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EARNINGS CALL TRANSCRIPT
EARNINGS CALL TRANSCRIPT 2015 - Q2
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Executives

Robert Veloso - Investor Relations Donald Guloien - President and CEO Cindy Forbes - Executive Vice President and Chief Actuary Steve Roder - Chief Financial Officer Roy Gori - President and CEO, Manulife Asia Craig Bromley - President, John Hancock Financial Service Scott Hartz - Executive Vice President, General Account Investments Kai Sotorp - President and CEO, Manulife Asset Management Marianne Harrison - Senior Executive Vice President and General Manager.

Analysts

Steve Theriault - Bank of America-Merrill Lynch Humphrey Lee - Dowling & Partners Gabriel Dechaine - Canaccord Genuity Robert Sedran - CIBC Meny Grauman - Cormark Securities Sumit Malhotra - Scotia Capital Peter Routledge - National Bank Financial Doug Young - Desjardins Capital Dan Bergman - UBS Mario Mendonca - TD Securities Tom MacKinnon - BMO Capital Markets Darko Mihelic - RBC Capital Markets.

Operator

All participants please standby, your meeting is ready to begin. Please be advised that this conference call is being recorded. Good afternoon. And welcome to the Manulife Second Quarter 2015 Financial Results Conference Call for Thursday, August 6, 2015. Your host for today will be Mr. Robert Veloso. Please go ahead, sir..

Robert Veloso

Thank you, and good afternoon. Welcome to Manulife's conference call to discuss our second quarter 2015 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 applied in making forward-looking statements, and actual results may differ materially from those expressed or implied.

For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ, please consult the slide presentation for this conference call and webcast available on our website, as well as the securities filings referred to in the slide entitled Caution Regarding Forward-Looking Statements.

We have also included a Note To Users slide that sets out the performance and non-GAAP measures used in today's presentation.

When we reach the question-and-answer portion of our conference call, we would ask you to participate to adhere to limit of one or two questions, if you have additional questions, please re-queue as we will do our best to respond to all questions. With that, I'd like to turn the call over to Donald Guloien, our President and Chief Executive Officer.

Donald?.

Donald Guloien

Thank you, Robert. Good afternoon, everyone, and thank you for joining us today. This morning we announced our financial results for the second quarter of 2015 and indeed we had a strong quarter. We continue to deliver robust sales growth in both Wealth and Asset Management and Life Insurance.

We grew our core earnings by 29% to $902 million and assets under management and administration reached $883 billion. Core earnings were in fact higher than our expectations, but net income as a result of changes in interest rates were lower than expected. On slide five, we are showing some of the performance and strategic highlights.

In Asia, we delivered another record quarter of Insurance sales with strong growth in Japan, Hong Kong and Singapore. We doubled gross flows into our Wealth and Asset Management businesses, reflecting the success of new funds launched in Mainland China, as well as continued strong growth in Hong Kong.

In June we become the first foreign invested joint venture life insurance company in Mainland China license to sell mutual funds through our insurance agency force. This latest development helps differentiate us from our competitors in Asia and allows a more holistic approach to helping our customers with their financial needs.

In Canada we generated solid individual insurance sales, we delivered strong Wealth and Asset Management flows and we announced the addition of more than 800 automated banking machines across Canada to provide our customers with more convenient and economical access to their bank accounts.

Our bank customers now have access to the second largest ATM network in Canada without paying convenience fees. In the United States, we achieved our second highest quarter of mutual fund gross flows.

We successfully completed the acquisition of New York Life’s Retirement Plan Services business and on July 2nd we completed the related reinsurance transaction.

We acquired Guide Financial, an innovative software provider, which leverages behavioral finance and artificial intelligence to assist advisors and customers in making financial decisions and we launched John Hancock Worldwide Investors, a platform focused on expanding our reach to non-U.S. domiciled investors.

In terms of our global Wealth and Asset Management businesses, we achieved $475 billion in assets under management and administration for our Wealth and Asset Management businesses lifting our total company figure to $883 billion, and we generated $14.5 billion of net inflows including record flows from institutional clients driven by large institutional mandate.

Turning to slide six, the financial highlights for the second quarter, on the bottomline, you see core earnings were robust and they were in fact higher than expected, up $201 million in the prior year to $902 million.

Our net income was $600 million was lower than expected, as I say, as a result of changes in interest rates having to do with shape of the yield curve. On the topline we generated strong growth in both Insurance sales and Wealth and Asset Management net flows.

Insurance sales grew 27% from the prior year and net Wealth and Asset Management flows of $14.5 billion, were up $8.1 billion versus the second quarter of 2014. This represents our 22nd consecutive of positive net flows.

Our strategy to grow our business through innovation customer interest are unfolding very well and we are confident that we'll continue to yield results for our shareholders. With that, I will turn it over to Steve Roder, who will review our financial results and then open the call to your questions. Thank you..

Steve Roder

Thank you, Donald, and good afternoon, everyone. Let’s start on slide eight where we summarize our financial performance for the second quarter of 2015. As you can see, most of our key performance indicators demonstrate positive trends.

Our strong core earnings demonstrate our continued execution on the key drivers of earnings growth, increasing scale in our Wealth and Asset Management businesses, generated strong Insurance growth in Asia and delivering on our E&E initiatives.

Sales results were very robust, with all divisions contributing to the success and we also maintained a degree of financial flexibility, with prudently conservative capital levels and improved financial leverage. We were however impacted by the steepening of the yield curve which led to lower net income this quarter.

In the following slides, I will spend time discussing our financial and business performance. Turning to slide nine, core earnings continue to demonstrate solid progress rising 29% compared to the prior year.

This quarter’s core earnings included a $37 million contribution from the recent acquisitions, but excluding acquisitions core earnings were up a very strong 23% compared to last year, driven by higher fee income from higher asset levels and our Wealth and Asset Management business, strong Insurance sales in Asia and the strengthening of the U.S.

dollar. This quarter we also benefited from higher than average realized gains on available for sale equity and a number of smaller items. Let me take this opportunity to note that we view the magnitude of the available for sale equity gains and favorable smaller items to be unlikely to repeat to the same extent, which experienced this quarter.

Thus said, investment related experience including in core earnings this quarter was below the $100 million we target. Turning to slide 10, second quarter net income was negatively impacted by charge from market related factors, primarily the result of the steepening of the yield curve.

You may recall that in the fourth quarter of 2014, net income benefited from the flattening of the yield curve, this quarter we saw the opposite happened reversing out the previous gains.

This was partially offset by strong investment related experience of $128 million, $51 million of which was included in core earnings and $77 million offset against the investment related experience losses in the prior quarter. On slide 11 is our source of earnings.

Expected profit on in force increased from the prior year period largely due to growth in fee income and low DAC amortization on our legacy variable annuity business.

Additionally, the impact of lower interest rates was more than offset by the benefit of standardizing the methodology for attributing expected earnings on assets that support our provisions for adverse deviation.

New business trend improved due to higher insurance volumes and improved product mix in Asia, partly offset by higher non-deferrable acquisition costs in our Wealth and Asset Management businesses.

Experience losses reflect the impact of the steepening of the yield curve and unfavorable policyholder experience, partially offset by favorable investment related experience.

Management actions and changes in assumptions this quarter reflect the integration cost of recent acquisitions, changes in actuarial methods and assumptions, and the expected macro hedge costs, partially offset by gains from reinsurance recapture. The other category this quarter includes standard life earnings and a number of smaller favorable items.

And earnings on surplus benefited from higher than average realized gains on available for sale equity. We have tax credit this quarter reflecting a benefit from an increase in the Alberta statutory tax rate, coupled with the mix of gains and losses in our various tax jurisdictions.

