Manulife Financial's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Manulife Financial (MFC)

Manulife Financial Corporation (NYSE:MFC)

Q4 2013 Earnings Conference Call

February 13, 2014, 02:00 PM ET


Anique Asher - Investor Relations

Donald Guloien - President and Chief Executive Officer

Stephen Roder - Senior Executive Vice President and Chief Financial Officer

Robert Cook - Senior Executive Vice President and General Manager, Asia

Marianne Harrison - Senior Executive Vice President and General Manager, Canadian Division

Craig Bromley - Senior Executive Vice President, U.S. Division

Paul Rooney - Chief Operating Officer

Warren Thomson - Senior Executive Vice President and Chief Investment Officer

Scott Hartz - Executive Vice President and General Account Investments

Cindy Forbes - Executive Vice President and Chief Actuary

Rahim Hirji - Executive Vice President and Chief Risk Officer

Steven Moore - Senior Executive Vice President and Treasurer


Robert Sedran - CIBC World Markets

Tom MacKinnon - BMO Capital Markets

Mario Mendonca - TD Securities

Steve Theriault - Bank of America Merrill Lynch

Peter Routledge - National Bank Financial


Good afternoon, and welcome to the Manulife Financial fourth quarter 2013 financial results conference call for Thursday, February 13, 2014. Your host for today will be Ms. Anique Asher. Ms. Asher, please go ahead.

Anique Asher

Thank you, and good afternoon. Welcome to Manulife conference call to discuss our fourth quarter and full year 2013 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investor Relations section of our website at As in prior quarters, our executives will be making some remarks. We will then follow with a question-and-answer session.

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

For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ, please consult the slide presentation for this conference call and webcast available on our website, as well as the securities filings referred to in the slide entitled, caution regarding forward-looking statements. We've also included a note to use the slide that sets out the performance on non-GAAP measures used in today's presentation.

When we reach the question-and-answer portion of our conference call, we would ask each participant to adhere to a limit of one or two question. If you have additional questions, please re-queue, and we'll do our best to respond to all questions.

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

Donald Guloie

Thank you, Anique. Good afternoon, everyone and thank you for joining us today. I'm joined on the call by our Chief Financial Officer, Steve Roder; as well as several members of our senior management team, including Bob Cook, our Asian General Manager; Marianne Harrison, our Canadian General Manager; Craig Bromley, our U.S. General Manager; Chief Operating Officer, Paul Rooney; Chief Investment Officer, Warren Thomson; our Executive Vice President and General Account Investments, Scott Hartz; our Chief Actuary, Cindy Forbes; and our Chief Risk Officer, Rahim Hirji; and last but least, our Treasurer, Steven Moore. I hope you'll make maximum use of these people in the call today by directing questions to one or more of them.

This morning, we announced our fourth quarter and full year 2013 financial results. They were quite satisfactory. As you can see from the chart, we've enjoyed an impressive trajectory in net income. In 2010, we had a loss of $1.7 billion; in 2011, a small gain; 2012, earnings increased to $1.8 billion; and for full year 2013, a further improvement to $3.1 billion.

While this trajectory is impressive, I wanted to dissuade anyone from applying a straight rule to that graph to extrapolate the growth rate and net income for next year. That is because our net income in 2013 benefited from unusual items, including exceptional investment-related experience of $906 million, which we would not expect to recur at least immediately.

In addition, we realized a $350 million gain on the sale of our Taiwan business, definitely a non-recurring item. These were partially offset by other items, including updates to actuarial models and market-related factors, which netted to a $543 million charge. It is for this reason that we introduced the core earnings metric, as it is a better measure of long-term earnings capacity of our business going forward.

If you look back in terms of history, core earnings were not comparable in 2010, because at that time we did not have hedging in place. But since that time, core earnings have grown nicely, and for the full year 2013 were 16% higher than they were in the previous year. We are very proud of that.

In terms of topline, we ended 2013 with another record year for wealth management sales with contributions from each of our territories and the sub-businesses beneath major territory. Our insurance sales in 2013 were slightly lower than what we would have liked, but they were accompanied by much improved margins leading to higher profit margins overall, better operating earnings and improved new business embedded value.

