Robert Veloso - IR Roy Gori - President & CEO Philip Witherington - CFO Steven Finch - Chief Actuary Naveed Irshad - Head, North American Legacy Businesses Paul Lorentz - Head, Global Wealth & Asset Management Michael Doughty - President & CEO, Manulife Canada Anil Wadhwani - GM, Asia Scott Hartz - EVP, General Account Investments.

Humphrey Lee - Dowling & Partners Steve Theriault - Eight Capital Meny Grauman - Cormark Securities Gabriel Dechaine - NBS Sumit Malhotra - Scotia Capital Doug Young - Desjardins Capital Markets David Motemaden - Evercore Tom MacKinnon - BMO Capital Mario Mendonca - TD Securities Linda Sun-Mattison - Bernstein Darko Mihelic - RBC Capital Markets.

Good morning, and welcome to the Manulife Financial's Second Quarter 2018 Financial Results Conference Call for Thursday, August 9, 2018. Your host for today will be Mr. Robert Veloso. Please go ahead, sir..

Thank you and good morning. Welcome to Manulife's earnings conference call to discuss our second quarter 2018 results. Our earnings release, financial statements and related MD&A, statistical package and webcast slides for today's call are available on the Investor Relations section of our website at manulife.com.

We will begin today's presentation with an overview of our second quarter highlights and an update on their strategic priorities by Roy Gori, our President and Chief Executive Officer. And following Roy's remarks, Phil Witherington, our Chief Financial Officer, will discuss the Company's financial and operating results.

After the prepared remarks, we will move to question-and-answer portion of our call. We ask that each participant adhere to a limit of one or two questions, and if you have additional questions, please re-queue and we will do our best to respond to all questions.

Before we start, please refer to Slide 2 for a caution on forward-looking statements and Slide 34 for a note on the use of non-GAAP financial measures in this presentation. Note, that certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from what is stated.

The slide also indicates where to find more information on these topics and the factors that could cause actual results to differ materially from those stated. With that, I'd like to turn the call over to Roy Gori, our President and Chief Executive Officer.

Roy?.

Thank you, Robert. Good morning, everyone and thank you for joining us today. Turning to Slide 5; yesterday we announced our financial results for the second quarter of 2018. We delivered strong net income and core earnings of $1.3 billion and $1.4 billion respectively with core earnings increasing significant up 25% year-over-year.

The strong core earnings contributed to core ROE of 14% and our expense efficiency ratio dropped 300 basis points to 51.2%. We continue to generate positive net flows in the quarter and APE sales declined and new business value generation increased to strong 24% to $411 million. Turning to Slide 6.

We continue to execute on our five priorities and are delighted with the progress we made in the quarter. In regards to our first priority, optimizing our portfolio, we set an ambition to release $5 billion in capital by 2022, representing almost 20% of the current capital backing legacy businesses.

In the second quarter we sold additional older assets which released $400 million of capital. We also announced that we entered into an agreement to sell Signator, a U.S. broker-dealer business, which we expect to generate about $100 million worth of capital in the fourth quarter of this year upon closing.

Since the beginning of the year, we released $940 million through portfolio optimization activity, which equates to 90% of our 2022 target. We're happy with our progress so far which has exceeded our expectations. Moving to Slide 7.

The second priority is to aggressively manage cost, and our 2022 ambition is to drive an expense efficiency ratio of less than 50%. To put things in perspective, that equates to roughly $1 billion in expense saves or avoidances.

And this target is net of $1 billion in incremental strategic investment over the same period, which is over and above the existing strategic spend. In the second quarter, we announced significant cost savings initiatives which we expect will deliver $300 million of per annum pretax savings once fully implemented.

And we delivered a 51.2% expense efficiency ratio this quarter, which does not include any benefits from these initiatives. We achieved this by delivering strong growth in core earnings and limiting core expense growth to only 4%.

Importantly, we're drawing expenses in the right places such as Asia and WAM, whereas Canada and the United States have relatively flat or lower expenses. Moving to Slide 8.

Priority three is about accelerating growth in our highest potential businesses, which include Asia and Wealth and Asset Management, as well as our group insurance business in Canada and behavioral insurance businesses in all geographies.

