Manulife Financial Corporation (MFC) Q1 2012 Earnings Report, Transcript and Summary

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the Manulife Q1 2012 Financial Results Conference Call for May 3, 2012. Your host for today will be Mr. Anthony Ostler. Mr. Ostler, please go ahead, sir.

Thank you, Dave, and good afternoon. Welcome to Manulife's conference call to discuss our first quarter 2012 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investor Relations section of our website at manulife.com. As in prior quarters, our executives will be making some introductory comments. We will then follow with a question-and-answer session. Available to answer questions about their businesses are the Heads of Asia, the U.S., Canada, Investments and General Account Investments. Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions 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 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 Precaution Regarding Forward-Looking Statements. [Operator Instructions] With that, I'd like to turn the call over to Donald Guloien, our President and Chief Executive Officer. Donald?

Thank you, Anthony. Good afternoon, everyone, and thank you for joining us today. I'm joined on the call today by our CFO, Michael Bell, as well as several members of our senior management team, including our U.S. General Manager, Jim Boyle; our Canadian General Manager, Paul Rooney; our Asian General Manager, Bob Cook; Warren Thomson, our Chief Investment Officer; Scott Hartz, our Executive Vice President, General Account Investments; Cindy Forbes, our Chief Actuary; and Rahim Hirji, our Chief Risk Officer. Also with us today is Steve Roder, who as we announced this morning, will be joining us as our new CFO. This morning, we announced our first quarter 2012 financial results. We reported net income of $1.2 billion for the quarter, which is up from $985 million in the first quarter of 2011. We entered 2012 with a very solid foundation for growth. Our first quarter reflects strong markets, positive hedging results, 35% higher Insurance sales and stronger underlying earnings relative to the fourth quarter of 2011. The strength of our underlying earnings reflects our healthier business mix, with the emphasis on wealth management, Insurance products with less risk, higher margins and higher returns. While we're very pleased with our results, the first quarter was not without its challenges. We experienced poor policyholder experience, which we expected largely a random fluctuation and mutual funds sales slightly lower than last year. That being said, we reported record funds under management of $512 billion, which fuels current and future fee revenue. In Asia, we delivered record Insurance sales. This demonstrates, among other things, that investments in our brand and distribution are paying off. In Canada, our broad-based diversified financial services strategy has resulted in strong Insurance sales led by record sales in our Group Benefits business. In the United States, we continue…

Thank you, Donald. Hello, everyone. Don, I really appreciate your warm comments. I want to emphasize to all of you that it's been a real privilege and an honor to be the CFO of our great company for the last 3 years. I've thoroughly enjoyed working with our team here at Manulife, and I've also appreciated my relationship with everyone in the investment community here. And I'm confident that Steve is a great executive and that our company is in strong hands. Now let's discuss the first quarter results. For the first quarter of 2012, we earned net income of $1.2 billion, and that compares to a small loss that we reported in the fourth quarter of 2011. Importantly, our first quarter underlying earnings reflected the benefits of our balanced product and business mix and sequential improvements in new business strain and fee income relative to the fourth quarter of 2011. The quarter also benefited from favorable equity markets partially offset by changes in interest rate spreads. And there were a number of other notable items totaling $592 million, which I'll discuss further in a few minutes. We ended the quarter with MLI's MCCSR at 225%. We view this capital level as strong particularly in light of our expanded hedging programs. And this capital ratio benefited from strong first quarter earnings and the capital issuances that we did earlier in the quarter. Turning to Slide 7. You'll note there were a number of notable items included in the first quarter's net income. The favorable impact of equity markets was mostly offset by the unfavorable impact of changes in interest rates, particularly the change in spreads. The net direct impact of equity market in interest rate movements in the first quarter was an after-tax gain of $75 million. There was a…

[Operator Instructions] The first question is from Steve Theriault with Bank of America Merrill Lynch.