In terms of capital, we ended the year with an MCCSR ratio of 248%, a 37 point increase over the prior year. We are very pleased with the balanced growth of our business over the last year, our strategy is unfolding into strong operating results and our financial performance shows that we are delivering on our long-term objectives.

In terms of progress on our major growth strategies, in terms of developing our Asian opportunities at fullest, in 2013 we achieved record wealth sales of $8.5 billion, an increase of nearly 60% from the prior year. We had new fund launches, which substantially contributed to wealth sales, and we successfully executed on the Mandatory Provident Fund's Employee Choice Arrangement in Hong Kong, where we now hold the leading position in new cash flows in that region.

We also expanded our distribution platform across the region. We secured and deepened important distribution agreements with key partners, including new bancassurance agreement and a wealth management acquisition in Malaysia.

We achieved strong growth in our professional agency force ending the year with a record 57,500 agents, an increase of nearly 4,000 from the prior year. As a result of these and other activities, insurance sales in 2013 were below expectations for most of the year, but momentum improved dramatically in the fourth quarter, with sales up 20% on a currency adjusted basis over the prior quarter.

We also continue to growth our wealth and asset management business around the world. Manulife Asset Management grew its assets under management by 18% to $243 billion and continues to generate strong investment performance with all public asset classes. All public asset classes exceeding their benchmarks for one, three and five year periods.

We ended the year with a total of 70 funds rated four and five stars by Morningstar, an increase of 10 funds since September 2013. Our funds under management at the end of the year was $599 billion, our 21 consecutive quarter of record funds under management. 2013, we achieved almost $16 billion in net mutual fund flows, more than triple our 2012 results, reflecting a strong products suite, a robust distribution partners as well as improved market conditions.

In terms of Canada, we continue to build our balanced Canadian franchised and made strong progress across our diverse businesses within Canada. We achieved record mutual fund deposits of over $6.5 billion, an increase of 61% from 2012. Life insurance sales in Canada were slower than the prior year, but with much higher margins.

Group Retirement Solution sales grew 25% to $1.4 billion. Group Benefits continue to lead the market through 2013. And Manulife Bank ended the year with record net lending assets of almost $19 billion, despite an overall slowdown in the residential mortgage market. We also expanded our distribution reach through increased broker-dealer penetration as well as two transactions to bolster our mortgage creditor life and our travel insurance business executed during the year.

In the United States, we continue to grow our higher ROE, lower-risk businesses, a fantastic turnaround from our U.S. operation. We achieved record mutual fund deposits of over $23 billion, an increase of 79% from 2012, which contributed to record funds under management.

On the insurance front, we continue to generate strong sales for our repriced, lower-risk insurance product suite. In the retirement plan service business, we launched new products, expanding into the mid-market 401(k) business. With several commitments now being funded, we are building momentum in this market. We also expanded our distribution reach with the acquisition of broker-dealer, which will further fuel wealth management and insurance sales growth.

Our U.S. operation has turned around nicely and along with our very strong Asian and Canadian businesses, leads us to a very well-balanced portfolio, with earnings split almost evenly between our three major operating geographies. We are also well-balanced between insurance and wealth.

In conclusion, we are pleased with the progress we made in 2013. As we embark on 2014, I am very confident that Manulife is well-positioned to continue to deliver the disciplined and sustainable growth, required to meet our long-term objectives.

And with that, I'll turn the call over to Steve Roder, who'll highlight our fourth quarter financial results, and then open the call to your questions. Thank you.

Stephen Roder

Thank you, Donald, and hello, everyone. Let's start on Slide 6, where we highlight our financial and operating results for the fourth quarter of 2013. We reported net income attributed to shareholders of $1.3 billion, up $220 million from the prior period.

In terms of our operating performance, we generated core earnings of $685 million, up 24% from the fourth quarter of last year. We achieved strong wealth sales of over $12 billion, up 15%. And delivered new business embedded value of $316 million, up 27%. Insurance sales however declined in the fourth quarter of 2013, reflecting normal variability in our market-leading Group Benefits business in Canada.

