Anique Asher Donald A. Guloien - Chief Executive Officer, President and Director Stephen Bernard Roder - Chief Financial Officer and Senior Executive Vice President Warren Alfred Thomson - Chief Investment Officer and Senior Executive Vice President Cindy L. Forbes - Chief Actuary, Executive Vice President and Chairman of Capital Committee Robert Allen Cook - Chief Executive Officer of Manulife Asia Operations and President of Manulife Asia Operations Craig Richard Bromley - Executive Vice President of Japan Operations and General Manager of Japan Operations

Steve Theriault - BofA Merrill Lynch, Research Division Peter D. Routledge - National Bank Financial, Inc., Research Division John Aiken - Barclays Capital, Research Division Robert Sedran - CIBC World Markets Inc., Research Division Tom MacKinnon - BMO Capital Markets Canada Mario Mendonca - TD Securities Equity Research Gabriel Dechaine - Crédit Suisse AG, Research Division Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division Sumit Malhotra - Macquarie Research Michael Goldberg - Desjardins Securities Inc., Research Division

Please be advised that this call is being recorded. Good afternoon, and welcome to the Manulife Financial Third Quarter 2013 Financial Results Conference Call for Thursday, November 7, 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 third quarter 2013 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investor Relations section of our website at manulife.com. As in prior quarters, our executives will be making some remarks. We will then follow with a question-and-answer session. Today speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are implied in making forward-looking statements, and actual results may differ materially from those expressed or implied. For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ, please consult the slide presentation for this conference call and webcast available on our website, as well as the securities filings referred to in the slide entitled Caution Regarding Forward-looking statements. We've also included a note to use the slide that sets out the performance on non-GAAP measures used in today's presentation. [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 it is indeed a good day, and thank you for joining us. Joining on the call this afternoon 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 Investment Officer, Warren Thomson; our Executive Vice President, 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 third quarter 2013 financial results. I am very pleased to see our strategy unfolding into strong operating results. We are making real tangible progress against our longer-term objectives. This quarter, we had strong wealth sales, driven by growth in our Mutual Fund businesses worldwide. We reported strong core earnings. And as we predicted last quarter, a number of items with unusual timing reversed themselves this quarter contributing to the increase in net income. Investment performance also made a very significant contribution. As a result, we ended the quarter with a very solid capital ratio, and we again delivered record funds under management. Let me start by reviewing the progress we made on our growth strategies in the third quarter. We continue to develop our Asian opportunity to the fullest, generating strong growth in our wealth sales, compared to a year ago, with double-digit growth in most of our territories. We maintained our leadership position in net cash flows in the Mandatory Provident Fund business in Hong Kong. And while insurance sales were below the same quarter last year, we've seen good momentum building in both Hong Kong and Japan in September and expect this to carry forward into the third quarter. We also…

Thank you, Donald, and hello, everyone. Let's start on Slide 6, where we highlight our financial and operating results for the third quarter of 2013. We reported net income attributed to shareholders of $1 billion, reflecting strong investment-related experience of $543 million, partly offset by a charge related to the annual review of actuarial assumptions. In terms of our operating performance, we generated core earnings of $704 million. We strengthened our MCCSR ratio by 7 points to 229%. And we generated new business embedded value of $278 million. Turning to Slide 7. You can see that we are demonstrating solid progress on growing core earnings. In the third quarter, our core earnings were $704 million, an increase of $95 million from the prior quarter. The increase was primarily due to more favorable policyholder experience, the release of tax provisions in Canada from closing prior year's tax filings and lower net hedging costs, partly offset by lower investment income in the surplus segment. Turning to Slide 8. Third quarter total company core earnings reflect improvements in each of our territories and lower hedging costs. In Asia, core earnings improved due to improved lapse experience and new business strain in Japan, partly offset by the negative impacts of currency and higher dynamic hedging costs. Excluding the impact of currency and additional dynamic hedging costs, core earnings in Asia improved 14% from the prior quarter. In Canada, the improvement in core earnings was primarily due to the release of prior year tax provisions of approximately $40 million and lower expenses. In the U.S., core earnings growth was due to improvements in policyholder experience and new business strain in the Life business, partly offset by higher dynamic hedging costs. Corporate & Other core earnings declined largely due to lower investment income on equities and…

