedicated team focused exclusively on the small end of the market, with a leader for that team, with a separate distribution focus and a separate distribution channel, separate product offering, and we're really doing a very good job there in growing that share.

The leader in the market 2 years ago had about a 30% share, and we were at 15%. Today the leader in the market has about a 25% share, and we're very close to hitting -- sorry, they have a 25% share, and we're very close to hitting a 20% share. So we put a focus on that business, and we're starting to see some tangible results from that focus.

In terms of the Individual Insurance business, I talked about our repricing efforts, not only to reduce strain, but also to ensure good returns for our shareholders. We have taken some small market share hits overall in the Individual Insurance business, but that's quite appropriate. I'm perfectly comfortable to give up some share, as long as we can remain very viable in the Canadian marketplace, but I want to make sure that we protect our margins in this business.

But you've seen a real shift in our sales mix. 2 years ago, about 40% of our sales came from long-duration guaranteed products. Today, it's about 20%, that was a very conscious effort, as we ramped up our product offerings in the shorter duration, more adjustable product mix, and we've seen growth in there. But not enough growth to offset the very deliberate decline in our long-tail guaranteed business. But all in, we're very happy with this picture, and you'll see this trend continue.

I think we'd like to see it at about 85-15 as a more long-term target in terms of the mix of adjustable shorter-duration products and long-term guaranteed products.

In terms of the bank. One of our best growth stories and one of a number of growth stories, but one of our best, just a little over 10 years ago, the bank earned virtually nothing. And today, last year, earned $120 million. It continues to grow quite dramatically. It is the largest -- continues to be the largest and fastest-growing bank in Canada as measured by mortgages or assets, and we intend to continue that.

We have slowed the growth deliberately of the bank down a little bit, with the new CMHC insurance rules. Some of the regulatory environment, we decided from a risk perspective, we tightened up our underwriting even further. While the growth trajectory will be there, it might be -- we're going to target slightly lower growth for very appropriate risk reasons in the bank.

But the bank isn't just about the products that we sell in the bank. It really is core to our distribution strategy. The biggest fear of a lot of our advisers is losing their clients to the major banks. And every major bank is trying to get the investment dollars away from independent advisers. They're trying to bring life insurance into the mix. They're trying to replace, either in-branch or near branch, the independent adviser.

What's the bank really does is it works directly with our advisers and helps them become a broad-based financial services player. And what we're finding is the best advisers now are leading with Manulife One and Manulife Bank, and they're helping Canadians become debt-free sooner. And once they convince them there's a better way of banking, that they can become debt-free sooner, that's the magic opportunity where they become the trusted financial counselor. And that opens up the doors for insurance sales, and wealth management sales, mutual fund sales, and if they own businesses, group benefits or group pension sales.

This is by far our largest and best cross-sell product in the company, in Canadian Division. Right now, if you -- new clients of Manulife coming into the bank, 40% of these clients now own at least 1 wealth or life insurance product, at least 1. And the cross-sell ratio of banking clients is now 3.6. So the average banking client owns 3.6 Manulife products. We're very proud of this, so we plan continue to that, and the bank will be a key part of not only our distribution strategy and our product strategy, but our overall growth strategy.

In terms of mutual funds, we put a lot of emphasis, we put a lot of investment into our mutual fund franchise. And our strategy has really been threefold to penetrate the mutual fund side of the business. First, we needed to expand our product range and to build out more 4- and 5-star fund managers. Secondly, we needed to expand our distribution in all distribution channels, including Manulife securities, where we now enjoy 25% of all Manulife securities. Mutual fund sales are sold in proprietary products by Manulife Mutual Funds. And thirdly, we needed to build the brand of Manulife Mutual Funds. And we've invested heavily in all 3 of those areas to grow our mutual fund franchise, and with good results.

Since 2008, we've -- our sales have nearly quadrupled. The mutual fund complex is growing very nicely. And I know, you might not be able to see the small print. But one of the most important things is getting on recommended lists throughout the country, and we've grown from 7 funds on recommended lists to today, where we have 29. Our 4- and 5-star funds have grown from 7 to 15, and our ultimate target is to get that up to 30 by 2016.

So the combination of building our brand in the mutual fund space, continuing to increase our fund performance and the number of funds that we offer and continuing to expand our distribution focus and broad-based distribution has really paid dividends, and we have no reason to believe that we won't continue that strong result.

In terms of group pensions, we've had tremendous success here. We've been the #1 market share player for 10 quarters in a row. And we've seen strong growth in earnings and strong growth in sales throughout the piece.

What's more important is where this business is going in the future. And there's 3 reasons why, not only should you think about the pensions business in Canada as a good opportunity for us, you should see it as a good opportunity for everyone. And as long as we maintain our #1 position, a better opportunity for us.

And there's really 3 reasons. First of all, the defined benefit to defined contribution plan conversion continues in Canada. We continue to see employers moving away from defined benefit plans and to defined contribution plans every day, and that will continue. The difference between defined benefit plans and defined contributions in Canada and the U.S. is stark. Over half of the pension assets in the U.S. are in defined contribution plans. Only about 5% of the pension assets in Canada are in defined contribution plans. And that shift will continue as employers cannot carry the burden of defined benefit plans, and we're perfectly positioned to take advantage of that.

The second piece is we're focusing a lot on retirees. The people who are leaving these plans will need payout products. They will need products and solutions into retirement, and we have a heavy focus on retaining those assets. We have a separate unit focused on doing just that. So we see a lot of availability to retain assets from these clients.

And last but not least, the pooled retirement pension plan concept here in Canada. This is a federal legislation that has come out that has been enacted, and now all of the provinces are debating how they respond to the need for small employers to have pooled retirement plans. We were very bullish about this. We thought that -- we still believe this will grow to a very, very, very large part of the market over several years. The wheels of politics are moving very slowly in the provinces. Only Québec at this point has enacted legislation on this front. And as different provinces move onboard, we will take advantage of that. Our goal in the PRPP market is to gain 30% share of whatever the market turns out to be.

I talked a bit about direct-to-consumer and also travel insurance related to affinity markets. There's a few interesting things about our Affinity Markets business. First of all, it is the area where we do a lot of direct-to-consumer, not the only place, though. I should remember to go back to the bank. The bank works with advisers and a lot of our customers come from advisers for banking solutions. But a full 25% of all new Manulife One sales now come directly through our website or through the telephone, where we actually take clients directly, and we don't have advisers involved. We make that available to our customers because not every customers wants to work with an adviser, and we want to make sure that we are available to do business with them on their terms.

We spent a lot of time and energy in Affinity Markets, growing our direct-to-consumer base. And as you can see, we've had good success, and we plan to continue to grow our direct-to-consumer sales here in Canada.

And our travel insurance business has grown quite dramatically, where we are now the #1 provider of travel insurance in Canada. And we have now launched a travel insurance business under the John Hancock brand in the U.S., run out of the affinity markets. Very early days, but some very, very promising opportunities to grow our travel business in the U.S. as well.

I'm not going to spend too much time on this slide in the interest of time. But there are a number of smaller initiatives. I've already talked about the pooled retirement pension plans, individual insurance. We're really focused on moving to the mid-market, not only adjustable products, but also to the mid market. We've been very, very successful at the high end of the market, but less successful in the mid-market.

But we're not going to do that by just offering "me too" products. Our goal in the mid-market is to be very differentiated in attacking that market. And the best example I can give you of that is our new Synergy product. Typically what you'll see from our competitors and from us historically in the mid-market is there's 3 sales involved. There's 3 needs and 3 sales involved: a life insurance need, a disability need and a critical illness need. And every consumer and every Canadian really needs to think about those 3 events and how they

prepare for them.

Our Individual Insurance team has built a very unique product for the mid-market, with a shorter-duration product that combines all 3 products in one: life insurance, disability and critical illness. And they move very well in tandem, depending on the outcome of the event. It's a wonderful product. It's a very innovative product. And we're seeing some good early success in terms of sales. And that will allow us not only to grow in that space, but also to attract advisers that we haven't dealt with as much in the past and grow our adviser base in that way.

The other one I'd like to mention briefly is Manulife private wealth. This has been very recently launched. And this is really focused on a team of people who are looking at high net worth clients in a very different way, bringing banking solutions, bringing investment solutions, bringing tax and estate planning solutions to pass along their net worth to their heirs tax-effectively. It's over here at 250 Bloor on the main floor. If you want to go in and visit this new organization, feel free to do so. They'll be happy to look for new clients.

The main focus of this, however, is on our advisers. So often we have high net worth clients who see our advisers for life insurance or segregated funds. And once they've made that deal, they then ask our advisers, "Well, what else can you do for me? I really have a lot of other needs. How can I deal with that?" And unfortunately, some of our advisers, some of our largest advisers are quite specialized in their businesses. They are specialized on high net worth clients, for life insurance or tax and estate planning purposes. And they can't refer them anywhere else. They don't want to refer them to the banks because they know the banks can steal their clients and they don't want to refer them to another high net worth family.

The goal of this is to have all of our high net worth advisers transferring and referring these clients to us, and then surrounding these people with Manulife products and services, so that we can not only keep the adviser in the relationship and the adviser happy, but also the consumer.

We're seeing very, very, very strong traction. I think we have over 50 referrals from our high-end advisers already. And I know we've closed some of those high net worth clients, and there are some very, very, very major opportunities in this area. We have some reasonable, you might even say, modest growth plans for the high net worth business over the next several years. But based on very early indications of referrals, I'm probably much more bullish on this opportunity than I would have been 6 months ago.