Our 2022 ambition is to lead businesses to represent 2/3 of the earnings of the Group, and in the quarter these businesses continued to perform well. Asia delivered core earnings growth of 19%, a 27% growth in new business value, and announced an exclusive bancassurance agreement in Cambodia.

Core earnings in Wealth and Asset Management grew 15%, and we continued our trend of positive net flows despite the loss of three large-case plans in our U.S. Group retirement business. We also delivered strong earnings in Canada Group Insurance, more than doubling the prior year, and our highest quarter of vitality sales in the United States.

Our fourth priority talks for our ambition of being a global digital and customer centric leader. We're very focused on putting customers first, and our 2022 ambition is to increase our net promoter score by 30 points across all markets. And while it's still early in our journey, we're making solid progress.

In Canada we integrated artificial intelligence into our underwriting of certain products, an industry first. This probably provides efficiencies that shortens our average response time to customers from three days to one day.

We also launched an end-to-end paperless process with Bank Danamon in Indonesia, and announced initiatives to digitize our back-office functions in Canada.

With our fifth priority, developing a high performing team, success is simply not going to be possible without the right corporate culture, and we've set a bold aspiration to become a top quartile employee engagement Company. In the second quarter, we launched a new mission statement, which is, invigorating our employees.

We're developing new corporate values in conjunction with our staff and more than 10,000 of them have so far participated. Finally, the transformation of our Canadian business does not just make us a more digital and efficient business but it's also helping to evolve our workforce to the right skills and right people for our priorities.

So in conclusion, I'm delighted with the progress we've made in the second quarter. Earnings were strong and we continued delivering into our five priorities. I'd now like to ask Phil Witherington to review the highlights of our financial results.

Phil?.

Thank you, Roy, and good morning everyone. Turning to Slide 12, and our financial performance for the second quarter of 2018. We delivered strong growth in core earnings and solid net income despite taking a restructuring charge. However, our sales performance was mixed. APE sales declined in the quarter, but we saw strong growth in new business value.

And while we delivered another quarter of positive net flows, they were down from the prior year. I'll highlight the key drivers of our second quarter performance with reference to the next few slides. Turning to Slide 13.

We generated core earnings in the quarter of $1.4 billion, up 25% from the prior year on a constant exchange rate basis, with double-digit growth in each of our operating segments. This was driven by improved policyholder experience and greater expense efficiency, the impact of lower U.S.

tax rates, and favorable tax items in Canada, and growth of inforce earnings. This was partially offset by lower investment related experience gains in core earnings which were solid $104 million this quarter, however down from $154 million in the prior, which included a larger catch up from the first quarter.

Core earnings in the quarter benefited from favorable tax items and notably positive policyholder experience gains in Canada Group Insurance. In aggregate, these items amounted to $94 million and extended the quarterly core earnings beyond the typical run rate.

We delivered net income of $1.3 billion as strong core earnings and a $45 million gain from the direct impact of markets, was partially offset by the previously announced $200 million post-tax restructuring charge. Slide 14 shows our source of earnings analysis.

Of note, expected profit on inforce business increased 3% from the prior year on a constant exchange rate basis, primarily due to inforce growth in Asia and lower amortization of deferred acquisition costs on our variable annuity business in the United States, partially offset by a number of small items in Canada, including the first quarter reinsurance transaction.

Core earnings included experience gains this quarter. Policyholder experience was positive and benefited from particularly strong experience in our Canadian Group Insurance business. Long-term care experience was neutral in the quarter.

And as a reminder, since our lots actuarial review in 2016, experience in aggregate has been consistent with our current best estimate assumptions. We also started to see our focus on expenses come through to the bottom line, with expense experience improving materially from the prior year. Turning to Slide 15.

You can see that we delivered strong double-digit growth in core earnings in each of our operating segments. The strong growth in core earnings which benefited from the two items I described a moment ago, drove the 2.5 percentage point increase in core return on equity to 14%.

As Roy mentioned, expense management is a key priority for us and we have expanded the disclosure in our statistical information package to provide more transparency. On Slide 16, you can see the core expenses of $1.8 billion which does not include the previously mentioned restructuring charge, grew by a modest 4% from the prior year.