Turning to slide 12, an Insurance sales, Insurance sales increased 27% from a year ago. This increase reflects very strong sales in Asia, driven by record volumes in Japan and Asia Other and double-digit growth in Hong Kong.

The benefits of product changes in Retail Insurance in Canada, coupled with higher large case group benefits sales and modest growth in U.S. Life Insurance sales. The rollout of vitality in the U.S. is progressing well and leading to a growing base of applications.

However, we don’t expect this to have a meaningful impact on sales until the second half of this year. On slide 13, you can see the net and gross flows in our Wealth and Asset Management businesses continue to be strong.

In the second quarter, net flows of $14.5 billion were up $8.1 billion from the previous year, while gross flows of $35 billion were up 74%, reflecting a record quarter for Manulife Asset Management, including a significant new institutional mandates from a Canadian client, strong mutual fund flows in Mainland China due to new fund launches and favorable investor sentiment and solid growth in Hong Kong Pensions, continuing strong mutual fund net flows in the U.S.

and solid growth flows in retention in Canadian Mutual Funds and Group Pension.

It is important to keep in mind that business in Asia tends to be somewhat dependent on the performance of local financial markets and therefore, we expect to see quarter-to-quarter variability, and while recent markets in China have let to some of the second quarter strong inflows reversing in July, we are quite pleased with the overall outcome.

Moving to slide 14, other wealth sales more than doubled from a year ago.

This increase reflects strong segregated fund sales in Canada, including a significant contribution from Standard Life products and very strong sales in Asia, driven by expanded bank distribution of our single premium wealth accumulation products in Japan and robust growth in Singapore.

On slide 15 is our new business value, new business value increased 34% from a year ago, largely driven by strong sales in Asia and an improved business mix. New business margins in Asia increased to 27% from 24% in the prior year, driven by a 6 percentage point improvement in Japan’s new business margin.

Turning to slide 16, our assets under management and administration at the end of the second quarter reached $883 billion, up $246 billion from the prior year quarter. The inclusion of the Canadian-based operations of Standard Life and the new Life RPS business contributed $130 billion to the increase.

Our Wealth and Asset Management businesses achieved assets under management and administration of $475 billion, up $80 billion excluding the recent acquisition. Pension, Mutual Funds and Institutional Asset Management business lines all contributed to positive net inflows.

On slide 17, you can see our capital position and leverage, our regulatory capital ratio of 236%, decreased 9 percentage points from the prior quarter, reflecting net financing in the quarter and the completion of the new Life RPS acquisition, which had a 4 point impact from MCCSR in the quarter, and the proportion of which will reverse with the third quarter closing of the related reinsurance agreement.

We ended the quarter with a leverage ratio of 26.2%, down 40 basis points from the prior quarter and 200 basis points from the prior year. Of note, we have a further $1.7 billion of debt maturing in third quarter. Turning to slide 19 and our focus on the operating highlights of our divisions, we will begin with Asia division.

Asia core earnings increased 23% on a constant currency basis, driven by higher insurance volumes and improved new business mix, favorable policyholder experience and increased fee income from higher assets.

Insurance sales of US$374 million increased 36% from the prior year reflecting record sales in Japan due to continued success of corporate products and expansion into the retail MGA channel. Recent product launches in Hong Kong and record sales in Asia Other driven by strong double-digit growth in all major markets.

Gross flows into our wealth and asset management businesses were US$5.2 billion more than doubled the prior year, reflecting new fund launches in Mainland China combined with favorable market sentiment. Robust pension sales in Hong Kong benefiting from successful sales campaign and new fund launches in Taiwan.

Turning to our Canadian division's operating highlights on slide 20. Core earnings increased 31% over the prior year driven by contributions from the Standard Life acquisition of $36 million. Higher fee income from higher assets and the benefit of reinsurance recapture, partly offset by unfavorable policyholder experience.

Insurance sales of $166 million were up 28% in the prior year, reflecting improved large case group benefits sale and strong retail insurance sales.

WAM gross flows of $3.9 billion increased 64% versus second quarter in 2014, largely due to large case sales activity and the addition of Standard Life in our group retirement business and continued momentum in mutual funds. Excluding contributions from Standard Life products, gross flows were up 26%. Moving onto slide 21 on the highlight to the U.S.

division. Core earnings were US$327 million, up 8% from the prior year, reflecting lower DAC amortization on the variable annuity block, higher fee income from higher wealth assets and a number of favorable policy related items, partly offset by unfavorable policyholder experience in JH Life.

Insurance sales in the quarter were US$118 million, up 2% from the second quarter of 2014, reflecting growth in life insurance sales from the continued strength in our UL products, driven by announcements made last year, partly offset by lower LTC sales.

WAM gross flows of US$11.1 billion increased 11% versus the prior year, reflecting return on plan services gross flows which benefited from the New York Life acquisition at a 9% growth in gross flows into our small case offering as we are seeing the benefit of actions taken to improve competitiveness.

And JH investments achieved second best quarter ever of gross flows, up only slightly from the prior year, which included the large institutional platform allocation. Turning to slide 22 on the overview of our wealth and asset management businesses.

Core earnings from these businesses increased 20% over the prior year, driven by higher fee income from higher assets under management and administration, partly offset by higher non-deferrable acquisition costs. Of note, we currently do not include contributions from Standard Life in any of our business line earnings.

We are going through the process of aligning Standard Life business without consolidated business line reporting. Once this is established, we will include the earnings from the pension of mutual fund business here.

Record assets under management and administration of $475 billion were up $189 billion from the prior year, reflecting $109 billion in contributions from our recent acquisition and positive net flows We achieved net flows of $14.5 billion in the quarter, more than double the prior year largely due to record institutional net flows including significant new mandate from a Canadian institutional client and strong performance of our mutual fund businesses in all geographies., So in conclusion, in the second quarter of 2015, we generated strong core earnings growth, achieved strong double-digit growth in insurance sales and gross flows, delivered net flows more than doubled the prior year and reached $883 billion in assets under management and administration.

This concludes our prepared remarks. Operator, we will now open the call to questions..

Operator

[Operator Instructions] The first question is from Steve Theriault of Bank of America-Merrill Lynch. Please go ahead..

Steve Theriault

Thanks so much. So couple of questions, if I could start with often asked, that management flows probably for Roy or maybe for Steve.

Just looking at slide 19, can you talk about the Mainland China launches from what I see on the right most chart on slide 19, it looks to me like it might be in the range of US$3 billion in terms of the benefit from the fund launches.

So just, if you can talk a bit about the repeatability, the volatility, what we might expect going forward from here?.

Steve Roder

Yeah. Thanks Steve. Let me start and then I’ll pass to Roy. So I think as I mentioned on the call, we obviously have very strong flows in the second quarter. And you’ll have seen what’s going on in the market, as you had expected, we had some outflows in the third quarter to date. But overall, it’s in aggregate been a good experience for us.

So we’re feeling pretty good about that. But why don’t I pass to Roy and see if he like to give some more color around that..

Roy Gori President, Chief Executive Officer & Director

Yeah. Thanks Steve. Yeah. I think that’s pretty much what I would say. I just reiterated couple of points, that is the asset management business, not only China but the Cosmos market in Asia obviously very much prudent by sentiment. And we saw a strong first half of the year, not only in China but many other markets growth Asia.

And that was also accompanied by larger whole of IPOs and that certainly helped their business in quarter two. Sentiment obviously is being impacted in a negative way in July. We have seen some outflows but overall we feel very happy with the movement of their business and gross flows in total..

Steve Theriault

Is there anything special about for the fund large relative to what look like a few billion of net flows? So would you tell me that in a good environment, you could see those -- that level of flows repeat in future quarters if it stays aligned?.

