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 Warren Alfred Thomson - Chief Investment Officer and Senior Executive Vice President Marianne Harrison - Senior Executive Vice President and General Manager of Canadian Division Robert Allen Cook - Chief Executive Officer of Manulife Asia Operations and President of Manulife Asia Operations Rahim Badrudin Hassanali Hirji - Chief Risk Officer and Executive Vice President

Tom MacKinnon - BMO Capital Markets Canada Robert Sedran - CIBC World Markets Inc., Research Division Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division John Aiken - Barclays Capital, Research Division Mario Mendonca - TD Securities Equity Research Stephen Theriault - BofA Merrill Lynch, Research Division Gabriel Dechaine - Canaccord Genuity, Research Division Darko Mihelic - RBC Capital Markets, LLC, Research Division Peter D. Routledge - National Bank Financial, Inc., Research Division Doug Young - Desjardins Securities Inc., Research Division Meny Grauman - Cormark Securities Inc., Research Division Humphrey Lee - UBS Investment Bank, Research Division

Good afternoon, and welcome to the Manulife Financial Second Quarter 2014 Financial Results Conference Call for Thursday, August 7, 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 second 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 the webcast available on our website, as well as securities filings referred to in the slide entitled, Caution regarding forward-looking statements. We've also included a note to users slide that sets out the performance and 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. Today is a great day for Manulife. We're very pleased to announce that our Board of Directors has approved a dividend increase of 19%. I'll expand on the dividend decision later in my remarks. I hope you'll bear with me as I talk about our second quarter results, which were highly satisfactory. Our businesses generated strong net income, core earnings on plan, record funds under management and a very healthy capital ratio. We continue to make progress towards our long-term financial objectives, and our outlook remains positive. In terms of our growth strategies in the second quarter, in Asia, we generated strong insurance sales, building on the momentum of the first quarter. Our recently enhanced corporate products in Japan continue to perform well and were the most significant driver of insurance sales growth. The overall results were also augmented by good growth in several other markets across Asia due to ongoing success of product enhancement initiatives and our multichannel distribution strategy. Wealth sales, while down from a year ago, posted a substantial improvement over the first quarter, benefiting from successful marketing campaigns and improved overall market sentiment. In terms of Wealth and Asset Management globally, net flows in our Asset Management and group pension businesses exceeded $6 billion for the quarter and $13 billion year-to-date, driving our 23rd consecutive quarter of record funds under management, which now totals $637 billion. And Manulife Asset Management was recently ranked as the 30th largest global asset manager, as measured by assets under management, up from 34th place last year. In terms of Canada, we had solid sales and record funds under management in both Mutual Funds and the group retirement business. Manulife Banks new loan volumes were up significantly over…

Thank you, Donald. Good afternoon, everyone. Let's start on Slide 8 where we summarize our financial performance for the second quarter of 2014. As you can see, our key performance indicators for profitability and financial strength are demonstrating positive momentum. However, core return on equity declined, but we are very focused on continuing to identify opportunities to deploy our capital for the benefit of shareholders. The indicators for growth are mixed. We had another quarter of record funds under management and solid growth in individual insurance sales. While wealth sales declined from a year ago, they were largely in line with the prior quarter. And new business embedded value is also down slightly. In the following slides, I will address each of these indicators in further detail. Turning to Slide 9. You can see that core earnings demonstrates strong growth compared with the prior year but declined $18 million from the first quarter, reflecting the timing of income on surplus investments, less favorable impacts from tax items and increased hedging costs. Partly offsetting the decline were lower expenses, higher fee income and the release of a legal provision. Turning to Slide 10. You can see that our reported net income benefited from continued strong investment-related experience of $267 million, $50 million of which was included in core earnings and market-related factors totaling $55 million. This was partly offset by $30 million in actuarial model refinements. On Slide 11 is our source of earnings. Expected profit increased as a result of higher fee income from our growing Wealth and Asset Management businesses and lower amortization of deferred acquisition costs due to the natural runoff of our variable annuity business. New business strain was largely in line with the previous quarter. Experience gains reflect the favorable impact of our investing activities and…

[Operator Instructions] Your first question is from Tom MacKinnon of BMO Capital.

A question just with respect to the basis change, comment about not being, I guess, any worse than what it was in the third quarter of last year. I mean, what are the key things that are driving the basis change? And I have a follow-up.

So Tom, it's Steve here. Let me start off. I just should start off by emphasizing it's early days in our basis change review process. We can't be too specific about the basis change at this stage because there are too many uncertainties. So we've tried to give some forward guidance around this. As usual, there would be a variety of items within the basis change, and the guidance we're giving suggests that we think the top of the range would be somewhere around where we were last year. Maybe I'd just see if Cindy wants to enhance that answer at all?

