Manulife Financial Corporation (MFC) Q2 2013 Earnings Report, Transcript and Summary

Anique Asher Donald A. Guloien - Chief Executive Officer, President and Director Stephen Bernard Roder - Chief Financial Officer and Senior Executive Vice President Cindy L. Forbes - Chief Actuary, Executive Vice President and Chairman of Capital Committee Rahim Badrudin Hassanali Hirji - Chief Risk Officer and Executive Vice President Craig Richard Bromley - Executive Vice President of Japan Operations and General Manager of Japan Operations Warren Alfred Thomson - Chief Investment Officer and Senior Executive Vice President

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division Tom MacKinnon - BMO Capital Markets Canada Steve Theriault - BofA Merrill Lynch, Research Division Mario Mendonca - Canaccord Genuity, Research Division Robert Sedran - CIBC World Markets Inc., Research Division Gabriel Dechaine - Crédit Suisse AG, Research Division John Aiken - Barclays Capital, Research Division Peter D. Routledge - National Bank Financial, Inc., Research Division Doug Young - TD Securities Equity Research Darko Mihelic - Cormark Securities Inc., Research Division Ohad Lederer - Veritas Investment Research Corporation Michael Goldberg - Desjardins Securities Inc., Research Division

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the Manulife Financial Second Quarter 2013 Financial Results Conference Call for Thursday, August 8, 2013. Your host for today will be Ms. Anique Asher. Ms. Asher, please go ahead.

Thank you, and good afternoon. Welcome to Manulife conference call to discuss our second quarter 2013 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast live, 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. Today speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are implied in making forward-looking statements and actual results may differ materially from those expressed or implied. For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ, please consult the slide presentation for this conference call and webcast available on our website, as well as the securities filings referred to in the slide entitled Caution Regarding Forward-looking Statements. We have also included a note to use the slide that sets out the performance on non-GAAP measures used in today's presentation. [Operator Instructions] With that, I'd like to turn the call over to Donald Guloien, our President and Chief Executive Officer. Donald?

Thank you, Anique. Good afternoon, everyone, and thank you for joining us today. I'm joined on the call by our Chief Financial Officer, Steve Roder, as well as several members of our senior management team, including our Asian General Manager, Bob Cook; our Canadian General Manager, Marianne Harrison; our U.S. General Manager, Craig Bromley; our Chief Operating Officer, Paul Rooney; our Chief Investment Officer, Warren Thomson; our Executive Vice President of General Account Investments, Scott Hartz; our Chief Actuary, Cindy Forbes; our Chief Risk Officer, Rahim Hirji; and our Treasurer, Steven Moore. This morning we announced our second quarter 2013 financial results. And while our net income was not as strong as we would have liked due to a number of market-related items, I'm encouraged by the substantial progress that we have made on our growth strategies, our solid core earnings, our record wealth sales and the reduction in our run rate hedging costs. I would also like to start the call reviewing the progress on our growth strategies made during the second quarter. We continue to develop our Asian opportunity to the fullest. Our wealth sales increased for the third consecutive quarter and were more than double those of a year ago. We increased our market share and achieved the leading position in net cash flows in the Mandatory Provident Fund business in Hong Kong. We also enhanced our distribution network with a new bancassurance agreement in Malaysia. Insurance sales in Asia were below our expectations and only 6% higher than the second quarter of 2012 after adjusting for the runoff in last year sales in advance of tax changes, as well as pricing actions to improve margins in that territory. We also continue to grow our wealth and asset management businesses and in the second quarter, we achieved record Mutual Fund sales in each one of Asia, Canada and the United States, which contributed to another quarter of record funds under management, which as you know, drives future fee income. On a year-to-date basis, we have now achieved over $10 billion in net, and I stress net, mutual fund flows, reflecting our robust distribution partnerships, our strong product suite, strong performance and improved market conditions. Our balanced Canadian franchise continued its steady progress. And in the second quarter, Mutual Fund sales in Canada continue to outperform the market with sales more than double those of a year ago. Manulife Bank's net lending assets increased, and we saw significant improvement in new loan volumes over the previous quarter. And despite the fact that our pricing actions have not been matched by some of our competitors, we saw an increase in individual insurance sales of 11% from the first quarter of 2013 with, needless to say, much improved margins. In the United States, we continue to grow our higher ROE, lower risk businesses, consistent with our strategic plan. Our Mutual Fund business achieved record sales, net flows and assets under management, driven in part by funds added to the preferred list and selected for inclusion in model portfolios. Our 401(k) sales declined due to lower plan turnover in the market, but also our recently launched mid-market 401(k) in full-service group annuity products, which are now gaining traction. While our U.S. insurance sales overall were flat compared with a year ago, again consistent with the strategic plan, we saw increased sales of Life Insurance products with more favorable risk attributes for our company. We also further strengthened our distribution capability with the announced acquisition of an independent broker-dealer to add to our already impressive distribution capability in the United States. We will continue to make investments to enhance our distribution networks globally. In terms of our operating performance in the second quarter, we reported net income of $259 million. This was not what the market expected and occurs as a result of a number of items that are unusual in nature, but say very little about our earnings capability going forward. Steve will elaborate on these later in the call. I hope it is obvious that the volatility in earnings is being constrained, and our earnings in the second quarter were a significant improvement from the same quarter last year. We also reported core earnings of $609 million and on the top line, we achieved record wealth sales, which increased 60% from a year ago. The performance of our wealth and asset management businesses, so far in 2013, has been outstanding. While our insurance sales did not match the strong results of last year, we have much improved margins and are developing and launching new and innovative products that we expect to take traction in the second half of the year. And finally, we also took advantage of favorable markets to reduce our quarterly run rate hedging costs by $30 million. In summary, our outlook is positive, and we are confident that our strategies will continue to yield results for shareholders and position us to achieve our goal of delivering $4 billion of core earnings in 2016. With that, I'll turn it over to Steve Roder, who will highlight our financial results, and then we'll open the call to your questions. Thank you.