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

So I have a couple questions on hedging, probably, for Steve or for Cindy. So we're seeing today that you unwound a pretty sizable portion of the notional macro hedge. So a couple of related questions. First, if equity markets reverse course, do you feel like would you need to begin ramping the macro hedge -- hedges to the same extent as before? Or the actions that you're taking on the dynamic side, would those actions preclude are required ramp in the macro hedge, at least to some extent? And then the second part was, I was surprised to see the decline in the expected macro hedge cost be fairly large this quarter or larger than expected. Can you help us understand it all how quickly the remaining macro hedges could run off? If market's rally another 10%, what's the sensitivity? I know that's hard to quantify, but anything you can give us would be helpful?

Okay. I'll start-off, and then I'll ask Warren to comment. The first part of your question, the answer is, no. We wouldn't necessarily have to reverse that. And what we've done on the dynamic side would prevail in a sense. So you shouldn't assume that we would have to go into reverse on that at all. On the macro hedge side, yes, the costs have come down. I think to date, we have around a run rate saving of $35 million. And we were at 20, and we have increased that to 35. But I'll just pass to Warren and see if he wants to add.

Sure. I think, Steve, the important point is, when things do move from the macro to the dynamic program, it's a permanent change. So anything that –- once it cease being subject to hedging under the macro program, it won't revert to the macro program. Market moves are adjust -- addressed by the changes within the dynamic programs. So as markets move, we adjust the dynamic hedges. So I think, as the name suggests it, the macro program is more of a static program and until things move from the macro to the dynamic, you don't really make much in the way of changes there. But once in the dynamic program, it does not revert back.

Okay. And, if I just before I let you go, can you tell us based on Q3 rates what -- just refresh us on what your URR expectations are looking out the next 1 or 2 years before any potential guideline changes?

Okay. On URR, you've seen the quarterly run rate has come down. Our expectation would be that it will continue to come down based on the mechanical process that we, eventually, have to follow through. So we would expect an improvement to that. And to a large extent that would be maintainable, although, it is as you know, a mechanical function of movements in interest rates over the last several quarters. So it wouldn't necessarily be without the uptick back up again, but by and large, we're going to see a lower continuing run rate per quarter.

So a little bit lower than the 63 we're seeing this quarter?

Yes.

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

Just a couple of thoughts on the lapse, and I'm on Page 28. Just to clarify first, the benefit is $1 billion. I just want to make sure, I read it right. You added $500 million this quarter. There was already $500 sitting there from your prior quarter. Is that fair? I'm talking about the benefit for premium increases.

So you're talking about Long-Term Care, Peter?

Yes.

Okay. Just a second, we are just trying to make sure we fully understand your question.

So, Peter, on Page 28 of the...

Press release.

Where we state that we have $1 billion of premium increases embedded in our reserves?

Yes.

$0.5 billion is due to the 2013 premium increases. We'll file for it in the next quarter. And the other $0.5 billion is from the 2010, the remainder of the 2010. It's not exactly what's left over because we did prudently reserve for premium increases in 2010. And so we had some experienced gains on that, which we had thought we had better experience than we expected on 2010. And now we're reflecting those additional remaining premium increases related to 2010 that would have been part of the margin before but now are being included in the reserve, but there again are properly and prudently margined, as conservatively as, we margined the premium increases in 2010.

Just -- you may not disclose, I'm not going to press for it, but you have a gross increase in expected claims costs. What is that number? Or if you can't give the direct disclosure, the concern, when I read that, I had was that could be a big number because there's a lot of offsets in there. And does it foreshadow more of these charges down the line?

It's Cindy again. The -- we've updated our experience. We, certainly, with being in the LTC business for 20 years, we have quite a credible amount of experience. And each time we updated our assumptions, we have even more credible experience. Really can't speak to what the future trends might be. But as you note, the increase in the gross claims cost, they're not a large percentage, but they are -- the dollar amount would be in excess of the $1 billion that you see in future premium increases are included in the reserves.