Thanks, Steve. Yes. So Tom, we are looking at, as usual, many different things in the basis change, over 100 different assumptions. Some of the more key ones are review of our life mortality in Canada and the U.S. and annuitant mortality in the U.S., as well as lapse experience in Japan and Canada. We're implementing the changes to the CIA bond, calibration standards that were recently promulgated and looking at the production of tax cash flows in our reserves on a number of product lines.

Okay. And as a follow-up, Steve, you make points on Slide 9 of things that may have impacted the core on a quarter-over-quarter basis, such as the timing of income on surplus investments, increased hedging costs, less favorable impacts from tax items and a few other items. Are you able to put some dollar amounts around those? Or how should we look at those?

Yes, okay. The way -- Tom, the way I would look at that this quarter is kind of interesting quarter in the sense that the noise in the numbers, if you like, is virtually awash. So the items you quote there, we've got some pluses and minuses. So there's little bits of timing on the receipt of investment income. There's slightly less favorable tax items. On the other hand, we have a little bit of legal provision release. And in aggregate, the whole thing is pretty much awash, which is why, as Donald said, we came in pretty much where we would have expected it to be this quarter.

And were there any, on a net basis, any policyholder experience gains or losses in the quarter?

Yes, but normal variability, nothing particularly outstanding. Canada has continued to have a little bit of a struggle there. But we have improved experience in the United States because we had some quite unusual single claim last quarter, if you recall, which was not repeated this quarter.

The following question is from Robert Sedran of CIBC Capital.

So I'm interested in the comment that core earnings are on plan. I mean, it was featured in the materials and it was certainly prominent in Donald's comments as well. Can you give us -- I'm not looking for you to boil down the Investor Day into 90 seconds. But can you give us a better sense as to what's going to drive this earnings emergence and what will make it accelerate in coming years? I know you've sort of said in the past that it is fairly back-end loaded, but perhaps remind us again some of the reasons why.

Yes. Let me start off and then Donald may add. I think what we've said previously, Rob, is there are a couple of specific reasons why the plan trajectory, if you like, to the 4 billion tends to be a bit back-end loaded. One is the way in which the bottom line impact of the various E&E initiative emerges. So we're doing extremely well on getting out our gross annual run rate savings. But at the same time, we continue to invest into new projects within the overall program. And so if you follow all that through, there is quite a back-end load effect to the net result of the whole E&E program. So that's one main factor. The other one would be, again, something that we've referred to previously, which is the scalability of the wealth business and what we can start to see is improving margins in the wealth business as a result of that scale. And again, we anticipate an improvement in margins through the plan period. So I think in summary, from my perspective, we're on plan -- or in fact, slightly ahead of plan for this quarter. We're still tracking for our 2016 targets. And therefore, I guess, the shape of our curve is -- does have a back-end element to it somewhat.

Yes. For entirely -- as Steve said, for entirely justified reason, I mean the E&E also kicks in on a delayed basis. And to emphasize what Steve said, his second point, on the wealth sales, we are plowing back a very significant portion of the earnings on that business into growth initiatives, designed to accelerate the growth of that business, which will materialize in very substantial compound rates of earnings growth that would, I think, frankly, shock most people. It's being plowed back into growth initiatives very aggressively, which are going to pay off for shareholders long term.

Okay. And then, Donald, maybe I can sort of come at the same issue from a different perspective, and I think that's why the dividend announcement today was an important one because I would say comments on recent calls certainly didn't feel like a company that was about to boost the dividend pretty meaningfully. The payout ratio, if I look at the trailing 4 quarters core earnings, which I'm assuming the payout ratio should be on core earnings, is about 43%, and that strikes me as higher than where you want it to be. So how do you think about the payout ratio? And is this an implicit earnings guidance for the nearer term in terms of you're seeing some of this ramp coming in coming quarters?

Okay. Rob, I'll start. I suspect Donald may want to add. So when we're looking at the payout ratio, we're actually looking at the payout ratio in relation to net income on a long-term basis. Now, obviously, we'll have some volatility in that because of the volatility that's inherent in investment experience. But at the end of the day, it's net income that pays out dividends, not core earnings. So core earnings are very important because they have helped us, I think, explain our story to the street. And they're very, very important in the total metric. But we have never wanted to pretend that net income is not also important. And in fact, if you look at the proxy filing and the annual compensation scheme, et cetera, we give equal weight to the 2. So they're both very, very important. So the 30% to 40% that we quoted is a reference to net income. And we're taking a view that at the end of 2014, we'll be able to look at Canada 2014 and show payout ratio that is in accordance with that payout range that we indicated.

And just prospectively, you're saying that there's a difference between net income and core earnings even as you look forward. In other words, I mean, the market-related items that end up having an impact in the near term is more of a rearview thing. But there still will be a difference in your plan, for example, in terms of your net income versus your core? And I'll leave it at that.

