Manulife Financial Corporation (MFC) Q1 2014 Earnings Report, Transcript and Summary

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the Manulife Financial First Quarter 2014 Financial Results Conference Call for Thursday, May 1, 2014. 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 first quarter 2014 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investor Relations section of our website at manulife.com. As in prior quarters, our executives will be making some remarks. We will then follow with a question and answer session. Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are 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 securities filings referred to in the slide entitled, Caution Regarding Forward-looking statements. We also have a note to use the slide that sets out the performance or non-GAAP measures used in today's presentation. [Operator Instructions] With that, I would 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. For responding to investor feedback, we're going to avoid the introduction of everyone at this meeting and for all future calls and allow more time for questions and answers, so Steve and my remarks will be far more abbreviated. This morning, we announced our first quarter 2014 financial results. We had a very solid start to the year, our strategies unfolding into strong operating results. We're making measurable progress towards meeting our long-term objectives. Let me start by reviewing the progress made in our growth strategies in the first quarter. We continued to develop our Asian opportunity to the fullest. In the first quarter, we saw improved momentum in insurance sales, with a very significant increase in Japan and double-digit sales growth in most of the other territories in Asia. This was largely the result of a new product launches and increased marketing efforts in region, as well as the growth for distribution capability. Wealth sales continued to be at levels seen in the second half of the year, but we're down from the first half of the year, as rising interest rates and market uncertainly impacted some markets in Asia. We also continued to grow our wealth and asset management business globally. We achieved our 22nd consecutive quarter of record funds under management. Manulife Asset Management reported particularly strong results with record institutional advisory assets under management, new mandates in Asia and North America, and the majority of public asset classes outperforming on a 1, 3, and 5-year basis. Our balanced Canadian franchise continued its steady progress. And in the first quarter, we had continued momentum in mutual funds, strong group pension sales, which drove record wealth sales. Retail insurance sales increased due to our actions to improve our competitive positioning, and Manulife Bank's slowed somewhat in light of tightening consumer credit and aggressive rate competition. In the United States, we continue to drive sustainable earnings and opportunistic growth. We achieved our 10th consecutive quarter of positive net mutual fund sales, and reported record sales and funds under management in our mutual fund business. Our Retirement Plan Services sales declined, reflecting competitive pressures. However, we reported meaningful sales of our new mid-market product, that is very good. Our insurance sales slowed in the first quarter due to pricing actions taken last year. However, we expect recently introduced product enhancements and more competitive prices to improve sales. Turning to Slide 6, in the financial highlights of the first quarter. We reported net income of $818 million, reflecting core earnings of $719 million and strong investment related experience. I am particularly pleased with Asia's core earnings this quarter, which are up 18% from last year's on an apples-to-apples basis when properly adjusted for factors such as currency, geography, of hedging costs on our financial statements, and the sale of the Taiwan insurance business. On the top line, we achieved wealth sales of $13.8 billion, up 5% over the first quarter of 2013. Insurance sales of $537 million were down 15% from a year ago, largely reflecting lower sales in the Canada Group Benefits business. Excluding group benefits, sales increased 4%. We ended the quarter with a very healthy capital ratio of 255%. And as I mentioned previously, achieved our 22nd consecutive quarter of record funds under management. In summary, our plan is unfolding very well. And we are confident that our growth strategies will continue to yield results for our shareholders. And with that, I'll turn it over to Steve Roder, who will highlight our financial results, and then open the call to your questions.