This modest growth in expenses coupled with an 18% growth in pre-tax core earnings drove the 3 percentage point improvement in our expense efficiency ratio to 51.2%. Of note, the expense efficiency ratio also benefited from the favorable policyholder experience in Canada, mentioned previously.

But it does not yet reflect the expected $300 million per annum pre-tax savings we announced at Investor Day. Slide 17, shows our annual premium equivalent sales and new business value generation. We delivered APE sales of $1.2 billion in the quarter, down 22%, primarily reflecting two items.

The first, being a strong prior year in Canada, which included one large Group Insurance sale, and the second being increased competition in the corporate segment in Japan. We continued our focus on margins and delivered new business value of $411 million in the second quarter, up 24% versus the prior year.

In Asia, new business value increased 27% from the prior year driven by an 8 percentage points increase in new business value margin to 36.8% and growth in sales of 2%. On Slide 18 you can see that we continue to deliver solid gross flows and our wealth asset management businesses and delivered another quarter of positive albeit modest.

Net flows of $92 million reflects solid gross flows and the loss of three large case plans in our U.S. retirement businesses. Core EBITDA margin in the quarter increased sequentially but declined from the second quarter of 2017 as a prior year benefited from an expense related adjustment.

Turning to Slide 19 total company assets under management and administration exceeded $1.1 trillion driven by global WAM which saw a 9% growth in AUMA from the prior year to $640 billion. Turning to Slide 20, our LICAT ratio for MLI was 132% at the second quarter which equates to $17.7 billion of capital above the supervised retarget.

This represents an increase of $1.8 billion since the last quarter reflecting our focus on capital efficiency. We reported financial leverage of 29.4% in the quarter compared with 29.7% in the first quarter of reflecting in retained earnings partially offset by a modest net capital issuance.

Slide 21 outlines our progress to free up capital and optimize our business. As of the second quarter of 2018 we have released almost $1 billion in capital from our legacy businesses. In the quarter we made further progress in ALDA portfolio of mix changes and sold ALDA assets which released approximately $400 million of capital.

This included continuing to commercialize our Alda management expertise with arm length sales to Manulife managed funds. The first was the sale of U.S. real estate to the Singapore REIT and the second was the sale of U.S. infrastructure assets to the John Hancock Infrastructure Fundamentally.

As well as the capital impact will not be seen until the transaction closes in the fourth quarter. We also announced the sale of Signator our U.S. broker dealer. Slide 22 outlines our financial targets and our year-to-date performance.

Core EPS growth and core ROE our both exceeding our medium term targets and cost efficiency and leverage are trending in the right direction. And while there is more work to be done to achieve and maintain our medium-term financial operating targets we are pleased with our position and progress. This concludes our prepared remarks.

Operator we will now open the call to questions..

[Operator Instructions] The first question is from Humphrey Lee of Dowling & Partners. Please go ahead..

Regarding the annual assumption review, you talked about 100 million potential after-tax charge at least based on your projection right now.

I was just wondering can you provide some sensitivity on the moving pieces that you highlighted in the press release?.

Sure Humphrey its Steven Finch. Here we highlighted some of the areas that we’re looking at the review is as it always is each year quite comprehensive. We’re covering lapse assumptions for U.S. life insurance, mortality assumptions for U.S. and Canadian insurance and annuity businesses.

Each year we review our investment return assumptions, as well as lapse and utilization assumptions for the U.S. variable annuities.

The 100 million that we've mentioned in the charge being up to is really at this stage we’re still early in the process but we see a little bit more pressure for a modest charge which is why we guided towards the up to 100.

I can’t give you details at this time on any individual items, what I can say is last year the review included some significant items that were largely offsetting. I think what you can expect this year is that the absolutely magnitude of the items would be generally smaller than what we saw in last year's review.

And then we’ll be glad to give significantly more detail with our Q3 disclosures..

Is any one area that could be a drive that the biggest sensitivity - or they come mostly even now across those items that you listed?.

Yes, I don’t think - I’d say there is any one individual items that we're worried about. As I said its comprehensive and there are some offsetting items and we’ll give you more in Q3..

And then shifting gear to wealth and asset management. So you talked about there's some large piece of flows in U.S. retirement plans.

I was just wondering if you can provide some color in terms of what happened there, and then also can talk about the pipeline that you’re seeing for the balance of the year?.

