Manulife Financial's (MFC) CEO Donald Guloien on Q4 2015 Results - Earnings Call Transcript

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Manulife Financial Corporation (NYSE:MFC)

Q4 2015 Earnings Conference Call

February 11, 2016 02:00 PM ET

Executives

Robert Veloso - IR

Donald Guloien - CEO

Steve Roder - CFO

Cindy Forbes - Chief Actuary

Scott Hartz - EVP, General Account Investments

Roy Gori - CEO, Manulife Asia & Yes

Warren Thomson - Chief Investment Officer

Analysts

Humphrey Lee - Dowling & Partners

Steve Theriault - Bank of America Merrill Lynch

Peter Routledge - National Bank Financials

Robert Sedran - CIBC World Markets

Meny Grauman - Cormark Securities

Gabriel Dechaine - Canaccord Genuity

Sumit Malhotra - Scotia Capital

Tom MacKinnon - BMO Capital Markets

Mario Mendonca - TD Securities

Doug Young - Desjardins Capital Markets

Operator

Please stand by, your meeting is ready to begin. Please be advised that this conference call is being recorded. Good afternoon and welcome to the Manulife Financial Fourth Quarter 2015 Financial Results Conference Call for Thursday, February 11, 2016.

Your host for today will be Mr. Robert Veloso. Please go ahead, sir.

Robert Veloso

Thank you, and good afternoon. Welcome to Manulife's conference call to discuss our fourth quarter and year end 2015 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investor Relations section of our website at manulife.com. As in prior quarters, our executives will be making some remarks. We will then follow with a question-and-answer session.

Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied. For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ, please consult our webcast slides for this conference call as well as the securities filings referred to in the slide entitled Caution Regarding Forward-Looking Statements. We also have a Note To Users slide that sets out the performance and non-GAAP measures used in today's presentation.

When we reach the question-and-answer portion of our conference call, we ask each participant to adhere to a limit of one or two questions. And if you have additional questions, please re-queue as we will 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 Guloien

Thank you, Robert. Good afternoon, everyone, and thank you for joining us today. This morning we announced our 2015 financial results. We delivered strong top-line growth for the full year most of it coming from businesses that generate our highest returns and I commend you to look to our additional disclosures this quarter on ROEs across the various businesses so you can see evidence for that statement.

Insurance sales increased 24% from the prior year driven by another year of record sales in Asia which contributed to a 35% increase in new business value. On the wealth and asset management front we delivered strong gross flows up 46% compared with 2014 and net flows of $34.4 billion which was simply outstanding, up $16 billion or 72% with positive flows in each division across the world and record institutional net flows. Thanks to the customers placing us we now managing an administered $935 billion in assets of which $511 billion relates to our wealth and assets management businesses.

We delivered strong core earnings of $3.4 billion which rose 28% for the year before giving effect to investment related impact. This result was ahead our plan and highlighted Manulife’s powerful operating momentum. Including investments related experience core earnings increased 19% versus 2014. From macro-economic perspective 2015 was characterized by headwinds which included persistently low interest rates the impact was very sharp drop in energy prices and concerns about the global economy. The mark-to-market impact of the decline in oil and gas prices in particular diminished an otherwise great year and contributed to a disappointing year in terms of net income.

As you know I have repeatedly cautioned that while Manulife has enjoyed as very positive trajectory in net income that it would be overly optimistic to assume that this would continue unabated because expected market volatility and experienced gains and losses could be expected to materially impact those results.

In 2015, that is exactly what happened resulting in full year net income attributable shareholders of $2.2 billion. It is worth highlighting that excluding the impact of continued lower commodity prices on our oil and gas investments that factor alone, 2015 net income would have been almost $900 million higher. Despite this macro challenges we strengthened our financial flexibility by significantly lowering our financial leverage by 4 percentage points to 23.8%. We have also maintained a strong capital ratio of 223%. Our underlying business continues to perform well and on this basis we once again raised our dividend today, marking our third increase in less than two years. This decision reflects management and the Boards confident in our capital position, our ability to sustain underlying core earnings growth and the significant progress that we are making on our strategic plan.

Turning to Slide 6, we review our accomplishment during the year. Throughout 2015, we made important progress on our ambitious customer-centric strategy, we capitalized on growth opportunity that develops in each of our businesses and we continue to innovate to ensure that we remain relevant and agile in a rapidly changing world. By keeping the customer at the center of everything we do and by innovating to create new and extra-ordinary customer experiences we are on track to set ourselves apart from the competition becoming a leading destructor in the industry.

In Asia we delivered a 28% increase in insurance sales with double-digit growth in most territories. And 56% increase in gross flows in our wealth and asset management businesses, driven by Mainland in China. It's interesting there is lot of concerns about the economy of China we are not seeing it in our mutual fund flows or our insurance sales in that country.

We entered into a flagship 15 year bancassurance partnership with DBS providing exclusive distribution rights in Singapore, Hong Kong, Indonesia and Mainland China. While it's still very really we are encourage by the seamless transition in the initial sales. We announced a 15 year exclusive Mandatory Provident Fund distribution partnership with Standard Chartered Bank as well as an agreement to acquire Standard Chartered’s existing pension business in Hong Kong. We launched ManulifeMOVE in Hong Kong and Macau, a wellness initiative that awards customers for active living and we successfully initiated insurance sales through WeChat in Mainland China, one of the country most popular messaging and payment apps.

In Canada we achieved record gross flows with both mutual funds and group retirement businesses achieving record levels, before giving effect to a recent acquisition and retail sales grew 8%. We completed the acquisition of the Canadian based operation of standard life, made progress ahead of plan on the integration and delivered better than expected earnings accretion. We launched the DrugWatch program, an innovative solution designed to ensure Group Benefit clients get value for money on higher cost drugs. We enhanced our customer service experience and now our customer in Canada I think use their voice as the password in interacting with us. And we added more than 800 automated banking machine across Canada to provide our customers with more convenient access to their bank accounts.

In the United States, we delivered our sixth consecutive year, our record mutual fund gross flows they were up 14% from the prior year and that included strong sales from our acquired pension business. We successfully completed the acquisition of New York Life’s Retirement

Plan Services business and related reinsurance transaction in sale-to-date have been strong and exceeded expectations. We entered the Exchange Traded Mutual Fund market with six offerings -- The Exchange Traded Fund market with six offerings, we track underlying indices designed by Dimensional Fund Advisors, a pioneer in strategic beta investing.

We launched John Hancock Worldwide investors, a platform focused on expanding our reach to non-U.S. domicile retail investors. And we launched the exclusive partnership with Vitality to provide Americans with forward thinking life insurance solution that reward customers for healthy living and essentially reinvents the proposition of life insurance.