In terms of cross-sell, I'll give you a couple of data points. But this has been a big focus of ours, as I said. And I'll just give you a couple of data points that might help you. If you look at our in-force block, about 8% of our in-force block across life and wealth has been cross-sold, in our in-force block. But if you look at our new sales over the last 2 years, 18% of -- sorry, 15% of all the clients we've attracted in the last 2 years have been cross-sold across life and wealth management. Now it's going to take a long time to move an in-force block of millions of customers. But as you can see the focus of our distribution organization, the focus of our product and marketing organization has been to cross-sell more and to create a stickier client relationship. And we should expect that new business growth and that 15% pie to continue to grow as we move forward and slowly shift our in-force block.

The other area I'd like to highlight is our Group Benefits and Group Retirement Solutions. They have been run as separate businesses with no overlap in distribution or commonality. We set out to change that a few years ago. I think I talked to you about that about 3 years ago, that we were going to make this a real priority, and I can -- I'm pleased to report it's been a great success.

If you look at the cross-sell in Group Benefits from group pension clients from 2009 to 2011, it was 6%. This year, it's 15%. And if you look at our new clients coming into our pension business, a full 28%. Remember, we're #1 share in GRS and a full 27% of our new customers coming into GRS are existing group benefits clients. And that's because we're marketing to these clients. We're giving them solutions. We're giving them package pricing, like the property and casualty business, where you buy home insurance at this price, auto insurance at this price, there is a deal if you buy both.

We're aligning our technology much better across these businesses so that the clients don't have to sign in to 2 separate sites, one on the pension side and one on the benefit side. But they can have it all amalgamated in 1 place. We spent a lot of energy and focus on this and it's gratifying to see that the organization is delivering on this. And of course, the bank continues to be our best cross-sell product by far.

So I hope I've given you some comfort in how we're going to get to our goals of $1.45 billion of earnings and a 14% ROE. We're going to get there by strong growth and wealth in banking. We're going to improve our insurance profitability. We're going to leverage all of our cross-sell opportunities and we're going to take advantage of efficiency and effectiveness, not only in the Canadian Division, but as part of the broader global initiative.

I feel very strongly about the prospects for Canadian Division. And I think we have a track record of delivering, and I believe we'll have a track record of continuing to deliver.

And I'll start where I finished. We're going to continue to build a broad-based financial services company that will differentiate ourselves from our competitors in the marketplace. We're going to continue to take a very disciplined approach to risk and managing that risk. We're going to continue to focus on growing high-return, lower-capital businesses. We're going to launch and grow new businesses and leveraging our strong track record of success. We're going to leverage our in-force block and continue to cross-sell and become the dominant financial services player in Canada, and that's it. I would strongly encourage you to ask questions of me or my team. Some of whom are here. And we'll chat after the meeting. Thank you very much, and have a great afternoon. And now I will introduce Craig Bromley, who heads up our U.S. division, John Hancock.

Craig Richard Bromley

Thanks for the introduction, Paul. That was a great introduction. But I think I may want to introduce myself as well. My name is Craig Bromley. I've been running the U.S. division for the last couple of months. I'm replacing Jim Boyle. Previous to that, I ran our Japan business, a business that has certainly some macroeconomic challenges to deal with. And prior to that, I actually worked in Investor Relations so there's actually some familiar faces here from those days. So thank you for coming today.

I wanted to basically first start off by saying that everything that you need to hear about the U.S. division strategy is on the first slide. So if you want to go and put your buy orders in, after the first slide will be the right time to do so.

I guess the first point that I would make is in response to Peter Routledge's question. We are committed to the U.S. market. I guess I'm the only one who has to stand up and say that, but that is the case. I think going back a few years ago, the U.S. -- our U.S. business faced a lot of challenges. And I think probably the biggest one was how to accomplish all the kind of product repositioning that needed to be done, the sort of withdrawals, et cetera, in a way that did not destroy our franchise, destroy our brand and destroy our distribution relationships. And it wasn't abundantly clear probably back then a few years ago how to do that. But basically, it has been done. It has been done successfully and I will show you some results of that and why I think that, that has been a great thing that was done by my predecessor, frankly.

But the good news is we have done a lot of this repositioning. We've done it early. We've done it before a lot of our competitors. And now actually, our competitors are moving towards us. So we were early, but we were right.

I came in at a time -- I've only been 2 months in the U.S., but I came in at a time, a good time, because we were doing our plan. And so that gave me an opportunity as each business came forward. And I got to make some decisions on how I felt about each of our businesses and then we were able to go forward to the executive committee with our plan and to the board and get commitment from everybody on it. And one of the decisions early on that needed to be made was around the annuities business. And that business, we decided to close our doors to new business on the VA side and pretty much on the fixed side as well.

However, that leaves us with 4 very strong businesses that we are very confident in. The first one, mutual funds. This is a business that has had tremendous success for the last number of years, is very well led and is a key part of our strategy going forward.

Our Retirement Plan Services business has always been a source of strength. It's widely admired in the industry. We have a great customer service ranking. And this is a business where we're not just feeling very committed to, but we are going on the attack in this business line.

Our Life Insurance business, I feel very good about our Life Insurance business. We are -- we've completed, basically, our product repositioning that are many of our competitors are really just starting. And we've done it and retained a huge part of our production and great distributor relations. We are still #2 in the brokerage market and on a given day, #1 as well.

The Long-Term Care business has certainly had its share of challenges. I'm looking over at Mary Ann here. But there are -- we have been an innovator in this business. We have, once again, led the market in terms of changes to our product designs and in terms of recognizing some of the in-force problems that exist throughout the industry. And I now feel very comfortable with where we are in the Long-Term Care business and I'll talk about that later.

So I mean, our focus right now is actually on growth. The big repositioning has largely been done. I'm coming in at a great time. I get to enjoy figuring out how to extend our success. We're going to be particularly aggressive in the fee-based businesses, where we already have a lot of success and expect a lot more in the future. And we expect to grow our sales in our Insurance businesses without getting more aggressive, just basically continuing with our product innovations and having the market come towards us as they reprice and they de-risk some of their products.

Now we talked about efficiency and effectiveness. You've heard that probably about 10 times today so I don't want to talk too much about it. But it was mentioned that this was a particularly important issue in the United States, and I think that is absolutely true. The areas of cooperation that we're looking at across the company are pretty similar no matter where you're talking about. But obviously, we've had some businesses where we have withdrawn, where we have downsized considerably in terms of our revenue and sales, and so we probably have an extra opportunity.

And I think even more so going forward, being efficient and being competitive in the fee-based business is incredibly important because this is a very competitive space, that I think you're all aware. Things get measured in fractions of a basis point, et cetera, to make profits. And so being the absolute, most efficient player out there is extremely important to our future success.

Our competitive advantages remain the same today as they were 5 years ago. We have a fantastic brand. I'm coming from Japan, where we don't have a particularly big brand identity. And there, we were able to find new businesses to go into without the brand. In the United States, I expect the advantage of having a brand will enable us to build businesses faster. Furthermore, our distribution capabilities have not diminished. They've actually expanded. Our product manufacturing capabilities are still the best in the industry, and we have an anchor in terms of our wealth management expertise which we think is going to gain in popularity in our asset allocation portfolios.

Moving to the financial side. I guess the first point I'd make about our earnings is that the natural trajectory of our earnings is up. Basically, even though we have pulled back from certain businesses or eliminated others, the in-force of our business continues to deliver higher earnings every year in spite of that pullback. Now we have had the headwind of increased hedging. We've had headwinds from interest rate environments and we've had headwinds from actually selling off some of our businesses to reinsurance transactions. But the natural state of things is to go up. So our job is basically to figure out how to make them go up faster. And I guess the key drivers for that are obviously, we have a great Mutual Fund business right now but one that is still subscale in spite of years of success. But the next doubling of our AUM, which we feel very confident in, will deliver a large amount of earnings growth because of the scale of opportunity that's afforded to us.

The retirement funds area, the Retirement Services is a big source of growth. And I'll talk a little bit more specifically about that, what we're doing in order to expand our presence in that market. But it will have an impact on earnings. Basically, the question was asked before, "How are you going to change your ROE profile? How are you going to change your profitability profile? Is it through expanded margins or is it through business mix?" I would say the answer is both. We are looking for E&E, efficiency and effectiveness, to expand the margins on the in-force, which is really almost all you can do, really on the in-force. It's sold. It's done. But it also gives us pricing power. And then, of course, we are shifting our mix more from the sort of long-term guaranteed and high-capital types of products to wealth products, fee-based wealth products, that have better ROEs. So it is both.

I think I've talked about our top initiatives. The doubling of our mutual fund assets sounds daunting, but it's a gigantic market. And we are still quite a small player and we have tremendous momentum.

Achieving top 5 position in the RPS mid-market sales, as you know, we are a big player in the small-case market. We expect to become a very big player in the mid-case market. Maybe a couple years or a few years from now, I'll be here talking about being a big player in the large-case market, but right now, our ambitions are in the mid-tier.

We will maintain our top 2 distribution place in the brokerage market for insurance, and we expect to get back to a fairly normal market share of 10% in LTC.

I talked about our brand, and I think every time somebody comes up from John Hancock, they talk about the strength of the brand. And I guess, the -- what I'd like to talk about today is, yes, that brand is as strong as it's ever been. And I think actually amongst distributors, while we took a little bit of a dip probably when we were changing all of our products, now that they recognize that we were right and we were ahead of the curve, which they weren't so certain before. Actually, I think our reputation has been enhanced with our distributors. They view us as straight shooters who understand the market and were trying to get ahead of it when others were not. So the brand is something that's going to enable us to go find other opportunities because we already have the trust of our distributors and we already have the trust of our customers. So introducing new types of products and new businesses is a lot easier.