Right. Because I think we have to go back to how we arrived at the investment experience in core earnings. So we -- if you remember back in late 2012 when we invented the core earnings metric to try and give the investor community better line of sight over our results, we baked in $50 million a quarter, and that was based on a historic analysis of the year 2007 to 2011 where we'd actually averaged more like $80 million. For the purposes of being recently prudent, we baked in $50 million a quarter into core. And therefore, in some of our internal plans, we would assume that we will generate the components of core -- of investment experience that does not fall within core earnings. Now it's probably fair to say that as times rolled on, if we conducted a similar level of scrutiny over our recent experience in investment experience now, we may come up with a slightly different answer because we've had some very, very strong experience. The size of the assets under management has increased. So I think we're going to take another look at this, and we may make an amendment. But there's no decisions on that yet. If we do, we would, I suspect, we may do it from the start of the calendar year just to keep it easier for everyone to keep track of.

The following question is from Joanne Smith of Scotia Capital.

Two questions. The first is just going back to the issues that hurt core earnings in the quarter with respect to lower earnings on surplus, higher hedging costs and some nonrecurring tax gains or whatever. It was my -- the way that I was looking at it was that the earnings on surplus was going to be made up for later in the year, probably in the third quarter, just because of the timing issue. And the other items may not necessarily recur. Now I understand the hedging costs may stay elevated because of the environment that we're in right now, but the other items that impacted should not be a factor going forward. So if you're going to -- if you're going to get back the earnings on surplus that you didn't get this quarter, I don't understand why it would be awash that we should consider not adding something to third quarter for.

Yes. Okay, I mean, I guess, when I said it's awash, I'm talking about within the quarter. But if you look across the time line, Joanne, you're always going to get a bit of variability because we do have lumpiness of dividend receipts on surplus, for example. So you're absolutely right. So I mean, all the items you're talking about were all basically sort of single-digit items this quarter. On the other side of the coin, the legal item would have been a double-digit item, low double-digit item, which I don't want to give quantification over. And you're correct. Some quarters, we won't have an improvement in the earnings on surplus, maybe we get a better result on tax that can be variable. The hedging costs this quarter did increase because there was a lot of volatility in Japan and we added some macro -- some hedges in Japan, but again, in single digit.

Okay, all right. That's good. And then just for Cindy, one of your competitors -- I'm sure this would have been brought up later on the call, anyway. But one of your competitors did have an issue with long-term care in the quarter, and they talked about 2 different types of reserves, disabled life reserves and active life reserves. And the last study they have done was active life reserves, and there was no increase in reserves. And the last time they did disabled life reserves was 2012. They've seen some changes in severity associated with the way that people are cared for. And I was wondering if you could just kind of opine on what you see going on and whether you're seeing similar instances of a little spike in severity on the disabled life claims for people who are actually on claims.

When we looked at our claims -- or assumptions underlying our LTC reserves last year, we looked at all of our assumptions, those affecting the active lives, as well as the disabled lives. Often under U.S. GAAP, companies would only look at their disabled life experience. They would not -- their active life reserves assumptions are locked in. So there's no changes. So there may be some differences in timing because when we do our assumption review, we look at absolutely everything. In terms of our experience, since we did the review last year, our experience on LTC has been, since that time, the last 3 quarters, relatively neutral. We did see a little bit of a claims loss on LTC this quarter. But for the past 3 quarters overall, some of them -- of the claims gains and losses would be relatively neutral; in fact, a small gain. The -- in terms of changes in severity, thus far, we really haven't seen any changes in what we're observing relative to our -- the assumptions that we set when we did our review last year.

The following question is from John Aiken of Barclays.

Steve, when -- in discussion with one of the other -- one of the previous questions, you talked about potentially amending the investment levels that you include in core. Would we actually maybe look at the way that the dynamic hedging is treated within core, particularly since we actually saw a negative experience this quarter, as you alluded to, in Japan?

I think Warren is going to take that question.

The negative experience in the quarter that was referenced with respect to Japan wasn't in the dynamic. It was in the macro hedging program, and in Q1, with the heightened volatility in Japan. We actually put on incremental macro hedges in Japan, which you didn't see really that effect because they were put on later in the quarter. So in Q2, you actually had the full effect of those macro hedges. And obviously, the Japan market, did better in Q2 than Q1. The volatility reduced. And so, therefore, that was the increased hedging cost. It wasn't -- our VA program continues to perform very effectively.

Great. And there was commentary within the Canadian segment about losing market share because Manulife doesn't have a par product. Is this something you may look at? Is there a philosophical reason why you don't offer a par product?

It's Marianne here. We have been looking at our product lineup and continue to on an ongoing basis. And par is something that we are relooking at. We were in it a number of years ago and have come out of it, but we are relooking at it. But no decision has been made at this stage in terms of what we want to do.