Thank you, Donald, and good afternoon, everyone. Let's start on Slide 8, where we summarize our financial performance in the first quarter of 2014. As you can see, we had a solid start to the year and performed well compared with a year ago on our key performance indicators for profitability, growth and financial strength. In the following slides, I would address each of these indicators in further detail. Turning to Slide 9, you can see that we continue to demonstrate measurable progress on growing our core earnings. For the first quarter of 2014, we generated $719 million of core earnings, an increase of $34 million versus the prior quarter, driven by lower expenses, the favorable impact of currency and higher fee income. Partly offset by a $64 million unfavorable swing in policyholder experience. Turning to Slide 10. In the first quarter, our reported net income benefited from continued strong investment-related experience of $275 million, $50 million of which was included in core earnings. This was partly offset by the negative impact of market-related factors totaling $90 million and $40 million in actuarial model refinements. On Slide 11 is our source of earnings or SOE analysis. Expected profit was largely in line with the prior quarter on a constant currency basis. As higher fee income and lower amortization of deferred acquisition costs were largely offset by lower PfAD releases in our variable annuity businesses due to higher markets and the implementation of the managed volatility program. The impact of additional dynamic hedging in Japan at the end of the fourth quarter and the sale of our Taiwan insurance business last year. New business strain was negatively impacted this quarter by lower volumes of insurance sales in the U.S. Experience gains include the favorable impact of our investing activities, partially offset by unfavorable policyholder experience and market impacts. Management actions this quarter reflect actuarial model refinements and expected macro hedging costs, which decreased in the first quarter. Turning to Slide 12, in insurance sales. Insurance sales of $537 million declined 15% over the prior period. The decline largely reflects our disciplined pricing actions and normal variability in our market-leading Canada Group Benefits business. Excluding group benefits sales, insurance sales grew 4% over the first quarter of 2013. Despite the overall decline in insurance sales, insurance new business embedded value increased 15% over the prior year, reaffirming that the profitability of our new business continues to improve. On Slide 13, you can see that we have achieved wealth sales of almost $14 billion. Wealth sales grew 5% from a year ago, reflecting record mutual fund sales in North America and strong pension sales in Canada, which more than offset a decline in Asia wealth sales. Wealth new business embedded value of $135 million was in line with the prior year. Turning to Slide 14. Funds under management at the end of the first quarter was $635 billion, our 22nd consecutive quarter of record funds under management. Slide 15 indicates the capital position for the Manufacturers Life Insurance Company and our financial leverage ratio. We ended the quarter with a regulatory capital ratio of 255%, up 7 points from year end. 5 points of the improvement in the ratio relates to capital issuances, which temporarily heightened both our MCCSR and leverage ratios. In the second quarter, the repayment of $1 billion of maturing debt will reduce our capital ratio by approximately 8 points. In addition, if the company redeems, subject to regulatory approval, $450 million of preferred shares, which will become redeemable at par in June, we would expect a further 3 point decline in the MCCSR ratio. We ended the quarter with a leverage ratio of 30.8%, down 190 basis points from the prior year, reflecting strong growth in our retained earnings. While we would expect some quarter-to-quarter variability in our leverage ratio, we are comfortable and that it will continue to trend towards our long-term target of 25%. Turning our focus to the operating highlights of our divisions, we will begin with the Asia Division on Slide 17. Core earnings actually increased 11% over the prior quarter and 18% over the first quarter of 2013 on an apples-to-apples basis, when you adjust for the impacts of currency, dynamic hedging costs and the sale of our Taiwan insurance business. We are also encouraged by the improved momentum in Asia insurance sales due to double-digit growth in most territories and the successful launch of new enhanced corporate term products in Japan. Japan insurance sales alone increased 43% compared with a year ago. This percentage increase reflects that the sales in the first quarter of 2013 was somewhat reduced after the higher than normal activity due to announced price increases in 2012, and the first quarter folds in the last quarter of Japan's fiscal tax year. Wealth sales of USD 1.5 billion continues to be at the levels seen in the second half of the year, but declined 37% from the very strong prior year results, as rising interest rates and market uncertainty continue to impact some markets. Turning to our Canadian division's operating highlights on Slide 18. Core earnings were largely in line with the prior quarter, as higher insurance new business strain on seasonally lower sales and unfavorable policyholder experience was partly offset by lower expenses. Insurance sales of $134 million was significantly lower than the prior year period, reflecting our disciplined pricing approach in our market-leading group benefits business and normal variability in the large case segment. Excluding group benefits, insurance sales increased 8%. Retail insurance sales, however, were up 9%, as the market reacted favorably to our actions to improve our competitive positioning. We achieved record wealth sales of $3.4 billion, an increase of 18% versus the prior year. The robust sales were driven by record mutual fund sales, and strong growth in Group Retirement Solutions, which more than offset lower Manulife Bank lending volumes. Moving on to Slide 19 in the highlights for the U.S. division. Core earnings were USD 339 million, down 3% from the fourth quarter, reflecting an unfavorable swing in policyholder experience and higher new business strain due to lower insurance sales, which offset a favorable one-time tax item and higher fee income. First quarter insurance sales of USD 108 million were down 24% from the prior year period, reflecting pricing actions taken last year. We introduced product enhancements and more competitive pricing this quarter, which we expect will improve sales. Wealth sales rose 13%, driven by robust mutual fund sales growth and meaningful sales in our mid-market 401(k) product, partly offset by competitive pressures in our core 401(k) market. We have strengthened our product in the core 401(k) small case market to improve our competitiveness through more targeted pricing, see transparency and additional investment options. So in conclusion, in the first quarter of 2014, we generated strong core earnings and net income, achieved strong wealth management sales, improved life insurance sales momentum in Asia and Canada, reported a capital ratio of 255%, and delivered our 22nd consecutive quarter of record funds under management. This concludes our prepared remarks. Operator, we will now open the call to questions.