I have a question for Mike and a question for Cindy please. Starting with Michael, I think. Just trying to get a sense of the drivers of the decline and strain on the sustainability. So maybe there -- is there any way you can split out the decline, the sequential decline between higher in-quarter interest rates and the impact of repricing? I guess what I'm getting at is if rates remain where they are today being lower quarter-to-date relative to Q1, can we realistically expect strain to be sustainable at Q1 levels? And then for Cindy, if we go back to 2009, you took an $800 million charge with respect to lapse assumptions, I think about $500 million of that was attributable to the U.S. and Japanese VA business. If memory serves, at that point, when you -- I think you took the lapse assumption down to 1%, again if memory serves. And I think the message was that, that was pretty low and conservative. So just a couple things there. Is your review for Q3 really just a concern for the U.S. business? Or is it the VA business broadly? And I know you're reluctant to provide an estimate here because you're early on in the process. But I'm trying to get a bit of a sense as to the order of magnitude. For instance, if you took that lapse rate down to 0, what would that imply in terms of a worst case?

Okay, Steve. It's Mike, I'll start and then hand it to Cindy. In terms of the new business strain, first, just a recap. The new business strain improved significantly relative to Q4 2011. And that was anticipated, and it was really driven, as you noted, by a handful of factors. Not the least of which is the importance of the price increases that we implemented in 2011. And obviously, a slight increase in interest rates in first quarter were helpful as well. Rather than trying to disaggregate the quarter-over-quarter change, which I think would be fraught with imprecision, I think the more important question that I'll answer is, what do we anticipate in terms of strain going forward? And we do anticipate, as long as rates, let's just say, were flat with the end of the quarter for the remainder of the year, we do anticipate continued improvement in new business strain over the course of the year. And that's driven by a couple of important factors particularly for the U.S. business and the Canadian business. The first factor is the price increases that we've put into effect. That had some improvement in -- drove some of the improvement in first quarter of 2012, but it will drive even more of the improvement again based on constant interest rates in the remaining quarters of the year. So we'd expect to get additional uplift from those price increases. And the other change would be the product mix. As we've been selling more of the next generation of products, we expect lower strain in both Canada and U.S. and we'd anticipate seeing a boost on that in second quarter and also some additional boost in Q3 as the sales convert over to the new products. So at the end of the day, not only do I believe that -- again, assuming interest rates are flat, obviously, if interest rates drop, that's another matter. But assuming flat interest rates, I would anticipate that the strain will actually improve further relative to Q1 as opposed to revert back, if you will, to Q4. The only other factor that I'd note for completeness is the volumes. Obviously, we benefited from some of the volume improvement relative to the new business expenses. That's always a wildcard in terms of implementing rate increases. But at this point, our anticipation is that net-net that would be a positive. And then just before I turn it over to Cindy, I will just add, Steve, on the VA lapses, again, I really suggest that you not overreact to the disclosure. Again, at the end of the day, the basis changes in third quarter will likely have a number of items, both positive and negative. Again, it'd be early to try to gauge what that list was going to look like or what the impact is. Cindy, you want to add?

Thanks, Mike. Steve, it's Cindy. The -- in terms of the scope of this year's review, we are focused on the U.S. It's where we have the bulk of our experience, so that is the scope of our review this year. We are looking at experience both before the financial crisis and after the financial crisis. In terms of the 2009 range, I think that maybe the 1% that you're referring to, maybe it wasn't related to VA, but rather to Universal Life's alternate loss rates. So there's not much you can do in terms of extrapolating from that data point.

The next question is from Robert Sedran of CIBC.

A question on capital to start, I guess. Considering that sensitivities have come down so far, and you're pretty much at your 2014 targets. What -- can you help us understand what kind of number you're managing towards in terms of an MCCSR ratio? 225% is a very different ratio today than it would've been, say, 18 months ago and yet you still did a fair bit of issuance during the quarter. I know there's some redemptions coming up. I guess what I'm trying to figure out is how much flexibility you have in terms of deployment? And whether you'd consider drawing that down in an acquisition scenario?