Turning to Slide 7, you can see that we are demonstrating solid progress on growing both our core and reported earnings. For the full year we generated $2.6 billion of core earnings, an increase of almost $370 million driven by growth in our wealth business, improved new business strain, primarily in our North America insurance businesses and lower amortization of deferred acquisition costs.

These were partly offset by higher legal and other expenses. In the fourth quarter of 2013, we reported core earnings of $685 million, up $131 million from the fourth quarter of 2012, driven by many of the same factors as our annual results.

Turning to Slide 8, and the progression of our total company core earnings over the previous quarter. In Asia, the decline in core earnings was largely driven by a one-off tax adjustment and normal variability in our branding initiatives.

In Canada, last year's core earnings included a one-time benefit from a release of prior year's tax provisions. Excluding that benefit, core earnings in Canada improved as a result of higher fee income from our growing wealth businesses and improved insurance new business strength.

In the U.S., core earnings reflected favorable claims experience, largely offset by additional dynamic hedging cost. Corporate core earnings were in line with the prior quarter, as higher earnings on our P&C reinsurance business and favorable tax items were offset by higher legal and other expenses.

And expected macro-hedging cost declined due to the favorable market environment and a shift towards more dynamic hedging. The shift to dynamic hedging is largely offset by increased hedging costs in the divisions, which I will discuss later in the presentation.

Turning to Slide 9. In the fourth quarter, our reported net income benefited from strong investment-related experience of $265 million, $50 million of which was included in core earnings. A gain on the sale of our Taiwan insurance business of $350 million and other items, including in-force product actions, the recapture of a reinsurance treaty in Asia, upgrades to actuarial models and market-related factors, all of which netted to a $47 million benefit.

On Slide 10, is our Source of Earnings or SOE. You might recall that transferring the hedging of equity exposures from the macro to the dynamic hedging programs impacts both the expected profit and the management actions lines of the SOE. Dynamic hedging costs are reflected as a decline in expected profit and the expected cost of macro hedging is reflected in management actions. The impact of the transfer from macro to dynamic hedging is largely offsetting.

After adjusting for the geography issues on hedged cost and currency, expected profit was in line with the prior quarter. New business strain continues to benefit from our efforts to reprice and improve the risk profile of our insurance businesses. Experience gains include favorable policyholder experience and the impact of our investment activity and the market environment.

The management actions line primarily reflects the gain related to the sale of our Taiwan insurance business, in-force product actions and a reinsurance recapture transaction. This was partially offset by the expected cost of the macro hedging program as well as model refinements. Earnings on surplus increased primarily due to favorable and tax-related items, which are largely offset in the tax line below.

Turning to Slide 11 and insurance sales. Insurance sales in the fourth quarter declined 32% over the prior year period and full year sales declined 13%. The decline for the year and the quarter reflect strong prior year sales in advance of product changes in Japan and normal variability in our market-leading Canadian Group Benefits business.

Excluding these impacts, insurance sales grew 7% over the fourth quarter of 2012. While, we saw a decline in insurance sales in 2013, insurance new business embedded value increased substantially, demonstrating that our product actions at repricing have positioned us well for continued success.

On Slide 12, you can see that we achieved record wealth sales of nearly $50 billion in 2013. Wealth sales grew 37%, reflecting record wealth sales in Asia and record mutual fund sales in Canada and the U.S.

In the fourth quarter, wealth sales exceeded $12 billion and grew 15% over the prior year period. Wealth sales in Asia declined reflecting strong prior year sales that benefited from a successful fund launch in Japan and the start of the Mandatory Provident Fund's Employee Choice Arrangement in Hong Kong. Canadian and U.S. wealth sales improved due to continued strong mutual fund sales.