[Operator Instructions] Your first question is from Joanne Smith of Scotia Capital.

I have a couple of questions. First, on the Asia sales improvement. I think it's really great that sales improved in Japan on the new product launches. I'd like to hear what you're doing elsewhere in the region, and if you could talk about x Japan and Hong Kong, what's going on with the sales in the rest of the region? And what you think the outlook is? And how the competitive market is?

Joanne, this is Bob Cook. I think our outlook for most of the countries in Asia is pretty positive, although Japan was a highlight for the quarter, we did have strong results from virtually all countries with the exception of Singapore. I think looking forward, we have a wide range of product launches in Hong Kong in the second quarter, which I think should keep their momentum going strongly for the rest of the year and -- so I'm certainly optimistic about that. I think we also had some very positive results in the first quarter from China. And again, I think a series of planned product launches going forward will help us maintain that momentum as well.

And then just on the U.S. Retirement Services, business. Craig, I was wondering if you could talk about competition in the small case market and any sea pressure that might exist there, I've been hearing contradicting remarks from companies over the course of the conference calls this quarter, and I'm just wondering what your view is?

Yes, this is Craig Bromley. We've seen -- we have seen contradictory results as well. But from our business perspective, I guess we're looking at what we can control. We haven't seen the margin pressure that you're talking about. That's -- margin pressure is kind of a constant in this segment. And not just in the small case, but across the board. But nothing particular this quarter or any new pricing actions by competitors or anything like that. In terms of our sales, we're down a little bit against last year. I would say that for really 2013, we saw some slowdown in sales momentum, coming off a strong 2012. We have taken a number of actions, including the launch of our Signature 2.0 product. And we expect to gain traction there as the year unfolds. So we don't have any particular concerns right now on the sales front or on the margin front.

What about distribution, Craig? Just in terms of -- have you been expanding distribution? Is distribution shelf space getting tougher to find? Maybe you could talk a little bit more about that?

No, I wouldn't say it's getting tougher. We have a very good distribution footprint, particularly, for small case. We are expanding distribution because we are moving into the mid-market. We're really starting largely with the distributors we already operate through, who operate in both segments, but we are starting to touch some new distributors that haven't traditionally done business with us. So we are expanding our distribution. I don't see distribution shrinking or shelves getting shortened at this time.

The following question is from Mario Mendonca of TD Securities.

Throughout the press release, there were -- you made reference to reducing pricing in the U.S. or better competitive offering in Canada, individual life, and even in the 401(k). Is there anything you can say, perhaps, Steve, about strain going forward, because it would seem that with long-term rates moving a little lower this quarter and what you're saying about pricing that we should expect strain to move higher?

Thanks, Mario. Thanks for your question. I think previously we tried to give a sort of indicative run rate for strain, and we indicated a number of around 70 per quarter. And I don't think we have any change to that guidance, so we're still comfortable with that guidance. And I'd also remind everyone that, that includes [indiscernible] wealth distribution costs within what we currently define as strain, but -- no, I don't think there is any fundamental change.

So what's the offset then, if you're -- if you expect to reduce pricing or enhance features or what have you to pick up additional sales? What's offsetting -- how could strain not have changed, your guidance for this?