Steve Roder

Kai, do you want to answer?.

Kai Sotorp

So this is Kai Sotorp representing wealth and asset management. We were clearly -- overall, I think we saw the franchise delivered results consistently across many markets and channels.

And so I think overall we are going to see pretty robust continuation of pipeline but we were helped pretty significantly by some major wins on the institutional side and these kinds of wavelengths are not necessarily repeatable.

With respect to what’s happening within Asia, I would say overall, it was an unusual quarter in terms of the China activity. And that’s not something that’s going to be likely repeated.

Quarter-on-quarter, it was a very brilliant equity market but there are other parts of Asia that are now going to be firing mainly Japan, Singapore and Hong Kong, which will, I think, offset that. Roy might comment a little bit further on that. We have a very well diversified platform overall globally..

Steve Theriault

Okay. Same question probably for Steve on new business embedded value. You’ve had a nice build up of Asia new business embedded value to the point where the majority of the 227 of new business embedded value in Q2.

Can you talk a bit about the sustainability of the $140 million or so million in Q2 for there are anything you see on the horizon that’s obvious that is going to moderate from this level or moderate that measure from these levels.

And can you talk a bit about the mix shift that you mentioned in Asia that was helpful from an NBV perspective?.

Steve Roder

Okay. Steve, let me make a couple of general comments and then maybe Cindy may want to have some more to this. So first of all, I will point out the recent seasonality in new business embedded value. So you have to be little bit careful if you look at the quarter-to-quarter trend line. So that we do experience.

And I think it’s probably fair to say that as an organization, we have got a greater focus on new business embedded value now than we probably had. Historically, that goes hand in hand with the new disclosures that we’ve provided in Investor Day et cetera.

So that seems to be good and I think that’s results into some of the inferences we made with some of the focus we’ve had on implementing changes to product et cetera. Let’s see if Cindy has anything else she’d like to add to that..

Cindy Forbes

I think you captured it Steve. We will see variability in our new business embedded value quarter-to-quarter based on sales volumes and mix. But we are seeing good sales results from Asia we have over this quarter. And we don’t see any change in that.

So I wouldn’t say that we see anything that is going -- we obviously see this quarter’s end for Asia being inflated. I think Roy would like to add something..

Roy Gori President, Chief Executive Officer & Director

Yeah. Now that I think that’s right. Cindy, I think new business values benefited in Asia from the expansion of our distribution as well as new product launches. And we are expecting that strong momentum will continue. So we feel very confident about that..

Steve Theriault

Would anyone take a stab at how much currency positive really impacted the year-on-year comparison?.

Steve Roder

Yeah. Overall, it was in the region of $60 million to $70 million..

Steve Theriault

Thanks very much..

Steve Roder

Sorry, I was talking about earnings not new business embedded value.

You talking about new business embedded value?.

Steve Theriault

Exactly, yeah..

Cindy Forbes

Unfortunately, I don’t have that number at the top of my head in terms of the currency impact. We can take that offline and get back to you..

Steve Theriault

Sounds good. Thank you..

Operator

Thank you. The following question is from Humphrey Lee of Dowling & Partners. Please go ahead..

Humphrey Lee

Good afternoon. Thank you for taking my question. Just a question for Craig, regarding the Department of Labor Fiduciary, last call you said you are constantly looking through the proposal on billings item.

Any material impact and we’re just wondering if you have any updated views on the proposal and what the potential impact will be on John Hancock, if the proposal will pass in the current fall?.

Craig Bromley

Yeah. This is Craig. Thank you for the question. Yeah. So certain things have occurred since the last time we spoke. The common period was concluded and I think we commented in a number of different ways both individually as a company and through a number of industry associations with which we are members.

The commentary to the Department of Labor was pretty consistent I think. If you look across the submissions, the general feeling from the industry is we support the principles involved here, protecting consumers, transparency, fairness et cetera.

But our real concern that some of the regulations maybe unveiled and may actually lead to a situation where actually advice for retiring Americans actually was reduced or is more difficult to deliver having a sort of a counterintuitive effect that than what to do, I was trying to achieve.

We believe that the Department of Labor is certainly trying to get this right. We’ll listen to these comments and we’ll come back with some balance to their proposals.

For our companies, specifically and the impacts on us, we’ve taken a lot of steps in the last two years to really comply with all the principles that the Department of Labor is trying to achieve. So you’ve heard a lot in some of our materials around fee levelizaton, transparency and fee reductions et cetera.

And so we feel we’re in a pretty good position to meet the spirit of what they are trying to achieve. However, if the advice industry is damaged in the United States because of regulations being applied inappropriately than obviously that has an impact on us.

But we’re pretty confident that we will get to the right answer here and right balance for the Department of Labor..

Humphrey Lee

Got it. And then maybe a question for Cindy. So about the annual assumption review in the press release, talked about potential net income impact could be up to $400 million and then minus 10 exist for the good chunk of that student body elapse assumption update particularly in the U.S. Life business.

Other than that what are some of the treasures in the account swing that is impacting the quarter and then specifically looking at last year’s review and kind of talk about potentially $200 million impact that will end up, there are some of the moving parts that offset to a lower impact.

So just $400 million figure that’s kind of referencing the press release include any potential offsets?.

Cindy Forbes

Thank you, Humphrey for the question. As you know, every year we go through this process of reviewing actuarial assumptions in assets. And we look at many, many different assumptions over 100 this year. Some have a positive impact. Some have a negative impact. At this point, the results are still preliminary.

Our estimate would include the impact of plusses and minuses that we anticipate but the numbers can change as they did last year as we finalize our results moving forward from this point. Other items that are being looked at, I mean I’m not going to go through the 100 obviously. That would be excessive.

Other ones that are being looked at this time would also be losses on our Japanese business, annuity mortality for U.S and Canada, some asset modeling refinements as well as our approach to modeling term conversions on a Canadian business..

Humphrey Lee

Okay. Got it. Thank you..

Operator

Thank you. The following question is from Gabriel Dechaine of Canaccord Genuity. Please go ahead..

Gabriel Dechaine

Hey. Good afternoon. Just my first question here is on the -- not the policyholder experience but the experience loss you had this quarter in nearly $600 million or over $600 million. If I back out the macro items and back the investment gains, I get to non macro policyholder experience loss of -- sorry experience loss of $300 million or so pre-tax.

Is that number accurate or in the ballpark and it would really help if you can add this to your disclosure, some sort of breakdown of what that number is really and what it’s comprised of, be it mortality, morbidity, lapse, all those usual items? Let’s start with that..

Steve Roder

Okay. So let me start that one that one and then maybe Cindy will also have some color. So, no, that’s not in the right ballpark, Gabriel, I’m afraid. The answer is that the post-tax number is somewhere under $50 million. It’s actually very hard to triangulate back into the number. There is too many components.

So the $50 million is largely what it is in North America. It’s partly in U.S. It’s partly in Canada.

And why don’t I ask Cindy to talk about the piece of the $50 million?.

Cindy Forbes

Okay. Thank you, Steve. So as Steve said, the impact of policyholders experience this quarter was just under $50 million post-tax, partly due to experience and group benefits, some negative impact from the cost of specialty drug, also LTD experience, slightly worsening our expectation.

And in the U.S., we saw a relatively neutral to positive impact from OTC, but offset by the U.S. life business, partly due to lapses, remember lapses on lapse sensitive, which we are addressing in this year’s review of our assumptions and partly due to claims experience on our life business.

We had a large number of claims this quarter and one particularly large claim at $19 million. But the results on the life side, the mortality result we see is just being within the normal variation that we would see quarter-to-quarter..