Thank you, Donald, and hello, everyone. Let's start on Slide 6, where we indicate the financial highlights for the second quarter of 2013. We reported net income attributed to shareholders of $259 million, which was impacted by a charge of $291 million, $180 million of which is expected to reverse in future quarters. In terms of our performance, we generated core earnings of $609 million. We increased our MCCSR ratio by 5 points to 222%. We recorded new business embedded value of $307 million. And we achieved approximately $175 million pretax annual run rate savings from our Efficiency & Effectiveness initiative. On Slide 7, you will see our progress on core earnings. In the second quarter, our core earnings was $609 million, a decrease of $10 million from the first quarter of 2013. The decrease was primarily due to the non-recurrence of prior quarter tax benefits in the U.S., which was partially offset by a higher fee income in wealth businesses and lower expected macro hedging costs. Unfavorable lapse experience was largely offset by improved claims experience this quarter. Turning to Slide 8. In the second quarter, as I previously mentioned, our reported net income was impacted by $291 million of charges, of which $118 million are expected to reverse in future quarters. Market-related items totaled $242 million and included approximately $100 million related to the impact on our policy liabilities arising from the increase in interest rates on balanced and bond funds supporting our non-dynamically hedged variable annuity business. We are in the process of updating our investment return assumptions as part of the third quarter actuarial review, which may largely offset these charges. Approximately $50 million in realized hedging costs in order to maintain our overall equity hedging position within our risk targets. Japanese equity markets were more than twice as volatile as the S&P 500 during the second quarter. Failing ongoing volatility, we also would not expect this charge to recur. And finally, a $70 million charge related to the quarterly update to our ultimate reinvestment rate or URR assumptions. The beneficial impact of increasing interest rates helped reduce the URR charge from $97 million last quarter. In addition, we reported a $49 million investment-related charge, largely due to the impact on our policy liability investment assumptions arising from a significant purchase of Government of Canada bonds. This purchase triggered a charge of approximately $80 million, which we expect will reverse in future quarters as we reinvest these bonds into higher yielding assets. On Slide 9, you can see the total company core earnings in the second quarter of 2013 benefited from improvements in core earnings in Canada and lower hedging costs, which were offset by the expected decline in the U.S. division's core earnings. In Asia, core earnings were in line with the prior quarter, as growth of in-force earnings were offset by the currency translation of the depreciating Japanese yen. In Canada, the improvement in core earnings was primarily due to improvements in claims experience and significantly low and new business strain on insurance products, partially offset by unfavorable lapse experience. In the U.S., the decline in core earnings was mostly due to the non-recurrence of onetime tax benefits recognized in the prior quarter and unfavorable policyholder experience, which was partially offset by higher net fee income. In addition, we took advantage of the favorable economic conditions to reduce our macro hedging costs in the quarter by $20 million. I will elaborate on this later in my presentation. On Slide 10 is our source of earnings. Here are some of the highlights. Expected profit on in-force increased 2% on a constant currency basis, largely reflecting higher fee income from the increase in our funds under management. New business strain improved due to pricing actions, a more favorable new business mix and higher interest rates, which was partially offset by higher wealth volumes. This quarter's experienced losses reflect a number of market-related items, which I previously mentioned, as well as the lapse experienced, partly offset by favorable interest rate movements and claims experience. Management actions and changes in assumptions largely reflect expected macro hedging costs, AFS bond losses and actuarial model refinements. Earnings on surplus declined due to the impact of rising rates on mark-to-market assets held in surplus. However, core earnings on surplus was consistent with the prior quarter. And finally, income taxes reflect income earned in lower tax jurisdictions, tax-free investment income and the favorable impact of provincial tax rate changes in Canada. Turning to Slide 11, you will see that our total insurance sales for the second quarter were $929 million, down 3% from the second quarter of 2012. Sales in Asia declined 31% due to a run-up in sales in advance of tax changes and pricing actions to improve margins last year. Excluding non-recurring items, Asia insurance sales increased by 6%, although they do remain below our expectations. In Canada, although individual insurance sales were lower than in the prior year, sales in Group Benefits drove a 19% increase. And in the U.S., while insurance sales were in line with the prior year, the underlying product mix reflected increased sales of products with a more favorable risk and a return profile. In addition, in the second quarter, we saw a significant improvements in insurance new business strain in North America from a year ago, reflecting the improved product mix and pricing actions. This was, however, mostly offset by the non-recurrence of last year's substantial new business gains related to the run-up of sales in Japan and Hong Kong. Turning to Slide 12 in wealth sales. In the second quarter, we achieved record wealth sales of $13.7 billion, an increase of 60% from the second quarter of 2012. Driving the strong sales were record results in Asia where wealth sales were more than double the prior year with double-digit growth in all territories and record Mutual Fund sales in each of Asia, Canada and the U.S. We are particularly proud that our year-to-date net Mutual Fund flows surpassed $10 billion, representing a substantial increase from the same period last year. On Slide 13, you can see that strong growth of our wealth business was reflected in our premiums and deposits. For wealth products, second quarter premiums and deposits was $17.4 billion, an increase of 54% from a year ago, reflecting significant sales in our Mutual Fund businesses. Insurance P&D increased 2% to $6.3 billion, reflecting the growth of our in-force business in Asia and Group Benefits in Canada. Turning to Slide 14. While our new business embedded value, or NBEV, was largely in line with the prior year at $307 million, it reflects a 41% increase in wealth NBEV, largely as a result of the very strong Mutual Fund sales. Insurance NBEV was down 16%, reflecting lower sales in the quarter, partially offset by improved profitability. Insurance NBEV has increased consistently over the last 3 quarters to $177 million and is evidence of the improvements in our business mix and our repricing actions. Turning our focus to the operating highlights of our divisions. We begin with the Asia division on Slide 15. Core earnings for the Asia Division were in line with the prior quarter. Asia achieved record wealth sales that were more than double the prior year with growth in all territories. And insurance sales while not yet where we would like them to be, increased 13% over the previous quarter. On Slide 16, you will note that Asia Division's total annualized premium equivalent, or APE, and total weighted premium income, or TWPI, were up over the second quarter of 2012 by 14% and 16%, respectively. Turning to our Canadian Division operating highlights on Slide 17. Core earnings for the Canadian Division improved 26% from the prior quarter to $225 million. Wealth sales in Canada were up 26% to $3.1 billion, reflecting record Mutual Fund sales and normal variability in Group Retirement Solutions. And while Manulife Banks new loan volume in the second quarter reflected a slowdown in the residential mortgage market last year, we saw a significant increase from the first quarter of 2013. Insurance sales of $534 million in the second quarter were 19% higher than in the prior year, largely as a result of a single large case sale in Group Benefits. Although individual insurance sales were lower than the prior year, sales increased in the previous quarter and reflect higher margins. Moving on to Slide 18 and the highlights for the U.S. Division. Core earnings in the U.S. were $336 million. Second quarter wealth sales of $7.4 billion were up 58% versus the prior year. Record Mutual Fund sales driven by strong distribution partnerships and improved productivity were partially offset by lower pension sales. Insurance sales of USD 130 million were in line with the second quarter of 2012, reflecting improved performance on our redesigned Long-Term Care and Life Insurance products, with more favorable risk and return profiles. Turning to Slide 19. Funds under management reached another all-time record of $567 billion at the end of the second quarter. Slide 20 highlights our diversified and high-quality investment portfolio as of June 30, 2013. Slide 21 summarizes the capital position for the Manufacturers Life Insurance Company. We ended the quarter with a further strength in regulatory capital ratio of 222%, an improvement of 5 points over the first quarter of 2013. The improvement in our capital ratio reflects the favorable impact of higher rates on required capital and a $200 million preferred share issuance in the quarter. Slide 22 summarizes our hedging activity in the quarter. During the second quarter, we took advantage of favorable market conditions to improve the effectiveness of our hedging program by adding $2 billion in guarantee value to our dynamic hedging program in Canada and an additional $800 million in the United States. We also began to hedge volatility and reduce Japanese yen exposure. And in addition, we unwound macro hedge positions to maintain our equity risk targets. In the early part of the third quarter, we also added an additional $5.7 billion in guarantee value to our dynamic hedging programs in the U.S. and Japan. The reduction in hedge positions increased our second quarter core earnings by approximately $20 million, and we expect a further $10 million benefit in the third quarter if equity markets and interest rates remain at June 30 levels. As you can see on Slide 23, we've been active in the quarter and have deployed capital on opportunities, which will further strengthen our distribution capabilities. In Malaysia, we commenced an exclusive 10-year bancassurance agreement with Alliance Bank, giving us access to their 1 million customers. We started in-branch sales under this new agreement in May. In the United States, we agreed to acquire Symetra Investment Services to bolster the John Hancock financial network. This represents a 15% increase in advisers for the network. And subsequent to the end of the quarter, we announced our exit from the Life Insurance business in Taiwan. This transaction, subject to regulatory approval, is expected to close by the end of the year and result in a 3-point benefit to MCCSR on closing. Before I conclude, I'd like to address a couple of topics which may be on the minds of our shareholders. The first topic is the outlook for our 2013 review of actuarial methods and assumptions. We will be completing our annual review of actuarial methods and assumptions in the third quarter of 2013. The scope of this year's review covers more than 150 methods and assumptions and includes morbidity, mortality, lapse and premium assumptions on Long-Term Care, premium persistency on U.S. Universal Life, lapse assumptions on certain blocks of business, annuity, mortality for some Canadian products, the modeling of seeded reinsurance and guaranteed investment accounts in Canada, as well as the annual review of investment return assumptions. While it is still early in the process, we expect that the third quarter review of actuarial assumptions will result in a charge that is lower than in each of the last 4 years. We also expect a number of positive onetime items in the second half of the year. The net impact of all of these items, including the actuarial assumption review, is difficult to estimate with precision since the work is still ongoing, but our preliminary analysis suggest it will not be substantial in either direction. The second topic I will address is an update on our 2016 objectives. As we set out in our press release, we continue to believe that our 2016 financial objectives, while bold, are achievable. The main growth drivers are expected to come from earnings growth in our wealth and insurance businesses, as well as a smaller contribution from our E&E initiative. Let me elaborate. Firstly, core earnings from our Wealth Management business is expected to benefit as we have developed a scalable platform, which we expect will result in improvements in the bottom line through operating efficiencies in our Mutual Fund businesses. Earnings are also expected to benefit from higher fee income fueled by net flows, and we expect to realize benefits in the runoff of deferred acquisition costs on our legacy variable annuity business. We have already seen evidence of strong wealth sales in each of our divisions in 2013. Secondly, our insurance business is expected to benefit from the growth of expected profit on in-force due to the higher release of margins as business matures, new business added to in-force and reduced strain due to pricing actions. While our insurance sales in the first 6 months of 2013 did not match the strong results of last year, in part due to price increases, we have significantly improved our margins and continue to develop and launch new and innovative products. In addition, the new business embedded value that we've generated on our insurance businesses continue to increase and in the second quarter, was $177 million, reflecting an improved business mix and our pricing actions. Thirdly, our Efficiency & Effectiveness initiative, while important, is not the predominant driver to achieving our 2016 objectives. Since starting the initiative, we have identified and sized over 200 E&E-related projects and have prioritized a number of quick wins for 2013, including projects related to operations, information services, procurement, workplace transformation, as well as organizational design. We are pleased with our progress and have already achieved approximately $175 million in pretax annual run rate savings to date. However, we do not expect a material bottom line impact in 2013 as we continue to make investments in this initiative. But we should see a meaningful net benefit in 2014 and further benefits in 2015 and beyond when the full year impacts of our improvements are realized. In summary, our record Wealth Management sales, solid insurance sales with an improved business mix and a strong start to our E&E initiative lead us to believe that our 2016 objectives, while bold, are achievable. To summarize, in the second quarter of 2013, Manulife made substantive progress on its growth strategies, generated solid core earnings, achieved record wealth sales and funds under management, reduced run rate hedging costs and further strengthened its capital ratio. This concludes our prepared remarks. Operator, we will now open the call to questions.