Okay. So there are all kinds of factors within the overall strain calculation. And I think you're highlighting one particular aspect. Maybe I'll just ask Cindy if she -- if there's anything she would like to add to that?

Sure, thanks, Steve. It's Cindy. We have seen offsets in pressure [ph] volumes, volume increases that would offset the impact of slightly lower margins. Some of the products have positive margins and also there's an expense contribution from new sales, and so that would offset.

So your -- the comment about not seeing strain increase from here is somewhat dependent on picking up additional volume?

It would be somewhat dependent on increased volume.

Okay. One other quick question. With reference to surplus earnings. In the presentation, you referred to mark-to-market gains that drove a higher surplus earnings number this quarter. Are there any gains, these -- any of these mark-to-market gains treated as items of note when you arrive at your core number or are they all part of core?

No, they're non-core.

So how much would that -- and so you're saying those gains in earnings on surplus that caused the number to be higher, they are non-core, where could you refer to that number in your items of note, which number is it?

It's in -- it's within investment experience.

Okay, that's helpful. I would normally think of investment experience as being something connected to changes in the assets backing your liabilities. So maybe just to finish that question up, what would that amount be that belonged in earnings and surplus? The gains that is?

Around $60 million or something of that order.

$60 million pretax?

Okay.

The following question is from Darko Mihelic of RBC Capital Markets.

I wanted to circle back on Asia. And just -- I mean, I understand it was a good improvement in the core earnings, but I'm looking at top line sales in agent count. And I was wondering, maybe, Bob if you could speak to the decline in agent numbers in Asia? And whether or not you expect that agent count to turn the corner and actually go higher. And I guess further to that, I think you outlined some strength in China and Hong Kong, but maybe perhaps you can talk about in Asia as well in terms of sales?

Okay, sure. In terms of agent count, there's really 2 things happening that are kind of slowing the growth. One is in Indonesia where we've kind of been going through, I guess, what I would describe as a periodic cleanup program of addressing some unproductive agents and just cleaning things up, they say something we would probably do every year or 2. The other one now that is, perhaps, more material is in China, where we have consciously more of a strategic shift to slowing down recruitment in China. We're not alone, as several of our foreign JV competitors have done the same thing. And I think we all reached the same conclusion that in the current economic environment in China, we were just experiencing too much churn in the agency for us and that a better path to grow would be to focus on additional training to improve the productivity of our existing core agents and that is, in fact, what happened, as I mentioned earlier, we had a good sales quarter in China despite not increasing the number of agents in China. In terms of your comment in Indonesia, Indonesia did have a very strong year-over-year growth in sales, once you adjust for currency. And a big chunk of that came from the bank channel, both our principal relationship with Bank Danamon, as well as the variety of other distribution agreements we have with both local and foreign banks in Indonesia, all delivered outstanding results in the quarter and was a major driver of what's -- the success that we experienced in Indonesia.

The following question is from Robert Sedran of CIBC.

I'd just like to return back to the issue of price declines and strain. And in Canada, in particular, I guess, is the feeling that the decline in prices put you in line with the market or ahead of where the market -- below, I guess where the market is from a pricing perspective?

It's Marianne Harrison from the Canadian division. It puts us in line with the market. We have done some, probably, 4 or 5 increases over the last couple of years. And the more recent one, I would say, at the beginning of last year. We didn't see the competition follow, so the change that we made in the third quarter of last year brought us in line with competition.

Steve, just on the policy, on the behavior issue, I guess, there was the swing from quarter-to-quarter, is that just normal volatility from quarter-to-quarter or is there, perhaps, something predictive in there. Can you give us a little bit of more information on which product that might have been and what the outlook might be for that going forward?

Sure. We had -- in Q4, we actually had favorable experience. And then Q1 we had unfavorable experience producing that swing. There were some special factors in Q4, which we talked about at that time. In Q1, we have 1, particularly large claim, that cost us just shy of USD 20 million, so that constituted a fair amount of the adverse experienced in this quarter. So I just put it down to normal variability in the policyholder experience, Rob.