Well, Robert, it's Mike. I'll start and see if Don wants to add. First, I appreciate your comments. They are on the money, that 225% is a very strong level particularly in light of the substantial hedging. And you're absolutely right, 225% today is a lot stronger than 225% 2 years ago before the big increase in hedging. So you're absolutely right. And you're also right that the issuances that we did, we also did that in light of the possibility of redemptions going forward. And so again, I wouldn't try to characterize it as managing to a specific number. I think it is multifaceted as opposed to trying to manage it to a specific number. And in terms of acquisition capacity, as we've said before, for smaller acquisitions that made economic and strategic sense, we believe that we could fund that with existing resources. For large ones, it would likely require external capital. And again, I wouldn't try to put a specific number on it, but those guidelines remain unchanged. Don, do you want to add?

Based on our economic capital models, one could infer that if we operated a ratio of something like 150, we'd be operating the credit quality equivalent roughly to an AA company. That's at 150. 225%, we're also obviously substantially above that. We're a conservatively run organization, and we've got very conservative regulations here in Canada. We don't frankly know where they're going to go in the new next few years, and we're going to err on the conservative side until such time that there is greater clarity. But we sleep pretty easy at night with the capital ratio that we've got now and the capital ratio below that. And -- but again, we don't know with perfect clarity where capital rules are going. They're normally changing here in Canada. This is not a uniquely Canadian phenomenon. But I'm sure, most of you are following the Solvency II, Solvency modernization in the United States. It's a moving feast where they're going internationally. So it's pretty tricky to term. So we're going to err on the conservative side for the next little while.

Okay. And just a quick follow-up question on the adverse policyholder experience this quarter of the $66 million. If I recall correctly, you did build the mortality reserve last year in the United States, which I would've thought would've increased the capacity to absorb some of the negative experience. So did that move not go far enough? Or is this a different business and experience then? And Donald's comment seemed to indicate that he was reasonably comfortable that it wasn't a recurring problem. I'm just curious what gives you that comfort?

Okay, Robert, I'll start and see if Jim Boyle wants to add. You're absolutely right. We did strengthen the mortality assumptions. You may recall that we actually changed the slope of the curve in terms of the mortality assumptions last year as part of the basis change. We were actually running better than anticipated in the early durations. It's the later durations that we're running higher. So again, the shape of the curve can also play an impact. It wasn't all one way. Again, our view, we've looked at that, and it's early to conclude. But everything we see would suggest that it is an aberration. And that again, this is going to bounce around quarter-to-quarter. We would not view this as indicative of a new, more permanent problem. But obviously, it's something that we felt like it was significant enough to note as a notable item. Let me see if Jim wants to add.

I think that's a pretty solid answer, Mike. All I would add is it's life and LTC. And in LTC, we did the major basis change a few years ago. We still feel comfortable with the assumptions there. I think you'll recall that in the fourth quarter, we had a claims gain in the Long-Term Care. And this quarter, we had a slight loss, but a loss that was not inconsistent with losses we've had in the last few quarters. So there's some lumpiness that we see there. On the Life side, we saw a slightly larger number this quarter. We had a lot of death claims and it's very hard to predict how death claims are going to come in. But we suspect they're going to revert to more normal levels. So insurance companies periodically do see a lot of claims in 1 quarter on Life and we did this quarter. So again, we're not overly concerned at this point. Business is generally operating as we expected.

The next question is from Tom MacKinnon with BMO Capital.

I just wanted to take this question on capital a little further here. If we look at the MCCSR and MLI right now, 225%, but you've got some headwinds coming up. You've got the hybrid redemption coming up, the CLA -- CIA calibration, URR. And I guess as we get into first part of next year, you're going to have the IAS 19 adjustment. I mean, all these things, even excluding the phase-in of the CIA calibration, is -- would be over 20 points or about 20 points on the MCCSR of MLI. So I mean, what are you thinking? How should we think about this? What kind of levers would you have? Just some of your thoughts around that?