Okay. Just final one, and perhaps for Don. You've done a great job in terms of getting your premium increases, and you're managing a tough business pretty well. I don't mean to be confrontational, but looking at more charges on this business, the question naturally comes up, why not just get out? Why go for the extra premium increases? Why not just pull out?

Yes. Well, pulling out would do nothing to reduce the exposures that you're observing. That's largely -- all on the in-force. The products we are selling now have a very, very handsome margin built in, even for profit and also for the potential for worsening results down the road. And if anything is going to be a profitable, it's the new business we are writing. We're also writing very small amounts in new business and as we've said another venue's -- part of the leverage we get in going for rate increases is being in the business because, I guess, the ultimate threat for regulators is if everybody pulls out of Long-Term Care business because they can't get rate increases. There will be no Long-Term Care available to consumers. So we are managing the new business very, very prudently, and I don't think you're going to have to worry about big swings with respect to the new business. What the future holds for the in-force business is something that we can't determine with any specificity, but we feel we are getting on top of it.

. Our next question is from John Aiken with Barclays Capital.

Wanted to circle back on the hedgings just for a moment. Steve, can you refresh our memory? In terms of the dynamic hedging, is there any accounting for volatility in terms of the hedges that are put in place? Are you specifically hedging volatility or is it in terms...

No.

Okay. And then...

Let me just pass to Warren, I think, Warren can give you an fuller answer on that one.

The actual dynamic hedging program doesn't actually cover the cost of volatility per se. That actually is one of the byproducts of the program. Actually that when we have a modest cost of hedging that emerges, that's we're including, when we talk about our realized hedging cost. The -- I lost my train of thought.

Well. That answers my question. The follow-on one that I had, Dan is, with the switch -- with reporting the dynamic hedging in the expected profit, any sense of -- I mean, volatility right now in the market this is actually quite low. Any impact on whether increased volatility would be a material headwind to expected profit growth going forward?

You helped me up by buying me some extra time there. The conversion to options was the piece that I was trying to get to. We have, in fact, been adding options into our program. The options do address the cost of volatility. So again, as -- once the cost of volatility has dropped in the current environment, we've actually been adding to our option-based program. So, prospectively, I think if you know the markets remain benign, you would expect us to do more option-based hedging. And that will cover the cost of volatility. The current dynamic program, it's a bit of a byproduct. The volatility comes out as a cost. As the -- when volatility rises, the cost of our hedging will be higher in the current dynamic program. But we do hope over time to have a meaningful portion of business covered by options.

Our next question is from Robert Sedran with CIBC.

Want to start with Asia insurance sales, please. The strong momentum we're seeing in September that you mentioned, Steve, is that the result of a -- of the product launch? Or is there a feeling that perhaps insurance sales in Asia are starting to turn and maybe we'll get to -- into a double-digit range going forward? And if it -- and if you do, is there a negative offset through earnings because of strain or some other expenses that might come?

Well, let me just start off, and then I'll pass over to Bob Cook. There are various factors to take into consideration when we look at what's been happening in September and heading into Q4. So first of all, he did have a new product launch in Japan, which is starting to get some traction. That's our SSLT [ph] product, which is what we are referring it as. And that was [Audio Gap] So we're expecting Japan to -- improving into Q4. At the same time, we've had a campaign running in Hong Kong, and it's had a lot of momentum in September and into October. So Hong Kong's come back. And Indonesia went through a bit of a lull in Q2 partly because of the weakness of the rupiah. But Indonesia has also come back. So our 3 largest jurisdictions, if you like, have all had a positive September and into October. But let me then pass over to Bob for a bit more color.

Yes, I guess the only thing I would add, Robert, is in the -- throughout the third quarter across our 11 countries in Asia, we actually launched 40 new or repriced insurance products. So we do expect those to have an impact in the fourth quarter and then more particularly, give us momentum going into 2014.

And, Steve, would there be then a strain impact that we should be watchful for going forward? Or is it -- should it be negligible?

Well, I guess you have to look at both sides of that. I mean, we have insurance strain and wealth strain. Now insurance strain has improved because of improvement in interest rates. Wealth strain is a volume gain. So I think we've said before, it's incredibly difficult to predict strain because there's so many moving parts. I think previously, we gave some guidance -- $100 million was a reasonable number for us on an overall strain number per quarter. Our feeling is that that's probably come down. And I think if we have to call a number now for the spreadsheet, if you like, I'd probably say $70 million is a better number.