And quick last one, I hope. Just on the capital position, and you always get asked about dividends and buybacks and all that kind of thing. I'm just wondering what level you might consider removing the discount from the drip and perhaps starting to buy the shares in the market rather than issuing them from treasury? Or whether for the foreseeable future, we should see the share count kind of drip higher, if you will?

Yes, it's something that we occasionally look at. We do keep it under consideration, last time we looked at that, we concluded to -- that we should maintain our current position, I don't think there's any change to that right now. So nothing more to say on that at the moment.

The following question is from Tom MacKinnon of BMO Capital Markets.

Question for Bob Cook with respect to Asia wealth sales, there the wealth sales are kind of trending in the second half of last year, but you certainly had a lot of success with some hot products in the first half of last year. Can you maybe update us on any potential product repositioning here in Asia to kind of reignite some of the wealth management sales?

Okay, Tom. I think not much news to report on Japan. Japan was probably the biggest driver of the reduction in wealth sales to the kind of $1.5 billion a quarter that we've had for the last 3 quarters. And the success that we had prior to that was largely driven by a hot fixed income product and when the government came in, the asset class of favor in Japan switched dramatically to Japanese equities, both fund products and direct investment in the Japanese stock market. That has not shown any sign of changing. And unfortunately, the way we distribute our product in Japan, all of our distributors basically manufacture Japanese equity products of their own, so they don't need that from us. So I don't see any short-term shift in that. There is a possibility of a shift in the other big decline year-over-year, which was in Indonesia. That was largely driven by local circumstances and there is some prospect that with the apparent resolution of the next government being favorable to the business climate that, that could lead to improved investor sentiment in that market and help our business there, but that may be more in the second half of the year.

So you're suggesting that it was an industry issue for some of the slowdown in wealth sales in Indonesia?

Yes.

Okay. And then just one quick follow-up, I guess, for Craig. This is unlike a lot of other conference calls, we're all asking the division people questions here, so that's good. But -- you just have repositioned a lot of the portfolio into kind of a lower risk profile product, and now it's like you're trying to introduce a much more of a competitive product. Is it suffice to say that the competitive products that you're building up, I think, it's the index UL, that's still a low risk profile product? How can you make us feel comfortable that as a result of being more competitive you're still maintaining your proper risk profile?

Yes, so we did do substantial change in our portfolio, and that really hasn't changed. The index UL doesn't have a particularly greater risk profile than other products that we offer. The types of changes that we're talking about making here in terms of increasing our competitiveness are not major structural changes. They're really more tweaking things like portfolio rates for our UL products and some tweaks on sort of caps and floors on our index product. So they're really not fundamental changes. We're not trying to become all of a sudden a lot more competitive through taking more risk.

Yes, Tom, I'm going to take the opportunity here [indiscernible]. Mario and Robert and yourself were asking a similar question. We are not moving off the preferring margins to market share strategy. But the limit to get some -- little bit of tweaks, as Craig said, can make a big difference when you get to some point, where you're just slightly off the competitive mark, and that's exactly what was done in Canada, and that's what is being contemplated in the United States. And at that sort of point of inflection, if you end up having your sales drop as a result of a fairly minor adjustment in the price, you make a lot more money overall, hence, Steve's observation on the strain not likely to go up.

The following question is from Humphrey Lee of UBS.

Just have a follow-up question on Asia wealth sales. I think in the press release you mentioned that kind of market uncertainty hurt your sales level a little bit, I was just wondering if Bob can talk about a little bit sort of second quarter-to-date in terms of how sales have been progressing and what you're seeing in Asia?

We're having some trouble hearing you, there's a break in the line. I don't know if you're using a cellphone, but if you can go...

Is it better now?

Yes, that's a lot better.

Okay. Just want to have a follow-up question on Asia wealth sales. You mentioned in the press release that market uncertainty hurt your overall sales a little bit, just wanted to ask Bob, to see in terms of second quarter to date, have you seen any improvement in that regard and how sales are trending overall?

I don't really have any comment on second quarter-to-date, no.

And maybe I'll ask another question to Craig. In terms of the mutual fund sales in the U.S., very strong. Do you think the current level is sustainable? Or if there's any kind of possible lever to drive harder in the near future?