This is what I was referring to previously, this graph, which is the central issue. When we were pulling back from the annuity space, was what was going to happen to our distribution relationships? Would we be able to pivot? Would we lose all of our non-annuity production from our top distributors given we were work pulling back from a very important category for them?

So what we're showing here is actually, we haven't put names, but our top distributors, top 8 distributors, and what they have done since 2007, when we basically were -- had not yet started our repositioning on the annuity side. So I guess the greatest fear was that with the decline in the annuity sales would be also a decline in every other type of sale. But actually the opposite has occurred. We've been able to grow our other products not quite to the extent that we've dropped in terms of annuities. But we've been able to replace a huge amount of the production. With our top distributors, they have actually given us the chance to display that we can do other products that perhaps they had not been selling before and do them effectively. And that was the -- I think the strength of our distribution relationships that we had going into the situation. And I think the way that we managed the process of removing ourselves from the annuity space. You can see many of the distributors are selling more today, even without annuities than they were selling previously.

A big part of our strategy going forward is asset allocation funds. This is an area where we have had traditional strength, up with the leaders of the asset management industry in the United States. And I guess, we kind of see that after the crisis that occurred, a lot of people are no longer so much interested in managing their day-trading activities and expecting that they can make money quickly with little investment knowledge. They prefer to leave it to professionals, but most of them do not have access to institutional management capabilities to manage their asset allocations through their lifetime. And we think that that's going to be a growth category. And we're just looking for all the different possible ways that we can distribute this type of product as an anchor of all of our asset management activities.

Mutual Fund sales have been strong, as I've said. And there are a number of drivers of why they've been strong. We've been adding great funds and great performance, driven in a big part from our own asset management capabilities but also through other third-party managers that we have either subcontracted with or lifted out of other organizations or adopted. We've also expanded our distribution and attacked some areas that we have not traditionally been strong in. So you notice the difference that I make here between retail and institutional. Institutional mutual fund sales are not like doing real institutional, I guess, in terms of going out to pension clients and pitching huge mandates to take chunks of their money. This is more doing a fund-to-funds work, doing 401(k) platforms, doing preferred lists, preferred portfolios within major distributors. This is an area where we have been underrepresented in the past and is actually the fastest-growing part of our business.

But initially, we have attacked other channels. Edward Jones, we were basically nowhere in that channel a number of years ago in Mutual Funds, and just recently, we were named as a preferred provider. There are only 8 preferred providers for Edward Jones. They're a company that actually does put their muscle behind their preferred providers. And what's really instructive going back to the discussion before about how we've handled our distribution relationships is the fact that 3 weeks before they named us to preferred provider status, we actually withdrew from their channel with VA. So basically, we went and told them, "Sorry, we're going to have to cut you off of VAs because we're exiting the business entirely. I hope this doesn't prejudice our relationship." Three weeks later, they named us as a preferred provider. So I think that goes to the strength of how we've handled our relationships and the type of trust that we get from our key distributors.

Our Mutual Fund sales are also very well diversified. So looking at the graph on the left, this shows our top 3 funds as a percentage of our overall fund sales. And for many companies, they'll have 1 or 2 funds that dominate the sales of their entire complex. That is not the case for us. So basically, if one fund falters, has bad experience, bad performance, the whole thing doesn't implode. That's very important for us, to have a breadth of product offerings that have high performance and that many distributors are embracing.

The second slide shows our diversification of the different types of channels we use. And I guess, I'd like to draw your attention to 2 points. One is the wirehouses. This is probably a big source of potential future sales going forward. We -- if you look at the other channels, we are probably well represented there and have a strong market share. But in the wirehouses, we're still a little bit weak, and we see that as a big opportunity to leverage all of our relationships worldwide to get the wire selling more of our product.

And the other point I'd try to make is the 6% there in gray is something called PFS, JH PFS. This is our rollover group and I'm going to talk a little bit about our rollover group on a subsequent slide. But this is a fairly new initiative and just represents our efforts to try and capture more assets with our asset allocation portfolios than we're currently doing through different channels.

I'm going to talk just a little bit about RPS and our past positioning and our future positioning. So the 401(k) business for us has always been a source of strength and has always been focused on a fairly small niche. So we dominate sales down at the small-case market and we do it currently through a sort of a unique product offering, an unbundled group annuity which we sell in conjunction with the wirehouses, the planners, but also third-party administrators. So basically, we outsource the administration, which works very well in the small-case market. And it has allowed us to be very strong in this market. You see we have had a strong position and continue to hold it.

But it has been under attack somewhat. So people will have recognized, competitors have recognized that this is a good space to be in that we are in a strong position there and have gone after our clients. We have successfully defended our position and maintained our dominance in this segment. But I think it also has spurred us to go on the attack.

So the next slide shows kind of where we stack up very well currently, which is in the under $5 million market. So the dark area is this group annuity unbundled, which is largely us. So we compete very well in this space against other companies that offer primarily bundled group annuities, which means that they do all the administration themselves and against companies that offer through mutual funds. So we are very effective in this space with our type of structure. But you can see that as you move up in size, the opportunities and the competitiveness of the unbundled group annuity product actually goes down. And it represents a much smaller portion of the market. So we're giving up right now big -- a big portion of the market that is adjacent to us because we do not have the product offering to satisfy clients in that area.

So as of third quarter, or I guess 2 months ago, we launched a bundled group annuity, which is not such a big revolutionary thing, but it represents the first time that we're administering for ourselves, and certain clients will prefer that even in the small end or the medium end. Others will prefer to stay with the TPA model and the unbundled.

But as of just a couple of weeks ago, we have gone to market with our mutual fund offering. And this was a big, big project for us, and I think as Steve Roder mentioned, that it was a few million dollars investment. I guess that's what they told him. But it was quite a substantial investment over a multiyear period involving, creating an entirely different system, a different chassis, a different platform for our 401(k) business, which you can imagine is a big endeavor. And now it doesn't mean that we're moving everything from our old chassis to our new chassis. We're running them in parallel but we do think it represents a big technological shift for Manulife, for John Hancock and its capabilities in this space. We think that the system will be leverageable into other parts of our business and we think it does give us an advantage in attacking this next space of the mid-market. So I said, our goal within 5 years is to be in the top 5 in the mid-market, just like we're #1 currently in the small market.

Long-Term Care -- oh no, sorry, I think I'm on the wrong slide. Life. Life business, I just wanted to reiterate what we've achieved here in the Life business. So if you go back to third quarter to-date, 2010, 48% of our business was long-term guarantee business, primarily UL No-Lapse Guarantee business. As you are well aware from having listened to our previous calls and conversations, this is an area that we have pulled back from in a significant manner. And we're -- a lot of our competitors have not yet done so. And so we have had some impact on sales. But you can see going from 2010 to 2012, we've gone from $402 million to $380 million in sales in our Life business, while reducing those types of long-term guarantee products from 48% to 6%.

Most of our competitors have not made this move, but we expect that they will do so. They will have to do so. And recent changes to AG 38 probably will prompt them to move more quickly on this. But we are already well positioned there on the front and with our distributors, they understand that we get this market outside of No-Lapse Guarantee and we are currently their preferred provider. As others pull back, we suspect they will, we expect to actually pick up more market share in this area. So once again, made it easy for me when I stepped into the job.

Moving to the Long-Term Care business. Right now, we are selling a modest amount of Long-Term Care insurance. And I guess I'd make a few points about why I actually have studied this business and like this business. First of all, obviously, there's a great demand for this product. And that demand is not abating. And if you look at the competitive set that we now are up against, this is a very rational group of competitors, for the most part. These are big, strong companies. The LTC industry has shaken out. A lot of the competitors have gone away. A lot of the irrational competitors have gone away and the competitive set now is much different than it was. There's less capacity, less supply, which does allow us to get some power in the market. We also have, of course, a lot greater experience than a lot of our competitors in this market. Unfortunately, in some cases, we've learned the hard way, but we have got a depth of knowledge that most of our competitors do not.

Obviously, we have changed the product portfolio dramatically. So this is no longer lifetime guarantees with interest rate burden completely on our company. The passthrough features have been introduced to these products. We have led that. We will continue to lead in the product innovation and design.

And as we've shown, it's certainly our intention that when we sell this product that the adjustability of the product will protect the company and that we have the pricing right. But as we have demonstrated, at the worst possible event, it is possible to go back to the states and ask for a pricing increase. We have demonstrated that.

So we are not aggressively pursuing sales growth here. We think that as our competitors have repriced and pulled back, particularly Genworth, which obviously has sort of an outsized market share on this chart, that we will capitalize and float our way back up to maybe a normal market share of around 10%, while we continue to innovate and find new features that protect our company.

The last point is just on what I described previously, this PFS. This is our rollover business. This is a business started with almost no staff, no investment, no capital. And the idea was we should have a direct way to contact customers who are 401(k) customers, either of our company or other companies that are moving into our IRA or into our 401(k) plans and see if they will continue after retirement or after termination or departure from their company, with the types of products that we offer on a retail basis. And we've actually had quite a bit of success with this. So this is something that we will be looking to expand, and we'll be looking for other opportunities to use direct cross-sell techniques across our business, which has not been a big focus of our company in the past. So this is very small, but actually kind of an exciting piece of what might be a brand new business model for us.