Gabriel Dechaine

Okay. That’s very helpful. It would be more helpful, I guess in the future, maybe I’m just bad at ask. But it’s hard to get to that $50 million from what you’ve disclosed in your financials. Maybe we can go over that offline. Next question is about the investment gains.

So, we’ve got two quarters in a row where you're coming in below the $100 million quarterly run rate requirement and all I acknowledge that’s not great. But you’ve also had a good track record over the longer period. So, I’m not going to lose too much sleep over it.

But the one thing that I’m getting a bit concerned about is the -- I guess the oil and gas component of that line item and another fair value mark-to-market loss.

With oil prices pulling back again this quarter, is this going to be a recurring issue that we see throughout the rest of the year potentially? Or alternatively, if it’s possible to start making investments in this space in the oil and gas space, while the prices are low and maybe sellers get desperate? Could we start to see big gains as you PV or expected returns in that asset class, which are probably different than they are today over cash returns? That might be a positive outcome actually..

Steve Roder

Let me start off with that one and then I will pass to Scott to talk about the oil and gas. So, first of all, it’s not actually correct to say that the performance this quarter was less than a $100 million. It was actually $128 million.

$51 million of which is taken in core and $77 million of which is taken outside of core and the $77 million is taken to offset the $77 million loss in the first quarter. So the $128 million we made what we wanted to -- we made our expectation this quarter if you like and it’s very much kind of in line with our flow for the year. Okay.

So, on a run rate basis, you are correct that we’ve got a bit to do to get to the $400 for the year. Whether we do or not, who knows. Let’s see how we go. But we know we have something to do there. But this quarter, we have strong gains and we are back to form you could say.

On the oil and gas, I would emphasize, we based our valuations on independent third-party appraisals and they may make use of some moderation of volatility in the curve and so that may account for me why there maybe some short-term difference between that in the headline market prices.

Why don’t I pass to Scott and he can give you more color?.

Scott Hartz

Sure. Thanks, Steve. First, I would mention that the $128 million as Steve alluded to -- it was a good result for the quarter despite a continuing loss in oil and gas. And so it points to the diversification of the portfolio and the power of that diversification. So, we felt very good about that result.

Now, the oil and gas itself, has been declining for a few quarters in a row here and it’s ultimately, obviously, the price deck that determines that. And what’s more important than the spot price, which everyone focuses on is the price five years out. And in the second quarter, that did come down a bit.

And then as Steve mentioned, it’s our appraisers who determine what prices to use to value these and most appraisers will use a little bit less volatile price deck. So their prices have been a bit higher than the forward market and so they brought that down somewhat this quarter, leading to a bigger loss then maybe the forwards would have imply.

And so going forward, what will happen there? It’s obviously a function of where the prices go. We may have the appraisers continue to bring prices down a little bit but they've adjusted most of the way. And so the good news is that the prices are low here.

And I think there's a lot of room to the upside, given where we would expect supply and demand forces to come out in the longer run. Obviously, quarter-to-quarter, it’s very hard to predict. What we would like to add in this price environment? We absolutely would and we are continually looking.

We’ve made some very small additions but really we are seeing that buyers and sellers have a bit hardened this environment. There has not yet been enough stress on the sellers to really get them to sell properties that what we consider fair value.

So, we are keeping our powder a bit dry here but continuing to look for opportunities and I think those maybe coming, particularly as hedges that producers head, arm start to roll off and the banks patience starts to wear thing. So, yeah, that maybe a story for upcoming quarters..

Gabriel Dechaine

So they are more in the U.S.

or Canada, you think because I keep hearing about those hedges rolling off? I’m not an oil and gas guy but I have heard that from a few sources and just wondering how impactful that can be in geographically where you are going to make these investments?.

Scott Hartz

We look both sides of the border. Our major operations are in Canada, so that’s maybe a little more of our focus but we are looking at both sides of the border..

Steve Roder

Well, Gabriel, that also tells you something when people aren’t willing to sell it what the forward curve implies. That tells you why appraisers and other people will have a different view of the price of the commodity going forward, right. And there is pretty thin trading at the long end of the curve. So it’s not very indicative, right..

Gabriel Dechaine

Okay. Thank you for that clarification on this. But you can follow-up on my calculation on non macro experience losses. That would be very helpful. Thanks..

Roy Gori President, Chief Executive Officer & Director

By the way, I’ve got an answer for first question that Steve had on new business value on a constant currency basis in Asia. And the answer is that it was up year-on-year by 57% and if you want the details you can find it on page 17 of the statistical information pack. Okay. So, we can take the next question, operator. Thank you..

Operator

Thank you. The following question is from Robert Sedran of CIBC. Please go ahead..

Robert Sedran

Hi. Good afternoon. I think I have got a basic one. So, I’m hopeful there is an easy answer to it.

But can you explain to me why the steepening yield curve is that -- isn’t that large of a negative for Manulife?.

Steve Roder

Okay. So, I will start and then, I’m going to pass to Scott again. So, as we mentioned in the preliminary remarks, this is basically a reversal of what happened in fourth quarter of 2014. And it’s basically a difference between the accounting and the economic impacts related to our hedging programs.

So as the yield curve steepens up, it’s beneficial for us. But we have an immediate impacts of taking up a loss on the mark-to-market valuation of the instruments within the hedging program. And we have the opposite when the yield curve flattened in Q4. So that’s my headline summary and Scott can probably give you some more color..

Scott Hartz

Sure. I guess I’d start by saying it’s one of the main reason we define core is that there's always going to be some volatility to our net income results to the interest rates moving around it. And it is very hard to give a rule of thumb of what will happen as we have businesses in many different markets and there is lots of points on the yield curve.

But it is true that a steepening is largely bad for us from an accounting perspective but positive on an economic basis. And the main reason for that is that in the accounting regime, there is this ultimate reinvestment rates that I think you are all familiar with, that sort of dampens the impact of long-term rate moves.

And so, beyond 30 years, there's not much impact in the current quarter to us from an accounting perspective of the move-in rates. And yet, as you know, our businesses are very long and we have lots of cash flows beyond 30 years. In the liability side, they are hard to invest for.

There aren’t many cash instruments or derivative instruments that go out beyond 30 years. As a consequence, our hedging program is designed to help sort of manage both the accounting and the economics and we want to do some hedging of those longer dated cash flows. So, we push a lot of our cash instruments out 30 years.

Our derivatives are largely targeted at 30-year point help, hedged some of those larger cash flows. But since from an accounting perspective, it's more a function of what's going on in the first 30 years.

It looks like we have too much, too longer duration at 30 year point and hence, we have a sensitivity when the 30-year point goes up relative to the other points in the yield curve from an accounting perspective. But from the economic perspective, it's a good thing for us.

And so the loss you saw in the second quarter as Steve mentioned, it's just the reversal of what happened in the fourth quarter last year and in fact that loss will come back to us in the future..

Robert Sedran

So, we can think the accounting principles for the counterintuitive movement in the earnings. But the underlying economics then remains quite positive. So to the extent you have a charge, this is an accounting issue that comes upfront and then over time you will get that back because the economics are quite positive of steepening curve..

Scott Hartz

That's exactly right. We were very happy with how yields moved in the second quarter despite the accounting results..

Robert Sedran

Okay. So I guess I was confused for a reason. Okay. And then….

Scott Hartz

Good reason. The accounts have worked hard to make this inscrutable..

Robert Sedran

Where would we without them, right? So, just a quick follow-up question if I may on the issue of the Chinese mutual fund or the mutual fund sales in China.

Have you noticed any spillover potentially outside of China into some of the surrounding regions in terms of investor sentiment and sales trajectory? Is this a fairly confined issue that may lead to some sales volatility but not really any earnings volatility?.