Yes, I think the sales have been gaining momentum for a number of years now, and we still have the same strong product lineup and distribution footprint that we did before. Obviously, markets can impact how sales go. So if there was a dramatic change in the equity markets or something that could impact our sales profile, but right now, I don't see any of that coming, and so I wouldn't expect any major changes.

Okay. And then in terms of the Retirement Plan Services, the sales mix, is there -- can you provide like a mix between small case and mid case for the quarter?

We said that our sales in the mid case market are material now. And that's probably the first time that we've been able to say that. We just launched the product last year. Still, however, the vast majority of our sales are in the small case market and our traditional core market. And that will continue to be the case for the foreseeable future. I mean, we've been in the small case market for over 20 years. We've been in the mid case market for a year and we're still continuing to build out features to make that product more attractive to the mid market. So it is very much tilted towards the small case still.

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

Couple of questions. Maybe first for Craig, I think we've covered off the 401(k), but I saw mention of a new retail Long-Term Care offering you expect to launch in Q2. Can you give us some of the details and expected impact there?

Well, we've made some changes to our pricing. I think that's probably what you're referring to, which we'll be launching in Q2. Prices will go up, we've obviously gone out for rate increases on the in-force, and we're starting margin in the new business as well. I guess in terms of what the impact might be on sales, obviously, if we're increasing prices, that's not a tailwind, that's more of a headwind. I guess it really depends on what our competitors do as well because I think they -- a number of them are contemplating or completing the same types of actions. So it remains to be seen.

Okay. And then, for Steve or maybe for Cindy, in referring to Slide 13 where you have new business embedded value for the wealth side. In going back to your comments, Steve, what is about the mix change in wealth that led to flat new business -- new business embedded value despite pretty good sales growth both quarter-on-quarter and year-on-year. Is it just -- is it Canada, oh sorry, is that U.S. versus Asia? And if you can help me understand that a bit better, I appreciate it.

It's Cindy, Steve. The mix change was really a reduction in pension sales year-over-year in Hong Kong. Very good employer choice, cash flows and sales of prior year, still good this year, but not as strong. That was offset by improved mutual fund sales, but not a complete offset. And then quarter-over-quarter, with strong sales in our PS 401(k) in the fourth quarter. And so the mix change there is largely pension again, but more in the U.S. Again, strong mutual fund sales quarter-over-quarter as well, but didn't fully offset the pension impact.

I'm sorry, just the pension impact is primarily Hong Kong on the negative side or entirely Hong Kong?

It's primarily Hong Kong on the -- year-over-year. So when you look back to Q1 2013 versus Q1 2014.

So Steve, if you recall, the employee choice arrangement was introduced in late 2012 in Hong Kong. So we had a strong run up in 2013 and we let on net cash flows, I think throughout 2013. But there's obviously, some tapering off of the amount of money moving around the market. So it's as anticipated.

The following question is from Peter Routledge of National Bank Financial.

Question on holding company financial flexibility. You've got a lot of it, I mean, with MCCSR as high as it is. What I'm trying to reconcile is a great deal of financial flexibility with the decision to issue capital this quarter in effect to replace the -- or at least partially replace the redemptions you have coming up this quarter? Why not just pay down or -- pay down the capital that's maturing this quarter and drive your leverage ratio down just straightaway?

Okay so -- okay, you're right, Peter. We, obviously, do have a lot of financial flexibility. And I think we made it pretty clear, we're not necessarily going to replace all the debt that is falling due, and we may indeed redeem preference shares. So over time, we would expect our leverage ratio to come down through earnings accretion, but also because we'll take some of the leverage off the table. That's -- that would be intent. We have prefinanced the majority of the debt falling due and the prefs that are up for redemption in June this year, but by no means, all of it. And so you can anticipate, subject to regulatory approval, as we state that this will play towards reducing our leverage ratio over Q2 and as we go forward. So I guess that's the color I would put on it. But the other factor that's out there, and this does not mean to say that we are going to refinance everything that comes due, but if we're going to do some refinancing, we'd rather refinance when rates are low than when they're high. So there's that other sort of overlay of considerations that we have to take into account.