Just -- so in conclusion. We have a number of initiatives underway. We're committed to growing in this marketplace. We have plans, aggressive plans, to grow particularly our fee businesses. We are -- we feel that our insurance protection product portfolio is de-risked and well-priced and that the market will be coming to us. And we will overlay that with increased profitability and increased pricing power through efficiency and effectiveness.

Thank you very much. And I guess I will introduce our next speaker, Warren Thomson, this is Mr. Experience Gains.

Warren Alfred Thomson

Thank you, Craig. Rather inappropriately, they've got me at the left end of the table here so now I have to talk about the left-hand side of the balance sheet. But just to show you that investments were balanced, the next speaker, J-F Courville, he'll be working at the right end. So investments, we try and cover the full spectrum. Anyway, what I want to talk about today is our diversified high-quality portfolio. You've heard a lot of discussion today about asset allocation, the importance of it and some of the products we have on our Wealth and Asset Management businesses. It's this core expertise that we developed first on our on-balance sheet management that we have actually taken out and used to develop into key products for our clients. We do have a very sophisticated asset liability management approach. We do predominantly use fixed income to match the bulk of our client exposure, particularly over the first 20 years. The first 5 years were very tightly matched from a cash flow point of view. 5 to 20 it's more duration matching at the long end, we use our alternative non-fixed income strategies. This does allow us to have better risk-adjusted returns that we don't need to go to the risky end of the credit spectrum to pick up yield, as many of our peers do.

In terms of our risk management culture, this is something that's very deeply rooted in how our investment management operations work. Both our asset liability management committee and our credit committee are chaired by our Chief Risk Officer, Rahim Hirji. They do set a lot of the limits under which we do operate, but we have the credit culture is steeped in our investment management professionals. They understand the importance of applying discipline in originating and underwriting credits as we put them on the books, as well we have very capable portfolio managers and over 99% of our on-balance sheet assets are managed in-house. Our asset mix is predominantly fixed. The green piece of the pie here, which you see, is about 86% of our overall asset portfolio is in the fixed income space. Notably, almost a little over 1/4 of it is in government securities. These obviously are very high-grade, very liquid securities. But we do have a meaningful amount in corporate bonds and mortgages, I'll detail each of these a little bit more in a moment, but you can see that we've got this very small piece of the pie at the bottom, which is our non-fixed income assets and I refer to that pool of assets as like spice in cooking. You just need a little bit to really add some flavor to what you're trying to produce. You don't need to have it overwhelm what you have happening.

In terms of our fixed income portfolio, again, it's diversified both beyond governments. Obviously, we've got a significant corporate bond exposure and this is divided between public and privates. We've finally got better diversification by having access to both the public and private marketplace and some of the progress we do directly originate in-house and others we're obviously dealing with some of the large brokers of private placements in both Canada and the United States. One of the interesting things that I'm going to start with respect to the privates, and note that the 2 sectors that had the most stress during the financial crisis, banks and securitized assets, did not have privates in them, and that really did help contribute to the fact that we had less exposure to problems than many of our peers.

Moving now to our mortgage portfolio, it's very well diversified by geography, in Canada and in the U.S., and by property type. We've got a meaningful portion of our mortgage portfolio is in Canada in CMHC insured mortgages, which do have the full faith and credit of the government of Canada backing them. Our mortgage portfolios are generally relatively low loan to value with very strong debt service coverage ratios. In another slide or 2, you'll see some experience with respect to credit on these portfolios, which has been superb through the financial crisis, very much outperformed relative to any of the universes for CMBSs or RMBSs, for instance, in the United States.

Our credit provisions. This gives you the picture from pre the financial crisis through to Q3 2012. And the dotted line that you see across it, that's what's expected in our evaluation from the credit experience perspective. And you can see generally speaking, we're outperforming the long-term assumptions with respect to credit experience. The spike in Q3 '08, that was an item that we did press release at the time, that we had losses attributable to AIG, Lehman and WaMu, were 3 of the notable names. I think we took very large hits on it at that time, as you're all aware, mostly AIG, but pretty well came back, the marks [ph] we took on Lehman at the time proved to be larger [ph] than the results have been proven necessary, so we've got very good experience in terms of what we've done through the piece. And this is one of the contributors when we get a little bit more into the investment experience gains that we talked about. One of the ways we generate investment experience gains is through our credit experience, and this has an interesting correlation to our trading gains because when things like in the credit crisis when the credit impairments were bad, we saw some of the best credit spreads out there in picking that commercial mortgage space, we were able to put on assets with very high value-add there, so we were able to get trading gains from the origination perspective at the same time that we were having tougher experience from an impairment perspective.

In terms of just looking at the U.S. and the specifics, we've got some data from Moody's, and this is comparing our John Hancock subsidiary's credit experience, looking at both the bonds and commercial mortgages versus U.S. peers. And the thing that's very notable about this is the outperformance is more than 100 basis points, and that's on $75 billion in assets, so it's a very significant book, it's a very significant data point, and I think the level of outperformance is something that's definitely of note.

In terms of our alternative asset portfolio, again, it's important to realize that this is extremely well diversified, first by asset type. The largest asset category we have in there is commercial real estate. Another key point to note about our alternative asset portfolio is that it is largely unlevered. We don't put leverage in the book because we have leverage within our primary capital structure, so we don't feel that there's any need to introduce incremental leverage in our portfolio. You can see most of the other asset classes beyond the commercial real estate take very small slices of this, and this is all, again, coming out of a piece of our balance sheet that's about 9% of our assets.

In terms of management, I mentioned that 99% of the assets we manage on-balance sheet are managed in-house. One of, I think, the real differentiators that Manulife does bring to the table is that each one of the alternative asset classes that we're in, we have teams that are actually steeped in experience, have worked through the cycle and are very, very familiar with how to actually optimize their portfolios. This gives us the discipline to know that we won't invest at times where you know risk-adjusted returns aren't appropriate and much like our credit book, where we withhold investing if we think spreads aren't appropriate for the risk we're taking on, we do the same thing with our alternative portfolio.

A good example would be our real estate book, and the period from between about 2004 and 2009, we put very little into commercial real estate from an equity perspective. Since 2000 -- started 2010, when commercial real estate market started to free up post-crisis, we've actually put out a number of transactions, and most of them press released, and they've all produced very attractive returns from acquisition. On the power and infrastructure space, we'd be one of the leading managers of power and infrastructure in Canada and the U.S. in terms of book lender. And we actually have a unique little subsidiary in Canada, Regional Power, where we actually develop, we're under the river hydro for our own account, and we do -- we put to that little business between $100 million and $200 million a year.

Our timberland company, Hancock Natural Resource Group, is the largest manager of timberland in the world. About 15% of what they manage is for our general account that balances for third-party customers. They just quoted a very large transaction at the end of -- or at the start of Q3. It was close to a $2 billion transaction, which was privately sourced by the team and ultimately, fully funded by the team.

Our Private Equity & Mezzanine group, so we have specialist teams, both in Toronto and Boston. Again, we do some third-party management on the Boston team from a mezzanine perspective.

Oil and gas, we operate in Western Canada as an oil and gas producer, and we deliver about a little over 15,000 barrels of oil and gas equivalent a day in Western Canada. And finally, farmland, we have been the largest manager of agricultural farmland in the United States. And again, a portion of that is run for the general account.

In terms of returns, what we have here are our 10-year total returns by asset class. And if we weight the asset -- the returns across the asset class over the past 10 years, we get a weighted average return of just over -- just under 11%, versus an S&P return which is just under 3% over that same timeframe.

One qualification you should note there, our oil and gas returns are 9 years, we didn't have the 10-year data for the oil and gas. That's noted in the footnote. But the other piece that would be important to note on this slide, while those are 10-year average returns, there's obviously a lot of volatility across the asset classes by year, but what we have is the portfolio effect of being a diverse group of assets that they -- when one class is outperforming, another is underperforming. And over the long run, this diversified mix delivers us actually a fairly stable series of returns.

In terms of our investment-related gains, we did mention that it's commencing in -- with our Q3 release, that we would expect on a go-forward basis, to produce -- or to have, including core earnings and assumptions, about $50 million of investment experience gains.

And how do we get to that conclusion? Well, based on the information that I've just presented, we do think we have very strong credit experience, and it will typically be a source of some positive effect on average. We have ability to originate assets at or above our expected returns, and we do that selectively and we watch all of the asset classes through the cycle, and we continuously, judiciously select the things we want to put on our books. And finally, our actual returns in the assets that we put on the books tend to outperform over the long run our assumptions. And again, the returns that were on the previous slide, that was the total return, so it's a combination of the income and capital appreciation, and a lot of those asset classes we have the ability -- commercial real estate we like -- you have the ability, if you're in the right markets, to increase rents over time, keep those buildings very well occupied and have very stable returns.

So based on our experience, and again, this is through the financial crisis, so from Q1 2007 to Q3 2012, we averaged over $80 million after-tax per quarter in investment experience gains. And so we think our assumption of $50 million is one that we're comfortable with.

In conclusion, we have a very high-quality diversified portfolio. We have very strong credit and risk management culture that enables us to maintain this experience over the long term. We do use our alternative assets in our portfolio in lieu of going to the riskier end of the credit spectrum, helping us maintain strong, stable returns. And we think we have a very good case to support our go-forward assumption of $50 million after-tax a quarter of experience gains to be included in core earnings.

We think this is a key cornerstone of our company's story, and it's not just for the general account, so the things that we've learned here, we do take to our third party asset management business.