In terms of our global wealth and asset management businesses, we surpassed $500 billion in assets under management and administration, lifting our total company figure to $935 billion. We delivered strong investment performance at Manulife Asset Management with the majority of public asset classes outperforming their benchmarks on a 1 year, 3 year and 5 year basis. We launched the new fund structure to support our institutional asset management expansion into the Europe and global market and we expanded our liability driven investing capabilities significantly with the successful integration of the Standard Life business.

In summary, we are pleased with the strategic progress that we have made throughout 2015, however we expect some of the microeconomic headwinds and energy price volatility will persist into 2016. And that unless oil and gas prices strengthen it will be difficult for us to achieve the $4 billion core earnings objective that we have set for 2016.

Putting aside the external factors which impact our investment experience we have never felt more confident about the underlying fundamentals, the momentum and the long-term strategic positioning of our company.

With that I'll turn it over to Steve Roder who will review highlights for our financial results and open the call for your questions. Thank you.

Steve Roder

Thank you Donald and good afternoon everyone. Let's start on Slide 8 where we summarize our financial performance for the fourth quarter of 2015 and the full year. In the fourth quarter we delivered outstanding growth in net and gross flows and a strong increase in both insurance sales and new business value. Core earnings were also strong but net income was negatively impact by charges resulting for fair value adjustments related to the continued decline in oil and gas prices and other factors. For the full year of 2015, core earnings rose 19% reflecting the strength of our Asia and wealth and assets management businesses. We were however similarly impacted by fair value losses related to oil and gas investments throughout the year and charges related to our annual review of actual methods and assumptions which led to lower net income.

It's worth highlighting that excluding the impact of continued lower commodity prices on our oil and gas related investments 2015 net income would have been $900 million higher and core earnings would have included $346 million in investment related experience. We further improved our financial flexibility by reducing our financial leverage and generating remittances of $2.2 billion while maintaining a solid capital ratio. We achieved excellent top-line results driven by our insurance businesses in Asia and outstanding net flows in our wealth and asset management businesses globally despite heightened market volatility. Return on equity was below where we would like to have seen it. However, we expect core ROE expansion over the medium term as we execute on our strategy and as investment experience normalizes. I'll come back to this point later in the presentation.

Turning to Slide 9, we continued to demonstrate solid progress on core earnings despite not having recorded core investment gains. Core earnings increased to $859 million in the fourth quarter, up 20% versus the prior year and reached $3.4 billion for the full year, up 19%. As Donald just mentioned, excluding core investments gains our core earnings would have been up 28% for the year. These results were driven by contribution from our recent acquisitions, strong sales and improved product margins in Asia, higher fee coming from our wealth and assets management business strengthening of the U.S. dollar. Unfortunately, continued volatility within the commodity space resulted in investment related experience loss in the fourth quarter and therefore we were unable to recognize any core investments gains in this quarter or for the year.

Turning to Slide10, you can see that our reported net income in the fourth quarter was impacted by adverse related experience charges of $361 million primarily due to the continued decline in oil and gas prices. The favorable impact of equity markets was more than offset by charges from interest rates resulting in a net charge of $29 million. We also recorded a numbers of other charges this quarter including a $97 million net charge as a results of actuarial model refinements, $39 million in integration costs related to recent acquisitions and an $87 million net charge for other items which included the impacts of recapturing a reinsurance treating.

On Slide 13 is our source of earnings. Expected profit on in-force increased 14% from the prior year, primarily due to recent acquisitions, actuarial refinements and higher fee income on WAM businesses due to higher assets on the management and administration. The impact of new business improved versus the prior year quarter reflecting higher insurance and other wealth sales volumes and improved product margins in Asia, partially offset by lower sales and less favorable business mix in our U.S. insurance businesses and higher non-deferrable acquisition costs in WAM businesses due to higher gross flows.

Experience losses reflect fair value losses in oil and gas from lower commodity prices, the adverse impact of interest rates and unfavorable policy holder experience. This quarter we incurred a pre-tax $97 million and post-tax $50 million charge for policy holder experience. As adverse experience in the U.S. was only partially offset by favorable experience in Asia and Canada. Management actions and changes in assumptions reflect changes in actuarial model refinements, the expected cost of our macro hedging program a charge for the capture of the reinsurance treaty and integration expenses from recent acquisitions.

Earnings on surface increased primarily due to higher interest and on higher asset levels and we had a tax credit this quarter reflecting the mix of gains and losses in our various tax jurisdictions.

Turning to Slide 12, and insurance sales. Insurance sales in the fourth quarter increase 22% over the prior year reflecting record sales in Asia with double digit growth in most territories and normal variability in large case group benefit sales in Canada, partly offset by lower U.S. insurance sales due to competitive pressure in the Life markets and lower long-term care sales. Full year insurance sales increased 24% from 2014.

On Slide 13 you can see the both net and gross flows in our wealth and asset management businesses continue to be strong despite a challenging macro environment in 2015. Net flows of 8.7 billion in the fourth quarter were up 5.9 billion from the previous year due to strong asset retention and gross flows of 31.1 billion which were up 53%, reflecting solid gross flows in Asia driven by mutual fund launches in Mainland China and pension sales in Hong Kong strong gross flows in Canadian mutual funds and group pensions, record flows in the U.S. driven by robust mutual fund flows and contributions from our recently acquired [indiscernible] business and continued momentum for institutional asset management where growth slows more than doubled. For the full year achieved net flows of over 34 billion and positive net flows in all divisions despite volatile markets.

Moving to Slide 14. Other world sales were up 80% in the fourth quarter compared to the prior year and 89% on a full year basis reflecting very strong sales in Japan driven by expanded distribution and new product launches and contributions from our recent acquisition in Canada.

On Slide 15 is our new business value, which increased 33% from the same quarter one year ago and for the full year increased 35% to over $1 billion. The increases were largely driven by strong sales and higher product margins in Asia. New business margins in Asia increased 34% in the fourth quarter up 3 percentage points from the prior year. This was most notable in Japan which saw its margin increase almost 7 percentage points to 27%.

Turning to Slide 16. Our assets under management and administration or AUMA at the end of the fourth quarter reached 935 billion, up 244 billion from the prior year. The increase was largely drive by recent acquisitions as well as currency movements and consistent net policy holder inflows. Our wealth and asset management businesses achieve AUMA of 511 billion, up 196 billion from the fourth quarter in the previous year driven by similar factor.

Slide 17 summarizes the capital position for the manufacturer's life insurance company and our financial leverage. The regulatory capital ratio remains solid at 223%, the 3 percentage point decrease from the prior quarter reflected a reinsurance recapture in Canada and growth in required capital that outpaced earnings partly offset by a subordinated debt issuance of 1 billion. We ended the quarter with a leverage ratio of 23.8% up 110 basis points from the prior quarter but down 400 basis points from the prior year. We are very pleased with the reduction in our leverage ratio when compared to the fourth quarter of 2014. That being said our leverage is influenced by our financing activities and currency movements and therefore we do expect variability from quarter-to-quarter.