Sure. Tom, it's Mike. I'll start. Again, I think regarding the known headwinds, I think your list is a fair one. In our view, as we look at our best estimates, best current estimates of each of those items, is that in aggregate, those items would be manageable in terms of the capital impact. Now having said all of that, the -- as we've talked about before, Tom, we do remain vigilant in terms of the downside of risk management. And as we've talked about many times before, we do believe that we have other good options to improve the capital ratio if markets, for example, were reasonably poor later this year. I mean, one example that we've talked about publicly before is doing additional reinsurance transactions. We completed a favorable one in 2011. We think there are other options in a similar category that could help us in 2012. So early to be definitive, but it's fair to say that number one, the items that you listed out we're very cognizant of, and we don't have perfect estimates, but we believe within the range of our estimates that, that capital impact is manageable. And then if other things go bump in the night, we believe we have other options like reinsurance to be able to keep our capital ratios at strong levels.

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

Yes. Tom, that's an important question. And I -- first, I think that's likely to be a couple of years before we have clarity in that. So I think that is not something that I would count on helping our ratio here in 2012, 2013. Obviously, I'd love it, and I think it'd be very fair if we did get credit sooner than that. But it's not something that we're counting on in the near term.

I think, Tom, in fairness to our regulators, I think it's time for our industry to come together to make a suggestion to the regulators of what the credit should be. They're not saying that they would adopt it, but I think we've got a lot of discussions back and forth. And I think maybe that's a way to break the logjam, is for us to put forward some suggestion with some of our peers as to how the credit might operate. And also you can take that or leave it, but I think that would be a constructive suggestion. I mean, the fact of the matter is, as you're well aware, the risk complexion of our company has changed very significantly as a result of the hedging. And we do not get -- we get relief in that it doesn't add to our capital credit or capital charge. In fact, under certain conditions, that will no longer be true. In fact, the more hedging we do, the more capital, required capital will be added, which is totally counterintuitive. So it's time for us to make some proposals to the regulators how that ought to be done. I think Mike's right though, it's probably going to be a fair bit of time in digestion on their part and the industry's part before we'll have an agreement there.

The next question is from Joanne Smith with Scotia Capital.

I just wanted to follow up on that question. And then, I have a separate question. I guess the part of the question that Tom asked that wasn't answered was how much is the current cost that's hedging, weighing your MCCSRs down? The second question is related to the policyholder experience in the quarter related to the Canadian disability business. And I've been listening to a lot of conference calls this quarter, and there's been a lot of talk about disability and how it's been developing poorly. So I was just wondering how you get that level of comfort that this was a onetime blip?

Okay. Joanne, it's Michael. I'll start. First, in terms of how much is it weighing down our MCCSR, I'm not trying to evade either your question or Tom's question, I just -- I'm not sure what we would compare it to. I mean, we're certainly not going to go back to an unhedged world. So I'm not sure of the relevance of trying to spike out and desegregate the hedging specifically as a near-term pressure point on the MCCSR. I think the main point is that we're not counting on any benefit from -- in terms of a change in the capital rules or change in the framework or anything like that from us. When we say to Tom that we're comfortable with our capital levels, and we think the known headwinds are [indiscernible]. On the LTDPs, again, I'll start and see if Paul wants to add. Number one, it's not lost on us that the increase in LTD claims and the lower claim termination rates have been an industry phenomenon. In fact, arguably, our experience was better than the experience of the industry really for about the last 6 quarters or so while we were a positive outlier. And I think that goes to show the strong execution of Paul's team in terms of managing this business. The -- in terms of why we think it's manageable, number one, we've been in this business for a long period of time, I think we know how to manage it. Number two, it is annually repriceable. So the -- again, we have an opportunity to increase rates as accounts renew if we think it's a more permanent phenomenon. Let me see if Paul wants to add.

Yes. Joanne, it's Paul here. There's really 2 things you need to think about. One is lower interest rates. So when we get claims today in this lower interest environment, we have to hold a larger LTD reserve for those future benefit payments that we will be making. So that's a phenomenon that we recognize and have increased prices for. And what you -- and the price increases will be implemented as renewals come up with our clients over the next 12 to 18 months. So that as long as interest rates stay where they are now, that should take care of itself. And the other piece is incidence. We don't think this is a trend yet. But again, if it is, and we conclude that it is, we will price it into the products. And again, as Mike said, they're annually repriceable, so there's no systemic in-force block issues here.