I have for you Paul Lorentz..

The redemptions were driven by a number of various factors nothing really systematic there I think one was related to an acquisition where the combined plan came outside of our target market. We had some relationship changes and one was just protecting margin.

If you actually look at the growth of our core market our mid plan from a gross perspective, our sales were up 9% year-over-year. So we feel quite comfortable of our outlook..

And then I guess in terms of the pipeline - what do you see in terms of the overall landscape?.

Yes, we would not expect to see – this is not a traditional quarter for us in terms of redemptions. We do expect very wealthy, but this is unusual for us to see these large concentrating in one quarter..

The following question is from Steve Theriault of Eight Capital. Please go ahead..

Couples from me, maybe starting with Phil on expenses. Phil, your newly minted efficiency ratios already improved 300 basis points from last year kind of year-to-date versus '17.

So wondering is there anything seasonal or planned in the second half of this year in terms of heightened investments that you think might - that at least are on your radar screen at this point that might look - might make the first half of the year look exceptionally strong or is sort of 51%, 52% a reasonable sort of run rate from here.

And especially in the context of the no benefit from restructuring in the numbers yet so..

Thanks Steve for the question, so perhaps if you might - we have made quite significant progress on the expense efficiency ratio 51.2%, three percentage point improvement from the prior-year. There are two components of that, the first components of course is that we have successfully controlled expense growth in the quarter.

So we've seen expense growth of 4%, and we've also seen strong core earnings growth which when you translate to the proxy for revenue core earnings before expenses that helps the denominator, so we see both of those elements contributing to the ratio. Now when we look forward from here, we focused on three things.

We are of course focused on executing against the strategic decisions we made about the cost base and we talked about at the recent Investor Day. So that's something that we’ll go beyond 2018 into 2019 so that we get that $300 million of run rate saves in the run rate by the end of 2019.

But we are also very much focused on secondly controlling the cost base of the organization so that we’re looking very hard at any discretionary expenses and making sure that our spend is as efficient and effective as possible.

And then the third thing that we’re doing is making sure that we are deliberately investing in our business and as we laid out at Investor Day as Roy mentioned in his remarks, we are earmarking an incremental billion dollars of investment between now and 2022 to really help accelerate the delivery of our five strategic priorities.

So in the second half of this year I do anticipate some reinvestment, very disciplined reinvestment, I can't quantify what it is at this point. What I can say is that, whenever we do make a reinvestment it will be a strongly business case so that it would generate a medium-term value to the organization..

Let me circle back a bit, but secondly maybe for Naveed, are you any more confident of getting something done in terms of an LTC reinsurance deal, having seen a deal done in the market last week with what looks like a pretty good counterparty.

Should be getting excited at all here - for the most part in past conversations getting something like this done it sounded pretty low probability, but wonder if the lay of the land is changing at all there?.

So, clearly it's a positive development that there's been a significant transaction in the long term first phase, especially with very strong counterparty. So it's something that we're studying by closely but not able to comment beyond that..

Steven, it's obviously very encouraging despite that we want to continue to watch, and we're encouraged that there is more activity here.

And beyond a specific transaction, we really do believe as we articulated at our Investor Day, there's a lot of opportunity for us to manage those blocks for greater value and we're going to continue down that path organically, and if there are opportunities inorganically we could certainly look - we'll be exploring those..

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

I also wanted to ask about the long-term care, there's definitely been some suggestion lately that morbidity assumptions are too positive and need to be adjusted.

I'm just wondering, is it more likely that you will have to take a charge on this relative to what you discussed at the Investor Day and also is this an issue that you're going to look at the triennial review or is it something that you could examine sooner than that?.

Yes, certainly there was fair bit of talks about this. And the angle I come out from is reminding people that you have to look at the reserve adequacy and aggregate, not at any one individual assumption.

And just a reminder, repeating some of the messages that we've given in the past and at the Investor Day, our IFRS basis reserves, we've got a very significant 30% buffer over any IC reserves. And with our - we have to put a margin on every assumption and that adds up to provision spread versus deviation of just over $10 billion.

We think that our block is reserved among the most conservatively in the industry and we highlighted some of the positive characteristics of our block relative to what we see in the industry. And on top of that in getting to that reserve level, we've strengthened the claims cost in our reserves by almost $11 billion over the last decade.