Okay. And can I just ask you for one point of clarification on this triennial review. You mentioned that a lot of the products are adjustable and you're also going for price increases. Are they -- I mean, are you making the adjustments plus the price increases? Or is there some interplay between those 2 variables? Or can you just perhaps clarify that for me?

Yes. I mean, Cindy can answer this, but we basically made assumptions about our ability to get price increases. As Cindy said before, we've got a lot of experience now from what happened in 2010, and bear in mind, in 2010, we were perhaps a bit of a trailblazer. We were one of the first companies to go out there for price increases. That's not the case now. The various states are well used to companies seeking to get these price increases to which they're entitled. And we're certainly not alone anymore. Our outreach program in relation to these new increases, and I think the mood is, well, nobody's surprised. So it's a lot more certain of an environment, if you like, than it probably was 3 years ago. But let's just see if Cindy wants to add anything to that.

Sure. So, Rob, it's Cindy. The price increases or the adjustable price I was referring to is LTC in particular, and that's related to the annual review of actuarial assumptions and what we're assuming for those future increases, which is separate from the discussion around our new business and the impact on -- of more new business on strain and the repricing of new products, so the repricing of products that we've done over the last number of years. So when you're looking at year-over-year or quarter-over-quarter numbers, the repricing that we've done has reduced our strain on the insurance side because we've reflected the current rate environment. So there's effort and distinct. And overall, I think increased sales in insurance sales in Asia wouldn't really have a negative impact on strain. In other words, the $70 million that Steve was referencing would be -- I think, stand up even with higher sales in insurance sales in Asia.

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

Just wondering if I can get 2 questions. The first is an E&E update. I think you talked about the initiative at $175 million at the -- Steve, at the second quarter call and talked about $100 million in 2014 benefits from the E&E initiative. Is there any update on these numbers?

Steve here. So you're correct. On the second quarter call, we made 2 references. One was to the fact that we had already achieved annualized run rate savings of about $175 million. And the second was to the fact that we expected an accounting benefit, if you like, in 2014 of around $100 million. And bear in mind that the accounting would take into account investment in certain projects to -- would have benefits in the future. So the phasing of the accounting and the phasing that we achieved on the run rate savings is not the same. That's why the numbers are somewhat different. And we are not -- we haven't provide an update at this quarter. We're going to provide an update on E&E in Q4. All I would say, Tom, at the moment is there's no significant change as to what we've indicated previously. So there's nothing material that I would highlight right now.

Okay. And then the follow-up is perhaps for Donald...

Sorry, Tom. Can I just say I'm just reminded to say that was pretax numbers, which I've omitted to say. Sorry about that.

That's right, okay. The follow-up for Donald was the MCCSR now really poised to -- I guess given the fact that the duration of, I guess, your VA business continues to shrink here and you get some required capital release there. It really stands to gain significantly if equity markets were to run up and interest rates were to run up. And you're already sitting at a 229% now. So is there a way you can think about returning some of that capital to shareholders? Can you repatriate some reinsurance contracts? What should we -- what can we look at you doing?

Well...

Or recapture reinsurance, I should say, pardon me.

Sure. I guess our order priority is first to reduce the leverage ratio. Two, as we see acquisitions more and more, we're funding them internally. Doesn't mean we can fund very huge deals internally, but it's nice to be able to do them internally. Third is, I guess, we'd look for some -- we are looking at reinsurance contracts as they come up and seeing whether it makes sense to recapture them or to keep them in place. And actually, we -- in different situations, we've taken different responses. It all depends on the circumstances. The next thing is we want to see some -- I guess, have greater insight into where capital rules and accounting rules are going long term. And then ultimately, we'd like to talk to our board about dividends. But that would be roughly the sequence.

All right. If you -- and if you have a -- like a -- some sort of internal metric for the MCCSR, is -- I mean, how -- would you be able to share with us anything related to that, like do you need enough to withstand a certain correction in the market and maintain that over a certain percentage? Is there anything that you have or you would figure an optimum level would be?