[Operator Instructions] The first question is from Joanne Smith with Scotia Capital.

I just have a question on the E&E initiatives and the $175 million in pretax savings that you've seen on a run-rate basis. Steve, I was just wondering if you could kind of bring us through how much of that should drop to the bottom line? Or if you could just kind of give us some type of a roadmap in terms of where we're going with this initiative, what the ultimate savings should be and when we're supposed to start recognizing them or seeing them on the bottom line?

Thanks, Joanne. Thanks for the question. We haven't given guidance on the total savings we expect to get out of this initiative, but we're pleased that we're able to give this update, and particularly declare victory on approximately $175 million of gross savings. The way this is working is that some of these projects are prioritized ahead of others. And so as we generate savings on some projects, we'll be investing into other projects. So next year, what we should have is the full annual impact of certain projects dropping through. But at the same time, we'll be investing in other projects. So I think what I've said previously, and it's consistent with the message I'm trying to give today is, in 2014, the bottom line impact on the financials I think will be meaningful. Whereas in 2015 and beyond, it will be more substantial. I think next -- I wouldn't be looking to see much on the bottom line in 2013. I think probably for 2014, based on the fact that the $175 million is pretax, it's probably not unreasonable to think of something in the region of $100 million for 2014 based on our plans. But there's a lot of work to be done.

The next question is from Tom MacKinnon with BMO Capital Markets.

Two questions here. One is on the actuarial assumption review. I think you talked about the charges will be lower than each of the last 4 years and that you're going to have some offset from some positive onetime items in the second half. What are the positive onetime items that will offset? And where are you -- in what areas are you thinking that you might have to take an actuarial assumption charge?

Thanks Tom. Thanks for the question. I think -- we're trying to give some guidance on the prepared remarks in terms of the areas that we are focused on, and it's too early to be specific about where we may take charges. I think Long-Term Care has been long talked about and the review there is obviously very complex. But I think it's premature to say where we expect to take charges. We still have a range of outcomes. If you look at the totality of the areas that Cindy and her team are looking at. In reference to the offsets and the other items that we're referring to, a couple that I would highlight here. First of all, we're expecting in Q3 that we will be redeploying certain assets with attractive yields away from surplus, and that's part of our liquidity management process, but we're expecting we'll get gains associated with that. At the same time, we have referred to the sale of Taiwan, and there will be some gain in relation to the sale of Taiwan, which will be welcomed. But it's not sufficiently material that I have to disclose it in this quarter's release. So those 2 I would certainly flag out, and there are 1 or 2 other bits and pieces going on. But those are 2 I'd concentrate on, Tom.

Now if I look at each of the basis, reserve basis changes over the last 4 years, there -- some are related to the macro environment and some are related to policyholder, policyholder experience or expenses. Should we look at these things, when you say they're going to lower than they were in each of the last 4 years, are they -- should we look at them in terms of what they were in total or what they were just for policyholder related? Or I mean, it significantly reduced a lot of the -- I don't know, maybe some of the volatility associated with the macro environment, but I'm not really sure if that ends up showing up in terms of your reserve review. Is there any way you can focus to say that this would be policyholder related and not necessarily related to things like -- any other kind of investment return assumption related or anything like that?

Yes. Tom, I'd like to be helpful, but I think we are looking at a large number of assumptions and processes. And there are a lot of moving parts, and the work is ongoing and I really find it difficult to be much more precise. The guidance that we've tried to give, that the aggregate number, we believe, will be less than in any of the last 4 years, or any of each of the last 4 years. In other words, you don't need to aggregate the last 4 years or take an average. It's less than any of the last 4 years.