The following question is from Mario Mendonca of TD Securities.

I want to go back, Steve, to the discussion you were having with Robert Sedran about the dividend. I understand the math you're giving us here that for the purposes of looking at the payout ratio, you're looking at some level of investment gains beyond the $50 million. But I still kind of want to try to do the math that Steve -- sorry, that Rob was getting at there. So it will be helpful then if you could tell us if $50 million is the amount in core, can you tell -- share with us what the amount would be in reported on a go-forward basis for the purposes of that payout ratio calculation?

I don't think I can you give you that, Mario. I'm sorry. But we can share the math with you offline, if you like. But essentially, we're looking at it on a calendar year basis. So based on where we are and without giving forward guidance, I think when we look back on 2014, we would see that our total dividend for calendar year 2014 would be somewhere around the middle, let's say, pretty central to the range we've indicated of net income.

I see. But you wouldn't expect -- so far this year in 2014, these gains have come in at like $267 million this quarter, $200-and-something million last quarter. I can't imagine you'd expect that level of gains on a quarterly basis going forward. So sorry about that...

No, we wouldn't bake anything like that into the plan, Rob (sic) [Mario]. I mean, I'd give -- I'll refer you to the guidance I gave earlier on about how we got to the $50 million in the first place. So we got to the $50 million by looking back historically and seeing we had an average of $80 million. So we wouldn't have anything of that magnitude.

All right. If I may go to a different type of question. You talked about the back-end loading of reaching that $4 billion target. One of the elements that you were objective -- one of the elements that you referred to was scale in wealth AUM. So it would be helpful for me to think through here as how much larger does the wealth AUM have to be, say, 1.5 years from now, at end of 2016 relative to where it is today to, say -- to reach that $4 billion? Does it need to be doubled, 50% greater? Something like that would be helpful.

Okay. I think Warren is going to have a go at that one.

In terms of where we sit today, we're actually, obviously not disclosing a lot of detail about -- at a granular level about our wealth business today, and we would expect to actually improve some of those disclosures possibly in the 2015 time frame. But where we sit today, we are on healthy trajectory. So I think the numbers that you're looking at, again, and you can see, there's lots of variability around the globe but we do have very strong numbers coming in Canada and United States. In Asia, again, there's some variability across the market. But we would expect to see strong growth, and we do expect to see an increasing share of our earnings coming from the wealth business with the passage of time. But I don't think beyond sort of giving you that sort of general direction that wealth is going to be an ever-increasing percentage of the total earnings, but there's going to be a slow change in the 2, I don't think there's a whole lot I can really give you in terms of specifics at this point in the context of forward-looking information.

So well, I'm not necessarily asking you to provide an estimate of what it will be in 1.5 years. What I'm asking is what is baked into your thinking to reach the $4 billion number in terms of AUM then relative to where it is today? And if the answer is you're not going to discuss it today, it's okay, too. I just wanted to make sure I was clear on the question.

Yes. It's a pretty substantial increase, Mario. And again, it's not -- that's not the only thing, right? There's the E&E as we mentioned. There a whole bunch of things, the business we're putting on the books. You guys are probably familiar with the fact that there's strain on various lines of new business that emerges with time. I think a lot of attention has been paid to the ASB change. Every time an accounting standard changes to make things more conservative on the valuation side, if we still get the same investment results, which is what that relates to, they will emerge as additional earnings, right, with investment experience over time. So there's a whole bunch of things that result in a legitimate amount of back-end load on the plan. I think the most -- we have, from the first instance, developed the trajectory that we felt we had to meet in order to be on line with that ultimate target. And as we said pretty plainly, the results this quarter were right in line and a little bit above but not significantly, but right in line with that, although we did not meet Street expectations, which I think are a bit more, shall we say, a linear trajectory to the 2014 -- 2016 numbers.

I appreciate your comments. But what we're trying to do is like if we don't know what the plan is, we need to know what we're trying to figure out as the inputs to that plan, and that's why we're asking questions about those. But let me move on to something a little different. The policyholder experience in Asia appear to be negative this quarter. And the reason I say that is when you disclosed it, and it looks like in the U.S. and Canada, it was positive -- or there was positive experience. Can you talk about what happened in Asia? Was it lapse? Was it mortality? What was it?

Mario, it's Cindy. It was largely -- not large losses, just small policyholder behavior-related losses in a few countries, largely related to lapses.

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

First question for Steve, please. So Steve, last quarter and I think maybe the last couple of quarters, you've said that you wouldn't refinance all the debt that came due. But in fact, it looks like you didn't refinance any of the debt that came due. So I'd be interested in -- if you could just give us your thoughts on how your thinking might have changed there. And maybe how much linkage is there between that decision and the decreased leverage and the decision to raise the dividend probably earlier than people expected?