So with that, I'd now like to call on J-F Courville, who is the President and CEO of Manulife Asset Management, and he will take you through the story of our third-party client money, how we manage it.

Jean-Francois Michel Courville

Warren, thank you very much. I'll demonstrate a very useful skill these days, I will cross any possible bridge, any possible divide, and join you on your left side.

So thank you very much for joining us today. I'm very excited to talk to you about Manulife Asset Management. Let me begin by first highlighting some of our areas of focus.

Manulife Asset Management has developed significantly since 2001. It has emerged as a top 40 global asset manager. And the 5 areas that we've been focusing on over the past few years are as follows: we've built a globally scalable investment and operating platform; we have leveraged our asset allocation capabilities across all our businesses; we have enhanced our investment complex through targeted talent acquisitions; we have delivered strong investment performance that is being recognized around the world; and we have leveraged distribution for diversified revenues globally.

Our disciplined and targeted efforts are yielding tangible results. In fact, we now have more products, leveraging more strategies, from more teams, delivered to more client segments globally than ever before.

So who is Manulife Asset Management? We are the asset management arm of Manulife Financial, which manages Manulife's external client assets. With $227 billion under management as of September 30, we offer a comprehensive array of investment products and solutions to meet the needs of affiliated and nonaffiliated fund companies, pension plans, foundations, endowments and financial institutions. We have more than 325 investment professionals, with offices in 17 countries and territories, addressing the needs of our clients around the world. We are on the ground in all the countries in which we operate, as has been highlighted before by my colleagues. We extract value through our local knowledge, and we share information throughout our global network to maximize our investment experience.

Our capabilities are vast. We provide our clients with a full spectrum of products and solutions organized into 3 major asset class groupings: firstly, public markets; secondly, alternative markets; and lastly, wrapping it all together, finance allocation solutions.

The majority of our $227 billion in assets is driven by the management of publicly-traded fixed income, money markets and equity securities. We have, as I mentioned, on-the-ground investment capabilities in the U.S., in Canada, in the U.K. and in Asia, in fact, all of the countries in which we operate.

We are also active in alternatives through investment and property management and real assets including timberland, farmland, renewable energy and real estate, as Warren highlighted. Our Hancock Natural Resource Group has, over the past 26 years, established itself as the true leader in the industry.

With close to 7 million acres in timberland and 300,000 acres in farmland, this makes us the largest timberland manager to institutional investors in the world and one of the largest managers of farmlands in North America.

And finally, we bring all these capabilities together by providing asset allocation solutions to clients globally through our market-leading Portfolio Solutions Group. In this space, we are a trusted adviser and a market leader for asset allocation solutions. Our lifestyle and life cycle funds, targeting both risk and time horizons, on the John Hancock wealth platform has ranked us third by total asset allocation fund assets in North America, as Craig highlighted before.

Through a suite of capabilities, we manage a wide range of assets that is also well-diversified. We have strong diversification by asset class, led by fixed income and asset allocation solutions. We have significant representation across all the asset classes.

As previously mentioned, we offer a broad spectrum of investment products and solutions, ranging from our highly specialized institutional mandates to pension solutions and mutual funds. Our high representation in retirement assets is enabled in no small part by the powerful combination of our asset allocation expertise and our strong presence as a pension services provider in Canada, in the U.S. and Hong Kong, just to name a few.

Lastly, we are diversified by geography, with the U.S. remaining a large market for us, and Asia exhibiting high growth as so clearly demonstrated by Bob a little bit earlier, taking full advantage of both our asset management footprint and the broader Manulife Financial footprint in 11 countries and territories in that region alone.

In terms of demonstrating our evolution, when I last spoke at this venue in 2010, I showed you a similar slide and described our evolution since our beginnings in 2001 through our growth foundation phase. In the past 2 years, we've made tremendous progress in integrating our asset allocation capabilities; in building a high-performance investment complex and attracting great investment teams; in unifying our global operating platform; in increasing our distribution capabilities, both directly into the institutional space and with our powerful retail affiliates around the world. And consequently, we have been internalizing assets and winning new mandates. This has proven the benefits of our operating model, of autonomous investment teams, strong distribution networks and a vast global footprint.

We are now entering a new phase, the growth acceleration phase. Let me describe to you what this looks like. In areas where we are dominant and differentiated, we will continue to strengthen our leadership position at a time of unprecedented demand. More specifically, we aim to expand our share in these growing markets while leveraging the capabilities that exist within Manulife Financial's arsenal. Some examples are found in asset allocation by bringing multi-asset class solutions to new markets like Taiwan, like Indonesia, like Singapore; in timberland and farmland; by pursuing global acquisitions to maximize the reach of our specialized professionals; and in real estate, by taking world-class proprietary capabilities and offering access to institutional investors.

Secondly, in areas where we are developing, we are attracting talent and we're leveraging our global footprint. Our strong investment teams will continue to focus on global and pan-regional public market offerings to address the needs of investors worldwide in search of attractive returns and of diversification. This is exemplified in our Asia Total Return Bond Fund, which offers access to a fixed income market in Asia now that is growing strongly in relevance.

In terms of tangible results, what does this mean? Firstly, we have spent the past 3 years delivering on 4 investment team lift-outs. As of September 30, the assets garnered by these 4 teams alone totaled $8.3 billion in new assets. Second, we continue to leverage our global investment platform, with an emphasis on Asia. In Greater China, we were the first organization to provide an institutional offshore RMB bond mandate to clients and institutional clients. In Korea, as mentioned before, we were granted in July an advisory license, allowing us to sell certain investment management services within the country, and we won our first institutional advisory mandate in August. In Japan, we continue to make strong advances in that market, with significant new mandates across channels, both institutional, retail and through multiple distribution platforms. Lastly, in Indonesia, we are now 1 of the top 3 asset managers by assets in this high-growth country that is very promising for us.

Third, we continue to strengthen our market leadership in real assets, highlighted by the recent $1.7 billion timberland acquisition that Warren mentioned on behalf of our clients in July of this year.

Lastly, in terms of results, we've achieved net sales in the institutional space alone of more than $7 billion for 2012 year-to-date, a portion of which we'll fund in Q4. And that is additive, of course, to the strong wealth management-generated sales from our regional businesses that were highlighted by each and every one of my colleagues here on the floor.

We have developed a leadership position in asset allocation solutions, largely driven by our target risk lifestyle portfolios. John Hancock is the #1 provider of these portfolios in the U.S., with over 16 years of experience in the growing solutions market. Looking ahead, we foresee the asset allocation solutions area to be a major focus for our industry as a whole, and Manulife Asset Management, with its partners, intends to be a dominant player in this field.

As you all know, investment performance is an essential building block of success in the investment management business, and our performance continues to strengthen. Overall, approximately, 80% of our clients' assets are outperforming their benchmarks for the 1-year period, and close to 2/3 of those assets are outperforming their same benchmarks for the 3-year period. In turn, our investment strategies are being recognized throughout the industry and on a global basis.

As of September 30, we had a total of 61 4- and 5-star MorningStar-rated funds throughout the U.S., Canada and Asia, up significantly from the 28 4- and 5-star funds that we had only in 2008.

As well, our award recognition spans the globe. Over the past 2 years, these various awards have highlighted our success and have provided an increasing level of validation. Specifically, I would like to focus on a few recent awards. We've been recognized by Lipper, again, this year for superior performance in all 3 of our regions: in the United States for our Portfolio Solutions Group and fixed income; in Canada for fixed income balance and international equity; in Asia for our regional equity and global fixed-income capabilities.

Earlier this year, Manulife Asset Management was named a 2011 Bond Manager of the Year Finalist in the United States by Money Management Intelligence. This honor was driven by notable mandate wins in core, core-plus and global fixed-income categories.

As a testament to our growth and strong position in Asia, Manulife Asset Management was also named Best Bond House in 2011 by Asia Asset Management. And this is just to name a few.

So I think at this point, I would just like to summarize Manulife Asset Management for you. So over a relatively short history, we've built a globally scalable platform; we leveraged our asset allocation capabilities quite well around the world; we've developed our investment complex, leading to strong investment performance; and we've diversified revenues across segments and across geographies. But most importantly, we've positioned ourselves as a point of leverage to help fuel the growth and success of Manulife's wealth businesses in each and every one of the regions. So this is yielding tangible results today, and this is just the beginning for Manulife Asset Management, a fast-growing segment of the Manulife Financial organization and a key contributor to our growth agenda.

And now let me give the podium back to Donald Guloien for closing remarks, and thank you very much.

Donald A. Guloien

Thank you, J-F We're all switching over to the left podium because I guess we've got feedback from the audience that the right -- the mic on the right is not as strong as it might otherwise be. It's picking up the wonderful things we're saying from the stage.

I'm going to wrap up with a little bit of the reason why I feel so confident about the future of this organization, and there's really 2 elements. One is people. The real assets in this company are not the ones that Warren, J-F or Scott manage, but the assets are in the elevator going up and down every day.

And I think you've seen a subset, but an important subset of the organization in the presentations here today. Cindy Forbes, our Chief Actuary, clearly has her eye on the ball, and who gives me a heck of a lot of confidence about the level of the reserving and the quality of the reserving and the capital and the analysis that goes behind that.

Steve Roder, a superb CFO, with very strong operating experience, a very strategic outlook, really has the broadest definition of a CFO, and most importantly, has in-depth, intimate knowledge of Asia, our fastest-growing market and a significant part of our future.