Yes, that's fair. And this is a good news, so I don't mean to quibble, but all this capital, this -- if I can call it excess capital of the operating company, wouldn't that be -- can you use that more productively, either through share repurchases or maybe to do an acquisition? How are you -- you've got this block of capital that you can use, and I'm wondering why haven't you used it yet. I guess?

Well, Peter, Donald here. I think the most dangerous thing is when you've got excess capital. Burning a hole in your pocket and encouraging people to reduce the amount of discipline they exhibit towards acquisition. Contrary to some of the coverage that you might have read a few years ago, we were never capital constrained in terms of doing deals. When we look at deals and turn them down, they've been matters that we just didn't feel it met the hurdle rates that do a good job for our shareholders. We look at every deal as if we had to finance it with capital, and we'll do that regardless of what our stock price is, regardless of how much excess capital that we have. You're quite right, if you can't deploy the capital in terms of funding organic growth, making investments for the future or doing strategic acquisitions, you should give it back to shareholders, and my personal bias is towards dividends rather than stock buybacks as stock buybacks do help share price in the short-term, and they help people who hold options, but my bias is towards something more longer, sustainable and frankly more in the best interest of shareholders, which is dividends. But the best use is, as you've identified, is either finding organic growth, investments in the future, or acquisitions. But we will never let a high capital ratio encourage us to make deals that otherwise we wouldn't do. That's a very dangerous proposition. You're not suggesting it, but I just want to make very clear that our discipline will stay the same regardless of what our capital ratio is.

Is it fair to say that in subsequent quarters, the Board meets, share repurchases are a very real alternative where maybe when things aren't quite as rosy in terms of outlook, that might not have been the case?

I think it's fair to say that if you wind the clock back a year, I don't think there was a lot of discussion that the Board around the question of capital deployment because when our leverage ratio was closer to 34 than 30, then that was probably not the top of the agenda. As we move forward, we obviously have to keep these things under consideration, but the leverage ratio still remains important and it's probably worth just reminding you that we have got over $2 billion of debt maturing in 2015 in Q2 and Q3 2015. And also the headline MCCSR ratio of $255 million is, as we stated, you can -- assuming that we redeemed the preference shares that are -- which will be subject to regulatory approval, then you can anticipate 11 points coming off that as well. So we have to balance all these aspects.

Okay, just one final, Steve. Macro hedging and URR assumption, change in costs are going in the right direction. Is there a point in the future where we'll see them both at 0?

Well, I think at some stage, the URR ultimately would become positive. It's now I think 25. But it will take time to get there because of the averaging effect.

I guess, so that's where the ASB changes might get you to 0 faster then?

Yes, that was right. So I'm -- That comment is assuming that everything else remaining unchanged as it were. But well, obviously, things could change if the new regulations play into that. On the macro hedge question, maybe Rahim might just want to make a comment?

Sure. We would expect our macro hedges, cost to decrease over the next few years, but I won't expect it to be sort of reducing dramatically over the next year or so, I think it's a steady decline from where it is today.

The following question is from Doug Young of Desjardins Capital.

I guess my first question, it was referenced a few times in the call that Asia core earnings were up 18% and that excluded a number of items, and one of the items just was the dynamic cost, and I understand that your macro costs are in the corporate sector and your dynamic costs are in your divisional? And I just want to confirm when you're backing that out, that's the one-time cost associated with setting up the reserve related to the dynamics? So that is a one-time item, I just wanted to confirm that.

No, it's actually -- it's a geography issue within the income statement. So the macro hedge costs are within the corporate line in the dynamic, within the individual divisions. So as we shift from macro to dynamic, when we're able to do that, then that does distort our quarter-on-quarter run rate analysis, if you like. So this quarter, the impact of the macro dynamic shift, I think is worth around $12 million. So that's essentially penalized the division and benefited the corporate.

I guess my question is, is that an ongoing cost then every single quarter?

Well, yes, if we -- we have hedging costs every quarter. So it's just a shift in geography.

But the absolute cost of dynamic hedging is a number that's variable based on the whole host of factors. So you can't say that the absolute numbers are constant, it's a completely variable number based on all the elements that go into its calculation.