Okay. And then a follow-up on the lapse, I think in the release you do -- you've mentioned that the unfavorable lapse experienced in the second quarter, a large portion of that was due to specific events that are not expected to reoccur in future quarters. Can you elaborate on that? And does that suggest that we would not anticipate reserve strengthening associated with the lapse?

Yes. There were 1 or 2 lapse issues in the quarter. One of them would be in Japan. We did have some lapsation on foreign fixed annuity products, primarily Australian dollar. And that was in response to what happened to the Japanese yen-Aussie dollar exchange rate, Australian interest rates. And basically, that involves a switch into a yen product and we assumed lapsation at that stage. So we wouldn't expect that to recur. We had a one other group case lapse, if I recall correctly. Those will be the main items.

And so we wouldn't anticipate that the adverse experience you see in there is going to drive any kind of change in assumption, is that right?

I'll just ask Cindy if she wants to elaborate on that, Tom.

Tom, what I would say is that the estimate that we've given you in terms of less than each of the last 4 years, basis changes, would include any changes to any lapse assumptions as well.

And to be clear, Tom, when Stephen and Cindy referred to basis change of less than URRs, I think a lot of you think of it as a basis change. Well, they're talking about basis changes excluding URR. So less than the more behavior-related basis changes.

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

Just first a couple of quick follow-ups. Steve, you mentioned $100 million for '14 as your, maybe, best guess at this point for -- on the expense side. Was that after-tax?

Yes, that is after-tax.

And you mentioned -- I just want to make sure I have this straight, you mentioned earlier that post quarter you added $5 billion of dynamic hedges and was I correct in hearing that, that would reduce the expected hedging cost by about another $10 million per quarter?

Well, yes. But the point to emphasize, I think, is that the reduction in hedging cost is really coming from the fact that markets are improving and therefore, we can take hedges off to maintain our position in a target range. So it's not so much the switch from macro to dynamic that reduces the cost. It's more about the fact that as markets improve, we can take hedges off.

And so there's -- there will be -- that you can map that to a reduction in the macro hedges as well?

That's correct. So this quarter, if you see the benefit coming through on the expected cost of macro hedges, that's because we've been able to reduce the level of notionals that we are holding.

And so what I wanted to ask was, again, I'm staying with you, Steve. Last quarter you stated that the very strong wealth sales didn't bring about as much strain as we should typically expect. So how did that track in Q2 in the context of another record quarter for wealth sales, again, in Q2? Have your -- would you change your mind at all in that front or how was the mix this quarter?

No. I mean, I think, we try and give guidance on strain, and there are many moving parts on strain. I think we think that the -- in aggregate, the kind of run rate that we are showing at the moment to strain in totality is reasonable with assumption into the future, for now. I wouldn't change that.

The next question is from Mario Mendonca with Canaccord Genuity.

A core question either for Steve or Cindy. In total, could you quantify what policyholder experience gains or losses, I suspect losses, this quarter were? Just the policyholder-related, nothing to the macro environment.

I'm going to see if Cindy has that data point for you, Mario.

Yes. It would be around -- probably around $30 million, $25 million to $30 million.

Okay. And were there any really large ones there like lapse, for example, offset by positive mortality? Was there anything like that you can point me to?

Well, as we said, Mario, in our press release's MD&A, policyholder lapsation was negative this quarter, offset partly by claims gain.

Okay. What I'm trying to get at is just an order of magnitude or can you give some flavor as to how big the positives and negatives were?

Not particularly, no.

Okay. A follow-up then -- a different question here. I'm not sure I understand, on Page 2 of your press release, you referred to -- you say, "We're in the process of updating the annual update of investment return assumptions as part of the third quarter review and assumptions which may largely offset these charges." That kind of confuses me a little bit. Why would -- like if you were reviewing your -- you're updating your investment assumptions, why would that offset charges that happened in Q2? And that's my -- could you -- it sounds like you're saying you're going to offset Q2 charges, that confused me.

Yes. Let me try and help with that one, Mario. We basically have a bit of an accounting mismatch here. If you look at the way we account for the unhedged variable annuity block, we are basically recognizing the change in the account value on a quarterly basis. So this quarter, as interest rates have increased, the value of the assets in certain of the funds, the balance and bond portfolios, has decreased. And that half of the equation, we take that bad news, if like, in this quarter. On the other hand, at the same time, as interest rates increase, we'd expect our investment returns to improve. But the review of the investment returns is an annual event and part of our basis change review. So from an accounting point of view, we now have a mismatch. And we'd expect as part of the basis change review that we would probably be revising those investment return assumptions upwards in Q3. So I do have it in mind that we will look at this and see if we might change our approach to this once we've got the Q3 basis change out in the way, although it's not entirely straightforward to do that.

And is the message you're sending that, that change in assumption would be about $100 million charge you took this quarter?

Yes, absolutely.

The next question is from Robert Sedran with CIBC.

I'd like to ask a question about individual insurance sales in Canada. I believe, unless I'm mistaken, I believe you're now in a positive strain position on those sales, but negative sales performance year-on-year. Donald, I think you mentioned that competitors didn't match the most recent price increase, and if the environment is indeed improving, maybe they just won't match that. So can you talk a little bit about what that does to distribution channels, the competitive environment generally? I mean, are you comfortable that such a discrepancy in pricing can persist over time? And are you comfortable feeding market share to protect the profitability of new sales?

Well, it's a good question. We're watching it very closely. I guess, there's 2 things, right. We don't manage the bulk, the positive strain is only one aspect of the characteristic. The other is how much risk you're taking on the downside if rates were to drop again. I mean, rates right now look like they're trending up, but that's probably anything but a permanent phenomena. And we in the industry have suffered a great deal when rates fell below the pricing rate. In other parts of the world, Taiwan, Japan, it's put companies out of business, that very phenomena. So there's an issue of how much strain that's possibly throwing up and it's also how much risk you take. We're pretty comfortable with our position. And as we mentioned in the opening, our sales are actually coming back pretty well. On the other hand, we're going to watch it very carefully. I guess none of us in the industry are returning outstanding returns just yet for our shareholders, and I'd like to think that people are like-minded and start looking after the shareholders as well as the policyholders. That's the posture we're taking.

There's been a number of price increases over the past few years, and it seems like pricing power was pretty strong. Does it feel like the most recent price increase maybe was a, not a bridge too far, but maybe it's finally starting to have an impact on demand?

It -- I think that is true. As you're observing and others, the industry sales has slowed down a bit. But that's not unusual when you have rapid adjustments like what we've had. I mean, we've seen a similar phenomenon in the United States where we sort of lead the industry in price increases, it wasn't easy doing that. And the market is actually getting quite a bit more hospitable now. And so sometime being a leader is not always a lot of fun.

The next question is from Gabriel Dechaine with Credit Suisse. Gabriel Dechaine - Crédit Suisse AG, Research Division: Just quickly on the macro hedge cost reduction. I believe when you initially implemented that program, we were planning on having a $5 billion of notional shorted or thereabouts. Are we heading back in that direction? Meaning, are we potentially going to see even more earnings up -- of an earnings uplift from this production? And then I've got a follow-up.