Yes, I don't know -- optimal level is not necessary the answer. But we have certainly a minimum that -- and we're well above that. We have a very handsome cushion in there, and the minimum is calculated with reference to extremely high probability of safety for not only in customers but also debtholders and everyone else in the chain. And we are in a very, very satisfactory capital position. But we do have our own calculation of economic capital that is different than the way OSFI looks at it, and we're in a very comfortable level regardless of which measure you use.

Well, maybe I will try to ask it a different way. If you're going to price the product, presumably, you have some sort of target surplus level that might be a function of the MCCSR. If it is, can you share with us what that MCCSR metric you would use when you price a product to try to get a specific hurdle?

Yes. I'd rather not get into the specific target right now, but yes, we do have a target that would be less than the amount of capital we're holding at the present time. And -- but, Tom, you also have to take into account that we -- when we price a product, we look at not only the MCCSR capital but the local capital because that can also be a constraint. In some cases, local capital rules are more conservative. In other cases, they're more liberal. We have to look at both.

Tom, one other thing maybe to add is we also have to be concerned about the external environment and what's going on in the external environment. So there's a couple of things out there at the moment that we have to monitor. As you know, there's the Actuarial Standards Board review here in Canada, and that piece of work has been going on for some time. But it's not complete yet, and how that will play out, we're not entirely clear. And the other is, as you're aware, we have to contend with the IASB, the International Accounting Standards Board, and their exposure draft and what does that turn into in terms of accounting standard and how does that flow through into capital rules. So those sorts of issues are also things that we have to consider when we sort of judge how comfortable we feel about our MCCSR ratio.

Our next question is from Mario Mendonca from TD Securities.

If we could just go back to the Long-Term Care for a moment, it would be helpful to understand how leveraged these assumptions are to getting the price increases across the board. I -- what I'm getting at here this is, is there a particular block of business where if the pricing increases didn't stick, the reserve hit could be more significant? Or is this -- would you characterize it as sort of broad-based, everything is equally important?

Mario, it's Cindy. I would not say that there's a particular block that we're overly leveraged to. I mean, I'd point to the disclosure on Page 28 where we say we have $1 billion of premium increases embedded in the reserves and every dollar of those are equal. I would not -- I mean, there are some blocks that would have higher percentage increases obviously, but I wouldn't say that we're overly leveraged in any one particular block.

Our next question is from Gabriel Dechaine with Crédit Suisse. Gabriel Dechaine - Crédit Suisse AG, Research Division: My first question's for Donald or Steve. Just the macro hedge cost reduction, revisit that one there. If I look at your 2016 earnings objectives, I don't believe it anticipated any increase to that program. I'm just wondering if that's correct. And if it is, how should we look at this reduction in cost? Is it additive to your target? Or are there any parts of the business that maybe aren't progressing as well as you'd anticipated, macro factors perhaps, like the yen weakening, that this is really somewhat of an offset to those issues?

Well, Gabriel, I'll take a start at it. I mean, you have to look at in isolation, I think you've got -- the answer to there is it is a positive. I mean, the more we have buoyant equity markets faster than the roughly 8% growth that we factor in, that is going to enable us to produce macro hedges shift into dynamic programs, and on average, there'd be less hedging taking place and less hedging necessary. So it will cost us less. So that is definitely a tailwind. As you pointed out, though, there's other headwinds. The earnings that are coming from Japan, they translate at a lower cost -- a lower currency translation rate currently. I mean, that may not be the case for the next 4 or 5 years but certainly is in the current period, is a bit of a drag. And there's a grab bag of things that go forward and go against us. I think on balance, though, we feel pretty good about not only the quarter but the next quarter and how things are shaping up against our long-term plan. There is one thing on hedging, I guess, I would want to point out. None of you asked the -- there have been a few questions asked about the shift from macro to dynamic. That creates some interesting geography issues, particularly as it relates to Asia. The -- we show macro Asia, and this is fairly prescribed, this presentation. The cost of dynamic hedging programs get reflected in the operating divisions, but the macro hedges show up in the corporate accounts. So when you have a shift from macro hedging to dynamic, that shows the benefit to corporate but a cost in the operating... Gabriel Dechaine - Crédit Suisse AG, Research Division: For the segment, yes.