Steve, thank you. So we actually took $300 million off the table basically in June this year. We were able to do that because of the strength of our capital position. I think much earlier in the year, it wasn't clear to us that we would do that but we were able to do that. And I think on a go-forward basis, we'll see how we go. There are a number of factors to take into consideration. In terms of the decision over the dividend, I think probably #1 on the executive list would be the whole regulatory environment. But if you press me on one quantitative metric, it would probably be the leverage ratio that came down to 28% and was probably down, I would say, probably 6 months earlier than we had anticipated. To that level. We had previously expected the 28% to be the sort of end of year number, and we got there significantly faster. Sorry, I think just back on the very first part of your question. We actually prefinanced. If you go back to Q4 and Q1, we prefinanced $1.1 billion of the -- what matured and the prefs that we wanted to redeem, and we took off $300 million. That's how it worked. So the [indiscernible] was $1.4 billion.

So the $300 million is more of a net number?

I'm sorry?

So the $300 million is net of -- what happened there, Q2 versus...

Yes, that's correct. So the $300 million was net of $1.4 billion gross minus the $1.1 billion we prefinanced.

Understood. Okay. And for Bob Cook, if I could. Insurance sales in Japan, certainly exceptional again this quarter. But when I look at Hong Kong, Indonesia and other Asia at least in aggregate, the numbers are flat to down somewhat. So I was hoping you could talk about your -- I know Don touched on it, but could you talk a bit to your outlook for the second half for Asia, maybe x Japan?

Yes. I guess, as Steve said in his comments, in the other Asia category, there were actually several countries that were up 30-plus percent, Philippines, Malaysia, Vietnam. Offsetting that was continuing poor results in Singapore, where our high net worth product is not currently competitive. And that was one country where we also distributed a fair amount through Citibank, which is now switching over to AIA. I think the real key for the second half will be results in Hong Kong. I'm still quite optimistic that Hong Kong will end the year strongly. And I guess my belief is that, and I've said this pretty consistently in the past, that a good recruiting year, 1 year will eventually pay off in good sales the following year. And as you know, we had a very strong increase in our agents counts in Hong Kong last year, and I think we'll see that pay off in the second half of this year.

The following question is from Gabriel Dechaine of Canaccord Genuity.

Just, I guess, going back to this path to $4 billion. And there's a few items that we can identify that maybe you can tell me if I'm on or off track with these. But first of all, the E&E are $100 million pretax now, getting to $400 million. That step-up, that's all going to the bottom line, I'm assuming, and not being reinvested? And if I understand your other comments is there's additional investment being made in the wealth business there for sales distribution. You'll be pulling back on that. And therefore, your wealth profits will go up because of that? Does DAC, is that still on track to go from $80 million of reduction in cost now to $200 million or so? What about hedging, the macro hedging, is that -- like what -- we see the macro hedge costs from, I don't know, $207 million last year in the first half to $100 million this year. There's about half that, I guess, that's going to the bottom line. And is this stuff enough to offset maybe the headwind of lower sales in Asia that are pretty far behind the original plan?

Okay. Gabriel, thanks. Let me start -- well, let me start off with the E&E, so just to remind you what's going on here. So we're grinding out, what we call, annual run rate savings So once we get a saving out, we can quantify what it means on a gross basis in a calendar year, and that's an annual run rate saving. And we've told the investor community that we've already got out well over $200 million of annual run rate savings. But around -- something in excess of $100 million of that will find its way to the bottom line in kind of the year 2014. By the time we get to 2016, the annual run rate savings we expect to be in excess of $400 million, and virtually all of that will drop to the bottom line. Now there is a possibility that we have even more to go for after that. In which case, we may have to take a small piece and reinvest it to get further run rate savings out of '17 and '18 because we want to do the right thing for our shareholder and not sacrifice the benefits. But I'm pretty sure, we'll be able to preserve that $400 million bottom line in 2016. So that's on the E&E. Then maybe Warren will take the wealth piece next.

Sure. In terms of what we're doing right now, on the public market side, I think you've seen the press release that we've given over time about the team lift-outs we've done. Those team lift-outs was bringing on board -- frequently we've been able to port institutional track records and we do get some institutional sales, but the real goal is to actually get those teams onto our retail affiliate platforms for distribution, which need Morningstar ratings. So typically, our team lift-outs -- so we've done a lot of those in the 2012, '13, '14 time frame. They will be negative cash flow. That's one of the investments that we're making, but they do as they get their strategies on. So the expenses don't go down, for clarity. The expenses will be sort of consistent, but there will be revenue and positive margin that will come on. Similarly, our private markets initiative, which we announced at the end of last year, is in a similar state, where, in fact, we're incurring run rate expenses at this particular juncture. We do, in fact, have a number of leads and active client engagements that we're working on, but we don't have the revenues yet. So again, those would be expenses that will be sort of staying at that level, but you'll have positive margin contribution in the future on those 2 items.