Well, I think the point is we've achieved our hedging target and we want to stay in the range. So now, whereas previously it's been a question of buying and holding and adding to our hedges as and when conditions allow us to do that, we now have to manage our position to stay in our chosen range. And as markets have improved, that means that the cost of doing that is going to reduce for us. Gabriel Dechaine - Crédit Suisse AG, Research Division: Long-Term Care, just want to -- some of your U.S. regulatory filings have some interesting information showing the actual claims to expected claims cost. And it looks like it's been trending down since 2009, but you had a pickup in 2012. Just wondering how 2013 is shaping up? And how we should see those filings? Are they indicative of stuff you've already reflected in your big LTC review in 2010 or is there persistent issue here as far as the true-ups every year for LTC reserves?

Gabriel, it's Cindy. The statutory filings in the U.S. give a partial view on our LTC business, it may not give the entire picture. We would have taken into account in our 2010 LTC review all of our experience up until the end of 2009. And then in this year's assumption review, we'll be updating our experience, our assumptions for -- up to 2012. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. So is there any indication of how 2013 is shaping up relative to the prior few years?

It's -- our experience has been quite consistent on the LTC since we did the last assumption review. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. And just, Steve, I'll throw another one in here. E&E, the $175 million you say you've achieved so far, I mean I read into that, but there's more to go. Is it a material amount, if so, of additional efficiency gains we could expect from Manulife?

Yes, sure. I mean, I think we said at the start that this is a multiyear project and we're only really about a year in right now. So there's still a long way to go. We've been focusing on some of the quick wins we can achieve. Some of the other wins may take a little bit more time to get out and need a bit more investment and just time to extract. So yes, this will go on for some time and there's still some way to go, for sure.

The next question is from John Aiken with Barclays.

Steve, when you talked about the hedging program, you mentioned that you reduced Japanese yen exposure. If I remember correctly, Manulife had just been hedging on the balance sheet exposure. Does this mean that you're actually now starting to hedge the earning stream coming out of Japan?

No, we're not. We still maintain our policy of not managing or hedging the earnings translation risk, John.

Okay. And Donald, in terms of the regulatory capital ratio moving up reasonably strongly as well as the impact from the sale of the business, what is the outlook now for Manulife making acquisitions? And I know you don't talk about deals specifically, but can you talk to the attractiveness of the 2 major markets in Asia that you're really not in, namely, India and Korea?

Yes. Maybe a little specific, I'll try and take a high level. We haven't really felt constrained by capital or access to capital in our acquisitions. I guess the biggest constraint is, can you find deals that make economic sense. And I'm also not driven -- I think you know this, not driven by E&E, it's going to be accretive in year 2 or 3, any specific number like that. But you've got to feel that if you're laying it out with cash, that it's a good return over the period considering synergies and everything else. And it's no surprise that there's a lot of interest in Asia and properties are getting bid up to fairly high levels. We always like -- we have the benefit of very strong organic growth and very strong franchises, generally speaking. And I'm proud to say that we have not have to do any significant acquisitions in order to fill a hole that we perceive. So therefore, we can be opportunistic and do them with a very strong sense of shareholder value. You mentioned the 2 places where opportunities where merge, I guess, I'll talk a little bit about India. I guess our attitude towards India is that we want to be welcomed in any place we do business and that the restrictions around a 26% ownership position, unless there's a clear line of sight to something different, is a very significant detractor. As you know and others know that is being debated right now in India, and we might see some changes. And I guess, I'd feel way more comfortable if we were to consider India to do so with a law that allows us to have more like a 50-50 ownership position. That doesn't apply for law changes that we would go in. Again, there's a whole series of other things that would have to be clear in the shareholders' interest. Market conditions would have to be right on a whole number of other things beyond the ownership. But while the ownership restriction is stuck at 26%, I find it hard getting really, really excited about doing something in India. In Korea, opportunities do emerge from time to time in Korea. We watch that market very closely. There's aspects about the market that concern us. There's aspects about the market that attract us. And if we were to do anything in any market, it has to meet the test of financial sobriety, that is it makes sense for the shareholders and is not driven by ego or flag planting. It has to be driven by real economic returns to shareholders.

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

Turning back to Slide 36, a follow-up on the hedging questions. 2 years from today if we assume, basically, your long-term annual return assumptions are correct, I know it will be more volatile than that. But assuming they're largely correct, can you give us a range of how much smaller the macro hedge will likely be?

I think we don't feel comfortable to put a number on that one, Peter at this stage.

Okay. But it will be materially smaller. That's not an invalid assumption, right?

Correct. Depends on what you mean by material. I think Rahim wants to add something to that.

I think we would definitely expect our back hedges to be smaller and our hedging book to be smaller. But I think our products are complicated, and so we don't really want to really give guidance around them.

Yes. As we've learned, Peter, I think the hesistancy is -- the volatility, for instance, in the Japanese market experienced in the quarter alone, creates gigantic changes in our hedging position. I think the general thrust of what you're getting at, though is our hedging cost likely to be lower in 2016 than we would have predicted a few years ago, the answer is absolutely yes.

And then just in the U.S. insurance business, just a technical question. There's a bit of a drop quarter-over-quarter in expected profit, but the impact the new business was strong, strongly positive. Give us a little bit of background on what might be driving that. And I guess the underlying question, is that a new normal for that business?

Peter, is your question about the new business strain?

It's both. The expected profit, I know this is down on the U.S. dollar basis quarter-over-quarter quite considerably. And then strain is strongly positive for a second consecutive quarter. I just want to know how sustainable those results are?

This is Cindy. On the earnings on in-force, we do see some noise in earnings on in-force each quarter. So I wouldn't say that necessarily this quarter is the new normal. It's probably somewhere in between -- Q1 does tend to be a bit higher than in the -- for the U.S. insurance business on earnings on in-force than the other 3 quarters. So that's how I would characterize this.

I would say, and generally, U.S. Life Insurance in-force is pretty stable. So I wouldn't -- it will bounce around a little bit, but it's not in a secular decline or anything like that.

And the gains on new business? So there are positives -- you had a positive contribution in U.S. insurance from the impact of new business?

Yes. And I think that's really -- we have done a lot of actions to improve the profitability of our business. I think we are largely at the limit of what we would expect to achieve in that area, but we do think that, that's sustainable as long as we maintain the current product mix that we're selling.

So those -- that level of contribution is bankable?

Bankable.

I mean, assuming that the market doesn't fall off and interest rates fall back that down. Yes. Okay.

Yes. It depends. Again, so the answer is the same as when strain was a negative number, we price the product. We can't change them month-to-month. We price them for a long-term rate. If interest rates end up being in the first year lower than what we expected, which is the more recent history, you take a strain at issue, and it's a negative number. And as we've reminded people before though, it's not a total loss because in subsequent years, the strain is -- the sort of the income is exactly what you would have expected at the time you priced the product, give or take a very small amount. The same thing occurs if rates suddenly go up and you priced it for a lower rate environment, they go up you. We tend to take that upfront in the accounting model that we have. And again, the second and third and fourth year numbers are pretty much as they were priced for. So the adjustment mechanism takes place at time 0 at point of issue. So the biggest determinant of whether that is repeatable are really 2 things: what rates are doing the time the products are sold and the second would be how much we're selling. And we feel pretty confident about the second one. The first one, we can't predict with any certainty at all.