Moving to Slide 18 and update on our recent transactions. The standard life integration is proceeding well and both run rate savings of integration cost are developing in line with our expectations. The deal has being favorably received by the market with gross and net pension flows exceeding our deal expectation and in the first 11 months the transaction was $0.05 per share accreted to core earnings excluding transition cost. This compares quite favorably to the marginal accretion we expected at the time of the deal. Our New York Life Pension acquisition is also progressing well. We have met or exceeded overall integration milestones and are on track to complete integration efforts this year.

In addition we are generating strong new business and have a growing pipeline. Our through preparation and strong partnership with the DBS resulted in a problem free launch in all four markets with sales momentum building through January.

Moving to side 19 and an update on the E&E initiative. In 2012 we launched the Efficiency and Effectiveness initiative, or E&E to best to leverage our global scale and capabilities and achieve operational excellence throughout the organization. Since then the E&E initiatives has become a way life at Manulife and is now engrained into the corporate culture. The result to date have been impressive and as you can see general expenses as a percentage of both assets under management and administration and premiums and deposits have steadily improved. We delevered approximately $350 million in net pre-tax savings in 2015 which is ahead of our previously communicated forecast of $300 million and are on track exceed $400 million in 2016.

Moving on to Slide 20 and a closer look at ROE expansion. Since the start of 2014, our core ROE has been impacted by an unfavorable economic environment characterized by strengthening of the U.S. dollar and declining interest rates and commodity prices. While the stronger U.S. dollar provided a tailwind to core earnings, it concurrently resulted in an increase to our equity base, due to an increase in the Canadian dollar value of our foreign subsidiaries. The net effect of the macroeconomic environment was a negative impact to our core ROE despite the solid performance of our underlying businesses. Despite these recent challenges we expect core ROE to expand towards 13% over the medium term.

Our investment experience in 2015 was negative due to lower commodity prices which resulted in fair value charges to our oil and gas investments. However, had we recorded investment related gains in line with our through the cycle expectations of $400 million. Core ROE would have been more than full percentage point higher. We are executing on our ambitious organic growth plan focused on less capital intensive and higher ROE businesses such as wealth and assets management and our Asia operations which should contribute to core ROE expansion along with contributions in recent major acquisitions and partnerships, as well as additional savings from our efficiency and effectiveness initiatives.

As we are still in the process of integrating our acquisitions and investing in the build out of our partnerships, we expect the core earnings impact to our transactions to almost triple over the medium term from the 2015 levels and after that to continue to grow driven notably by long-term strategic partnerships in Asia and revenue strategies. In addition, there are number or other lever to further improve our core ROE including balance sheet optimization. We are reviewing block of businesses with sub-ROEs and are actively exploring options which could provide additional upside to core ROE. And from the capital management perspective we continue to generate substantial remittances which can be profitably redeployed.

As mentioned earlier, the challenging macroeconomic environment which is beyond our control has create a drag on core ROE in recent quarters. However, should circumstances improve over the medium term or overtime the impact of these factors could reverse providing additional for core ROE. We have prepared a more wholesome presentation on core ROE expansion which you can consult on the investor relation section of our website.

Turning to Slide 22 and the operating highlights of our divisions. We begin with the Asia division. In the fourth quarter, core earnings were $264 million, up 18% from the previous year due to improved business volumes and product margins partially offset by expenses related to growth initiatives. On a full year basis, core earnings were also up 18% when compared to the prior year. Insurance sales reached record level for the fourth quarter and the full year. Fourth quarter insurance sales of U.S. $416 million increased 20% reflecting record sales in Hong Kong driven by recent product launches and sales campaigns and double-digit growth in Japan and Asia other. Full year insurance sales of U.S. $1.5 billion were up 28%, WAM gross flows U.S. $2.5 billion in the fourth quarter increased 7% driven by strong mutual fund flows due to growing demand for wealth management solutions in mainland China and higher pension growth slows in Hong Kong. On a full year basis, WAM gross flows were up 56%.

Turning to our Canadian division operations highlights on Slide 23. In the fourth quarter, core earnings increased 58% driven by contributions from our recent acquisition in-force growth the benefits of standardizing our methodology for attributing expected investments income on assets supporting provision throughout the deviation, an improved policy holder experience. On a full year basis, core earnings increased 36% when compared to the prior year. Fourth quarter insurance sales of $303 million increased 76% largely reflecting normal variability in large case group benefit sales. Full year insurance sales of $825 million were up 43%.

WAM gross flows of 3.9 billion increase 45% in the fourth quarter driven by a strong mutual fund product line up and solid group retirement flows which benefitted from the recent acquisition. On a full year basis record WAM gross flows were up 57%.

Moving on to Slide 24 and the overview of our U.S. division. Fourth quarter core earnings of U.S. $262 million decline 12% reflecting reduced new business gains in insurance due to business mix, an unfavorable policy holder experience. Partially offset by higher fee income from higher assets under management and administration. Full year core earnings declined 4% mainly due to unfavorable policy holder experience. Insurance sales for the fourth quarter were 127 million down 17% due to competitive pressures in U.S. life insurance more than offsetting momentum in our Vitality product and lower long-term care sales as we continued to transition sales to our innovative performance long-term care product. Full year insurance sales of 488 million were down slightly from 2014.

Record fourth quarter WAM gross flows, the 13.3 billion increase 50% versus the prior year reflecting record mutual fund flows driven by a strong product line up and solid investment performance and solid retirement plan services gross flows which benefitted from the recent pension acquisition. On the full year basis we achieved record WAM gross flows of U.S. $47.2 billion.

Turning to Slide 25 and the highlight for the wealth and asset management businesses. Fourth quarter core earnings of $157 million increase 22% reflecting the strengthening of the U.S. dollars contributed from our recent acquisitions and higher fee income from higher assets under management and administration partly offset by high end non-deferrable acquisition costs from higher sales volumes.

For the full year the wealth and asset management businesses generated core earnings of $639 million representing an increase of 27% compared to the prior year. Record assets under management and administration of $511 billion were up $196 billion from the prior year reflecting $109 billion in contributions from our recent acquisitions the strengthening of the U.S. dollar and strong net flows. We achieved net flows of 8.7 billion in the quarter more than tripled the prior year largely due to strong mutual fund and pension in flows across all regions and record net inflows and institutional advisory assets. On a full year basis we achieved very strong net flows of $34.4 billion despite volatile markets.