Bob Cook, clearly in command of the Asian business, and driving it from success to success, and a strategic outlook, but a real capacity to execute.

Paul Rooney has built a very, very solid Canadian franchise, and I guess, lets us, in terms of customer intimacy and cross-selling our various innovative product lines, run some businesses where we have no paid intermediaries, go direct to customer. If you've seen those cover-me adds on TV at late at night or the Manulife Bank success, in fact, 25% of the customers come to us directly, as a result of creative approaches to the customers there, which I think probably has application much broader than Canada.

Craig Bromley, who I'm proud to say I hired in the business development, I think about 12 years ago, who went on to take over that operation, then went on to run IR, then became CFO in Japan, then took over the Japanese operation, is now running the United States, and clearly, a very capable guy, and a new appointment that's going to be taking over Paul's role in Canada, an equally impressive character who has a great track record in getting the job done.

And last but certainly not least, Warren, Scott and J-F, the only thing I don't like about these guys, they're doing such a good job of leading the investment operation that they make me look like a ne'er-do-well when I was involved. Their success has just built upon success. So I feel very confident about our future with that quality team in place.

I also feel very confident in terms of Manulife's overall positioning in the markets. And Willie Sutton once said when asked him why he robbed banks, he said because that's where the money is. If you think of the top 10 economies in the world, #1 is United States, we're there in a big way; #2 is China, we're there in a big way. As Bob said, the only foreign company with a national platform in that country. And the third economy, Japan, we're there in a big way. If you think of the rest of the top 10, you've got Canada in the ranking, so we're there, not only the top 3, but including Canada, in 4 of the top 10. Now what are the other 6 in the top 10 economies of the world? They're European economies and fortunately, we're not there in any big way. If you think of the other parts of our business, the other 9, Hong Kong, Indonesia, Philippines, Singapore, Malaysia, Thailand, Macau, Cambodia and Taiwan, those are amongst the fastest-growing economies in the world, all of them essentially growing at double-digit rates. So Manulife is incredibly well-situated. And then with the impressive presentation about our global investment operations, which truly does span the globe, we have clients everywhere, well-situated with a very broad product range and best-in-class, literally best-in-class, asset allocation services. You could see it on the general account. You can also see it in our lifestyle portfolios that we sell to retail customers, ideally suited to capturing a big share of the savings and retirement needs that are developing on a global basis, selling to retail, high net worth and institutional clients.

I remember the days when our institutional business, we would celebrate a $50 million win and stop the floor trading for a couple of hours to celebrate that wonderful success. In the last quarter, these guys delivered a $4.5 billion mandate from a single client, I'm not allowed to talk who the client is, and we also got put on Edward Jones' preferred list. And you can imagine what that will produce in terms of streams of assets under management for the organization. So I'm very, very confident.

To recap some of the other things you've heard today, we want to develop our Asian opportunity to the fullest, we want to grow our wealth and asset management business in Canada, the United States and Asia, we want to continue to build on that balanced Canadian franchise that keeps delivering year in, year out, and we want to continue to grow our higher ROE, low-risk U.S. businesses, the ones that Craig talked about.

We expect that if we do all this, it will result in $4 billion in core earnings in 2016 and with any luck, net income actually exceeding core, perhaps in 2016, if Warren lives up to some of his personal expectations. Less volatile earnings, much less volatile earnings, more sustainable earnings.

And I think we haven't done as good enough a job as we need to do in explaining to you a little bit more about earnings emergence. The products we sell have quite different profiles in terms of earnings emergence. And a lot of you are familiar with linear programming, right? You've got products -- let me give you an example. You've got a mutual fund and a variable annuity product. You sell a mutual fund the way we sell it, you typically have a loss in the first year, and then you have a steady stream of earnings going on to the future, as long as you hang on to the business. If you sell a variable annuity, let's say, one that had no guarantees, with the exact same economic profile, because the acquisition costs are deferred and amortized, so it's a DAC asset, it will actually show a big profit in the first year, and then a very low stream in future years. The exact same economic benefit to the shareholders, 2 products, 2 different accounting bases for no good, particularly good reason, unless Steve has one that he wants to hatch up from the stage, but no particularly good reason. If you decide to do your optimization based on quick earnings emergence, what will you sell? Bingo, you'll sell lots of variable annuities. If you want to build long-term shareholder value and take advantage of the middle market in the United States, you've got to sell mutual funds, the VA products simply won't work for a whole variety of reasons.

What we are doing is we are investing products that offer the highest long-term returns to shareholders on a risk-adjusted basis, and not those that will produce short-term earnings. So for those of you who are in the stock for the next 6 months, that's not necessarily good news, those of you in the stock for 10 years or 5 years, it is good news. So it's one of the reasons that I'm very optimistic about the future.

A lower risk products suite. I think we beat that to death. Core ROE of 13% 2016, and a leverage ratio of 25% over the long term. And with any luck, with some positive equity markets, a little lift in interest rates, we'll actually be able to achieve that well ahead of goal as we did with our hedging objectives.

So thank you for coming today, thank you for listening to all the presentations, and thank you for all the great questions so far, I look forward to some more.

Anthony G. Ostler

Okay. So it looks like we're starting with Tom MacKinnon again.

Tom MacKinnon - BMO Capital Markets Canada

Two questions. Maybe a first quick one for Paul, with respect to Canada. A lot of other guys are gaining traction by selling par, so if you want to tell us why you don't sell any par? And then a follow-up for -- it would probably be for, perhaps, Craig, and -- well actually, each of the Canada, U.S. and Asia can take it. I mean, it's always good to get earnings and earnings growth, but the key thing is, how easily is it to have those repatriated back to the home office, if you will? It's great to have earnings in one jurisdiction, but if you can't pull it out on a local basis, I'm not sure why -- you've got to question yourself as to, is that really viable? So maybe you can give us some sort of percentage of the earnings that are being able to be repatriated back to the head office on a cash basis? And then talk about how -- what the outlook would that be given the projection.

Paul L. Rooney

Okay. Do you -- I don't know if this is on -- do you want me to start with par? So, yes, we exited the par business a few years ago, and it was for purely economic reasons. OSFI and the regulators provide separate and special rules for stock companies selling par insurance, and they limit the amount of profitability that you can transfer from the par policy holder account to the shareholder account. For us, that would be about 2.5% of dividends. Now there are some breaks in capital, in terms of how much capital you have to allocate to par products versus non-par products. And par products, because they are passed through and part of a par fund, get a break, but I believe over time, that break will cease to exist. The fundamental fact is that as we looked at the par products, the return for shareholders were mid single-digits. We did not want to persist in that avenue and what we did, instead, was we built adjustable non-par products, where our shareholders could reap more of the benefits and we could share the risk experience with the client, just like in a par product. However, we can get much more reasonable returns for our shareholders in that environment. When we exited par, the product that we sold most of was called Performax, and we replaced it with a non-par product called Performax Gold that had a better proposition for shareholders. We have more than replaced all of those par sales with non-par sales of Performax Gold. And unless the rules change, I think you can expect us to stay out of the par business. However, there may be rule changes down the road that allow the transfer of returns to the shareholders to be greater out of the par fund and if that happens, we will rethink this, but at this point in time, we have no plans to reenter. I don't know who the second question was for -- I think you're talking about the distributable earnings. For our Canadian division, I don't know, Steve, how much are we disclosing on distributable earnings by territory, is that something we want to get into today?

Stephen Bernard Roder

I think not specifically, but we can give some general guidance.

Paul L. Rooney

Sure, okay. So a significant proportion of our earnings in Canada are distributable back to the parent. It's -- we have a mix of products, which have lower distributable earnings, like our long-tail life insurance businesses, and the bank, where we're investing heavily. And then we have businesses, shorter-tail businesses, like Group Benefits and some of the fee-based businesses, that the vast majority of those earnings are repatriable to the parent immediately, in excess of 90%. The mix is quite a solid and sound amount distributed back to the parent every year.

Craig Richard Bromley

I guess I can answer for the U.S. I think the U.S. is probably more of an issue than Canada. And that is something I actually failed to talk about in my presentation, but where we sat a few years ago is very different than where we sit today. So I think there were significant issues of trapped capital in the past in the United States, capital immobility was an issue. The mix of business that we were selling caused a fair bit of strain on a local basis, and that led to issues of remitability. We've done a lot of work on that, and we are tested for our plans to be able remit. There's a lot more -- has been a lot more focus over the last few years, and basically, the testing that is done, I'm not going to go into too much detail, but others could, I suppose, is really based around trying to meet our dividend and capital growth and debt financing requirements, that the, each of the operating divisions should be able to contribute in a way that defeases all those costs at the higher level. And we have been able to reengineer our affairs [ph], both from a product mix perspective, and from some use of capital markets transactions, especially if we can meet all of our obligations. So the issue has become much, much less acute in the U.S. than it had been in the past.

Robert Allen Cook

And I think in Asia, the story is somewhat similar to the U.S., as we do have to have active strategies to manage the impact of local capital rules, but in the plan that we've laid down, we expect to meet the corporation's targets for remitting earnings.

Tom MacKinnon - BMO Capital Markets Canada

And if I could just squeeze one more in, you've got these ROE from and to for each of the divisions. Is that based on -- is there something -- what's the denominator in that? Is that an MCCSR?

Donald A. Guloien

Capital, Tom.

Tom MacKinnon - BMO Capital Markets Canada

Yes, okay, whatever, that's great. But is that some sort of target MCCSR? What is that denominator in the -- for each one of those divisions? And I assume that -- how do we -- how is that measured, both at the beginning, both now and at the end of projection? The 200% MCCSR allocation...