Turning to Slide 13. New business embedded value or NBEV was $1.2 billion in 2013, representing a 16% increase over 2012. NBEV in the fourth quarter was $316 million, up 27% over the prior year period. We are pleased with the increases in both periods, as it demonstrates the successful execution of our strategies, including the repositioning of our product mix and repricing. This reaffirms that the profitability of our underlying new business continues to improve.

On Slide 14, we illustrate the change in in-force embedded value for the company. In-force embedded value increased to nearly $42 billion or $22.62 per share, up approximately 10% over the prior year. The increase is largely due to the unwinding of the impact of discounting and the addition of 2013 new business.

Turning to Slide 15. Premiums and deposits in 2013 increased 17% to over $88 billion. However, P&D in the fourth quarter declined reflecting the non-reoccurrence of strong volumes in the prior year, related to product changes in Japan and a large deposit in the institutional advisory business.

Turning our focus to the operating highlights of our divisions, we begin with the Asia division on Slide 16. Asia division's core earnings of US$216 million were down 7% from the previous quarter. However, on a full year basis, adjusting for currency fluctuation and the higher hedging cost, Asia core earnings increased 6% over the prior year.

In 2013, Asia division achieved record wealth sales with contributions from most territories. Fourth quarter wealth sales were US$1.6 billion, a decline of 18%, reflecting strong prior year results, which included the successful launch of the strategic income fund in Japan and a strong start to the Employee Choice Arrangement in Hong Kong.

While insurance sales in 2013 and in the fourth quarter declined versus the prior year, largely reflecting the run-off in sales ahead of tax changes and product repricing in Japan, we had a 20% increase in insurance sales over the third quarter, with record quarterly sales in Hong Kong and Indonesia, due to the success of agency sales campaigns. We also achieved record quarterly sales in the Philippines and Vietnam.

Total annualized premium equivalents in 2013 increased 8% over 2012, driven by growth of wealth sales in most territories. And total weighted premium income in 2013, increased 7%, reflecting in-force business growth in most territories, higher mutual fund sales in China and Taiwan, and higher single premium unit link sales in the Philippines.

Turning to our Canadian division's operating highlights on Slide 17. Core earnings for the Canadian division decreased 13% from the prior quarter to $233 million. In 2013, we achieve record wealth sales, an increase of 21% from 2012. However, insurance sales declined 14% due to normal variability in Group Benefits. Wealth sales in the fourth quarter of $3.1 billion were up 24% versus the prior year period, driven by robust mutual fund and Group Retirement Solution sales.

Fourth quarter insurance sales of $162 million, declined 59% versus the prior year period, reflecting normal variability in our market leading Group Benefits business. Partly offsetting this decrease was strong double-digit growth in individual insurance, where new annualized premium sales increased 16% over the fourth quarter of 2012.

Moving on to Slide 18, and the highlights for the U.S. division. Core earnings in the U.S. were US$349 million, in line with the prior quarter. 2013 wealth sales rose 39%, driven by strong mutual fund sales growth. While insurance sales declined 6%, reflecting our actions to improve margins and new business mix.

In the fourth quarter wealth sales grew 22% over the prior year to US$7.1 billion, driven by continued strong mutual fund sales growth across all channels. This more than offsets lower retirement plan services sales, which declined as a result of the competitive pressures and a general slowdown in the industry.

Fourth quarter insurance sales of US$137 million were down 21% from the prior year period. The decline reflects the introduction of new products with increased margins, which as expected are taking time to generate momentum.

Turning to Slide 19, funds under management at the end of 2013 were $599 million, our 21 consecutive record quarter of funds under management.

Slide 20, summarizes the capital position for the manufactures life insurance company. We ended the year with a further strengthened regulatory capital ratio of 248%, an increase of 19 points over the third quarter of 2013.

The increase in our capital ratio reflects contribution from earnings, a reduction in capital requirements to the variable annuity guarantees as a result of rising equity markets, the sale of our Taiwan insurance business and a subordinated debt issuance executed during the fourth quarter.

Before I conclude, I would like to address a couple of topics, which maybe on the minds of our investors. The first topic that I want to discuss is capital deployment. A strong MCCSR ratio of 248% provides a solid cushion against adverse markets, but there are other factors that would have to be considered in making a decision to recommend a higher dividend to the Board of Directors.