The next question is from Doug Young with TD Securities.

Just on the E&E initiative, Steve, how much of that, the $175 million is related to lower unit costs and is built into your reserves? And what I'm trying to get at is -- and at what point -- I guess, where I'm trying to go with this, at what point in time do have to reflect about lower unit cost expectation into your reserves? I'm going to guess you have to wait until you think it's sustainable. And I'm going to assume that would be done as a part of your Q3 assumption review. But I'm just trying to gauge at what point in time you could have a reserve release related to this item?

Yes. I think, Doug, we're focused on getting the run rate savings out. And we haven't -- it's a pretty dynamic and fluid situation and there's a long way to go. And I don't think that we would be looking to refine at that level of granularity yet. I don't know if Cindy wants to do that, but...

No, I agree with you, Steve.

So this isn't something that's going to happen in the next few years, in your Q3 annual review essentially?

No.

No. You should not -- I think I know where you're going. You should not take that number and capitalize it and assume that there'll be a positive base of change associated with it. Remember, we have made huge shifts in our product mix, right. Some products we've taken, reduced the sales of them by very nearly 100% and it's a very significant line. Other lines are growing and, of course, the unit costs are moving all over the place when you cut sales of product by 100%, your unit cost kind of go right to the roof, right, because you're stuck with certain legacy cost that you can't get rid of. In other areas, our unit costs are going down enormously. So there's a whole bunch of different mix changes and volume changes occurring. So take your rate back to your management accounting base of standard cost and you got volume mix and efficiency variances, all occurring simultaneously. And we'll have to stabilize that and see where we sit. And at this stage, you can't predict whether it be a release or a charge.

Okay. And just in Asia, you've noted other Asia was off meaningfully in terms of earnings year-over-year. And I'm just wondering if there's a certain region, if there's something in particular that occurred in the quarter that you can kind of detail?

Yes. Just a second, we're just pulling up the data point on that one, Doug. I think what it was, was -- it was high margin on [indiscernible] sales in 2012. So we had a high benchmark from last year. I think that's the main reason.

Other Asia.

Other Asia, I'm sorry. Just a second, let's see if anyone else can answer that one.

I can follow-up this.

Yes. I think we're sort of a bit in the weeds there. Can we get back to you offline on that one.

That's fine. And then just lastly hedging volatility. It sounds like you are hedging volatility in the equity side now. Is that meaning you're putting on put options? And what does that do to your hedging costs?

Yes. We have started putting on some options and I don't know if Rahim just want to give you a little bit of color on that.

We have started using options to hedge our book. And I think we would expect there's a more stable hedging cost into the future and higher efficiency. But I won't expect this to have a material impact in our sort of core earnings going forward. It will be more stabilization of our earnings.

Yes. Also, volatility has come down with a -- puts become far more economic for us and we can put them off, in other words, hedge. Hedge more Greeks at not significantly greater cost, which is a very positive outcome as you'd readily appreciate.

The next question is from Darko Mihelic with Cormark Securities.

I have a couple of questions. The first question, Donald, you mentioned in your remarks the net income to shareholders $259 million, I guess, or $227 million after dividends is, I guess, not as good as you would have liked. If I add back the $291 million of charges, let's just for argument sake, call that $550 million, it still seems somewhat short of what I would've thought you could have earned given all the good stuff that's happened in Q2 relative to Q1. In Q1, you had $540 million, so a $10 million rise quarter-over-quarter, it doesn't seem like a lot to me, again, given all the positive movements in equity markets and interest rates. And then I draw your attention to slide -- I guess, slide -- sorry, with your sensitivity, it's in Slide 32. And your interest rates sensitivity is far below the 2014 goal. Now your equity market sensitivity is well ahead of where you want it to be. I guess my question is, have we gone too far in the hedging? And are we now in a situation where almost anything could happen with markets and we won't see a positive outcome?

Yes. Darko, yes, just want to put it for the people in the call, it's Darko Mihelic. It's actually your 2 questions sort of concatenate into the same answer and that is, it's a disappointment. You guys spend a lot of time doing modeling and some of the things that occurred this quarter would be unable to model it, and they are clearly a disappointment. So I guess at the end of the day, I don't care if other people like me or dislike me. I want people to trust me and if it's a disappointment to us, it's a disappointment to you and we want to be honest about that. So it is a disappointment. I think your analysis is exactly right. If you add back for those factors, you get a number of closer to core. And which is, again, why we responded to request from the street and from investors to have our core earnings measure. It gives you a better indication of the earnings capacity. The third aspect of your question, which is, it feels in many ways like a better quarter, I would agree with you 100%. The underlying dynamics of the business as we've indicated are very positive. Some of those, as Steve has indicated, the show up until subsequent quarters. The fact that URR is dropping and a whole bunch of other things, we need less hedges in place in order to manage our outcomes, a narrower fan outcomes as we promised investors. Your comment specifically as relates to interest rate sensitivity, we've said this one before that the interest rate sensitivity depicted by the in-quarter sensitivity interest rates is only a part of the fact. But there's a whole bunch of things that changed in a very positive way. And while this is an accurate depiction as best as we can calculate it, what will happen with the next quarter's earnings for a move in interest rates, it is not a depiction of the economic exposure of this enterprise to interest rate movements. And that is difficult to quantify because it depends on what you include and in what time period and so on. But I give you my assurance, 100% assurance, that our sensitivity is far greater economic sensitivity than what is depicted by what happens in the next quarter, which is all that's depicted here. And while we have dramatically reduced the interest sensitivity of our company, we haven't reduced it entirely. And in my humble opinion, haven't gone too far in reducing it. Of course, if interest rates go up to 6.5%, I think a lot of people will say, "Well, you shouldn't have put those hedges on." But if they were to drop again because something untoward happened in Asia or in Europe, the answer will be, we put on insufficient number of hedges. But we have considerable positive exposure to upward interest rates left, and it is not depicted by this -- by what happens in the next quarter.

Okay. Fair enough. I appreciate that. And it's just that it's a difficult thing to work on this side of the street with the limited tools we have. I guess, a follow-up question, Donald, is with respect to the entities that are now creeping up, could you order for us, in the order of importance, is the next move more likely to be more deleveraging of the balance sheet with any "excess capital"? Are you happy with the level of leveraging you have? And if -- maybe you can outline where you'd like to take that, too. And then the follow-up question to that is, at what stage -- or what would it take for a dividend increase to occur? And again, I apologize for asking this, I know you were asked this last quarter. But again, if we look at just core and look at the payout ratio on core, would that be something that you'd consider raising the dividend based on core after you've reached a certain leverage goal?