In the segment. So that has had the impact of depressing Asian earnings. You've identified the other one is the yen particularly given that we make a lot of money in Japan. That has had an impact on Asian earnings. If you adjust for those, you get a different picture what Asian earnings are. But those are important things to adjust for. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. And I'm just so I'm clear, Steve, you mentioned the -- it was $35 million a quarter is the run rate, and that's net of the macro shifting into dynamic, I guess.

No, that's the year-to-date run rate saving per quarter. We flagged $20 million previously, and now -- it's now increased to $35 million. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. Then my next question is a quick one on the Long-Term Care. Would you -- when you went to your first round of pricing increases, had you left the door open with the regulators that maybe we'll be coming back for more? And then how did your pricing increases compare to the industry? And then I'll just throw this one in while I'm talking. The lapse rate assumption increase in Japan on the VAs, does that in any way affect the outlook for the capital free-up from runoff of that book if people are annuitizing instead of just surrendering?

Well, let me start with the first one. I think -- I don't think it will be characterized as "By the way, we're coming back for more." That might... Gabriel Dechaine - Crédit Suisse AG, Research Division: Those are my words.

Yes. But I think actually, there was some comment from some regulators who said, "Can -- if you need to come back again, please come back again fairly quickly. We'd rather you came frequently for smaller amounts than kind of coming less often for a larger amount." So that's good. And we're following that advice, I guess, you could say. So that's the first part of the question. The second part of the question on Japan, I think Cindy is going to have a go at that.

Yes, Gabriel, could I ask you to repeat it, sorry? Gabriel Dechaine - Crédit Suisse AG, Research Division: Also, the magnitude of pricing increases, how that compares to the industry? But the Japan element is -- because of the lapse assumption, I guess, people aren't lapsing enough in -- on the Japan VA book. Is -- does that change the outlook for the capital liberation that you're expecting to ramp up next year and into the later parts of this decade?

No, I wouldn't say so. We have seen somewhat higher lapses on our Japan VA book, particularly one product line that has -- or one price that has a target hit feature. And obviously, as we have higher lapses, that does release us from liability and capital. But I wouldn't characterize it that way you did.

Most of the lapses that they're being reflected are things like when markets are down, fewer people lapse at the bottom because it's not in their economic interest to do so. And while some of that was anticipated, not the -- a full reality of what we're experiencing today. So no, that does not expect -- affect at all the runoff of the Japanese block. Gabriel Dechaine - Crédit Suisse AG, Research Division: All right. I don't think so. I was just confirming.

Yes, Gabriel. You asked the question there that on the Long-Term Care, that the second part of it, which was, how do the price increases compare with the competition? And I think that's a good thing. Number one is when we're -- the price increases that have been reflected in Cindy's valuation are lower than the ones we asked for last time, and they tend to be lower than what a lot of the competition has asked for more recently because some of them delayed in their catching up. So not to say that any regulator is happy to see us coming in for a rate increase. But what we're looking for is, shall we say, in the scheme of things, rather reasonable.

Our next question is from Joanne Smith with Scotia Capital.

I just wanted to touch on a couple of things. One is the changes that you're -- that you are making to your variable annuity subaccounts. And that, I guess, is part of the reason that the basis review is not complete for the third quarter. And I just would like to understand from either Steve or Cindy how that could possibly reduce the volatility in earnings and also would possibly reduce your hedging costs.

Okay. So we're talking about -- here about the items that we flagged up as being potentially [indiscernible] it was in the fourth quarter.

Yes, the shift to the volatility control funds.

Right, okay. So in our release, you see we talked about the future tax reserve work that's been -- that's going on and is yet to be completed. And that is -- that work is in some way dependent on the outcome of the change we're making in relation to the investment strategy on the Seg Funds within the VA product. And these changes are being made for the benefit of policyholders, and we need to see how that -- those changes that are being proposed to policyholders, how that progresses so that the work can be completed. So that's the linkage there. Does that answer your question, Joanne?