Some of these factors would include, a continued trend of stable and increasing core earnings and net income, a leverage ratio that is trending towards our long-term target of 25%, ability to organically fund the capital requirements of our fast growing businesses and more clarity on the direction of the evolving capital and the counting frameworks.

We are pleased with the progression of our earnings trajectory and we continue to expect financial leverage to decline based on organic growth in retained earnings to the 25% range by the end of 2016. But until we have some further clarity on some of the other factors, we do not expect to recommend any changes to the dividend to our board.

The second topic I would like to address is an update on our E&E initiatives. In 2012, we announced that we're embarking on an efficiency and effective initiative, now known as E&E initiative that would allow us to leverage our global scale capabilities. And our local market focus to achieve operational excellent throughout the organization. I am pleased that E&E has become a new way of life for Manulife that will continue well past 2016.

We made significant progress on this project in 2013. We completed our organizational design project, which resulted in fewer layers in the organization and wider spans of control. We have identified over 300 projects, which will improve efficiency and effectiveness of which over 60% are currently in execution.

Some examples that these projects include are workplace transformation initiative, which is being rolled out across North America. The project's goal is to improve and modernize our workplace environment to promote collaboration, global mobility and flexibility. The project also results in a smaller real estate footprint, which will realize cost savings.

Second, through our global procurement project, we have significantly upgraded our processes to leverage our global scale and vendor negotiation, and are already achieving significant cost savings as a result.

Third, is in regard to global infrastructure. We have consulted our information technology teams from the various business units into a global function and are achieving efficiencies through better data and information storage management. We would also be consolidating and standardizing systems globally to achieve significant savings.

The annual pre-tax run rate savings from E&E were over $200 million in 2013. These savings were achieved throughout the year and we continue to invest in the planning and execution of a very significant number of projects.

As I've said in previous quarters, the net impact in 2013 was immaterial. However, we do expect pre-tax net savings of approximately $100 million in 2014, increasing thereafter. And we can see our way to net pre-tax savings of $400 million by 2016.

So in conclusion, in 2013, we generated strong growth in both net income and core rating, achieved record wealth management sales, improved new business embedded value despite a decline in insurance sales, delivered record funds under management and increased MLIs capital position.

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

Question-and-Answer Session


(Operator Instructions) And the first question comes from Robert Sedran from CIBC World Markets.

Robert Sedran - CIBC World Markets

Steve, just a follow-up on the expense issue. I mean, I know it was noted in a couple of places, I guess on both on a year-over-year and for the quarter. For the quarter and year that expenses were a drag on core earnings. And so when you think about those savings that you disclosed and you talked about net savings, is that reinvestable expenses into other initiatives or is that $400 million that over time you would expect to fall down at the bottomline?

Stephen Roder

Thanks for the question Rob. The $400 million, I would say, over time, it will fall down for the bottomline and be available to us to do with what we well if you like. Of course, we always have new initiatives, but based on the projects we have identified right now by the time we get to 2016, we'd expect $400 to fall through to the bottomline.

The caveat I would put around that is I think I said on the call that E&E is a way of life. So we don't want to sense of our newfound culture coming to an end in 2016 as it were, but essentially, yes, it drops to the bottom line.

In terms of the quarter, and your reference to the quarter and year-on-year, yes, we did have one or two cost that we have to take into core earnings in Q4. And I can say as an accountant, if I ever see an earnings trend where you see a very nice, neat, straight line improvement from one quarter to the next, I am pretty cynical about that and it never happens that way. There is always odds and ends that impact a quarter. And this quarter, we did have a couple of expenses, legal and other that we highlighted that did impact core earnings.

Robert Sedran - CIBC World Markets

I want to ask a question about new business embedded value and as it relates to insurance sales. For a few quarters now or at least a couple of quarters, we have been hearing that insurance sales have not been tracking as expected. But your new business embedded value would seem to be doing exactly what you would want out of insurance sales. So this sounds like a softball, but I don't intend it as such.