Steve Roder

We’ve not seen any contagion effect at all. And China is a pretty important market and it’s actually doesn’t really function according to many of the open-market principles that we see elsewhere. So if you looked at Hong Kong, Hong Kong remained much more muted in its response even in terms of the eight shares.

And we see no adverse impact in terms of launches or net new flows either. So both from a evaluation and flow point of view, there has been a spillover effect..

Robert Sedran

Thank you..

Operator

Thank you. The following question is from Meny Grauman of Cormark Securities. Please go ahead..

Meny Grauman

Question is about Manulife Bank. You referenced 800 branded ATMs and I’m just wondering what the strategic rationale is specifically for doing something like this right now. I note that you talk about ongoing competitive pressures in the residential mortgage market.

Is this in some way an attempt to kind of address the competitive position for Manulife Bank?.

Marianne Harrison

It’s Marianne Harrison speaking. Yes, it is to address some of the competitive positioning and it’s also to address our strategy in terms of trying to be more customer-focused and making it easier for people to do business with us. Now they can get at some of these ATMs without having to pay the extra cost.

So it’s good from a customer perspective and I think it’s good from a competitive perspective because it really adds to the exchange which we are part of as well..

Meny Grauman

And do expect to see sort of an impact to earnings anytime soon, or is this a much longer kind of process?.

Cindy Forbes

No, I would say that this is a much longer process. Really, it is for the benefit of our customers and trying to make it easier for them to do business with us. And I think that does a lot from a customer experience perspective..

Meny Grauman

Thanks for that. And just a second question in the US. You talked about extending vitality to indexed UL products.

On the subject of indexed UL product and reading about changes -- regulatory changes impacting those products, I am wondering what your view of those changes will be on the sales there?.

Craig Bromley

It’s Craig. I am not aware of the changes you’re referring to. What are the suggestions -- who are suggesting the changes? I will get back to you..

Meny Grauman

It’s a Wall Street Journal article talking about some of the changes in disclosure on these indexed UL product side in the US coming in as early as September 1..

Craig Bromley

Okay. Well, I am not aware of it. So obviously, we don’t have a view on it or any opinion on it. So thank you for the heads up and we will -- I will check that with my folks to make sure that we understand the implications..

Meny Grauman

Okay. Thank you..

Operator

Thank you. The following question is from Sumit Malhotra of Scotia Capital. Please go ahead..

Sumit Malhotra

Thank you. Good afternoon. First for Steve, and going back to the reconciliation from the reported results to the core number. You mentioned off the top that the company had a tax benefit as far as the reported result is concerned. I don’t think we can do it with the disclosure we see. So I am hoping you can help me.

What do you believe the core tax rate to be for Manulife for this quarter? And how should we think about that number from a run rate perspective?.

Steve Roder

Yes. Thanks, Sumit.

Well, first of all, the tax -- the overall tax rate this quarter was very favorable because we got a tax credit in relation to the change in tax rate in Alberta, now with an increase in the tax rate, which again is slightly counterintuitive from an IFRS point of view, but what it actually does it increases the value of our deferred tax assets.

So tax rates go up when we get to win. That’s accounting for you. So on an ongoing basis, the tax rate depends on the mix of earnings in our various jurisdictions and it can be quite volatile depending on where we’re earning in any particular quarter.

And I think I find it hard to give you any firm guidance on that, but typically the rule of thumb number we tend to give is around 20%, but it can be pretty volatile..

Sumit Malhotra

So on a reported basis, you have a benefit.

Is it the same on a core basis in your estimation, or did some of these experience items feature favorable taxation?.

Steve Roder

No, the change in tax rate in Alberta falls within our definition of non-core. So that was pulled out of core..

Sumit Malhotra

Okay. It’s as was referenced before maybe rough, it’s possible to go down this real, but having an idea on pre-tax and after-tax on some of these extraordinary items I think would be helpful for all of us, but we will talk about that another time.

Moving over to Kai and the wealth and asset segment, we’ve got this new disclosure now so it gives us a few more questions to ask. We talked at the Investor Day about the trend in EBITDA margins. And you’ve given us numbers back to 2013. It certainly seemed like in 2014 we had a decent size expansion in the margins of this business.

The asset growth has continued at a good clip. The margins have stabilized. So I will stop there. Maybe get your thoughts. I know there is a lot of moving parts in terms of acquisitions and other factors that are coming into play.

But what do you think is required to get the EBITDA margins moving higher again as we saw last year and what are some of the initiatives that you have underway?.

Steve Roder

Right. Okay. So let me just give one comment off the top and then I will pass to Kai to talk about the strategy going forward to increase the margin. So I think one key factor this quarter is the inclusion of new life. So I think I have a dampening effect on the margin.

So that’s a bit of an explanation as to why that trendline didn’t continue in quite the same way. But I will leave it there. And I will pass to Kai to talk about what he is doing in terms of margin expansion..

Kai Sotorp

So we have been historically very concentrated in our earnings stream and retirement services businesses and over the past three, four years have been emphasizing the growth in mutual funds, which come in at a higher earnings and higher margins. And the quality of those trendlines are very positive both in US and Canada and Asia.

So that’s one aspect, which is the change of mix and the emphasis of a higher margin mutual funds business. Secondly, what we are doing is, we are growing the institutional book, which although has a lower fee base then for example mutual funds, it does offer a countercyclical effect on the positive side.

Both contribute to a larger base of assets against which we can get their operating efficiencies. Now the next to mention is as I mentioned at Investor Day, we are in the path of globalizing our infrastructure and operational backbone.

That’s going to take a period of time, because we have historically operated the various countries rather independently from one another. We started with doing so in Asia. We consolidated all the operated companies under one leadership back in December.

And obviously, we are going to try and leverage the stronger capabilities that we have with the larger base of assets that you see in core markets, like the US. But moves like that, and you know this from looking at other asset management companies do take a period of time. They don’t happen over a simple couple of quarters.

They tend to be multiyear in effect. And so I will see the two factors both in terms of topline, improved mix, plus the efficiency gains to stop materializing over the next 12 to 18, 24 months..

Sumit Malhotra

So that’s the details. Now let me ask you the number.

Where do you think you can get this margin too over that period?.

Kai Sotorp

I think we indicated at the Investor Day what we believe we could deliver..

Steve Roder

Yes. We talked about over a period of time getting to 30% to 35%. But I think Kai basically said look, if you look at the best-in-class whatever that means, but if you look at the best-in-class, you will see people at 40% or higher. But on the other hand, we have a variety of types of business in various jurisdictions.

So for us to get to that sort of level would take a lot longer. But over the planned horizon, our ambition was to get to that sort of 30% to 35% number. I think Craig wanted to add something..

Craig Bromley

I will let [Chuck] [ph] address the indexed UL, if but you finish with this..

Sumit Malhotra

I will stop there..

Steve Roder

Are you okay with that?.

Sumit Malhotra

Yes. That’s for me. Thanks for your time..

Craig Bromley

All right. Thanks. So just on the Indexed UL question that was previously positive. This is going back quite a way, so why it wasn’t really impressed my mind. There was the NAIC was looking to tighten up some of the illustration rules around indexed UL in the US.

They asked for the American Council of Life Insurers if they feel live to opine and how best to do that. And sometime ago, we provided that response. The NAIC adopted a new regulation around those illustrations and it’s really about how aggressive the illustrative rate can be around equity returns for these products.

We were at the guidelines that came out very consistent with what we had submitted and we are already in compliance with those guidelines. So there is really not any impact on our business.

Does that answer the question?.

Steve Roder

That was the previous question. That was many quite questions, so let’s assume it. Okay. I think operator we can take the next question. Thanks..