You don't have any 2-year or 3-year guarantees?

No. These are all annual repriceable Group products. We don't have anything of that nature, of material.

The next question is from Gabriel Dechaine with Credit Suisse. Gabriel Dechaine - Crédit Suisse AG, Research Division: Just one more question on the capital and just to try to tie in your comments about us taking into consideration your capital and context of the significantly reduced earnings sensitivities. When I look at Manulife, I think of 220 MCCSR being kind of your target. Is that too high? Are you willing to target something lower now given the reduction to your earnings sensitivity? And then on the lapse assumption, the strengthening for VA, in 2009, as Steve Theriault mentioned earlier, you had some reserve strengthening. It's -- and last year as well, I think about $400 million, and it sounded like in 2010, can you tell me how much VA lapse assumptions strengthening has been tied to the U.S. VA block over the last 3 to 4 years? And since this seems to be like a recurring issue, would we have to assume that it could be quite large to kind of put it to rest, for a lack of a better term?

Okay. Gabriel, I'll start, and then I'll see if Cindy wants to add. First on your question on capital, I would not try to pin it to a specific number. I mean, it has never been a specific number. I can anticipate -- I don't anticipate any time in the near future that it would be pegged to a specific number. I think it's based on a whole number of different factors. Obviously, the expanded hedging gives us a lot more cushion than what we had before. I mean, the cushion for example relative to 150% regulatory level is substantially higher now than it's been anytime in the recent past because of all the hedging. We can withstand significant declines in equity markets and interest rates as a result of that hedging. So to answer your question very bluntly, my view is that 220 is too conservative of a target given the hedging. And I'm not going to give you an alternative number, but I think 220 is too ultraconservative even for a conservative management team like ours. Gabriel Dechaine - Crédit Suisse AG, Research Division: So you'd be comfortable running at 210 for a while?

Well, I'd really -- I'd rather not try to pin down to a certain number because again, I think it would be a number of different factors. What else did we see on the horizon? What else, what weather storm clouds do we see? Do we see a bright sun? Or do we see storm clouds? Again, I really wouldn't try to pin it to a number, but I certainly think 220 is too conservative. On the variable annuities, and maybe I should've said this in the prepared remarks, I really would suggest, Gabriel, that you not again, overreact to the disclosure. The -- really, what we're signaling here is that we see some early evidence of some unfavorable post-crisis experience here. And we've been operating with a notion under a principle that as soon as we see any kind of bad news, we think it's important to note it. And again, this is relatively immature experience post-crisis. It is not in line with the experience that we saw pre-crisis. And the question is, how much credibility to give the lower lapse rate that we've seen more recently? Is it predictive for the future? Is it an aberration? Again, if we simply gave it equal weighting with the pre-crisis experience, we'd say it's no big deal. So again, I -- it's early to draw any conclusions. We're just signaling that again, the post-crisis lapse rate has not been as favorable as what our long-term assumptions would be. Let me see what Cindy would like to add.

Thanks, Mike. So I would echo all your comments in terms of the lapsed review. We're just trying to follow through on giving you a signal, and we're looking at experience and early indications of storm clouds. Prior basis changes, as I've said in the past, there are very -- there are a lot of different policyholder behavior assumptions embedded in VA valuations. And so those prior basis changes would've been looking at one aspect or one block of business, say, Canada. I don't have with me a breakdown of prior basis changes by country, so that's something we'd have to take offline. Gabriel Dechaine - Crédit Suisse AG, Research Division: You're breaking in and out a bit there.

Sorry. I guess I moved the mic a little bit away. So we would -- in terms of the prior basis changes by line and by country for VAs, I don't have that with me, but -- so we would have to take that offline. Gabriel Dechaine - Crédit Suisse AG, Research Division: It was a portion of $800 million in '09, a portion of $600 million in 2010 and $400-and-some million in 2011, but those are somewhat different than what you're seeing now, the causes for those strengths?