When I look at new business embedded value versus insurance sales, are there other issues from a business perspective we should be thinking about that would make us look at the insurance sale number? For example, I am thinking of things like expense accruals or perhaps issues with the distribution network that might not make you as attractive a partner if you don't have a high-enough dollar value of sales. Should we just look at new business embedded value? Or does the dollar value of sales really matter from a business perspective?

Donald Guloien

Rob, I think it's a great question. More sales people like to be associated with a growing organization. It's not an issue what the scalability. Obviously, the more we sell, the more we cover the fixed cost. And that is an issue. We've scaled back certain products considerably. But in our core businesses, we like to see growth. Everybody likes to see growth.

And we were playing a balance between selling them at the right margin, but also getting sales increase year-on-year. I think the balance has been pretty good for the shareholder and that we've increased new business embedded value, you can see core earnings going up, both them by 16%. It's absolutely a result of those factors, but we also don't want to see sales fall on precipitously.


Your next question is from Tom MacKinnon from BMO Capital Markets.

Tom MacKinnon - BMO Capital Markets

Steve, I wonder if you can elaborate on Slide 8, what some of these little one-timer items might be, the higher legal and other accruals and one-off tax adjustment in Asia? And then I've got a follow-up.

Steve Roder

Well, first of all, let me just say at the outset, Tom, I would they're on balance. You could always a discussion about what's a one-off item, how one-off is one-off item and so some of these things are harder than others. I'd say this quarter if you take all these items together they largely net out possibly slightly negative to us in the quarter, whereas last quarter, they were slightly favoring core earnings. You may recall last quarter we highlighted the favorable tax item in the Canadian division, so that they trend line is negative, but if you look underneath it, I'd say it's probably pretty much flat or very slightly positive.

In terms of the items themselves, I can't comment on the nature of the legal item, which we took this quarter, but we decided we need to make a provision there, and the net amount was in the order of $20 million. And in Asia, again, we took a tax accrual based on perception of interpretation of a tax law in a particular jurisdiction. Call it, magnitude there, Tom, roughly $10 million.

Tom MacKinnon - BMO Capital Markets

If I look over at the Source of Earnings exhibit on Slide 10, I think you had mentioned if you ex-out currency and as well the transfer, the offsetting transfers from sort of the macro, the dynamic, as they work between expected profit and management action, I think you had said the expected profit excluding those items was flat quarter-over-quarter.

Now given the equity markets went up nicely, you have been building all this wealth management business, presumably you get higher fee income coming in and that would flow right into the expected profit. Why wouldn't we have expected the expected profit to be up a little bit quarter-over-quarter? What may have been working against it?

Donald Guloien

So you're on Slide 10.

Tom MacKinnon - BMO Capital Markets


Donald Guloien

The expected profit was marginally up quarter-over-quarter, I believe -- or no, actually currency adjusted.

Cindy Forbes

There is always a little bit of variability in earnings on in-force quarter-to-quarter. It's impacted by things like corporate spreads and just investment actions or the timing of when swaps reset or mature. So there is a little bit of noise and you're just seeing some downward pressure from that noise in the fourth quarter, but it's just really period-to-period noise, it's not a trend.

Donald Guloien

If I can just correct myself, what I should have said is that the decline that you see, if you currency adjust it, that there is still a marginal decline, which Cindy is referring to, but it's not as pronounced as the headline number.

Tom MacKinnon - BMO Capital Markets

I mean one of the things, I think is that don't you have the dynamic costs in the expected profit and the macro costs in the management actions? So those two things kind of net out, but I thought you said net of that as well it was flat quarter-over-quarter?

Donald Guloien

Tom, just you can't hear, but everybody here is agreeing with your analysis of the geography, as we move from macro to dynamic, it shows up, the reduction in expected profit, but not a loss for the company.

Tom MacKinnon - BMO Capital Markets

And I guess my final question is really just with respect to the capital deployment and the solid cushion you talk about, but a series of steps you want to see before you would consider increasing the dividend. And one was more clarity in terms of a capital and accounting framework.