Yes. Darko, I got to be straight with you. I much prefer questions about when are you going to raise the dividend, to questions we usually get which is, do think you're going to have to do a down round equity financing. It's much more pleasant getting the former question. The -- our order priority is, before we would contemplate rate in a dividend, I suspect both of your questions go at that core thing. We'd have to see earnings grow. It have to stabilize and we'd have to be comfortable with our leverage ratio. And obviously, comfortable with the overall level of capital. I mean, at 222%, we feel very comfortable. But I will be clear that our regulator here in Canada is a conservative one. I think they increasingly look at the top 3 companies in Canada as -- whether we're global SIFIs, they sort of treat them as they've got to act as if they were global SIFIs, which means capital -- not only to withstand the unthinkable crises, economic crises and have enough to pay the policyholder at the end of the day. But basically, be able to continue to operate and be -- function pretty much as normal even after the unthinkable occurs. And that is a very high standard. That is, as you will recognize, the standards applied to the largest banks in the world as a result of the FSBs work. I think that is more and more the way our regulator looks at it. So the definition of how much capital is enough is changing all the time. You have identified the deleveraging, and we have to. We carry a little bit more leverage than we'd like to have. We would like to bring that down over time. So before I could contemplate recommending to our board any dividend increase, 3 things have to occur. Number one, our earnings would have the grow and stabilize. They're going in the right direction. I'm very comfortable that, that will occur within a reasonable period of time. That we will have deleveraged somewhat, that is a commitment that we have made, and want to complete. And then we'd have to convince our regulator that we have sufficient hedges in place. I mean, after all, you got something like 85% of our VA risk, and I don't know, a similar portion of our interest risk hedged now, plus a very high capital ratio. I sleep really easy at night. But of course, they are refining their standards all the time and we'd have to satisfy them that we're earning a very comfortable position.

Operator, it's Steve here. Just before we go to next question, we managed to find the answer to Doug's question on Other Asia. And it was actually, we dug out the data point here, and it was actually due to the U.S. dollar and NT dollar exchange rate. So in Taiwan, we actually have -- we have some U.S. dollar assets backing the PfADs on some of the Taiwanese business. And that appears to be the main constituent of the point you highlighted, Doug. So I think we can go to the next question, operator. Thank you.

The next question is from Ohad Lederer with Veritas.

I just want to go back to the $100 million charge related to the higher interest rates and non-dynamically hedged variable annuity business. In response to Mario's question, Steve, you noted that the higher rates caused the balance in bond funds to decline in value. Just for clarity, we're talking client money in Seg Funds, not Manulife's general fund assets backing reserves. Is that correct?

Yes, that's correct.

So out of Manulife's total $104 billion of notional subject to Seg Fund guarantees, how much is in bond funds and related to fixed income? Has there been a -- clearly, in the retail asset management world there's been a big shift, big customer preference for fixed income over the last 24 months. Has there been a big shift within Manulife's? I know your book hasn't changed in size, but within the $100 billion or so portfolio, has there been a big shift?

Ohad, I'm going to direct that to Rahim Hirji, our Chief Risk Officer.

In general, about 40% of our Seg Fund assets are in bond funds, and that hasn't really changed over the last 2 to 3 years. We track this fairly well and closely as part of our hedging book, and it doesn't really move by more than 0.5%.

So this quarter, the commentary is that there's a timing mismatch and some or most or perhaps even all of the $100 million charge is going to come back in the third quarter as part of the annual review. Could there be instances where a backup in rates is -- where you can't get it back? Is there -- are there guarantees on, I guess, bond funds at what may prove to be peak prices?

I think Cindy is going to answer your related question on reserves.

Right. So the timing difference you're talking about is the difference between how frequently we update the interest assumption and our determination of policyholder reserves on these products. And we typically update that interest assumption on an annual basis. So there's just a timing difference. So we would expect to get back the $100 million.

Okay. So in general, whatever you give up on -- whatever the amount the reserves need to go up on, you think you'll be able to get back on the investment return assumptions, whether it's 1 quarter later or 3 quarters later?

Right. So that's correct. We would expect the reserves to change by an offsetting amount in the next quarter when we do our basis change to recover the $100 million.

The next question is from Tom MacKinnon with BMO Capital Markets.

I wanted to follow-on that. When you give a sensitivity of changes in earnings to a 100 basis point moves in interest rates, do you take into account the fact that Seg Funds are in bond funds? Is that reflected in that sensitivity? Because it certainly, when you talk about changes in equity markets, we certainly are taking in changes in reserves for VA guarantees associated with equity funds. When we do the interest rate sensitivity, are you taking into account the changes in any of the guarantees and any of this discount change on those reserve guarantees for bond funds?

Tom, it's Cindy. We have not taken into account the sensitivity of the bond funds and it's because -- you're only seeing this sensitivity because of the timing difference between when we're updating our viability assumptions and when we're reflecting the change in the market value of the underlying funds. So we would always expect to come back to a neutral position and it's just timing. So we haven't reflected it in the sensitivity.

So the one is a change in the net amount at risk, and the other is a change in the discount rate. You use for that net amount at risk?

It's not a change in the discount rate, it's a change in the expected future return on the bond funds. It would be like, if you held a bond and you already bought a bond when yields were 3%. And then they went up to 3.5%, and you intended to hold it to maturity, you'll still have the same return. So it's really just the future returns on the bond funds. The market value of the bond goes down but the future expected return on the bond fund moves to the current market return. So they offset each other for liabilities that are sufficiently long in duration.

Okay. Well, I guess that makes sense. I would assume you would have just done that in tandem to avoid the noise?

Well, we...

We'll take a look that.

Yes. Tom, We're going to take a look that. I mean, you raised a good point. It's accounting noise and we'd rather have less accounting noise. So we'll take a look at it.

It's a bit like you bought a bond that had started to meet -- in my simple mind, you bought a bond at the start of the year and it's going to accrete to 100 at the end of the year. Interest rate move, you take a loss in the first quarter because -- but then it creeps up to the values, so you get a higher return in the subsequent 3 quarters. Net-net, you got exactly what you bargained for, but you've had some very odd in-period movements.

The next question is from Gabriel Dechaine with Credit Suisse. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. Just a clarification. On the lapse, you mentioned that was group insurance and something in Japan. There's nothing there that the negative experienced from VA in the U.S. or UL in the U.S. or UL in Canada?

I'm sorry. I think it was COLI in Japan and the it was off. The other lapse was from a fixed annuities in Japan. But I think, Craig is going to...

This is Craig Bromley. There was a large COLI case that lapsed in the quarter. And was a big cause of the poor lapse experience. And that happens from time to time. COLI is a bit volatile. We've experienced lapse, gains on that in the past as well. Gabriel Dechaine - Crédit Suisse AG, Research Division: And that's in the United States.

In the United States, sorry I think I said Japan in error. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. I just want to make sure it's not the thing that I was asking about. So it's not VA, not UL?

No.

The next question is from Joanne Smith with Scotia Capital.

I just had a follow-up on the interest rate sensitivity question, the non-disclosed impacts from a rise in interest rates. If I look at the required capital in the MCCSR calculation, the interest rate risk required capital. I would expect that, over time, if rates continue to go up that, that would come down, and some of that capital could be released. As well, the lapse rate in Japan as a result of the strong equity markets and the way that I understood how some of that triggers automatic lapses on certain VA policies. As those policies lapse, I would expect that the capital backing those guarantees would also be released. So how should we think about a gradual rise in interest rates over the next 2 years and what that means to your capital levels and any other type of undisclosed impacts from interest rates going up?

Joanne, your question is good one. The rise in interest rates, as you've suggested, is very positive in a whole number of ways. The trouble we have, I guess I'm having a little trouble with the term undisclosed. I mean all we can do is -- all we think we can do humanly possible is tell you what can occur in the next quarter. And even that is difficult enough.