Yes. And I'm glad Warren highlighted the fact that we do not plan to cut back on the expense. But what you do is, eventually as a result of the reinvest and the growth in the assets, more money is coming through in terms of bottom line that you can't possibly spend it all even if you wanted to. And that's why when we display the wealth business separately. Those of you who want to look at it on an EBITDA basis will be able to do so.

And the DAC and the hedging?

Yes. Okay, so -- and then let's go to the other pieces. So on macro hedging, well, I guess, we'd expect the cost to reduce over time as the Japan book matures, so there will be a piece of that. I guess, one other thing we might want to call out is that with the ASB changes, that we would not be taking the URR charge every quarter. And embedded in our results this quarter is a $25 million charge for URR. So that will be a benefit as well. And I missed one, DAC. Sorry. Cindy?

Our outlook for DAC amortization charges hasn't change.

Perfect. And my next question, this one tying in, I guess, the ASB changes. And I guess, my concern is seeing that you're taking a charge, and it's not a big charge, but I was hoping to see a reserve release that might allow you to top up some other reserves, maybe lapse. Because if I look at the combination of lapse and URR over the last couple of years, those are like 2/3 of all the management actions and changes in assumption -- assumption charges that you've had over the last couple of years. And the URR is going away. And if you're able to strengthen lapse, and that wouldn't be as big of a charge going forward, we'd see better surplus growth. And I don't get that feeling anymore, I guess. Have you taken enough lapse reserve -- strengthening? Or is that still something I need to be concerned about?

Gabriel, I think I'd look at in a different way. If you think about the ASB charge, the reason we are ending up with a charge is because of our higher use of alternative long-duration assets than some of our competitors. Now the other side of the coin is that, that gives rise to -- or has given rise to substantial investment experience gains in this quarter and in previous quarters. So within investment experience this quarter, we have got gains in relation to ALDA of somewhere around -- between $150 million and $200 million. And that relates to -- a piece of that is origination, but a lot of that is actually high-quality cashing out with gains on private equity investments. It includes appraisal gains on oil and gas and timberlands. So this is really good stuff. So the $200 million is taken care of -- virtually taken care of by this quarter's investment experience gains on ALDA. So I think we just see that as the price of staying in the game, and we'll go on and hopefully reap the rewards of that activity. But then I'll just pass to Cindy and see if she's got anything specific.

No, that's a good answer, Steve.

And lapse?

Oh, on lapse, we have reviewed, Gabriel -- over the last number of years, we've reviewed most of our lapse assumptions. I talked earlier in response to Tom's question about the fact that we're looking at our lapse assumptions this year in Canada and Japan. As we complete this year's review, we will have reviewed all of our lapse assumptions, at least all the material ones, for our book over the last 3 years. So going forward, we should only see the impact of changes in experience relative -- future experience relative to our lapse assumptions in our valuation.

And Canada is UL, Japan is VA, I take it?

Canada is a number of nonpar blocks and Japan is also on the universal life product.

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

Maybe perhaps a question for Donald with respect to the dividend increase. You mentioned that there were some regulatory, I suppose, some information that's come to you that gives you some comfort on the regulatory landscape. I wonder if you can provide a little color on that. And maybe as well, can you just remind us what the role of the regulator would be with respect to a dividend increase? I mean, with the bank, they have to approve it. I'm just wondering if that is the case, in fact, here as well that you provided them with a capital plan. And whether or not that capital plan is also somewhat related to the view of the payout ratio against net income rather than core. And the reason why I asked that is I seem to remember that the decision to cut the dividend was based on core earnings power, and now there's a switchback to net income. So any color on this would be helpful.

Yes, okay. The first one, there's a variety of indicators that have all turned very, very positive more recently. The one that you've known about for a while, the OSFI capital road map,which we've said that -- if you go back to my annual meeting speech, we talked about some of these things specifically has looked positive for a long time. The OSFI's view is the industry is well capitalized and there's nothing on the horizon that would cause us great concern. There has now been emerging testing of the rules that are coming out from the global standards, both as they relate to global SIFIs and as they Relate to internationally active insurance companies.We're certainly the latter, an internationally active company. We're not a SIFI, but we look at those standards because we expect to be measured against them, and we don't see anything that as terribly problematic there. On IFRS, which has been a big concern of ours, as you probably know, the IASB has said they're taking a little look at the discount rate. A couple of months ago was they're steaming ahead. They're going to publish the rules and expect everybody to be compliant by 2018. And now they've sort of recognized that they do have a challenge there and they have a challenge on another matter, which is how they treat par products, and they're going back to the drawing board on both. We've had acknowledged from OSFI that even if IFRS turned out in a negative way, that OSFI would work around those rules and using the accounting and equity calculations as it relates to the capital formulas and capital adequacy. That's been said by many of the people at OSFI that they're not satisfied with the rules being proposed by the IASB. And…

Okay. And is OSFI involved in the decision to...