There are -- yes. There we would have adjusted different aspects of our lapse and policyholder behavior assumptions. We would've looked at Japan, for example, as some of that would've been Canada. There would've been, last year on the U.S. block, we looked at the ultimate lapse rate post the surrender charge period. So there were different aspects that we looked at, at different points in time based on the emerging experience. Gabriel Dechaine - Crédit Suisse AG, Research Division: What's the -- can you pinpoint like the subtlety that you're looking at today? Or you're seeing today?

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

Yes, Gabriel, Donald here. It doesn't make any of us very happy. We're, I guess, less afraid than most that open -- reopen those assumptions and make sure we got them right as new experience emerges. And under U.S. GAAP, you wouldn't reopen those assumptions. There's no panic here. There's no suggestion that some -- we've had analysts in the past talk about scenarios that would scare a lot of people on the phone. There's no suggestion that, that's happening. But you also have to figure out how long after the crisis do things rebound more to normal levels, and that's what Cindy and the team are trying to figure out.

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

Just a couple questions about Asia. First, I'm just looking at expected profit in Asia. I mean, it was a very strong quarter this quarter, and I mean the broader takeaway in expected profit is it's nice to monetize and trending upwards. So I guess the first question is, how does that growth break out, growth and sort of expected profit or maybe core business break out across Japan, other Asia and Hong Kong? What are underlying earnings growth rates in those 3 segments? Ballpark numbers?

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

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

Again, rather than us trying to speculate and potentially get it wrong, Peter, let's figure out how to follow-up -- follow back up with you and perhaps get some additional information out in the public domain.

Okay. And the other question is just around acquisition speculation. And you hired a CFO with very strong Asian background. So that's probably going to fuel it even more. But given just capital will be, even as strong as your balance sheet is capital as measured by the regulators will be constrained. Leverage from annual life is probably higher than you would want it to be in the normal course environment. Do you really have to acquire in Asia? I mean, why not just rule that out and focus on organic growth?

Well, Peter, we're not going to go too far down the speculation because we're trying to steer clear of being too specific on M&A possibilities for a whole number of reasons. But I guess all I can say is, we are in the deal flow. There are properties that we would see from time to time that are highly attractive and that we bid on. We certainly get a small fraction of the ones that we pursue because we're very disciplined bidders, but there are properties that are attractive. But we're also mindful at what the multiples our stock is trading at and what can happen. I guess we also assess that if we saw a really attractive deal, that they are pools of capital that we would access. There's a lot of support for us. We have a good track record in executing acquisitions. Those are all very general comments quite specifically, and I think what shareholders can take away as an absolute promise is that we will be disciplined in any process that we get involved in. And we never fall in love with a deal. We stay disciplined right to the very end. And you're absolutely right, organic growth is the best way to grow, and -- but we don't mind supplementing that by acquisitions where they make really good sense for shareholders.

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

Well, we are doing so well in Asia, it is hard to imagine something being transformational other than the one that's been heavily rumored from some years ago, which was AIA. And I refuse to comment on that one specifically. But that would've been, I don't know transformational's the word, but pretty exciting. And with the different prices then the stock's trading, their stock is trading now, that's for sure. We have a very complete business in Asia. So it's not like we have to do anything. That's the wonderful advantage that helps you stay disciplined is when you don't have to do anything. You don't have to pay a strategic premium. Having said that, we're anxious to add to our franchises in Asia, and we're happy to look at transactions that could make sense.

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

The next question is coming from Doug Young with TD Securities.

Just I guess back on the capital. Just on Page 22, you talked on the bottom paragraph a lot about new capital rules, and I just want to hopefully dig a little bit further into it, Mike or Donald. But it sounds like, and correct me if I'm wrong, that new capital rules are probably not coming until 2016, but they're going to be more applicable to the Holdco as everybody had thought. And it sounds like you don't think it's going to be an even playing field across the insurers in Canada. Do I have that right? And can you talk a little bit, give us details or even generalities in terms of some of the discussions that you're having around this topic? And when we would get more detail around the new capital rules?