So in conclusion while net income was disappointing in 2015 Manulife generative strong core earnings achieved strong growth and record levels in net flows, gross flows and insurance sales achieved record assets under management administration announced two strategic transactions. Maintain solid cash flow levels and reduce leverage and increase the dividend for the third time in less than two years.

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

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And the first question is from Humphrey Lee of Dowling & Partners. Please go ahead.

Humphrey Lee

Just a question about the block optimization assessment that you are planning, I saw it on your, as per the presentation mentioned there’re at their the top five priority blocks total approximately, 16 billion reserve. Can you provide some additional color in terms of this exercise and maybe you could talk about in terms of potential timing of these executions?

Donald Guloien

Thanks Humphrey. Yes, for sure, so we are always looking at our mix of business but we are putting some particular tension on looking of some in-force blocks that don’t meet our return requirements and where we think there may be other people how may have different view of risk or different return requirements and where we may be able to reach some sort of agreements.

So it's relatively early days on that I mean clearly some of these transaction's would be easier to executing and then, currently we’re prioritizing a small number of relatively small transactions that we would like be to able to progress. But we’ll keep the street informed of that project progresses and I guess the point we wanted to make really was we are concerned to expand our ROE and we will be looking at various actions that we can take to do so.

Humphrey Lee

Okay got it. And then just a question related to your unfavorable policy experience in long term care in the U.S. We need cases to provide us with some can you just provide us some additional color on what you are seeing and what were the major pressure points?

Steve Roder

Yes sure, I think Cindy is probably best placed to answer that one.

Cindy Forbes

Sure thanks Steve, hi Humphrey. We are seeing some adverse experience on the LTC block in the current quarter and over the course of this year on benefit utilization as well as on loft and on mortality.

Humphrey Lee

Okay. And then given your tri-annual review is coming up in the third quarter, how does the experience over the past several quarters affects? How you are going to approach to review this year?

Cindy Forbes

The review will be done as it always, we look at all of our experience over the last three to four years and assess our assumptions, our current assumptions against the emerging experience so be the same process. Our LTC claims losses for the year are about 50 million so that’s the magnitude of the average experience for this year, and note that we have had as I’ve said in the past that the translation from the source of earnings analysis, claims losses too are the impact of annual review, it's not -- you can't really project from one to the others. So at this point in time its early days we don’t have the results of our experience review and so don’t really have insight as to what the impact might be of this year's review assumptions.

Humphrey Lee

So just to clarify, so it was 50 million adverse in 2015 and then I recall there was some kind of adverse experience in late 2014 as well. Is there any way to kind of give us a sense of the accumulative adverse experience relative to when you revised your assumptions back in 2013?

Cindy Forbes

It's probably in the neighborhood of the 50 million because for the prior two years we had positive quarters and negative quarters and it pretty much offset.

Humphrey Lee

Okay. And then in terms of that 50 million unfavorable impact this year, would you say utilization was more adverse or versus the other two? Which one is the main driver?

Cindy Forbes

Actually Humphrey, I don’t really recall it. In terms of the relative magnitude in each of the factors.

Humphrey Lee

Okay aright.

Operator

Thank you. The next question is from Steve Theriault from Bank of America Merrill Lynch. Please go ahead.

Steve Theriault

Thanks very much. A couple of questions. First, Don, I wanted to go back to something that you said, never felt more confident outside of the questions around investment gains. But I would think it's not just all about energy certainly. And I'm thinking about rate, so you're obviously much better hedged than last time the U.S. 10-year was around these levels, but how much does the fact that the U.S. 10-year is back to right around 2012 lows, how does that affect your outlook for the ability to get to your 4 billion next year? If I do the math on your sensitivities I may be not as worried about rate swaps and spreads in terms of the mark to market. That could easily prove a wash, but what about the core business and the risk to core earnings with rates going back down pretty precipitously in the last little bit?

Donald Guloien

You are right Steve and from an overall perspective I mean that is a bit of the headwind and the question is does it persist or continue to get worst, I mean from a macro perspective we have offset, as rates go down things like real estate tend to go up, so we have that. But that doesn’t affect our core earnings as you well know. I -- on the macro side there is a lot of volatility out there right now that quite frankly I don’t understand, you got the U.S. economy doing pretty well, you got the Chinese economy doing pretty well, you got India doing pretty well, you got Europe and Japan with some challenges that’s for sure. But when you look at falling energy prices the principle beneficiaries of the lower energy prices are the big energy importers, which is Japan, China and Europe.

So that impact, people are typically hedged out 12 months or so but that impact is going to start to be felt and I think it will be salubrious for the global economy. So despite the movement in the market today in the overall market sentiment that seems to prevail, I am certainly not pessimistic, the rate are continuing to fall. But as you said we have way more hedging programs in place than we ever have before and we have some prediction against rates falling further. But obviously not absolute protection and that will, as you identified affect core earnings. That’s one of the reason that we are being cautious on our guidance that and energy prices.

Steve Theriault

I definitely appreciate the cautionary tone in your statements and in the press release. It's a tough question, but are you trying to telegraph to us that with energy prices where they are that that ’16 target is still doable but challenging? Or are we in more of the category of it may not be realistic with oil at $25?

Donald Guloien

No I think, we basically can on 400 million of investment gains and looking at that. So if you assume that oil prices stay where they are now, there is very little possibility, I never say never but extremely low, low, low possibility of us getting that 400 gain. So what 400 of headwind that sets you back 400 against the target of 4 billion, there are other things that Steve and I have explained that are going really, really well in terms of operating performance. But you have to go unbelievably well to overcome 400 million in headwind.

Steve Theriault

Okay. Maybe that segues into --.

Donald Guloien

With the core growth we are going get there, it might be a year later I guess I sort of said before we're not going to fixated on that number that we’re going do anything stupid to get there. But we clearly are on the path to achieving that target from our core operations and it's unfortunate what happened to energy prices, but that will happen from time to time. We're also not panicking with respect to that asset class. I am sure somebody is going ask the question, are you planning to get rid of oil and gas and on the contrary this is the time to perhaps load up the truck.

Steve Theriault

Well, I won't waste my second question on that then. But kind of a segue into coming into the quarter looking at what happened to the oil futures curve it looked like across the curve prices were down about 10%, that resulted in a 250 million charge this quarter. And as I think of Q1, and we're early days here, but it's hard not to think of how it's going to plant given the volatility, but the quarter ended today spot is down almost 30%. And I haven't done the calculation across the curve -- across the forward curve, but let's say that's 20%. How linearly can we think about 10% down in the futures curve in Q4? Is 250 million charge and if it's 20 million in Q1 it could be a 500 million charge. So maybe someone can just help me with how we should think about that math.

Donald Guloien

Its great question Steve, I am going to pass it over to Scott Hartz.