Okay. I'm going to come back to you on that. And just the -- maybe this is for Donald, when I do, I look at your $4 billion earnings target for 2015, and I look where are your core earnings were as you guys, I do the numbers for this quarter, I mean, the CAGR to guess there is 14%. And then I -- if I assume you can get your E&E benefits closer to 10%. When you look at that, Donald, does that at all concern you? How do you get from here to there? And I do understand that it's probably going to be more back-end weighted.

Well, I'm not going to tell you the absolute trajectory, that would get into the guidance game, but I think it's sort of a 16% compound growth rate and, and -- which happens to be exactly what we did last year. And I'm feeling very comfortable about it. That's not a prediction, I mean, as I've said many, many times before, what I care about is not whether we get $4 billion right on the money or $4 billion, $1 billion or $2 billion or $3.8 billion or $3.9 billion, but that we're on the trajectory, so that the next year will be a nice incremental of that, the trajectory -- that 2018 will be a nice increase over 2017. And we're on a very, very healthy path towards that. Again, no projection, but we're moving in the very right direction.

So you're still comfortable with that target range?

I'm comfortable, Steve is comfortable, management team is comfortable. Now that doesn't mean as any prediction, we're not in the guidance game. So as you know, a variety of factors could derail that. But we feel as of this moment, quite comfortable and again, all I care about is getting close to that target and ensuring that we have the right momentum that 2017 and 2018 are progressively better. And that's the thing I care most about, but I have a lot of comfort with that target, not to say that it's a guarantee.

The following question is from Joanne Smith of Scotia Capital.

Just a question on how much of the earnings are redeployed into organic growth? So I'm looking at the leverage and the strategies to reduce leverage through earnings, primarily. And so that tells me that the cash that you're generating from your earnings is going someplace else. So does that mean that all of the cash that you generated from earnings is going into organic growth opportunities? Or investing in the business? Or what else can you tell me about where the cash earnings are going?

It's Steve. Well, I guess, first of all, as I've said earlier, we're not going to refinance all the debt that's falling due, I'm sure we'll take some of that off the table. We may redeem prefs as well, so that would be another utilization. Yes, we are reinvesting into the business. And yes, we have to consider other forms of redeployment and we've talked about those on this call, whether that be, as Donald's reference to potential future dividend increases and the like. So there's all those sort of factors to take into consideration. And we would definitely be happy to find acquisitions that satisfy our strict criteria. And particularly, we believe that our major shareholders will be supportive of that, particularly those that could be financed internally. So they're all sorts of factors we have to take into consideration.

The following question is from Tom MacKinnon of BMO Capital Markets.

My question has been asked and answered. Thanks.

The following question is from Mario Mendonca of TD Securities.

On the macro hedging, I saw that the notional went up, and I understand Japan was weak this quarter and that's probably what necessitated it. But it's a little different from what, how I understood that trade-off between macro and dynamic would play out. So my understanding was that as if rates were deteriorating, once you put on the dynamic hedge and there was no need to go back to macro. So can you help me think through it, where did my thinking go wrong?

I think that's absolutely true that when we switch from macro to dynamic, our intention is not to take off our dynamic hedges and move business back into our macro hedging program. But for the business that we are looking overall, in terms of managing our earnings sensitivity through our macro program, to the extent that we have market movements and in Japan, in particular, was a volatile first quarter. We did put on more positions in terms of managing all our sensitivities to equity markets.

So is it fair to say that in the very near-term, we could actually get an increase in the expected cost of macro hedging because of the small lift this quarter?

Based on market so far, I wouldn't expect it to be material.

And then a question that's similar to Doug's, but not on earnings so much, just more on ROE. Warren's business has generated an awful lot of these investment gains, over the last 12 months, which I guess is good, but it's added materially to the book value, which makes getting to that 13% ROE target or outlook, whatever we're calling it, a little harder to get to. So when you think about that 13%, Donald and Steve, does that still make sense in the context of how fast your book value is growing?

We can't -- we run the numbers from time to time, but both Steve and I feel pretty comfortable with that, Mario.

Okay.

And then by your observation, it's absolutely true. But it's not lost on us, but all things considered we feel -- still feel pretty comfortable.

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

Thank you, operator. We'll be available after the call if there are any follow-up questions. Have a good afternoon.

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