I was -- I'm talking specifically about once the policyholders approve the shift of their funds from, let's just say, an S&P 500 Index fund to one of these managed volatility funds. Obviously, it's to the benefit of the customer because they're going to have less volatility. A lot of your peers have done this. They'll have less volatility in the fund returns. But it should also result in less volatility to your earnings as well. And I would also expect that it would result in lower hedging costs because if you're embedding some of the hedging at the product level now through these managed volatility funds, that's one less hedge that you have to put on.

Yes, that's correct, and that's laid out in the filings. But you're absolutely correct.

We expect the -- we'll have all those benefits you ascribed, but we expect them in total to be modest. And of course, it depends so heavily on what the path of outcomes is going forward. We wouldn't want to put out a number. It really depends on what happens. This -- the markets go up and then go down or if they go down and then go up, the whole direction, how much volatility is experienced, then how much to get moved. It's impossible to predict. But we expect, as a result of these changes, if they are passed by the policyholders -- and one of the things that we've tried to do is be very, very clear of the benefits and the costs to our policyholders, that if they pass it, that it will reduce volatility for them and also for us.

Okay, all right. That's -- that helps a lot. Second question is on the Retirement Plan Services division. Is Craig on the phone?

I'm here, Joanne.

Okay. So on -- what I wanted to know is I believe that you've had a lot of success in the midmarket and you have a lot of momentum there. But it appears that the small case market has increased in competitiveness. And I'm wondering if you could just flush that out a little bit for us.

Yes. So I mean, as you know, we're a leader in the small case market. We consider that our -- has been our core market. We have the #1 market share, and we have reasonably good margins because we have a high service model for small customers. The -- we are under some attack, that position is an attractive one, and there are a number of competitors who would like to displace us. And so we are getting some pricing pressure. The way we've reacted to that -- we knew this was going to be coming. It's competitive market. We are going on the attack and going into the mid-market, taking some of the abilities that we have from the core market into the mid-market, which was really like a -- launching almost a whole other company but based on the core of our service model. And that is doing very well in terms of commitments, but you won't see it in terms of recorded sales probably until 2014 because these things have a long lead time as sponsors move the plan and take some time. And so that's going very well, and that's sort of one part of responding to the competitive pressures. And the other is both working on our expenses and on our pricing for our core market to vigorously defend that. So we're adding features all the time, and from an economic perspective, we're making sure that we're competitive because that's -- it's a very important segments to us.

Okay. And I guess just on one of your competitors -- not maybe direct competitors in this market but a peer, in an earlier conference call today, suggested that they've been seeing a lot more RFP activity in the full-service retirement plan market because of a shift in focus from health care to now retirement plans. And that's just an anecdote that I got from a competitor's conference call earlier, and I'm just wondering if you could comment on what you're seeing there.

Well, in our segment of the market, we saw an awful lot of RFP activity last year and actually the year before. And it's actually -- we see it having slowed down this year. It may pick up going forward, but we haven't seen that.

Our next question is from Sumit Malhotra with Macquarie Capital Markets.

My first question is for Bob Cook, and it relates to Wealth Management sales in Asia. Your year-over-year results here have obviously been very strong over the past number of quarters. Just looking at this sequentially, it did seem to be a material step down. And I know there was some commentary in the documents about the fact that a number of new products were launched late in 2012. Is there anything more at play here than just seasonality? Or is there a situation where you think there is a slowing trend because those launches from last year are starting to slow in terms of sales?

Yes. No, I wouldn't characterize it as seasonality at all. And I am still very bullish on the long-term trajectory of our wealth businesses in Asia. I just think you have to look at them over longer periods of time than just quarter-to-quarter. So I think if you look at full year next year versus full year this year, you should see and expect good progress on our part. The reason why I say this is that in most of the countries in which we operate in Asia, the Mutual Fund business operates more on a -- what I would call an IPO model rather than a regular contribution model that you would be used to in North America. So our sales tend to be very lumpy depending on when we have new fund launches. And this year, it just happened that our product calendar concentrated the bulk of our fund launches in the first 2 quarters of the year, and that's where our sales were concentrated. So I don't -- we don't have a firm calendar for next year or so. I can't really predict what the pattern of sales will be next year. But again, over the course of the entire year, I would expect -- I believe our strategy is still working extremely well, and I think the long-term trajectory is positive.