A lot of that's been offset by a very successful premium rate increase program. And if we onto the morbidity improvement assumption, because I will answer your question on that, at the end of the day I believe - we believe that there are correlations between mortality and morbidity improvements. And in our reserves those assumptions materially offset.

Recognize that there is some judgment there and we also disclosed that the amount of the morbidity assumption zone is $1.6 billion, if experience did deteriorate from that we would add it to rebate program.

The other thing I would point out is that on other assumptions such as our premium increase assumption, we only have - as we disclosed at Investor Day, $0.8 billion embedded in our current reserves. Our outstanding request and what we're seeking for approval is multiple times that, and we could easily justify a more aggressive assumption there.

So, I think all back to say that we're comfortable with the adequacy of our reserves, our experience continues to track in aggregate close to our assumptions, and we'll do our usual comprehensive review of all the assumptions in next year's annual assumption review..

Just on that $1.6 billion that you also mentioned at Investor - is that, do you think that is sensitivity to 1% change in the morbidity assumption or is that not correct?.

That's what we've got embedded for our morbidity improvement assumption in total, which is - and that amounts to about 5% of our aggregate reserves right now..

The following question is from Gabriel Dechaine of NBS. Please go ahead..

First of all on the infamous LTC, I appreciate the neutral commentary both for the quarter and for the longer period, but when I look at the core SOE for the U.S. segment it looks a negative experience - on experience loss $20 million or so.

Can you tell me what drove that if not - if it wasn't LTC?.

In terms of policyholder experience for the quarter, in total for the Company it was a positive as Phil highlighted. In terms of U.S., we had a modest loss in policyholder experience. We actually had that - we had claim gains in the quarter and then we had some lapse losses. So that's what drove the U.S. experience.

But I think overall for the quarter it was a very positive quarter for policyholder experience..

I agree with that, but just want to drill into that one, what product line was it?.

On the U.S. side - U.S. was driving the lapse losses..

And then just the illustration I guess of the cost saves over time, where am I going to see those in your SOEs, is that unallocated overhead line or is it just going to be something that flows through and to expect the profit just to kind of visualize how I should track in - I should be tracking the progress?.

So, it won't overflow through the unallocated overhead line. All parts of our organization are subject to cost discipline as we move forward from here. So a component of it you'll see in unallocated overhead would be my expectation.

But then within the SOE you'll see it as a component of inforce business, and you'll see it as a component of new business as well as we become more efficient across all aspects of our businesses in all geographies..

Manulife Bank looks like a little bit - in profits $10 million versus a normal run rate, what's - is there anything going on there?.

There is really two drivers to the drop in the Bank earnings. The biggest one is just actually a timing of investment that we've been making in both projects - new projects and in the marketing spend, we have two campaigns out in the market currently.

So that was the biggest driver, the results are just investment gains that we received in the prior year that did not repeat this year..

So that initiative spending kind of going to be temporary or I assume it would be?.

Yes, I think it's - the initiative spending is really just a timing issue. It's a similar span to what you would see normally..

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

Jus to go back to Steve on maybe some of the differences on long-term care, your disclosure at Investor Day seems to have prompted or maybe aided the industry in being more forthcoming. So I will thank you for getting the ball started on that.

I fully acknowledge that if we're going to compare against what other entities are doing there, there are different estimates or assumptions embedded in LTC. But specifically for the change that Prudential made with respect to morbidity.

In your view, do you have any sense that this is going to represent a best practices approach that your regulators are going to want to see or was this just very specific to that company and not something that you feel will be adopted by all LTC issuers, providers?.

It's difficult question to answer in terms of what will happen. I think, I guess, what I consider best practice is what our requirements are under the IFRS, which is updating all the assumptions and making sure that you've got current assumptions on everything.

I do know that the NAIC is discussing this so I guess stay tuned for where it heads, but when I look at best practices I'm quite comfortable with where we sit..

And as I mentioned I think if we go line by line on this, there are certainly a few assumptions in which your estimates or your assumptions look more conservative. So I think that's your point. There are put and takes with this stuff and the one negative may have offsets for you when you look at this again next year..