I guess I was just saying non-quantified, Don?

Yes, non-quantified. Well, I know where you're getting at, and I take no offense. It's just it will appear over a period of time, and we can't predict depending on what the impact is and how that curve goes and so on, what quarter it shows up in is going to be, like, next to impossible to predict. And for us to give you -- I guess, and I think you know this that the economic impact is very, very beneficial. It reduces capital. It reduces required reserves. It's indicative of a more robust economy, right. And also, the top line is growing. A whole bunch of positive things happen that this company will be benefiting from in a number of ways. But all we can really quantify with any rigor is sort of the next quarter's impact, and even that is an imperfect science.

Yes. I guess, the question that I get most often is when you'll be able to take down some of the required capital or the reserves. And obviously, we're not looking at the next quarter, even the next 2 quarters. But if trends continue and going in the right direction, we're looking at a situation where maybe a year from now we're looking at a much different risk charge related to interest rates. Would that be a safe assumption to make?

Joanne, you're right. I mean, one of the things that Cindy does when she does her annual dynamic capital adequacy testing is she tests for various scenarios, deflation scenarios, inflation scenarios. And sort of the one that some of you on the end of the phone might imagine is, highly likely, is with the turnaround in the U.S. economy is inflation coming back in higher rates and so on. And without getting too specific, when we look at those over a large number of years, they end up producing levels of capital that are, to describe them as comfortable, would be an understatement of the year. I won't tell you what kind of handle what they have on them, but it's -- these are big levels of capital sufficiency. If it reaches a conclusion that there's a lot of pro-cyclicality in the capital calculations, you would be drawing the correct assumption. So we -- our balance sheet is bolstered for really, really tough conditions. And if conditions turn out to be not anywhere near that tough and in fact, quite robust, we're going to have some very happy choices about what to do with excess capital.

The next question is from Michael Goldberg with Desjardins Securities.

I have a couple of questions. First one, and maybe this is a curiosity, but to have that $80 million loss in the quarter, just as a result of the parking of cash, must have been a lot of cash that got parked. Could you give us some idea of how much that was and what gave rise to it?

It's Warren Thomson here. We actually had about just over $500 million in Canada was parted in long treasuries. So we had over $850 million in cash flows in the quarter. We got about $350 million invested as we would expect, and $500 million was just temporarily parked in treasuries. I mean, we anticipate we had invested that over the course of Q3 and Q4.

So where would that have come from, and why wouldn't it have been deployed sooner?

It actually comes from reserve adjustments that occurred in the quarter. And it basically -- it was just basically cash flows in excess of what we anticipated. And so actually, in the ordinary course, we would have anticipated cash flows in Canada, let's say, in the $300 million to $400 million range and we had an incremental amount to invest. That was greater than our normal run rate investing activity would cover.

So Michael, in the normal course, it would have been invested in the quarter. I mean, we don't force the people. We try and manage the economics. Will they get it invested when they see the right opportunities? In the meantime, they park it in long treasuries that are locked in the yield. And there's just an anticipated in flow of it. It wasn't invested but it's -- unfortunately, it makes some noise in the results. But you can guess, they're getting it invested now and that's why we can say with some comfort, that reverses. We had this before. We've had this very phenomena sometimes we get a hit, sometimes we invest behind. This one, it was behind.

So just to clarify, would the reversal of this, or the deployment of that cash, and perhaps the reversal of that $80 million loss, would that be in addition to the other $100 million that you're talking about?

Yes. Yes, It would be, Michael.

Okay. And that could potentially happen some time in the remainder of the year?

Yes. And you can [indiscernible]

Okay. And my second question, if you took your asset management businesses together, are they profitable on a stand-alone basis? And if not, what level of funds under management would you need to breakeven?

Yes. They are profitable on a stand-alone basis. And it's not as profitable as if we've been in the business 100 years because we are growing at a very rapid rate. I mean, those of you who witnessed the rate of growth here, that becomes the results of the investments that we're making in a business. So it's not as profitable as if it had been around for a long time because we're creating this business almost from nothing. But it is profitable and we see the day when we would expose that to you as a separate line of business, and you could look at it in that way. And you might be able to calculate EBITDA, you might be able to put a multiple on it. You can do whatever you want with it. But we will, at the appropriate time, disclose that as a separate line the business.

Well, let's put it this way, what do you figure your earnings go up by for $1 billion increase in funds under management?

I can't give you that right now, Michael, and I think -- and one of the reasons for that is we have -- in different segments, right, you've got the product manufacturing segment, you got the Asset Management segment. So one of the things we want to do, and I'm talking very openly, we want to pull together all the financial reporting on this business so that we can see that totality on a single sheet. That's obviously a necessary thing for us to be able to depict it to you as a separate business line. And it is a global business, so it shows up in different P&Ls all over the place. I mean, it depends on what the business is. If it's institutional business, we can give you a ready answer. It's pretty nearly what the fees are because it all flows to the bottom line, as you well know, because the costs are more or less fixed. If it's sold through a wirehouse in the United States, it's a little bit more complicated because there's a different element that would influence the contribution margin. But we are taking steps to improve the margins on this business by a bunch of appropriate measures to make sure we're spending in all the right places, as well as to grow the assets under management. And we're making progress on both scores, and I hope you'll be impressed when we start to depict it at some point in the future as a separate business line.

Okay. And just one last question on this. What number would you use as the current funds under management for this business on an aggregate basis?

We have $260 billion in the Manulife Asset Management entity as assets under management, but that isn't fully comprehensive, because you also have assets that in the wealth businesses where they would have third-party managers. So the aggregate number would be probably closer to $400 million taking what's within the liability businesses, as well as the asset management business. It would be in the $300 billion to $400 billion range.

I'm really thinking of just the fee generating assets under management.

That's what he's talking about. What Warren is explaining is that the portion is managed by Manulife Asset Management. By the portion that's managed other managers. As you might get the margins not quite high on that, but we make product margins on it, that's the higher number towards the $400 billion -- $300 billion to $400 billion. And that's the $260 billion from what we manage ourselves for third parties. And that is, that's a combination of retail product, it's sold through mutual funds. Some of that is in variable annuities, which is more or less a run off block but not running off very quickly as you well know. And increasingly, there's a whole bunch of institutional businesses being sold. And the nice thing about it is it's being -- our success is not just in one territory, and it's not just in one product line, it's not just equities or not just bonds. It's across bonds, fixed income, alternatives and it's in all the geographies that we do business. We've got some of our largest sales in Asia, for instance. Well, you know the U.S. Mutual Fund numbers are just staggering. And in Canada, both the group pension products, the Mutual Fund products and other wealth products and institutional are also selling quite nicely. So it's starting to be a decent business.

So just, again, to clarify, $260 billion roughly under management for third parties, so $140 billion on funds?

No. There's $260 billion would be what's within Manulife Asset Management, that's what we manage. Over and above that is an incremental piece, which is -- I don't have a crisp number on that, but it's more than $50 billion it's less than $150 billion. So it's in the $300 billion to $400 billion range if you can aggregate it the piece that's run with third parties.

There are no further questions registered at this time. I would now like to turn the meeting back over to Ms. Asher.

Thank you, operator. We'll be available for further questions after the call.

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