Yes. OSFI, I don't know the particular rules for banks, and I assume it's similar. But no, OSFI does not have to approve our dividend increase, although it would be silly. We have a very good relationship with the regulator. We would tell them what we're planning to do and any significant action, including a dividend action, and if they had any displeasure or discomfort, we'd have to take that very seriously. But no, OSFI, does not have to approve our dividend increase.

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

Don, I'll follow up. You talked about your Manulife conservatism around investment gains and wanting just to be careful, and I appreciate that. Is that same ethic of conservatism, did that influence the dividend increase this time and the payout increase this time? Which is another way of saying, could you have gone for more but because you're so conservative, you're holding back?

Well, that's a very pleasant question, and I can't tell you the range of discussions that went on in the board meeting. But I mean, given my tenure as CEO, I'd imagine you'd expect me to be fairly conservative. And the last thing I'd want to do is have to take back a dividend increase or perhaps not be in a position to increase it again in the future. So you can read into that whatever you want. But yes, so I think it's fair to say that we talked about multiple options.

The next sort of question that came to mind after the increase was just that very, very high MCCSR. I mean, are you happy to operate at 240% and higher for the foreseeable future? Or is that an usually high ratio that maybe will see you work down whether it's via acquisition or buybacks or just organic growth?

I think -- well, you asked me if I'm comfortable. I can speak on behalf of all shareholders and say a lot more comfortable at that ratio than a 205%. But we have ample capital, and it's pushed down our ROE a bit. And we'd like to see it employed, but it's a comfortable position to be in. There's still a lot of uncertainty in the world. I mean, we've benefited enormously. Let's be very straight, direct about it. The last, I don't know, 8 quarters have been pretty benign quarters in terms of things going on in the world that would affect global equity markets and interest rates. And that's not always going to be the case. I don't want people to go to sleep and kind of assume that Manulife's net income is an annuity because it's been so positive the last 4 quarters or 8 quarters, whatever. There's still some volatility there, and you guys know that. You look at the sensitivity analysis, you'll see it's still there. And if equity markets and interest rates bop around, our earnings will bop around, too. So it's nice having a healthy capital ratio that we could deploy. But in the meantime, it's good having that degree of protection that we can sustain very significant movements in markets without a qualm of concern.

And just a technical question maybe for Cindy. I get the guidance around the 200 hit for the economic reinvestment guidance that will come in the fourth quarter, and that's a net number. And there will be increase in reserves for your non-fixed income. The increase in that reserve, would be the best estimate? Or will it also include the provision for adverse deviation?

Our estimate includes any change in provisions for adverse deviation.

So the PfAD will go up in the fourth quarter. Does that mean in 2015, there will be a little bit more earnings release? That's where I'm going with that.

We haven't completed our analysis on the impact of the standard change on earnings on in-force. It will depend somewhat on what the level of rates are at the time of implementation, and we're still looking at some of our methodologies. And that -- those will impact as well whether earnings on in-force might be going forward. So we're not -- at this point in time, I really can't answer that question.

Okay. And lower rates mean a higher PfAD as a general rule?

Lower rates means slower PfAD emergence. They have a negative impact on earnings on in-force.

The following question is from Doug Young of Desjardins Capital Markets.

I guess, the first question is for Cindy. And I guess, part of the ASB change is related to the methodology revision for the URR. And I believe within that calculation, you can now assume a credit spread, which is a huge benefit versus previously. Can you talk about what the credit spread you're assuming is relative to the max that you're allowed to assume under the new methodology?

Well, we've done our own analysis and gone back and looked at historical spreads to come up with our assumptions. I can't really comment on exactly what the relationship is between what we've assumed and the maximum. We wouldn't be at a maximum, but I don't think we'd be all that far away from it either in total, to give you a sense. So -- but I can't really comment exactly on what that relation -- on exactly where our spread assumptions would be.

Is -- am I correct to assume the max is 80 basis points?

That's correct, the max is 80.

And okay. And you're just -- you're not disclosing what the actual number that you're assuming right now?

No, not at this time. We're just still working on our implementation, so I think it's premature to disclose that at this time.

Okay. And then I don't know if this is for Donald or for Steve. Just related to the -- your target for 2016, and you talked about some of the key drivers of how you're going to get there from today to then. When we think about a timing perspective of when some of these benefits start to kick in, is it a Q2 2015? Or is this something that we're probably most likely going to see starting to really kick in starting in Q1 of 2016?