Yes, I think - it's got a lot of attention and there are certainly judgment in that item and that's why I started my comments with looking at reserves and aggregate in the size of the total margins that we have got over $10 billion because I think it's easy when there is one point of comparison to just focusing on that, but I think it's as you just pointed out you go line-by-line, there are puts and takes and certainly on the more bid or the improvement it's an error of judgment..

So let me just add, I think Steve is absolutely right.

You can look at anyone assumption isolation, need to look at the entire package and I'll just reinforce the comment that he made and that is on the Canadian IFRS, I think it provides a more robust method of reserving and a more up-to-date method, which we obviously believe is the appropriate way to reserve in this space.

And again on the Canadian IFRS, we were also subject to an independent assessment of our assumptions we do that regularly and again we think that's the best-in-class practice as well..

I'm going to move on to the core earnings in the quarter. Obviously, the core experience gains line has been a major swing this year for many of lives in the first half of '18 relative to what we saw last year.

I think we discussed last quarter that looking at this line now, we are going to see predominantly the core policyholder experience along with expenses. So as far as experience gains and expenses were concerned, I'm somewhat curious here, what's the governing factor that drives a experienced gain when it comes to expenses.

You new disclosure this quarter is obviously helpful in that regard, but are we basically looking at something like this quarter core expense growth was 4% and that's better than what you folks had embedded in terms of an expectation for this year as a result you end up with an experience gain, is it a simple as that or is it more underlying what drives expense experience in the given quarter?.

As we become more efficient and drive efficiencies in the organization, you will see the benefits of that follow through our expense experience. At the moment expense experience is actually headwind for us and we are very focused on making sure that we close that GAAP in experience that we have. So you will see the benefits in the experience line.

You will also see a benefit in the new business line as well as we become more efficient in growing the organization at scale, which is particularly important to our operations in Asia where our sales fall to EBITDA are very material on the insurance side.

And that shouldn't look when and I said earlier all aspects of our business are subject to cost discipline, ramps up to part of that so you will see definitely the improved efficiency footing through one earnings too..

And one quick one to wrap for you as well Phil, your LICAT ratio up three point sequentially, you mentioned to us another $400 million freed up in capital from the ALDA sales.

At what point do we start to see more aggressive action taking against the new leverage ratio is two to three points of LICAT, organic growth in terms of that ratio reasonable on the track you are at and when can you start to deploy that towards paying down that leverage ratio?.

Yes, we are very focused on achieving and we remain committed to achieving our long-term leverage ratio target of 25%. We've made some progress in the quarter largely as a consequence of an improvement in the denominator higher equity.

As we look forward from here we will be evaluating capital issuances, maturing issuances in the context of our long-term debt management strategy. And you can expect to see progress towards achieving our 25% target in the next two to three years..

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

Just maybe on the expense side you talked about some of the benefits and targets and how it flows through still on experience and then new business.

And maybe this involves Steve but is there and point where you foresee getting to able to or remain ability to release reserves around your expense assumptions as a result of the cost reduction or is this really just going to be an experience in new business item?.

I'll go back to one point that Phil made - so what goes through the source of earnings as I am sure aware is that the variance versus our valuation assumption. And as Phil said we still have a gap versus the valuation assumptions. So we have first we got to make progress on closing that gap before we would think about anything related to reserves.

But to the extent that we drive those efficiencies will show up in new business gain line and then the core experience gain line..

So this isn’t really an assumption item then?.

No. In the short-term, no..

Yes okay….

That would something we would revisit when we have the consistent track record of expense gains..

And then just on Canada I guess if back out the tax benefit the improve group experience and core earnings increased 11%. I mean that’s kind of what I would suggest be in my view of the high end of what I would expect. Can you maybe talk a little bit about some of the drivers here I know last year may be the experience was not so favorable.

And then yeah can you maybe build into the discussion expected profit was down 8% year-over-year so we’re seeing kind of conflicting messages maybe you kind of package that together? Thanks..

Let’s me start and Steve you can jump in, so I think you pointed it out the biggest driver was clearly the improved experience that we had in our group business. We had a very strong quarter really across all the product lines but the one that swings the most is the long-term disability part of group.

Where we've had a very significant focus on that business and I’d say it's successful because we have a very shared interest with the employer right. So you can you think about how you manage that business it’s really three kind of core components you replace the business on an annual basis based on experience.