Operator

Thank you. The following question is from Peter Routledge of National Bank Financial. Please go ahead..

Peter Routledge

Hi. Thanks. Let me ask the softball question. I have been looking at your net flows in your new disclosure and your net growth management flows in your new disclosure. And I can’t have it with onus just consistently positive net flows.

And I am wondering why you’re or why Manulife and particularly in the US is you able to get positive net flows so we’ve seen some peers struggle with that. Outside of management competence so as I am sure it’s part of the story.

What is it about your client base or your distribution model that’s driving this?.

Kai Sotorp

So this is Kai for wealth and I will turn it over then to Craig to talk specifically on the US. We have a unique model because it is a combination of internal capabilities in an open architecture.

And the open architecture lasted to be much more responsive to market trends and we’ve launched lot of new products that actually have been in the sweet spot of demand. That’s been one reason we have been able to have a positive momentum.

I will turn over to Craig, who can then talk specifically about some of the products we have had greater success with..

Craig Bromley

Yes. So I think there is a number of different aspects to the success. And I thank you for noting. And it’s I think over 15 quarters now I think of net positive net flows, which is a pretty good record of consistency. A lot of folks bounce in and out of positive, negative flows. Probably product is a big part of this.

The way we sort of structure ourselves is we are kind of advisories to our distributors in terms of all aspects of risk adjusted returns in the products that we sell. We have a very large group that is kind of a gatekeeper group within our own company that interacts very well with professional buyers of the distributors.

They are making model allocations and recommendations. I think that is as probably indicated probably the biggest driver. And the second is there are a number of distributors yet that have not really caught on to this story.

And as we basically go through one by one of the major distributors in the United States and explained to them our model and how powerful it is and how successful some of their competitors have been in terms of distributing these types of products, we are gaining traction in these new distributors. So we think we still have a ways to go.

The model is very robust in terms of new product offerings and there continue to be opportunities to get market share within the distribution partners that we currently have and that we are targeting. So it’s a great story..

Donald Guloien

I am going to jump in here. It’s Donald. I think Kai was being a little too modest. I mean he talked about the open architecture, which is certainly part of the ingredients for success, but also the performance of our internal managers has been nothing short of extraordinary. We now have 101 4 and 5 star rated Morningstar funds.

When I ran investments, it was a big deal if we got a $1 billion mandate from somebody. Now that’s a very regular occurrence and there has been a number of them that are multiples of that and even greater.

So they are simply on a roll and it’s not one or two products, it’s across a whole range of products, supplemented by some of the very best offerings from competitive asset managers, which is the open architecture..

Peter Routledge

So I am curious as sort of claims strong active management results as well and explain maybe net outflows by saying while there is this huge demand for passive and active management has not been a demand.

So within your net positive flows, is there a distinct waiting towards passive or is it how does it compares to active?.

Donald Guloien

So today the net flows has not been the case, although we have just launched a new smart beta lineup with BofA, but historically the emphasis is always on active. There have been a couple of key things that we have done however, that’s different than some of our peers. Our colleagues in the US were early on, on the bandwagon of liquid alternatives.

And we did launch a global asset return strategy that was in the sweet spot of the demand for clients to have greater certainty around outcomes and better risk control on the downside. And that’s been one key trend next to the passive trend, that’s taken away from traditional fundamental active.

And that’s been one very robust reason for the positive flows..

Steve Roder

Yes. I think just to add to that, I mean what -- I think the differentiated sort of alpha through alpha investing, active investing were always be a powerful product offering. Beta is taking a share, passive is taking a share when there isn’t true differentiation and I think that’s a big advantage for us as we truly have differentiated outlook..

Peter Routledge

Just a quick one for Steve.

Any update how you account for the DDS payment?.

Steve Roder

No real update. We are still waiting for the smoke to come out of the chimney or whatever from the big four accounting firms.

So we are getting our heads around how to account for these major bank insurance transactions, but we are optimistic that we will end up with a more favorable outcome than the worst case that we portrayed which would have meant the 10 point hit to MCCSR.

We think there is a good chance to get a better result and that I would hope to have clarity on this at the end of Q3..

Peter Routledge

Okay. Thanks for your answers..

Operator

Thank you. The following question is from Doug Young of Desjardins Capital. Please go ahead..

Doug Young

Hi. Hopefully these are few quick ones.

The first one just along the Canadian reinsurance recapture, I’m just wondering if you quantify what the earnings impact was and what the -- if at all what the MCC solid impact was? And was that just related to a group insurance business that you reinsured back in the crisis?.

Steve Roder

It’s Steve. The reinsurance recapture we’ve referred to this quarter was immaterial, which is why we didn’t spark it out in that way and it had a negligible impact on MCCSR..

Doug Young

So no material impact on earnings, no material impact on MCC Center..

Steve Roder

No. It was just part of our overall view that our earnings were a little bit froppy this quarter. We have one or two small items of that so which we’re not sufficiently material to be regarded as non call..

Doug Young

And what your definition of materiality, is it $10 million and below or ….

Steve Roder

You probably well -- I had a long history in a big four accounting firm and I could probably go in for hours on the subject to materiality. Now this will be any the way. So, $10 million will not be regarded as material..

Doug Young

Okay. And then shift on the oil and gas loss, did you quantify what the impact was? And then I know in Q1 dealt into the investment result, there was some timing items that was more impactful. And I’m wondering whether that’s build over and you actually had a positive impact this quarter just looking for some details on that..

Scott Hartz

Sure. It’s Scott. Yeah. The impact in the second quarter was $125 million loss on our oil and gas. And I think there was a thought that there might be some catch-up in the second quarter as we got statements in from some of our GPs after the end of the first quarter, which is maybe yet another reason that was maybe a little higher than you’d expect.

But I think we’re fairly caught up on that and don’t really expect any more timing issues going forward..

Doug Young

Okay. And then just lastly, the EN I don’t -- but the E&E initiative just looking for me be a quick update. And I know that some -- I think you mentioned previously that you thought a net benefit for 2015 was going to be $300 million pretax, don’t think that’s changed. But can you quantify talk about what came through in the second quarter? Thanks..

Paul Rooney

And it’s Paul Rooney here. Good afternoon. The E&E effort continues to progress as we wanted. We’re on track to hit all of our objectives including the $400 million of savings of 2016. The good news is this is also funding a lot of our growth initiatives and we’re reinvesting some of this in new capabilities.

We don’t have a number that we could share with you on the impact on quarter..

Doug Young

Okay. Great. Thank you..

Operator

Thank you. The following question is from Dan Bergman of UBS. Please go ahead..

Dan Bergman

Hi. Good afternoon.

I was hoping you could provide a little more color on how the Standard Life acquisition is performing so far relative to your expectation? And any update on how that integration is progressing?.

Donald Guloien

Well, yeah. Just very quickly and I’ll just pass to Marianne after that. Essentially from a financial point of view, we’re progressing inline with our expectations. The earnings in the quarter were actually slightly ahead of what we expected and we were successful in getting the approval to integrate the businesses from the 1st of July.

So all good news but Marianne can probably give you some more color on that..

Marianne Harrison

Yeah. As far as the integration is going, we’re very pleased with how it’s been proceeding. We’ve done a lot in terms of integrating the people side of things and to a certain extent or maybe even ahead of schedule in terms of where we though we might be at this point in time.

Now we’re very focused on product as well as systems conversion so that’s where we going to be spending most of our time going forward. We talked about during some rationalization of mutual funds in the fall which we will do but we’re quite pleased with the line that we’re seeing on the seg fund business as well.

Now we are looking at their Standard Life seg funds compared to ours and trying to see what we want to do and we hope to have a better idea on that in Q2 of next year. But things are progressing quite well. We’ve been very pleased with the talent that we’re seeing from an employee perspective and so far things are been going well..