Scott Hartz

Sure, thank you Donald and thank you Steve. Yeah you can't just look at spot prices, obviously lower oil prices are going to drive down valuations, but we are really trying to value along reserve life here. So it's a function of what prices are expected to be in the future. Spot oil prices, we’re not actually that optimistic about, a lot of people called for $20 with storage getting full that’s certainly a possibility or even lower. I think what we have much greater confidence around the market, is that ultimately prices have to go up in order for us to produce enough to meet demand.

So, it really is that forward look that the most important not the current spot price. And clearly there are couple of elements there. One is that yes there is a five years strip you can look at where there is some but not much trading in the market, and so if you look at that you see that this quarter has not come down nearly so much as spot prices have but has come down about as much or maybe a little bit more than we saw in the fourth quarter.

But then the other elements is that for our Canadian oil and gas operation, that’s valued by an outsider appraiser. So, it's also a function of what the outside appraiser is expecting for prices. And our appraiser is pretty much in line with what most appraisers would do in the market. And there I think in the fourth quarter we got a little bit whacked by the third quarter was down a lot and the appraiser sort of delayed a little bit bringing their curve down, they brought it down more than the market did in the fourth quarter.

So, in the third and fourth quarter we had about the same amount of hits to our oil and gas even though market prices were down more in the third quarter. So, we had that catch up and yes if prices there will stay where they are this quarter, we’re going taking other loss, but it’s probably more in the realm of what we saw in the fourth quarter and not a bigger numbers than that.

Steve Theriault

Okay that’s helpful thank you.

Operator

Thank you. The next question is from Peter Routledge with National Bank Financials. Please go ahead.

Peter Routledge

Hi, just a follow on from Steve and just the core earnings momentum. I'm kind of surprised you're stepping off the 4 billion although you've been clear about the reasons for why and I don't quibble with that. Just the momentum in your core business is so strong it seems like you're awful close to 4 billion even if you don't get any investment related gains in core earnings this year. So if I were to promise you or guarantee to you would get 200 million which you got in 2014, could you get 4 billion?

Donald Guloien

Peter I admire your entrepreneurial style and I just suspect that whatever answer is going to e then you will ask for 100 or 300 and parse it that way. No seriously, so you are saying 200 million of investment gains if we got that. Okay in that hypothetical which is extremely hypothetical, I just want to be honest with people because given oil prices where they are today again they can go up to $100 tomorrow, but that’s not our expectation. But in that hypothetical it would be different, might be a different answer.

You are quite right that the operating momentum is incredibly strong. I think the likelihood of operating momentum alone getting us that extra 400 is remote we have to conservative on that view and appropriate. As you get it to a different number sure there is some number that if you said investment gains at 399 I don’t know what I’d have to say, but I think I’d said it's not in jeopardy. But anywhere between those two there is a big gulf and I guess the expectation is we don’t think anybody should be baking in 400 million of investments gains. So, your hypothetically is extremely hypothetical.

Peter Routledge

Right.

Steve Roder

And Peter just a follow up on that, it's Steve. Bear in mind that we have an obligation to sort of set out the risk to the market. So, when we just felt that we ought to highlight the risk associated with that 400 million and almost just sort of [pure math leads you to believe that would put the 4 billion risk, but that doesn’t sound really fundamentally, mean that we have any different opinion as to our sort of underlying earnings power. So I’d look at it that way.

Donald Guloien

And then I guess another question that one might ask or when somebody, we make that pronouncement are we giving up the ghost or something like that, I mean no we are driving our organizations to deliver that number despite the investment impacts. We’re just saying that there is a really good chance that will not get us to that target.

Peter Routledge

Right. The other I think issue pressing on the stock is Asia and what's going on in China. So apologies, it's another hypothetical, but China devalues from 650 roughly to 8 yuan or renminbi, pardon me to the dollar. What happens to your Asian business in that scenario?

Donald Guloien

Well. Our Asian business, there is always currency translation gain or losses, but in any fan of outcomes on the Chinese currency in relation to the Canadian dollar it's going to be small and earnings from China are small. I think as it relates to Manulife China, ex-Hong Kong. But the concern about China is one of this huge fear of China slowing down and I guess remind people that while the manufacturing sector is slow in China the services sector is incredibly robust and it's approximately 50% of the economy right now and consumer spending is high. Robert our life insurance business in China alone is up 35% and our wealth business and mutual fund flows?

Robert Veloso

On the growth flows were up well over 100%.

Peter Routledge

And those products are denominated in renminbi?

Donald Guloien

Yes those are renminbi products. So as 35% and over 100%. Do I guess when I read the newspapers about China slowing to a halt I find it hard to relate to, if you look at BMW their sales of cars into China, you’re look at a lot of indicators, there is no indication that Chine is coming to a screeching half which half the world seems to think is factual.

Steve Roder

In 2015 we had record insurance sales and just about every location in Asia I think there were two exceptions to that and they were both smallish locations and in the fourth quarter we had record insurance sales including in four location Hong Kong, Vietnam, Singapore and even Malaysia. Now Malaysia is probably one of the economies supposedly most impacted by the China slowdown because it's an export economy to China. And yet we still seeing very strong sales, so the core earnings growth year-over-year 18% in Asia and the earnings translation risk associated with the renminbi is not material at all.

Peter Routledge

Okay, thank you.

Operator

Thank you. The next question is from Robert Sedran from CIBC World Markets. Please go ahead.

Robert Sedran

Just curious about what you think the impact is of the recent changes by the Chinese authorities in terms of the ability to purchase -- for mainland Chinese to purchase insurance contracts in Hong Kong. And not just the impact of that, but if there's any other similar issues that perhaps aren't obvious today but that you might be concerned about from a regulatory or political perspective in China?

Steve Roder

Okay so let me take that and then I will pass to Roy he can give you some more color. So actually Manulife has a very diverse business in Hong Kong. Our exposure to what we call mainland visitors if you like is relatively low compared to the market as a whole and so this is not going to being material to Manulife because the sales from mainland China to Hong Kong represents less than 1% of our group sales, but let's ask Roy to give you a bit more color.

Roy Gori

Yes, thanks Steve. Robert I think Steve covered the key point and that is that firstly our Hong Kong business is a very strong business, it’s well diversified. Not only have we got a strong insurance franchise here but we also have a very strong wealth management business and that is focusing on our NPF or retirement pension business where we are the second largest provider and the largest in terms of new flows. In terms of the Union Pay regulation change that we saw announced recently mainland Chinese visitors really only account for about 15% of our sales in Hong Kong and that's much less than many of our competitors and therefore that statement represents about 4% of our total Asia sales.

So quite we really does see this change to be very material to our business. And again as highlighted earlier our total insurance sales for the year are 28% and our other world sales are north of 100% for the full year. So we see very solid momentum, very optimistic about the progress we are making and that we will continue to making the regulations is one that it's obviously is going to have somewhat of an impact on markets limited for us and quite frankly feel still very optimistic.