Sure, Doug, it's Mike. I'll start. First, I'd emphasize there's a lot of uncertainty in this area. There's just -- there is not yet clarity based upon what OSFI has said publicly or even more private discussions around what the new rulebook is going to look like. So our best estimate at this point is that new rules would likely go into effect for 2016. But again, more specificity than that would be speculative. The concern that we have, for example, around the level playing field, I'd put into 2 buckets. Number one, at least based on what we've seen to date, it does appear that OSFI is moving faster, for example, than their counterparts in the U.S. And our concern, of course, would be that our U.S. business ends up being governed by both Canadian and insurance standards and in some sense, the tougher of the 2 in any given time period versus the U.S. competitors that don't have that. So we have that concern around the level playing field. The other issue around the Holdco is that it's not clear what kind of OSFI rules there would be for non-Canadian Holdcos or even for non-insurance company Holdcos like Great-West. I mean, are they going to expect somebody like a Munich Re to publish a Munich Re Holdco MCCSR? We don't know. But the point is, it's not clear to us that it will be a level playing field than -- and that's why I say the lack of specific clarity at this point, we view as a risk factor and again, one of those known unknowns.

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

Yes. Doug, I got to tell you, I find that term to be a horrible injustice. I would not characterize it as double leverage. Since you're referring to the, I suspect, the senior debt that we've issued in the Holdco, again, our view is that, that is very, very similar and should not get different treatment than sub debt issue that the Holdco because it's in the same place in the overall pecking order. It's still completely subordinate to all of the policyholder obligations, for example, in the operating company. But having said that, the concern that we have around potential Holdco capital ratios is if they don't give any credit for senior company -- or excuse me, senior debt at the Holdco, but they do give credit for sub debt at the Holdco for companies like ourselves who have a long history of issuing senior debt. We view that as changing the rules after the game is played. And again, not a level playing field versus starting over and making the rules level playing field going forward.

Okay. And just a second -- I know you're saying not to overreact around the U.S. VA policyholder lapse experience. But I guess it is frustrating to know that there is more coming in the U.S. And I guess the fact that you've mentioned it would suggest that it's probably material enough. So $200 million to $300 million, and I'm just trying to get a better sense of, what really -- is there anything else that's changed here? And can you talk maybe about what the lapse rate was pre-crisis? And what your lapse assumptions are now? And maybe give a little bit of color?

Okay. So Doug, a couple things. First, as I said earlier, there are likely to be a number of items as part of the basis change. And I would anticipate that there'll be pluses and minuses. This just happens to be one of those potential minuses that we had enough data that our view was that it was important to get that out on the table. I mean, our rule of thumb is if we're concerned about it, we need to put it out in the public domain. I wouldn't put any kind of number on it. So just to be clear the hypothetical range you gave was your range, not ours. I would certainly not try to put it out there. And in terms of what's changed, it really goes back to what Cindy said earlier and what I said earlier. The -- it's immature data, but the immature data post-crisis would suggest that lapses are lower than what they were for similar in the money policies pre-crisis. And the question is, is that a harbinger of a new long-term trend where people hold onto these products because they felt a lot of insecurity during the crisis? Or is this a temporary phenomena? And once people see the S&P back at 1500 or something, they revert to more normal pre-crisis behavior. We don't know, and that's exactly the judgment that Cindy and her team will be working on in conjunction with the business units over the next 6 months as part of all the basis changes. So that's why we just suggest not to overreact. But I -- we just feel like it was good disclosure. Again, we've worked hard to do that over the last 3 years, and it's now an important part of our culture. Let me see if Cindy wants to add.

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

And can you give numbers like what was the lapse rates, pre and post, and what your assumption is?

Doug, I'd rather wait until we've completed more of the analysis. Again, I just -- we'd end up giving you a partial data. You would try to extrapolate. You'll probably draw conclusions that wouldn't be necessarily on the mark. Just let us do our job, and we will give you as strong an update as we can next quarter.