Dan Bergman

Great. Thank you. And then maybe switching over a little bit at life insurance. I believe that there is an expected -- do you have any major impact on sales on new VitalityLife over the second half of this year but not there a little further along in the product launch.

I wondered if you had any updated thoughts on how the launch, market reaction are going so far.

And any updated thought well on maybe the magnitude of near and medium term sales in terms of product?.

Craig Bromley

Yeah. This is Craig. I’ll take that one. So it has only been actually a few month since we launch this. So I don’t think we’re too far into the process just yet. We expect this to be a build over time. We have a full bunch of different initiatives going sort of on parallel tracks to expand the impact of vitality on the insurance sales.

So since we are continuing to added to two new products, so we’ve only headed on two, not headed on three. We will continue to add it to each of the products in our portfolio over the course of the next year. Additionally, not all states have approved the product as yet so we’ll continue to get state approvals and that’s product by product.

So as we get put it on to a new product than we have to get the approvals for it. And then we're looking at extending it to older ages. We’re looking at different ways that we can sell this product.

I think the really exciting thing now is that your reception that we’ve received from both the public and our distribution is fantastic in terms of the concept and where this is going to take insurance. Its going to take some time to have all that, the sales and the realty meet the expectations of how this is going to revolutionize insurance.

But we’re pretty confident based on the reaction we received and that will indeed occur..

Dan Bergman

Fair enough. Thank you..

Operator

Thank you. The following question is from Mario Mendonca of TD Securities. Please go ahead..

Mario Mendonca

Good afternoon. First a quick question on the appraisals.

Scott, how would you characterize the difference between where the independent appraisals are on oil and gas with where oil and gas is today or the futures are today?.

Scott Hartz

So, you are talking about be price DAC they used….

Mario Mendonca

Right. How far….

Scott Hartz

… relative to the forward curve..

Mario Mendonca

Right..

Scott Hartz

… and yeah, and I would say, so they’re above and it’s not like the appraisal we uses above and no one else is, I think, virtually all, if not all the appraisers use a higher forward DAC. And part of the reason for that is the forward curve to get out after year or two and there is really very little volume there.

It’s a -- so unlike the forward curve for interest rates where you can execute in size and although, is being adequate for using the forward curve for interest rates. But for various commodities including oil and gas, it gets very thinly traded. It is not reliable, can get pushed around a lot by a few trades. And so that’s the reason they’re above.

And out at the five-year point between $5 and $10 above is sort of the ranges to where they are..

Mario Mendonca

We’re above where it is today?.

Scott Hartz

Above where -- up with the forward, so the forward curve is -- it is an upward slope. And if WTI is currently a little below 50, five years out the forward curve would be a little above 60 and then appraisers would be a little above that..

Mario Mendonca

Okay. I’ll follow you. And then a question for Cindy, in relates to the lap support issues in the U.S., and what I’m getting, I hear is, for as long as I've been around Life Insurance, this issue has been here.

This issue have lapse supported issues, lapse supported policies and how the insurance industry as a whole have struggle to get that lapse assumption low enough? So the nature of question is this, once you take -- make that adjustment this quarter or Q3 2015, will you have lowered the lapse assumption to a level where wouldn't be realistic to expect any further experience losses where there is a lapse issue?.

Cindy Forbes

Thank you, Mario for the question. It’s Cindy. Well, every time we do our assumption review, we look at the experience as high as the volume since the last time we evaluated an assumption. When we last looked at our U.S. lapse experience on Insurance, it was 2012.

the experience that we’re looking at on our lapse support business is largely on business written in the 2000, so at that point we had somewhere between four and 10 years of experience, now we’ve got three years more. We’re reflecting what we're seeing and reducing lapses on lapse supportive business.

But there is always a possibility that you could see further deterioration or as you get experience in later durations that you see policyholder behavior that’s different than what you have projected out now. So I think that possibility always exists. We have brought our lapse assumptions down for our lapse supportive business.

It ranges but many of them are between 0.25% to 0.50% to 1%, there is some that are hired, so we have bought them down quite a bit. They are quite low but it would still have an impact if we saw even lower lapses..

Mario Mendonca

That’s helpful. And then question like to directly to Donald Guloien and it goes to the point that both Gabriel and Sumit were making on the experience gains and losses, and trying to understand the tax rate on a core basis. Without that information, the code number that you’ve provided is starting to lose a little bit of its credibility.

And so the question to you directly is do you expect to eventually provide a core, like the experience gains and losses on a pretax basis and after-tax basis?.

Donald Guloien

Well, I am going to, the comments when people are trying to triangulate in getting answers that are so wrong, because the use of the imprecise tax rate that you can’t figure out, that doesn’t make me very happy. I'm going to be cautious though or not guarantying a solution to it.

I would like you have as much visibility and as you written up very well in the complementary way about our core, the fact that we do take experience gains into our core measure very explicitly. But if you're coming to the wrong conclusion about how much the experience losses or gains can be, we obviously have to help some more.

So I don’t know what all the issues are providing in more detailed reconciliation, but we will take that at heart and I’ve already made the note based on the questions and we’d like to have as much transparency as you can possibly have. We have nothing to hide here. And until such time as we do, give you a reconciliation larger figure though.

You should keep asking the question every quarter to say exactly how much were they Steve, because we’re having trouble computing it and he will give you the answer. But I would hope we will have better answer than that..

Mario Mendonca

Because let me clear, when Gabriel offered a $300 million number for the experience losses on the quarter on a core basis, that’s the number I came up as well, because we’re all sort of going about at the same way..

Donald Guloien

Yeah..

Mario Mendonca

So rather than sending us down such a long path, it would be better to just have the disclosure..

Donald Guloien

Yeah. No. It’s right. Steve said the tax rate that’s bouncing around..

Mario Mendonca

Oh! Sure..

Donald Guloien

… when that is in the reconciling items, that can be a big number, right. So just we’ll find a better way to help you through that..

Mario Mendonca

And then finally on the -- I think it's amusing to sort of point at accounting and say accounting leads to weird results and it does. And I’m referring specifically to the $600 million plus loss related to the steepening yield curve. But if accounting drives a large enough loss, it can have a real economic impact and so far it affects your capital.

So the nature of the question is this.

Is there a possibility that this approach to hedging, these large hedge positions that you put on this forward starting swaps could create an accounting loss large enough that it could have a material affect in our capital?.

Scott Hartz

Yeah. Hi. It’s Scott, Mario. Yeah, clearly that’s right. We can wave away accounting but if it gets big enough, it becomes a problem for capital and that’s not good. So, we certainly do stress testing around that so forth.

But I would tell you is that, it was a particularly large shop this quarter and part of it was the low level of yields we had going in. If yield curve continues to steepen in a higher rate environment, it’s not going to have near ways big an impact. So, we certainly take that to heart. We do a lot of stress testing around it.

And I don't think we are that concerned that you could have the yield curve moving in a way that becomes an issue for capital..

Mario Mendonca

To be clear, the yield curve only steepened by about 30 basis points, comparing the 30 to the 5 here.

As you point that it was on such a low base to start with that 30 basis points is meaningful, is that the point?.

Scott Hartz

That’s correct..

Mario Mendonca

Thank you..

Scott Hartz

And substantially you all know us, a substantial model is already a reverse rate..

Mario Mendonca

Right. Already in Q3. I understand that. I just didn’t think of discounting accounting as others might be..

Steve Roder

Yeah. Because accounting can become real in the end that’s why we talked about net and core. They both count..

Mario Mendonca

Okay. Thank you..

Scott Hartz

Good point..