Robert Sedran

Okay and just a quick one on Japan, or maybe not a quick one on Japan. But obviously the country has been dealing with very low interest rates for a very long time but are there any further implications to a negative interest rate policy on your business, in any aspect of your business whether just technical accounting or actual operational implications to the business?

Steve Roder

So well let me have a go at that and again I will pass to Roy. I think t think the low interest rate environment in Japan is obviously being perceived as being potentially a negative to the Abenomics success if you like, so perhaps the biggest risk to us is that it slows down the behavioral changes we seen in Japan.

Having said that we have seen some significant changes starting to emerge in Japan with move on personal balance sheets away from bank deposits into mutual fund products and other world products, and we have been benefiting from that. And beyond that we have some new products and new distribution in Japan which have gained a lot of traction. So in fact Japan for us in 2015 was a raging success story and we have a lot of momentum in our business there. So maybe Roy may want to talk a bit more about some of that success in Japan.

Roy Gori

Let me just add to the comments that Steve provide, I think the first comment I would make is that not all of our product are interest sensitive and we re-price regularly. I think that would be the deciding comments. We are really quite happy with our and momentum in Japan, we have expanded distribution quite extensively throughout 2015, in fact we’ve got 13 new bancassurance partnerships and that contributed significantly to our sales momentum and obviously we’ve also expanded our product range. So it's obviously interest rates are a factor. But we obviously keep a very close eye on that we we-price accordingly.

Operator

Thank you. The next question is from Meny Grauman from Cormark Securities. Please go ahead.

Meny Grauman

Just to follow up on Rob's question about negative rates, you answered it in terms of Japan but in your view would there be significant disruptions to your business with negative rates if they came to North America? Is that something you've thought about at all?

Donald Guloien

Well Meny, Don wants to get in here. Negative rates typically are at the short end right, created by central banks trying to stimulate the economy. What is really relevant to us is rate out at the 10, 20, 30 year tenor not at the short end now. And you see instances I think recently when the Fed increased short rates and the long rates came down. I think a lot of people sort of thought our stocks was -- and it did go up for a period, but that’s not a good thing when long rates down. It's really the long end of the curve. I mean if people institute negative rates and that gets the economy moving in the right directions, it’s a very positive things for us. But what really counts is what’s happening at the longer end of the curve.

Meny Grauman

Thanks for that. And then I just wanted to ask a question about the dividend and just curious about your response to maybe some criticism that given the kind of uncertainty and the moves that we're seeing that you should have held off on a dividend hike to kind of wait for the dust to settle.

Donald Guloien

Well, we are long term thinkers, we take a long term view of business, the core earnings, the growth has been fantastic. We’re projecting that despite the headwinds that we have talked about in this call, we feel pretty good about that going forward and that’s the base of which the decision is made. I mean you know oil prices may remain depressed for the rest of the year and other things could happen that would be negative. But our capital is strong and our outlook for core earnings to the growth is strong and outlook for longer term net income hopefully some reasonableness will prevail. I guess we have the view that when things look dire, look lowish, seldom as bad as they appear, and when things look really good they’re seldom as good they appear and this one of those insistent.

Operator

Thank you. The next question is from Gabriel Dechaine of Canaccord Genuity. Please go ahead.

Gabriel Dechaine

Donald, why no buyback?

Donald Guloien

Well, we don’t have one in place. We historically, we’ve never said no buyback for all time and then there is times like this where we had nice time it be kind of nice to have it in place, on the other hand as we’ve talked other questions on the call, we are going to air on the conserver side because when the world is skittish as it appears to be, bad things can happen for longer periods of time. So while we feel really good about the long term. We want to protect ourselves from short term movements that could go against you. So we are going to air on the conserver side, but you are right, if you wanted to say criticize and see if you get a buyback in place you'd be picking up some Manulife stock at really cheap prices, that’s a fair comment.

Meny Grauman

That's exactly what I was thinking. You spend the post-crisis period building the fortress balance sheet, reducing your macro sensitivity, all very good moves for shareholders. But at a time like in companies in general, they buy back stock when it's at the peak and they don't want to do it -- they don't do it when it's at a trough. I mean it would seem like you're in a good position to shift from defense to offense so that the market can put some value on that fortress balance sheet.

Donald Guloien

It's a fair observations, I guess the only thing I would say in our defenses. We didn’t buy it back at the peak, so I am thankful for that.

Meny Grauman

Right.

Donald Guloien

If you are saying you’re going to miss the opportunity while it’s low, you are right there too. So it's a good comment and we’re giving some consideration to whether or not a buyback would fit in the overall context of prefect capital usage overtime.

Meny Grauman

Well, I think a lot of debate around buybacks and it's a signaling theory at the very least and in this case probably would be a good one. That's pretty much it. Thanks.

Operator

Thank you. The next question is from Sumit Malhotra with Scotia Capital. Please go ahead.

Sumit Malhotra

Let me go back to Scott for a minute. I just want to make sure I'm thinking about the energy exposure correctly. So on your Slide 32 in the presentation you show us just over 13 billion of fixed income exposure to the energy sector and 1.7 billion in the alternative book. When you talk about the 875 million of write-downs that were taken against energy this year, round numbers what was the percentage that was allocated to the alternative portfolio relative to fixed income?

Scott Hartz

That was all the alternative book. The fixed income had very little impact of the oil price environment.

Sumit Malhotra

So when we're talking about 2016 now and the fact that the core earnings target has been - you're signaling off that number largely due to the oil and gas, are we still contemplating alternative being the only issue or are you now expecting there are going to be losses that are emerging in the fixed income book as well? I'm kind of looking for your thoughts on where that portfolio trends next year?

Scott Hartz

Yeah, now that’s a really good question, it’s something we spend a lot of time on. We are examining all the exposures on that Page 32 very closely and while yes our bond portfolio which has been 95% investment grade has held up very well thus far, to the extent these oil prices keep extending we’re looking at definitely some downgrades coming. I think the agencies the longer prices stay down, they will look to move to downgrade. I would say a lot of the company have done a lot of the right things in terms of cutting dividend and raising equity and certainly cutting CapEx so that’s helping them and we feel good about the long-term survival of these companies, I’m not sort of forecasting any impairment or anything for the future, but I think as you know downgrades do run through our investment experience gains. And so while we didn’t -- we had a little bit but not very much of that in 2015 and 2016. To the extent prices stay where they are, we would expect to see some of that. So, while we've had five or six years of positive credit experience in 50 to 100 and even a little above $100 million, I think that will be very hard to achieve this coming year unless we get a rebound in oil prices because that will be a drag.