Donald A. Guloien

It'd be -- roughly, Tom, we use -- it'd be roughly that. Target capital sort of ratio kind of thing applied to the business. And I guess, surplus, I'm assuming the extra -- sometimes we allocate out all of the capital and say whatever it is, and in other cases, allocate out at some formula, and the residual shows up at corporate. Rahim, do you know, by any chance?

Rahim Badrudin Hassanali Hirji

For the most part, we allocate capital based on MCCSR requirements to the extent that our local operating tend to require higher capital, we will essentially allocate the higher [indiscernible].

Anthony G. Ostler

So, Gabriel?

Gabriel Dechaine - Crédit Suisse AG, Research Division

First question, what's in the black box earlier? Kind of ironic, insurance company, black box.

Unknown Executive

It's to help you with your [indiscernible].

Gabriel Dechaine - Crédit Suisse AG, Research Division

So first question is for Warren. You guys have been getting a lot of questions on the NFI assets, and you pointed out that they're unlevered right now, or relatively unlevered. As the company leverage comes down, is there any temptation to increase that leverage, reduce the returns to address the potential issues with diminished returns if you don't lever them up?

Donald A. Guloien

Simple answer, no.

Gabriel Dechaine - Crédit Suisse AG, Research Division

All right. Okay. Next, I've got a couple on Japan -- sorry, Asia. The quadrupling of wealth sales seems to be a big element of growing the earnings there. Does it also contemplate a big shift in mix? Because right now, it looks like you're selling a lot of fixed annuities, I know that's the case in Japan, I'm not sure about the rest of Asia. So if you could comment on that. Japan, also on the capital side, I think your what is it, the SMA, or the SMR, is somewhere around 1,000%, what does that kind of imply in terms of excess capital in Japan? And then on the -- you talk about annuitization assumptions for the U.S. business, what about Japan? Because I think 2014 is a pretty big year for the annuitization trend to pick up in Japan variable annuities. So have you strengthened that assumption at all, or if you could put some numbers around that?

Robert Allen Cook

Okay, I guess, in terms of earnings, I think in the short term, it's still going to be the growth in insurance, is going to drive most of the earnings growth that you'll see. I mean, the wealth business is still a relatively small piece of the overall pie, will grow very fast. But even at the end of quadrupling, it's still pretty small, relative to the insurance business. On the mix question, relative to where we are today, most of the growth is going to come from mutual funds. We did get a faster start than we expected to our entry into the fixed annuity business in Japan, but the runway for that going forward is nowhere near what the runway is for either the mutual fund business around the region, or for that matter, for the pension business around the region. Capital in Japan, I wouldn't focus too much on the SMR, because that's really not reflecting our entire Japanese business, because our entire Japanese business, you have to look at the business that we also reinsure, we use a lot of internal reinsurance to manage that business. You have to kind of look at the whole package. And annuitization in Japan, I guess, the way to answer that question is that the best way to think about the Japan VA business, and Craig can help me because he knows this more than I do, is it's a much shorter duration block of business than what we have in North America. So we really expect a lot of that business is going to mature in the 2017, 2018 kind of time period.

Gabriel Dechaine - Crédit Suisse AG, Research Division

How is that -- like you sold a lot of GMWBs, so what makes it different than the U.S. in terms of duration?

Cindy L. Forbes

If you want, I can comment. So the Japan business, we did not sell a lot of GMWB business. It was mostly accumulation benefits.

Donald A. Guloien

Gabriel, as that comes due, actually, the capital reserve we hold is excess of where it's in the money. In fact, the day before a policy is to mature for the cash value, we will hold still substantial capital for the risk that markets could go down 30% on that last day. When that last day has arrived, we actually pay it out in cash, that will release a fair amount of capital, and probably, reserves at that time.

Gabriel Dechaine - Crédit Suisse AG, Research Division

So are you assuming a lower annuitization or utilization rate in Japan than...

Donald A. Guloien

These cash, these mature for cash. It's not a WB.

Anthony G. Ostler

I just want to make sure -- is there anyone on this side of the room before I go. I can't see if anyone -- Okay, Rob Sedran, over here.

Robert Sedran - CIBC World Markets Inc., Research Division

Actually, just 2 quick ones. Paul, you mentioned that the competitive environment on anything that was capital intensive is certainly reacting well to price increases. How confident are you that some of the businesses you're targeting for growth, the fee-based, the more less capital intensive stuff, which a lot of your peers are also targeting for growth, how comfortable are you that the pricing will hang in?

Paul L. Rooney

So the areas we're targeting for growth, let me go through the [indiscernible] one, the bank, we've seen some small erosions in spread in the bank, but I'm very confident with our ability, not only to maintain our spread in the bank, but also grow it. Our strategy is no bricks and mortars, Internet-based bank only, sold through advisers, with a unique product. The margins on the business are incredibly strong, much higher than at the big banks. And because of our underwriting, we only take very low-risk, very low-risk mortgage clients, the average loan-to-value right now is 55% in-force banking clients. So we feel very strong about our ability to maintain our margins in the bank. The mutual fund business, we run a very lean operation there. We generate significant margins on there, but I think there will be some margin pressure in the mutual fund business going forward, it's a much lighter margins in Canada than it is in other parts of the world. And so you should expect that to come down, but I still think you'll see stronger margins in the mutual fund business in Canada than other parts of the world. In the small end of the Group Benefits business, we're well north of 20% to 25% IRRs in that business, and that's where we're targeting our growth. In order to really generate the margins in that business at the small end, you have to have a large end block to provide the technology and the services required to generate the economies of scale to drive those earnings. So it's really only the largest of large competitors that can generate those kind of returns at the small end, leveraging their huge in-force book at the large end of the market, so we feel very confident about the margin at the small end of the group benefits market. The Affinity Markets, we dominate that share. If you look at our competitors, we're #1 in every segment we choose to do business with in Affinity Markets, the margins, they're all well north of 20% IRRs, and we don't see any competitive pressures at this time in some of our core businesses like travel insurance, direct-to-consumer. In fact, the direct-to-consumer business is our highest profit business sold per dollar of acquisition costs. So we feel very bullish about the continuing margins in Affinity Markets. And what have I forgotten? Mutual funds, bank, Affinity? And GRS, that's a scale game. We're third in the marketplace today. Our margins are solid in that business. It's an interest margin game there, but as we continue to grow and outstrip our competition, any competitive pressures that we see, we will be able to offset, we believe, by the continuing growth and the scale benefits of growing faster than our competitors in that market. So all-in, in our growth business, there may be some margin pressures, but we're confident we can handle them all.

Robert Sedran - CIBC World Markets Inc., Research Division

And Donald, a couple of years ago, you were fairly empathic in terms of -- you were confident in being measured and evaluated against the 2015 targets, both from your shareholders and at the board level. I didn't hear so much about it today. Are you still being, and is your management team, still being evaluated against those '15 targets, or have we rolled them forward to '16?

Donald A. Guloien

No. They roll over to the '16. I think I had a slide with a list of 6 things, all of them were outside the control of the management team, quite frankly. And I think those are good and sufficient reason to reset those targets, not letting them off the hook. Now, I'm not planning to let them off the hook for the past -- what's done is done, but it's only fair, they didn't control interest rates, they didn't control equity markets, they didn't control what was going on in Europe, they didn't control new regulatory and accounting standards, and they certainly didn't control some of the reasons that caused basis changes to occur from historical reasons, or from changes in the actuarial standards or other factors, macroeconomic factors. So I think it's only fair to evaluate them against a reasonable set of targets. But they will not get relief on what was a commitment of the past.

Anthony G. Ostler

So we've got 2 more questions on this side of the room. So we have Michael Goldberg and Joanne Smith. We'll try to fit those in and see how we do for time. So Michael Goldberg is just right here and we'll get the mic right here. And then we'll do Joanne and see if we have time after that.

Michael Goldberg - Desjardins Securities Inc., Research Division

Don, I'm glad you brought up the point about earnings emergence, because just I guess, first, to make sure that it's understood clearly, I presume what you're talking about is the predominant source of earnings, release of PAD, that's essentially programmed into the earnings as soon as business is sold. So a couple of questions. First of all, what would the $4 billion of earnings be if you didn't sell anything between now and 2016? Second, if I was -- let's assume that your earnings were sufficient and everything else was sufficient to accommodate it. If I was a fly sitting on the wall of your boardroom when the topic of dividend came up, if earnings are largely programmed by the release of PAD, then what criteria would you be basing the dividend decision on?