I think Doug, I mean, it's a fair question to ask, but you're asking for far too much precision. I've said before, we're in this for the long game. And I care less about meeting a $4 billion target than making sure this company is in a great trajectory to keep increasing earnings beyond $4 billion. Now when you hear that, you might say, "Oh, he's nervous about the target." Not so. I feel very confident at the target. But I can tell you that if there's a decision being taken in the third quarter of 2016 that says we can invest some money in an initiative, significant amount of money in an initiative that's going to get a 14% return to the company with a high degree of probability but it's going to cause us to miss our -- because it's going to be fully expensed, it's going to cause us to miss the target, we will make the decision to make that investment. And we aren't going to be so caught up in meeting the target that we will do anything to get there, and anything is pretty broad that we will forgo good decisions about investing in our future. If we miss the target by a lot, we're bums and we should expect to be -- shareholders to agitate that we'd not get a good payout on our various compensation programs and so on. But if we miss for a very good reason -- so I guess, I don't want to be pinning us down to a trajectory that is so tight as to talk about what it is by quarter and moving towards that. I mean, you should draw comfort in the fact that it is consistent with our plan. We have from the beginning compensated the management team against a trajectory that leads to $4 billion in 2016. We're in line with that, and -- but we're not going to be so beholden to that trajectory that we will make uneconomic decisions for our shareholders because we want to meet that plan. And if I was to give you any specificity about when that emerges, I would basically be condoning that kind of behavior.

The following question is from Meny Grauman of Cormark Securities.

I notice you changed the way that you disclose your sensitivity of net income to public equities. I'm just wondering why that is. Can we read anything into that change? Or is it just simplification in announcement?

It's Rahim Hirji. Thank you for your question. It was really just simplification. I think all the information we have been providing when we looked at it, we just thought that it had been built up over time as we have been implementing our various hedging programs. And given that our hedging program is now robust and performing well, we just took the opportunity to simplify the disclosure, nothing else.

The following question is from Humphrey Lee of UBS.

Just a clarification question. So for the $250 million in new run rate savings, how much of that kind of fell to the bottom line in the first half of the year?

I'm sorry, I don't think we picked up the question. Could you try and maybe get close to the mic or something and try again. I'm sorry.

Is it better?

Marginally.

Okay. For the $250 million in new savings run rate, how much fell to the bottom line in the first half of the year?

The E&E run rate to the bottom line in the first half of the year?

Yes.

I don't think we're giving that guidance right now. But we're still expecting to see in excess of $100 million for the whole year. And like the overall program, you'd expect it to be weighted towards the second half because of the way in which the investments play out and the way in which the run rate savings play out. So it will be weighted towards the back end.

Okay, got it. In terms of sales in Asia, it was good to see the wealth sales in Indonesia kind of recover quite a bit. I think Bob mentioned last quarter that some -- there were some Asian cleanup in Indonesia and also there were some political headwinds that were unfavorable to top line in the first quarter. So are those issues kind of mostly behind you now? Or should we see this quarter as just more of things breaking your way and the underlying headwinds still exist?

Well, I think a couple of things worked well for us this quarter. We started to see some come back in Japan, not a lot yet. And so I think we're still hopeful that some of that can come in the future. We had a good quarter in China. Some of that is seasonal. There are some tax-related sales that occur in the second quarter each year. And as you mentioned, we definitely saw a pretty strong bounce back in Indonesia, as during the quarter, I think the environment relative to the political situation and the July election, the people became more comfortable about the likely outcome of that, and that improved their sentiment towards investment.

So -- but at least for Indonesia, are those kind of issues behind you right now? Or would they still have some headwinds in the next few quarters?

Technically, the losing candidate is appealing the election. But I think most parties in the country -- I visited there just a couple of weeks ago, and I think most parties feel that nothing will come of that appeal and that the winning candidate will take office later this year. And he is viewed as a corruption-fighting candidate who will continue the positive trend that, that country has experienced over the last 5 or 6 years.

The following question is from Mario Mendonca of TD Securities.

Don, just one quick question on the dividend. From your answers to all of the questions, it sounds like this isn't the last dividend increase, at least in the near term. Do you have an outlook on how often we're going to see the dividend increase? Is it every couple of quarters? Is it once a year? Or do -- would you prefer to just sort of surprise us once in a while?

I know how much you like surprises. Mario, that is entirely the purview of the board. I mean -- but I don't think I'm going out on a limb by saying if we are successful in delivering on our plan to 2016 that somewhere between now and then, there might be another dividend increase as we see that trajectory. If we continue to deliver on the trajectory, that the board would be obligated to discuss it. And that will be a very happy thing. It may be a surprise, but it will be a very happy occurrence. And then -- but that's with all of the same provisos, right? That's assuming that we are still comfortable with the volatility of our earnings, that we're still comfortable with the capital ratio, that we're still comfortable with -- the hedging is working as it should, that we're still comfortable with the global capital outlook and it hasn't turned negative again, but -- and all those provisos. But right now, it all looks pretty good.

Thank you. 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, everyone.

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