Sumit Malhotra

That's helpful. Let me wrap up with just, I'll call it a request for Steve. Steve, I know we've talked about this before, but now that it's yearend hopefully you get a chance to rethink or add to the disclosure. I do think it would be helpful if you could provide us with the pre-tax after-tax numbers on the adjustments that take you from the reported number to core. I think it would give us a better understanding of what's happening in the underlying businesses once we clean up if you will for some of these items. So hopefully that's something you can think about for 2016.

Steve Roder

So we haven’t forgotten that, we have it on the agenda to consider for 2016.

Sumit Malhotra

Okay thanks a lot for your time.

Operator

Thank you. The next question comes from Tom MacKinnon from BMO Capital markets. Please go ahead.

Tom MacKinnon

Yes, thanks for a much. Good afternoon. I just want to talk about the investment losses outside of oil and gas actually in the quarter and if you had 361 million of the total investment losses of which 250 million were oil and gas that leaves 111 million in other things. Now you did some actuarial cash flow modeling update. So trying to figure out what the impact of that was? And then really just talk about investment gains you make outside of oil and outside of actuarial modeling and things, like what were they in the quarter? What's the outlook for those? Because I think those things were pretty good in 2015.

Steve Roder

Tom you are absolutely correct. So that’s estimation process that we have to true up if you like a quarter in arrears produced quite a significant negative this quarter. That processes is something that we have as you know we have to go through each quarter it can be positive, it can be negative in this quarter was actually quite significant negative, If I recall correctly it’s in the region of 150 million. So, that is a big piece of the explanation and in fact the various other assets classes produce I think virtually produce positive returns. So credit was positive, private equity was positive, et cetera.

Warren Thomson

If I can just add for the full year, its Warren here Tom. On the full year basis the oil and gas charges I think we are in the over 800 million but our net investment experience gain was about 350 million post-tax and if you think that relative to 100 million to quarter with no contribution from oil and gas which otherwise we expect something from oil and gas. We would otherwise be running at pretty much our indicated long-term trend line rate.

Tom MacKinnon

And that's even with this CAD150 million actuarial modeling?

Warren Thomson

Yes that's correct.

Tom MacKinnon

And this actuarial, what should we think -- what are you doing here, just adjusting some cash flows and all of a sudden you've got 150 million charge? Like you wouldn't anticipate that number to be to swing that much. How should we think of that number?

Cindy Forbes

Yes. Tom, its Cindy. So maybe I can explain. Because the call and reserve process takes quite a bit of time we can't complete it all within the quarter end window. So our standard practice is to take the prior quarter reserve and roll it forward for changes in markets and new business. And then after the quarter we do the actual calculation using the actual live rolling asset cash flows. Take into account the fact that we've got 250 billion of liabilities on our balance sheet that's not really a very large number, it is on the large side of what we see, but as the Steve were saying it can be positive or negative and there's been quarters when it's been positive and in the same ballpark. So it really is just the impact of updating our assumptions to bring the reserves to the end of quarter value and the differences between what we actually booked in that trued up reserve is what you see coming through in terms of actuarial modeling.

Tom MacKinnon

So in an environment things don't change much from quarter to quarter you wouldn't anticipate that to change significantly quarter to quarter?

Cindy Forbes

True, but keep in mind that the liabilities cash flows can be different. We assume that they are the same and we just drop off one quarter of cash flows, so they can turn out to be different. We also Q4 is the quarter after our annual review of assumptions that can lead to some noise and there can be even some impact from equity from the direct impact of interest rates in that number because it's not possible always to take everything out.

Tom MacKinnon

And is that numbers showing more on a rising or falling interest rate environment?

Cindy Forbes

I can't say that I’ve ever looked at it to give an answer, but I think Scott would like to add something.

Scott Hartz

Yes I just like to add when we put that 400 million number out there, we looked really hard and what has happened over the last five or six years and this is a number as Cindy said that's in there every quarter, tends to be fairly small and there was no bias to it over that time period so we didn’t -- we felt comfortable assuming that would be sort of net zero going forward. It's obviously unfortunate you have a quarter where isn’t big negative, but and over that period we've had largely falling rates, so I don’t see a bias with respect to the rate environment.

Tom MacKinnon

Okay, that's great. Thanks. And then the MCCSR going from quarter-over-quarter change in it, it was 226% and I assume I'm adding about 5 from the debt to 231% and then you ended up at 223%. You recaptured some reinsurance and then you had I guess just a little bit more drag on the MCCSR as a result of what kind of happened in the quarter. So can you separate those two items and then give us some sort of a feeling as to how we should be looking at the MCCSR going forward excluding any other kind of capital movements?

Steve Roder

Yes. So it's just very high level, Tom. So in an average quarter if this there is such a thing we probably expect the growth in required capital to be in the order of 3 points, but it could be more it could be less it can vary and so we would expect that normally to be more than covered by earnings. So this quarter there were two specific issues, one was that the growth in required capital was actually at the high end of that range whereas the earnings where obviously low, so there was a net negative there and then the reinsurance treaty recapture cost us about 3 points on the MCCSR.

Tom MacKinnon

Okay, thanks for that.

Operator

Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca

Just to put a final point on these investment gains, are you suggesting that you're still confident in 400 million a quarter -- sorry, a year ignoring anything to do with oil that that 400 million when you proposed it early in ’15 still stands or has something changed that caused you to be less confident in that number?

Donald Guloien

Mario nothing has really changed, we continue to believe through this cycle. It is the correct number because again I mentioned that we had close to 350 million post-tax for the year almost all the other components of that were performing as per our expectations now the reality is and this is again if you even go over the last five years and remodeled it, in any given quarter we have had negatives from let's say the given quarter, real estate or agriculture is something that underperform briefly in a quarter, but through that full year we do see everything emerge and credit goes up and down but again over that time frame.

But the best piece because it is such a well-diversified portfolio in total does tend to deliver it and obviously in the current environment a good example would be, while rates are down spreads are up. Wider spreads actually presents an opportunity for us to invest in realized trading gains from investing in that wider spread credit product obviously in the same environment again we may see a few more default charges. So there's going to be tos and fros on the thing all the time but our general expectation given the diversity of our book and how things work we feel very comfortable on our through the cycle view.

Mario Mendonca

Okay. A related question. Perhaps for Cindy or maybe Steve. Could you go through the policyholder-related experience losses in the quarter? I think there's some disclosure here where it says it's about 97 million and it relates mostly to is it mortality in the U.S.? There's just a lot of paper in front of me, can you help me think through that again?

Steve Roder

So it just a high level. In this quarter we had negative experience in the U.S. offset by positive experience in Canada and Asia. And then maybe Cindy wants to take you through those.