Donald A. Guloien

Okay. Great question, Michael. You're absolutely right, Michael understands more than most, I think, about the accounting model that we have. You set up these provisions for adverse deviation, which is essentially a deduction for risk, and if the risk goes away, as expected, for the fullness of time, those are released into income. And you can look at that as being automatic, and I do that in inverted commas, because I want to put an important proviso on there. When they calculate the amount of reserve required, they look at the future benefits are like this big, and then the future premiums are this big, and then they take a deduction for the PADs to determine what reserves should be established. And as indicated by my hand motion there, if there's any mistake in the pricing assumptions, we assume morbidity is a little bit too optimistic, or mortality's too optimistic, or lapse rates are too optimistic, that can wipe out a really good portion of the PADs. In fact, they could more than wipe out the PADs. I think something like a 20% deviation in morbidity results, of long-term care, can pretty much wipe out all the PADs, in other words, the future profitability of that product line. So I don't want to mislead people into thinking that future earnings are totally automatic. They're automatic if you get the assumptions right in the first place. And that is the challenge of our industry. It's easy to go in with an optimistic view, especially around assumptions that you don't have a lot of data on and take an overly optimistic view, a lot of earnings will show up very quickly, and then somebody else has to recalibrate them down the road and get it corrected. We have taken a very appropriately conservative stance to that, as we set -- reset the reserves, we also reset the PADs and restore the PADs. That is required by the accounting model here in Canada. It's a good and conservative model and if that is done correctly and if in fact, we've identified the risks and priced for it appropriately, that will lead to fairly automatic emergence of earnings. So I have -- that's one of the reasons I have a lot of confidence about our future, whether it shows up in 2016, 2015, 2017, I can't tell with perfection, but I do know with a high degree of confidence that it will show up so long as we've made the assumptions as conservatively as I believe we have. So that's a long explanation, but you have the accounting model right. The real test of the model is, have you really calibrated and measured your risk properly? That those PADs truly are PADs, and will emerge as automatically as you described them? Other businesses, like mutual funds business, I'm glad you're allowing me to elaborate on the point, you don't have that PAD mechanism, but because of the way it emerges, and you guys -- most people in the room know what model there, people look at it in the industry, whether you're CI or AGF, they look on it as a -- on an EBITDA basis, right? They add back the acquisition cost, look at the cash flows, and that's an intelligent way of looking at it. It's becoming a more significant part of our business. And I think we probably should, over the fullness of time, start to look at it that way. Because as we sell more of that business, have more success with it, it is actually creating a little bit of a drag on earnings and it's being reflected in all 3 of our -- or in fact, all 4, including investments, as a bit of drag on the business, although the value of that down the road is enormous. So it's almost a parallel, although it doesn't have the PAD structure, it is a delayed emergence of earnings. So yes, I feel a lot of -- I feel quite robust about the earnings that will emerge from this company over time. And I guess what I'm most comforted with is the fact that all of our decisions are being taken with a view to long-term shareholder value, not to maximizing earnings. If we wanted to maximize earnings and get to that goal faster, there's a lot of levers we can pull to do that. But we're not going to do that.

Michael Goldberg - Desjardins Securities Inc., Research Division

You didn't answer my question about the dividend.

Donald A. Guloien

Oh, the dividend? The dividend, well, when you get confidence that you've got the assumptions right, that your capital is right, that there's not going to be exogenous changes, it's either capital or risks that you've captured, that's the time to be talking about dividends. I think you might have more confidence in terms of the future earnings emergence, but I guess a lot of people, including our board, would want to see it happen and get closer to the time where we're realizing some of those earnings, as opposed to just having them in the plan. I think the other aspect that Steve touched upon is we want to get our leverage ratio down. So if we have some good years, and I'm guessing we'll have some good years and bad years over the next 4 years, if we have good years where things go a little bit further than we think, and it goes back to Gabriel's question, I think I would want to be paying down some of the debt, assuming it's coming up at the right time and so on, to get to those target leverage ratios faster than expected.

Michael Goldberg - Desjardins Securities Inc., Research Division

Is the conclusion to take away that a payout ratio on earnings, because the pattern of earnings emergence can be so different depending on the type of product, or the other criteria, that a payout ratio isn't necessarily a good indicator of the ability to increase or not increase the dividend?

Donald A. Guloien

I think it's a good point. And it goes back to a discussion that some of us had a long, long time ago. A payout ratio being applied to net income for an insurance company, certainly one that had some of the elements of volatility that we had, I don't think is a terribly good way of look at it. That's why we moved to -- we called it -- remember adjusted earnings from operations, we had to look at, I had to make the decision what the levels of dividends were going to be. And as I looked at it, looked at adjusted earnings from operations, taking the fact that we had profits in the past that were unhedged VA profits, and that was not going to continue. We had profits from businesses that there's no way you would want to write on a risk-return basis, that when we looked at adjusted earnings from operations, when we signaled that to The Street way back when in 2009, that was roughly 1/2 of what the company had earned in the past and therefore, the dividend should be calibrated against that objective, and that's why we reduced the dividend by 1/2. Those were rough approximations at the time. A number of things have happened since then, hedging, interest rates, a whole variety of things. I think it's still the right way to look at it. I think if you look at, if we in fact, get to our $4 billion of core earnings, and we see it emerging on a fairly consistent basis, ramping up according to that nice chart that Steve showed, not just on an annual basis, but on a quarterly basis, I think that will give us and our board a lot of confidence that we might want to talk about increasing the dividend, subject obviously to the total level of capital being appropriate, and regulators and everybody else feeling comfortable with it at that time. I think the biggest test is to deliver that steady emergence of core earnings that will make people feel comfortable.

Anthony G. Ostler

We need to give Joanne a turn, sorry, Michael, it's just we've got a few minutes left. So...

Donald A. Guloien

Well, Michael, I'm -- I'll add one more thing. I mean, again, one of the first things I did as incoming CEO was to drop the dividend in 1/2, and I look forward to increasing the dividend some day before I retire.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

I have 2 questions. The first one is just a follow-up to Gabriel's question, which is I'm still struggling with what this thing is in the box, is it a pad?

Anthony G. Ostler

No, it's a pen, like a finger pen, like -- so you use it on an iPad or a screen phone. So instead of using finger, you use it like a pen.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Like an old-fashioned stylus?

Donald A. Guloien

Yes. This is in case you don't have a finger.

Unknown Executive

Or you've got a dirty finger.

Donald A. Guloien

You can be sure when Paul gets going on E&E, you won't get a box like this next year.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Okay. Now that we're straight on that, my second question is to Craig. And Craig, this may not be a fair question to you, because you've only been running the business for 2 months. But I think that it's appropriate, given the fact that you've stated your commitment to the U.S. market. Because I've seen other companies transition away from products and it has really disenfranchised them from their distribution. And yet you seem to have accomplished that successfully. And I'm wondering if you could point out just a few things that you think you might have done right in that transition, because I think that we could easily say, "Well, yes, it was probably easier for them to make that transition because of all of the disruption in the market and all of the other competitors were making changes as well." But I'm just wondering if there was something that owes to your success and others who have almost a significant a brand name in the market, to their failure to be able to accomplish that goal.

Craig Richard Bromley

Well, it definitely wasn't me. I can say that unequivocably. I don't think I am...

Donald A. Guloien

I can speak to that.

Craig Richard Bromley

Yes, why don't you do that, Don.

Donald A. Guloien

Yes, I mean what the management team did was very careful. I'll give you some real examples. The VA business, we knew we were getting out of it, we're cutting certain products. And [indiscernible] in fact, a couple of times, I gave people some deadlines, and said, it's got to be reduced to x by such and such a date. And there's different ways you can do it. You can come in on a Friday night at 7:00, and you're talking to the guy who is the gatekeeper for a large firm and say, "As of now, you no longer have our product for sale." That's a difficult conversation, because in some of these channels, we would represent say, 30% of their volume and that therefore, is 30% of that person's income. And it goes to 0 as of Monday morning when the market's open. That's not a very pleasant message to deliver. On the other hand, if you come in and say look, we're not going to have that product for sale in a month or 2 time, there is a risk that they'll telegraph that to their channels, and they'll have a fire sale as it's known and tons of business would flood in. We made some very considered judgments, and this could've worked out very poorly, but it didn't, to trust people and to tell them that the product was going to disappear, but we also took in lists of competitors and said, "Here's other products that are similar to ours in features and benefits, you might want to sell these ones." Because after all, that gatekeeper, he's trying to put his kid through college, right? And if he cuts his income by 30%, that means either the car goes, or the college goes. And when you show up 2 weeks later and say, my God, we've got the best-performing equity fund in the land, would you like to sell it? The reaction isn't quite as warm if you cut them off cold turkey. So we did that. Let me give you another example in long-term care, it's not exactly a gatekeeper example, but I wanted to get the long-term care pricing increase and threw out a date and said it has to be done by this date. They came back to me and said, that's going to be awkward because there's a funny little thing that we have called elections, midterm elections, and if you do it on that date, you're going to set yourself up to be the target of the midterm election. In fact, you'll make a platform for a number of governors across the United States. And if we simply manage it in a different way, we can get it done in time, it won't mean a big present value loss for shareholders but on the other hand, we'll miss the election period and not become political fodder and front-page news of how so and so stood up against the big mean insurance company, which of course, is something that doesn't lose people votes. And we managed that, it was a little annoying to wait, and I was worried that we had delayed so long, that we wouldn't get it in time. But in fact, they picked exactly the right time, went in, actually before the election, but before it could become a political platform, and we got in at exactly the right time and got all our increases, and as you know, the rest is history, and it's worked out very well. So what our people are good at is executing. They understand the objective, they buy into the objective, they don't always execute it the way the CEO would want it done, because they have a better, more intimate feel for what the markets will accept. And I think Craig touched on it. Edward Jones put us into their platform for mutual funds, which is a very exalted platform, in the same quarter when we were terminating the last bit of the VA access that they had through our company. But by then, it had gone down to such a small amount, they weren't dependent on it, and they're good business people, and they understand the business rationale. We try and take that approach with everyone of our distributors, which leads to our repeated access to the market.

Anthony G. Ostler

Great. So just, I have to cut it off here. And I want to thank everyone for coming here today. I want to thank my executive team for doing such a great job. If you have any follow-up questions, please let me know. If you have a minute on your way out, we'd love it if you could fill out the survey because it would help us improve what we do here. And with that, have a great afternoon. Take care, everyone.

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