You did mention in the release, I think this is the first time we have heard something like that, but with respect to the Actuarial Standards Board, that you don't anticipate the implementation of what they are proposing here is going to have any impact on net income.

So I would take that as being a checkmark in the clarity box there. What other things do you need here? I understand the leverage and the stability in the earnings, but if we want to keep looking for clarity in terms of capital and accounting in insurance-land, we could be not ticking that box for another 30 years here or so?

Steve Roder

I think the item is probably at the top of our agenda in that category right now. Tom, it would be IFRS and IASB issue and where that's going to end up, so we're waiting for further clarification from the International Accounting Standards Board. What they're intending to do about accounting for insurance and then the question will be how does that translate into regulation here in Canada. So I think that that's certainly one large cloud we'd like to see move away from the horizon. And I would agree with you, however, that in terms of the Actuarial Standards Board that particular cloud has become significantly more benign in recent months. Cindy, do you want to add anything.

Cindy Forbes

The only thing I would say, Tom, is we didn't say no impact, we said it wasn't significant, and we did point to fact that, it is somewhat -- the impact will depend a little bit on interest rates at the point of implementation. And of course, we only have exposure's draft, not the final one. So there is some uncertainty out there. Just to put in perspective.

Donald Guloien

We have to be mindful also of capital change in other jurisdictions. The United States, AG38 seems to be going in a positive direction. There is principal-based reserving coming in, a whole bunch of things, developments going on in Asia as well. So we have to be weary of capital rules in the territories, which we operate, not just the Canadian ones.


The next question is from Mario Mendonca from TD Securities.

Mario Mendonca - TD Securities

Steve, when you refer to the leverage ratio reaching 25% by 2016, should we interpreted that to mean that the company wouldn't do anything to reduce the leverage ratio ahead of time? And in fact, the intention is to allow it to decline organically?

Steve Roder

Not necessarily, Mario. We have a significant amount of debt coming due over the next two years. So no, we do have some flexibility. But it's probably fair to say that our current bias is towards refinancing whilst interest rates remain low, but we perhaps have an outlook for the future where they may increase. So given the volume of refinancing that we have coming up, we are probably more than likely to refinance in the short-term. No, we're not locked into any particular position.

Mario Mendonca - TD Securities

And then a detailed question on experience. Could you just give us an understanding of what expense experience was like in the quarter? After-tax is fine as well. If you had an expense experience loss, it sounds like you did? And if you could just talk about policy holder experience more generally, like mortality and morbidity, it sounds like it was somewhat positive this quarter, if you could just flesh that out?

Cindy Forbes

On the mortality morbidity experience, yes, it was positive in the quarter, largely on our U.S. life business. There is some volatility or variability in our claims experience quarter-to-quarter on that business, because the policy sizes are quite large. So we do see some variation Q-to-Q and this is was a good quarter. On expenses, I actually don't have that number with me, in terms of our expense impact this quarter, the gain or loss. And it would have been a loss this quarter, but I don't have the exact number with me.


The next question is from Steve Theriault from Bank of America Merrill Lynch.

Steve Theriault - Bank of America Merrill Lynch

A couple questions. First one is probably for Warren. Warren, in the report to shareholders as you indicate investment-related experience of positive $265 million; and I know only $50 million gets included in core. But I am interested. You flag yield enhancement within part of the text in the report to shareholders. I was just hoping you could tell us how much yield enhancement actually came through within that $265 million. And if you could size that for us in terms of what kind of an opportunity is this going forward?

Warren Thomson

I would break it down into two items. We don't, I think give the actual details on it, but in terms of what the two items are, it's largely credit experience is one of the big contributors and we've had good credit experience for several quarters now. Obviously, this current environment has been quite benign. And one of the items that did occur in 2013, as we did have some recoveries on positions that we had previously provided for us, so that's included in the sort of better recovery numbers in 2013, as well as in Q4 specifically.