So don't read too much into the stepdown in this quarter's results?

Correct.

And second question, final question is probably for Steve. You've talked about the expectation of an extra $100 million pretax from the E&E initiative in 2014 and then a larger benefit in 2015. Are you in a position to talk about what -- if any, which geographies of the company are set to benefit more from this? Or do you still -- do you see it as being relatively widespread?

Okay. Yes, I think the way to look at this is probably to say that there are 4 work streams, if you like, that contain the most dollars. That would be information services, operations, workplace or workplace transformation and procurement. And then you'd probably say that there's more opportunity for those in North America than there is in Asia because Asia is a bit of a growth story, if you will. But then I'd also say that from an Asian perspective, it's more about making sure that we continue to get our unit costs down. So rather than, as we say, it will be a -- if you like, a save-a-future cost increase, if I could characterize it that way.

So yes, just to make sure I get you clearly here, so from the E&E initiative itself, the benefits are more likely to accrue in the North American business?

The immediate benefits, that's correct. But I think at the same time, some of these initiatives will benefit us in terms of preventing cost increases in Asia and in terms of getting unit costs, if you like, down over time in Asia.

And our last question is from Michael Goldberg with Desjardins Securities.

A couple of questions. You've given some color on insurance sales and to -- and Asian wealth sales. And I guess that it was the slower sales this quarter sequentially that contributed to the slower VNB levels sequentially also. Is that a fair way to look at it? And also, that being the case, can you give us some idea of what kind of VNB growth you think is achievable over the remainder of the year and into 2014?

Okay, Steve here. I'll start off. Well, first of all, the new business embedded value year-on-year is actually increasing...

No, but I'm talking quarter-over-quarter.

Yes. No, I understand. But there is some seasonality to that. So yes, you're correct in the sense that the insurance sales in Q3 in Asia in particular were not as strong. That would impact new business embedded value. On the other hand, we have been successful in getting some pricing actions implemented, particularly in Asia and in Canada. So that will benefit us going forward. In terms of the new business embedded value growth going forward, we're optimistic about that. It's a focus to continue to make sure that we're getting our pricing actions passed and implemented and would expect that to see on an upward trajectory.

Why don't we have Bob fill in on Asia specifically.

Well, I guess I think you will see, although we don't give you the granular breakdown, is we are expecting that our value of new business will grow at a somewhat faster rate than our sales growth because of -- most of the product activity that we've been engaged in for the last year has been in the direction of reducing risk and widening margin.

Okay. I have another question also. Looking at the potential impact of higher interest rates, is it reasonable for me to think that you would -- you'd offset some of the benefit of rising rates by strengthening other reserves? Would this, in effect, back-end load the benefit of higher rates on earnings emergence? And whatever you do to shape the pattern of earnings emergence over time, is it fair to say that there's no change overall to your present value or future profit?

Michael, it's Steve here. No -- I think the answer to your question is no. I think when Cindy and her team go about their reserving exercise, they want to sort of play it straight down the middle rather than vary their stance on conservatism or otherwise. So I would say the answer to that is no.

Yes, that's correct, Steve. We -- we're -- we would not be changing our earnings emergence or back to -- adjusting reserves to offset the impact of rising rates. We have an approach to setting our reserves that's defined and disciplined, and we follow the same approach every quarter. We're not, for example, holding back changes in reserves and then reflecting maybe the impact of interest rates at the end of the year. Some companies do that, and maybe that's you're thinking about, Michael. So for us, it's we really -- the impact of interest rates flows through in the current quarter.

No, I'm not really thinking about it on a quarter-by-quarter basis. I'm thinking on more of a longer-term basis.

Once again, I'd -- I wouldn't expect us to necessarily strengthen our reserve base to hold back the impact of higher rates. If we -- but if we did anything at all to change the earnings emergence pattern, in general, the PV wouldn't change very much. But obviously, you're discounting the time value of money. It might -- there might be some difference somewhat in the PV. I would've expect it to be material.

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

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

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