Cindy Forbes

Right, so Mario I’ll have to apologies because I have got post-tax numbers in mind and you have got pre-tax number, so the post-tax impact the policy impact to policy holder experience was 50 million in the quarter. As Steve said we had positive results from Asia and from Canada and that was offset by losses on LTC due to -- as I said earlier utilization, mortality and lapse. As well as some lapse loses on our U.S. Life block related to some universal Life products. This quarter our mortality experience on the U.S. Life business was neutral. So that was a change from the prior two quarters when we had some losses due to larger claims, as you’re well aware we focus on the influence segment in the U.S. and so we have large size policy, so we see quarter-to-quarter volatility on our U.S. life experience.

Mario Mendonca

Okay and the tax rate on these types of policyholder gains and losses, would you expect them to be sort of normal? Normal tax rate?

Cindy Forbes

Yes, but keeping in mind that you have different tax rates by the jurisdiction in your positive results in Asia which we generally have a lower tax rates. And in Canada that would usually have a lower tax rate, and then losses in the U.S. which has a higher tax rate. So then the average tax rate is difficult to -- maybe non-intuitive.

Mario Mendonca

And how about the tax rate on all the items of note, all those adjustments you make, would that be a normal tax rate or would that be an unusually high tax rate?

Cindy Forbes

Well, I don’t know for each item, but it was impacted by the same phenomena where you can have gains in lower high tax jurisdictions offset by losses in lower high and tax jurisdictions you end up with have a very unintuitive results for the tax-rate.

Steve Roder

[Multiple speaker]. The tax rate on core earnings this quarter was 18% but we had an overall -- we had a tax credit if you get down to the net income level. And that would be a results of clearly some investment incomes is not taxed, other reduction have low tax rates. And that sort of slightly counterintuitive result arises from deferred tax accounting. So if you look at the year as a whole you will end up with more -- sort of more logical outcome. But maybe that’s helpful.

Mario Mendonca

Well I guess where I'm going with this is you guys spend a lot of time talking about core, but you can't really -- look I don't understand core anymore because there just isn't enough disclosure. So like Steve when you say this is something you're going to look at when you're going to look at providing this disclosure, I mean clearly it's available to you or you couldn't do your tax returns. So given the importance of core to this Company why wouldn't you disclose it?

Steve Roder

We will -- we plan to disclose, we will disclose the core of tax rate and we just need to look at what level of granularity we want to give and the various items in our financial statement. And there are potentially some -- there are pros and cons to that and as I said we’re looking at it Mario and we understand your ask and we will get back to you in fact and talk to you about what would do the trick for you. So we have that on our list of things to do for 2016.

Mario Mendonca

So what its worth, core is becoming unusable for me and I expect for a lot of people. Appreciate your efforts in that regard.

Operator

Thank you. The next question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young

I will try to keep this relatively quick. The MCCSR, just going back to that it was 223% at the end of the year. Correct me if I'm wrong and maybe I'm wrong in this, I still think you have 3 points coming through from DBS and then you quite clearly give us the sensitivities and declines in equity markets and interest rates. So you could be -- if I do all the math there, and again correct me if I'm wrong you can get to a 210% to 215% MCCSR, what am I missing I guess in this kind of thought process? What's the level you're comfortable letting that go down to? And maybe I will leave it there.

Steve Roder

Well, you are correct we have to do with DBS, but as we say we have -- as we said we have confidence in the outlook for our core earnings now. But sure we have sensitivity to investment experience. On the other hand we have a very strong leverage position right now. So we have a lot of financial flexibility. And we want to manage our position as Don said and appropriately conservatively in the current environment and that’s all we seek to do.

Doug Young

And what would --.

Donald Guloien

We kept the capital ratio strong right, it is for times like this. I mean it wasn’t too long ago that people were focused and said, you had too much excess capital and that’s what it’s for. Market volatility hasn’t disappeared.

Doug Young

So what would you let that, I mean I guess two questions, what would you let the MCCSR go down to? And then how much leverage are you comfortable putting in because you obviously have room to raise debt and I think I always think of it between 25% and 30%. But I'm just trying to think of how comfortable are you -- what level are you comfortable putting that down -- letting that go down to?

Donald Guloien

Well you know capital management is a very carefully managed things we don’t talk about the ranges it depends on the whole bunch of factors, but in terms of leverage we have tons of capacity. At the peak we had 35% or something like that and there is lot of capacity there. We’ve got a lot of options.

Doug Young

And I mean if it was 215% or 210% on one particular quarter that would be fine?

Donald Guloien

Well you would not expect the stop rate at too lean a range of ratio. I am going to avoid specific numbers but when bad things happen you expect the capital ratio to go down. I mean that’s what the capital is therefore, to be drawn on. So again prudently conservative, but if something happened tomorrow, yes obviously that would drop the capital ratio. I don't think anybody would panic about that. You know the question is do you plan to rebuilt it or keep it low and what we like to do and you’ve seen us act consistently with that going right back to 2008 and 2009 is if the capital ratio gets too low, we rebuild it to a higher level overtime. It doesn’t need to be done immediately, but that’s what our practice has been.

Doug Young

And then just second, you know obviously you've had great sales results in Asia and good core results there. I'm just wondering so far, maybe Roy, so far what you've seen in 2016 given the market volatility. Have the wealth management net flows and insurance sales have they abated at all or have they continued to be relatively strong?

Roy Gori

Thanks. I guess I think someone made the comment earlier and that is that we haven't really seen equity or currency market movements affect our insurance sales. A very solid Q4 that really topped up a good year for us. That’s obviously very true for insurance, but it’s also true for other wealth sales. And our WAM flows are a little bit more impacted by market volatility, but even there I feel pretty good about the year that we just had our gross flows are about 56% up on prior year and our net flow is actually which is probably the more important indicator for us is it was very positive, 142% up on prior year.

So generally I feel that we’ve got some momentum a big part of our core earnings growth over the course of '15 was the function of strong sales momentum and we expanded distribution both in terms of the banker partnership as well as agency, but also we had some good product launches. We've been focused on our mix and the mix is being -- while we tried to really shift our attention much more towards protection as a need which gives us much stronger margin.

And then finally on the margin front we’ve also put a lot of action into improving our margin and that includes looking at our product and re-pricing where appropriate as well as our distribution expenses. So, look generally, I guess I’d say that I feel pretty good with the foundation we put in place in 2015 and momentum that we have in closing year the good. I think we’ve got some good tailwinds with DBS, Standard Chartered and some of the other banks partnerships that we've launched as well as launches that we’ve made more recently that really puts us in good shape for the year ahead.

Doug Young

Great you.

Operator

Thank you. This will conclude the question and answer session I would like to turn the meeting back over to Mr. Veloso.

Robert Veloso

Thank you, operator. We will be available after the call if there is any follow-up questions. So have a good afternoon everyone. Thank you

Operator

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

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