The next question is from Michael Goldberg with Desjardins Securities.

A couple of questions actually looking at value-added. So I noticed that you restated your protection DNB historically. But I also see that for the latest quarter, the amount is up very dramatically from recent prior periods and it's also up year-over-year. So can you remind us for the reason, for the restatement? And also, the reason for the strength in the latest quarter? And I'll just give my second question, which is related. Where do you think you have the greatest potential for growth in value-added from sales over the next 1 to 2 years in terms of products and markets?

Okay. Michael, it's Cindy. I'll start with the first question in terms of the reason for the restatement, as well as the reason for the very good new business embedded value results for the first quarter. In terms of the restatement, that is a practice that we've followed in prior years as well. It really just restates the prior year new business embedded value for the changes that we made in terms of the discount rates for the -- at the -- for new business this year, so that you've comparable year-over-year new business embedded value numbers to look at. And that restatement is or that change in the discount rate is the same as what we would've reflected in our in-force embedded value that we published at the end of the year. So it's just bringing those all into alignment and giving you numbers year-over-year that you can look at. In terms of the Q1 results, largely, you may remember from last year that in Q1 and Q2 and as particularly in Q1, a lot of our P&C treaties, our reinsurance treaties, are renewed in the first quarter and some in the second quarter. And they add to new business embedded value but they don't -- are not reflected in our sales numbers. And that's about half of the increase or maybe a little bit more than half of the increase is due to that. And the remainder of the increase is, compared to fourth quarter 2011, is due just to increased business volumes largely. In terms of where the future goes, I guess there are many people around the table who could chime in on that. But certainly, we would see Asia contributing heavily to growth in new business embedded value in the future. But as well, Canada and the U.S. would also be contributing to new business embedded value growth in the future. I don't know if Jim, Bob, or Paul want to say anything.

The next question is from Darko Mihelic with Cormark Securities.

I also wanted to ask a question on sales, and one of the things that you highlight in the report is the 16% growth in contract and agents in Asia as part of the reason for the growth. What are you targeting for this year in terms of growth in agents? And how should we extrapolate, presumably if you've grown your agent force by 16% that many of them may not actually be hitting their full stride in terms of sales power. So the question there is, what are we looking for in terms of overall growth in Asia in terms of sales and agents?

Darko, it's Bob Cook here. I think we've, over the last 4 or 5 years, have achieved roughly that order of 15% growth rates. So it may be slightly higher or slightly lower in any year, but building that distribution capacity is a core part of our strategy going forward. And we're seeing a great success already this year continuing in places like Indonesia and the Philippines and Vietnam, so we would expect that to continue going forward. The second part of your question is that future sales growth is, in many respects, the function of the ability to build the distribution capacity in the current period. So some of the sales success that we've had in the first quarter was the result of the recruiting success that we had last year. And so if we can continue that this year, that will be a good advanced signal of our ability to deliver continued sales growth in the years ahead.

And just a quick follow-up on that. The strain is actually positive in Asia this quarter by a fairly large amount. Do you expect -- I mean, and given Michael's commentary that strain is likely to improve. In future periods, if interest rates stay flat, what is driving that in Asia? I would've thought that perhaps competition would step in here and cause strain to actually at some point actually turn negative rates.

Darko, it's Mike. Just before Bob answers that, I want to be clear, my comments earlier were specifically around North America, that we expect new business strain to improve in both U.S. and Canada in Qs 2, 3 and 4 here in 2012. I specifically cited North America, not Asia. Again, I'll let Bob start in terms of Asia. I may have a comment as well.

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

And Darko, it's Mike. The only other point I would add, we did see a significant uptick in cancer sales in Japan, which were very helpful. Again, I would not take that as the new run rate given some of the tax law changes are over there. So that contributed in first quarter. We'll probably see some contribution, a little lower contribution in Q2 and then probably some step-down in the second half of the year. So once again, Asia is more moving parts where I would expect pluses and minuses. Whereas I would expect both Canada and U.S., the strain to improve in the quarters relative to Q1.

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

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

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