Operator

Thank you. The following question is from Tom MacKinnon of BMO Capital Markets. Please go ahead..

Tom MacKinnon

Yeah. Thanks. I got a question, but just a follow on of that.

If you ever did, credit we are hedging, the fact that you are using this forward starting swaps to hedge, would not -- how does that play into not impacting capital or impacting capital?.

Cindy Forbes

Tom, it is Cindy. The forward starting swaps you are referring to are on the general account and those are already included in our calculations of reserves because they are highly assets of Quebec or liabilities. And so you could say that we have credit for those forward starting swaps.

The issue on credit for hedging relates to the variable annuity business versus the general account..

Tom MacKinnon

Okay.

But none of the hedges that we are weighted into this accounting or either associated with hedges on the variable annuity business?.

Cindy Forbes

No. They are not..

Tom MacKinnon

Okay. That’s the question, I guess, which needs to be ask first then. When everybody is getting all excited about the net flows, I was looking at the net flow with respect to the pensions business that is been negative in three of the last quarters? Now, you’ve got standards license here in now as well and the New York license here as well too.

So, maybe you can elaborate on what’s leading to the negative net flows attentions and what jurisdictions they might be coming in?.

Kai Sotorp

Hey. Tom, this is Kai and then, I’ll turn it over to Craig. The competitive threshold in retirement and the pension business is increasing pretty markedly.

And all of the pressure around DOL and their requirements for a separation of revenue streams and transparency disclosure and also exercise of fiduciary responsibility is causing quite a large shift and particular in the United States.

And that’s why a number of years ago, we started trying to diversify our asset mix and bring on board the mutual funds business more. So, a lot of what’s going on can we really attributed to what’s happening in the U.S. I will kind of let Craig speak to it..

Craig Bromley

Yeah. So, Tom, we’ve been in need of asset flows in the U.S. pension business for a number of quarters and it is coming from two directions. There has been a little bit more churn in the industry because of what Kai outlined.

I think plan sponsors are taking a hard looking at their fees and making sure that the in-force pricing is the same as new business pricing. And I think the whole industry is adjusting or has adjusted to that, especially at those kind of churn numbers you probably start to reduce. The second point is that we haven’t had a very strong growth sale.

So, our sale has been down in the last two years. I think we sort of peaked in 2012. And the good news on that one is that is actually now turned around. So as of this quarter, forget about the New York Life and whatever addition that will have to our business, our gross sales are now heading in the right direction.

So, we think that between those two, we will be end up in a situation where we get out of this net flow -- negative net flow situation and then that’s really on our core business. And then the TRS business is going to have a different impact on our kind of net flows and that is very lumpy.

So, you’ll have some quarters where we take in a big plan and in other quarter where a big plan leaves and that is going to put some noise into what I would call, more of a gradual trend that was trending down and that was trending back up.

So for this quarter, I would certainly tell you what’s going on with the core business and the TRS business, which is the New York Life business sort of separately. We may have to do that continuously to really give you enough information to asses the business. But we haven’t really come to any conclusion as how long we will keep separate disclosure.

So it’s a good observation, Tom. The answer is pretty clear. We’ve not had great sales and we have had some outflows but that is turning around and we are seeing a much more positive picture looking forward.

Tom MacKinnon

Do you think having a fully -- an offer now that works for mid-sized groups as well? Do you think that would help improve the situation here?.

Craig Bromley

Yeah. So, we see revenue synergies by having a broader lineup. And we now have a lineup that actually goes up to large scale sales, but there are distribution synergies and I think that will be helpful. In terms of actually the near-term impact of what this has had on us has probably been somewhat negative.

And that for both our core business that from John Hancock in New York Life business, I think there was a little bit of hesitation in the market to say what is going to happen here. But that is sort of clearing out and we actually have some very strong sales on both sides of the ledger.

And as we are able to take New York Life platform and bring it down scale a little bit into what we would more categorize as the mid market sort of 5 million and up. From where they are we should sort of mid high. We think we’ll see even additional sales synergy and a better picture for net flows. So it’s a good observation..

Tom MacKinnon

Thank you..

Operator

Thank you. The following question is from Darko Mihelic of RBC Capital Markets. Please go ahead..

Darko Mihelic

Hi. Thank you. Steve, I just wanted to clarify the comment you made at the very beginning of the call with respect to the AFS gains that are included in core as being relatively high. And then you pointed to core investment gains has been around 51 million or so.

Net, net, the long and short of it I guess is what I’m asking is should I think of the earnings and surplus has been inflated by about $50 million this quarter? Would that be where I should think of it?.

Steve Roder

Okay, Darko. I think you may have got to the right answer, but I am not sure you call it by the right route..

Darko Mihelic

Okay..

Steve Roder

So sorry about that. Okay. So starting with the -- so there are three two separate things here. One is the AFS gains that form part of core and do not form part of investment experience gains. And what we’re saying is that this quarter, we would say they were probably 20 higher than the run rate that we would expect.

And in addition to that, we have another 20 to 30 of other items that we think means that are overall run rate core in this quarter maybe up a bit roughly by the tune of maybe 40 to 50. So that’s the core earnings point and the investment experience gains is really entirely separate to that.

And there was an aggregate of 128 this quarter compared with the aggregate amount of 100 that we would like to make into core earnings, but we couldn’t because we have to have the sufficient cumulative gains to get us there..

Darko Mihelic

Okay. So I understand that. And then I guess the question then still goes back to 20 million of AFS. I understand that would be in earnings and surplus.

I’m just looking for the geography and the 20 to 30 of others, would that also be in earnings and surplus?.

Steve Roder

No, it’s part of the core earnings, but it is not part of investor experience gains. There is no earnings and surplus..

Donald Guloien

Yes. Not earnings and surplus..

Darko Mihelic

Okay. All right. That’s the clarification I needed. Thank you very much..

Steve Roder

Okay..

Donald Guloien

We are trying to avoid aggressively giving guidance, but we also one of the favorite people that 902 was a very good result and greater than what we would have expected. And Steve has given you a pretty good sense of the quantum..

Darko Mihelic

Okay. Thanks a lot, again..

Donald Guloien

Thanks..

Operator

Thank you. The following question is from Humphrey Lee of Dowling & Partners. Please go ahead..

Humphrey Lee

Hi. Just a quick follow-up on the mutual funds in China.

Can you talk about the kind of fund offering or is it more focusing on the A-shares in China or are they more broadly globally focused? Just want to get a sense of like what the follow over offering over there?.

Steve Roder

Yes. I think Kai is going to take that one..

Kai Sotorp

Yes. So look the market in china is dominated by banks and bank are very much in the load games. So a lot of it is A. A play of getting on top of the bandwagon of foots really hot and there was a lot of margin lending against that. And so there is predominantly equity based funds that had load shares driving along the commission revenue for the banks.

Is that answering your question?.

Humphrey Lee

I can just kind of the big investment focus, are they kind of equities, at least something in China?.

Kai Sotorp

There were equities. Asia funds, that’s all I meant..

Humphrey Lee

Okay. All right. Thanks..

Kai Sotorp

Yes. So it was equities. Now I might just address also that one of the things that we saw as a result of having this recent fund launches is a positive outcome for us was hat the pressure relative to redemptions and in suit as a result of the market correction.

For us it was not a big issue because most of these funds had still not being heavily invested, they were largely in cash. So the outcomes for investors actually were pretty favorable in the sense that we have not invested into the markets and those funds have are not suffered the downturn that the rest of the market did..

Humphrey Lee

Thank you for the color..

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Veloso..

Robert Veloso

Thank you, Operator. We will be available after the call if there is any additional follow-up question. Have a good afternoon, everyone. Bye..

Operator

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

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