You can adjust plan design and you can make sure that you have the appropriate support to get employees back to work that have an incident. And in all those cases you know we're joined at the hip with our clients in making that happen. So that was the biggest factor in moving the experience.

And you're right I mean the significant earnings growth I saw in that quarter is not the kind of increase that you would expect to see in the mature Canadian market. So backing that out as you sort of look forward is not inappropriate. From an earnings and inforce perspective Steve I am sure can add to this, but there was a number of items.

Some of them I would say one-offs but there was some items like we did a big reinsurance deal in the first quarter that has a – with ongoing headwind towards our earnings and inforce. There were some changes at the long end of the yield curve which is drag them down. So it is a combination of factors..

So just add a couple things also new business gains were a nice increase based on product actions that were taken in 2017 that helped drive the year-over-year comparison. And on the earnings on inforce Mike is correct in terms of the number of smaller items. I would say we don't expect that downward trend to continue.

It was a number of smaller items Mike hit on slightly lower interest rates and impact of hedging and some seasonality in results. So that's what was driving this quarter’s result..

And maybe if I can get just one clarification, in Asia the SOE Steve the other line draw over 48% increase or was up 48% on a pretax basis.

What goes into other in the SOE?.

Other yes, other - in the quarter there is a number of tax items actually and it's really geography between the tax line and the other line. So, for instance minority tax on minority interest so it’s primarily geography..

The following question is from David Motemaden of Evercore. Please go ahead..

I just had a follow up on LTC and a lot of my questions have been asked already. I just wanted to ask just what exactly are you assuming for morbidity improvement within your reserves. This is a reference Prudential had assumed a 1% a year improvement for 20 years just wondering if you could help us understand what you're assuming there..

Our are assumption its under 0.5% for 25 years on the padded basis and the other comment I would make is that you can think of morbidity improvement. I think some in the industry may have the improvement on the total morbidity cost so the total claims cost.

Our assumption is only on incidence which would represent a little over half of the total claim cost..

And just as you said it's - I guess under 0.5% a year for 25 years on a padded basis, what is it on a best estimate basis if you could help me with that as well?.

I don't have that handy..

And I guess kind of mentioned it, but I guess just wondering on the various factors in morbidity.

Could you just describe how incidents or frequency trends have been trending as well as severity?.

Sure, so I guess what we’ve seen in our results is and we talked about this in previous quarters. We've seen higher claims costs overall offset by higher lapse rate. In terms of incidents I don't think we’ve seen any increasing trends there. The last time that we looked at the assumptions what we saw was that we had strengthen our termination rates.

And then in terms of utilization how much benefit being utilized we’re seeing that that's coming in around expectations and there hasn't been any trend there..

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

About Japan, we’ve got core earnings kind of declining here and insurance sales declining, annuity sales are up and you’ve got improving NBV and NBV margin. So looks like you're changing the mix of this business.

How long does it, which drove the decline kind of year-over-year in terms of core earnings there have been sort of running flat and how long does this improvement in business mix take before its going to translate into some core earnings list?.

This is Anil, so as we had indicated in quarter one as well we have faced a lot of competitive pressure in Japan in the quality segment and we kind of held up ground and been very prudent about some of the pricing actions.

In addition to that as you rightly pointed out we been driving a different product mix and focusing on a foreign currency product that we kind of distributing through both our bank and retail channel which is really kind of translating to some of the margin gains that you're seeing in Japan.

What we have focused in Japan is as you pointed out is firstly to ensure that we kind of get the right product mix but also we have a couple of products on the anvil that will be targeted to the core market in a bid to kind of reverse the trajectory of the first half.

So a combination of factors plus driving a much tighter discipline on expense should kind of augur well for the NBV margin in Japan..

So, I'll maybe just add renewals coming, so I think that the business mix change and the focus on margin and profitability is being a driving force for us over a number of years and we're now starting to see that much more so in the new business value.

The other factor that I think we should all just remember it and at least consider when we look at our quarterly results is that we had an exceptional quarter, two of last year. In fact in Japan Q2 of '17 was - demonstrated a growth of 45% on the prior year from an NBV perspective. So that's also impacting the year-on-year numbers to some extent..