The second thing that was probably more important in Q4 was the actual deployment of treasuries. And again, if you recall in Q2, we actually had a lot of treasuries for which we had a weaker experience gain in that quarter. And those treasuries were deployed in Q4 into spread product. And that deployment into spread product gives rise to experience gains.

And so it's really those two were the big contributors this quarter. There was a lot of issuance in the market, and because of that level of issuance, that is what we're able to take advantage of and deploy the treasuries.

Steve Theriault - Bank of America Merrill Lynch

So the yield enhancement this quarter is probably better characterized as a bit more one-time in nature than something that's going to be ongoing. Is that right?

Steve Roder

I would say that both were probably higher than we would expect on an ongoing basis. Actually what we are flagging, it was a very robust quarter for both. I mean, again, we are in a more benign credit environment, so we expect likely to see favorable credit experience continue as long as the sort of economy stays on its current path. And the issuance, it was again a function of sort of where markets are at. So again, Q4 was a very good quarter for us across the board from an issuance perspective.

Steve Theriault - Bank of America Merrill Lynch

And so secondly, life insurance sales have been, as you said, Don, a little lower than you would have liked. So I was hoping maybe we could ask Bob Cook to provide maybe a quick outlook on what he is looking for, for insurance sales next year, in terms of, Bob, where you're seeing momentum specifically? And is there any more pricing changes in the pipeline or on the near-term horizon that could affect momentum either positively or negatively?

Robert Cook

Steve, I think as we indicated, or as Steve indicated in his comments, we saw a number of areas of improving momentum in the fourth quarter, notably Hong Kong and Indonesia is two of our largest businesses. And towards the end of the quarter, even though the total quarter numbers for Japan were still down, towards the end of the quarter we started to see some recovery in Japan.

I think looking forward to 2014 that will kind of be the big question mark. We have some new product launches that we've made earlier this month in February in the corporate market, and corporate sales peak at the end of the first quarter in Japan. So that will be a good test for the quality of the new products that we have launched.

I guess in terms of last part of your question, about ongoing pricing and product changes, I think for the most part we can look at them as kind of improvements to competitive position from here on in as opposed to addressing any particular risk issues in the portfolio.


The next question is from Peter Routledge from National Bank Financial.

Peter Routledge - National Bank Financial

Just coming back to the capital issue, if I look at your MCCSR, which is quite high this quarter, it's 248%, you're probably $3.6 billion in capital above 220%, which I have always thought is pretty stellar MCCSR. But you're talking like you don't have a lot of excess capital. You're talking about refinancing debt that's coming, delaying the dividend for a couple years, no mention of share repurchases. Should we just take it that 240% is the new minimum for Manulife, just in this environment?

Donald Guloien

I am glad you asked the question, Peter. We have very, very healthy capital ratio. We clearly have excess capital, as you've indicated. But last thing we want to do is start using that capital too early until, as Steve so capably indicated, a few things are resolved. They seem to be getting resolved. I mean Tom MacKinnon asked earlier, the picture is getting clear and clear all the time, but it's not one year that we want to declare a victory.

And again I draw your attention to some of the big changes that are being discussed right now in the United States. It's just one jurisdiction that we deal with. So while the picture is much clearer in Canada, it's a little less than it used to be in other jurisdiction. We're not particularly worried about anything. We don't anticipate any issue, but just to be a little bit better prudent than set expectations and then have to reset them later.

Peter Routledge - National Bank Financial

Are you worried at all about the OSFI framework, particularly either the Holdco capital regime or maybe a different treatment of internal reinsurance?

Donald Guloien

No, not at all. No worries there at all. I mean I think you're quite right. In terms of the OSFI capital, framework is getting clear and clear by the minute and is not causing us any concern or whatsoever, and the other ones aren't particularly causing us concerns either. We just want to be very prudent, because when we next increase the dividend, which is not likely, but it's a certainty, the question is when, when we recommend that to the board we want to be able to do it in a way that has almost zero probability that ever having to be reversed in any reasonable period of time.


Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to, Ms. Asher.

Anique Asher

Thank you very much. We'll be available after the call, if there are any follow-up questions.


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

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