And how long before generally it takes some of this improvement in mix in NBV margins, how long before that translates into some core earnings growth, maybe Phil might be able to throw color on that..

The NBV that we generated, you'll see through flowing into the earnings in two ways, of course new business value and growth in the expected emergence of inforce. We do see new business gains from Japan, and I think if you look at our earnings results, there's an element of resilience given the rate in sales declined in the quarter.

But I think you can expect to see a gradual build in expected earnings from inforce. But the impact of that is naturally slower than new business value, which does indicate the full value at the point of sale.

So, probably just improving new business gains and then little bit of modest impact uptick from expect - in expected profit?.

That's right..

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

I'd like to follow up on a couple of questions that are already been asked. First, on Asia, so the new business gains are about 35% of your pre-tax earnings and we are clearly seeing the APE start to slow down and insurance sales slowed down, and at some point type - I suppose you'll maximize the benefits of all this margin improvement.

I guess from going with this is maybe for Roy, is it conceivable that Asian earnings could actually just really slow in 2019 or do you have something else in store to drive the story going forward?.

We see that we've got a lot of drivers for future growth. And one of the biggest driving force is that we've been able to execute against that the last two or three years is just getting scale in markets where we've had significantly less scale.

You know that we've got a very strong and big business in Hong Kong and where we had scale like we do in Hong Kong, our margins are actually very comparable to the leading players. But in many of our other markets we're only just building scale. So we still see quite a lot of runway to improve the margin.

If you look at the margin of our entire business in Asia, it's still significantly lower than some of our leading competitors. So, we think scale has a big room for growth. We think that again driving continued focus on bancassurance, we've got seven exclusive bancassurance arrangements in Asia. We've already penetrated about 5% of that customer base.

So that again will be a driving force for us to continue to grow our business. And then again on the agency front, we see productivity improvements as well as absolute growth in agency. So, we certainly do not see or our forecasting a reduction in our momentum in Asia. We think that we're going to build on a strong platform.

We got some headwinds as Anil pointed out, in relation to Japan. But we're quite optimistic about the growth prospects..

Let's flip over to long-term care. And again, maybe slightly different way of looking at it. When Peru took the mortality or sore morbidity hit, essentially what they said is, their estimates, their experience was just not showing, it was not showing up as mortality - morbidity improvements.

Now, Steven, you said that your experience is consistent with your best estimate assumptions.

Were you talking about assumptions in totality or individually? Essentially, are you seeing them - the 0.5% or maybe call it 1% if you do it unpadded, are you seeing that kind of morbidity improvement?.

You're right, the experience that we're seeing that's naturally is an aggregate, it's actually very difficult to separate out and identify morbidity improvement. And I think that's one of the reasons why there's been debate on this. There are studies that demonstrate that there is evidence of morbidity improvement in general population.

I think it's been more challenging to get definitive in the insured population. But it's something that we're continuing to study closely as we will for all the assumptions..

So if you can't get it for the general population, can you get it for your book or is it not reasonable to estimate for your own book of business?.

We continue to drill in and evaluate it. It's hard to isolate..

So at this point you don't know whether you're getting morbidity improvement?.

We believe we are, but it is an area of judgment..

Then, if that's worth say, $1.6 billion.

Is the $1.6 billion based on the best estimate assumption?.

The $1.6 billion is the padded assumption..

So presumably it would be something materially higher or higher on an unpadded basis?.

It would be higher? I don't know. I don't have it handy what the number would be unpadded..

And then you're saying that the other assumptions are sufficiently strong enough to offset that i.e.

like the rate of price rate increase or acceptance and morbidity or mortality route that you're so definite that those are sufficient to offset the padded or unpadded morbidity improvement, is that what you're telling us?.

Yes, I guess what I'm saying is we still believe that there is a correlation between mortality improvement and morbidity improvement. So, I'm not saying that it's an area that we don't believe our assumptions.

The one assumption that I pointed out where I think it's clear to understand that is the assumption around future price increases, where we've embedded $0.8 billion in our reserves. We've made progress since that disclosure at Investor Day, and our outstanding premium increases that we're seeking is multiple times that.

So that assumption is definitely conservative..

The following question is from Linda Sun-Mattison of Bernstein. Please go ahead..

I have just two quick questions. Number one, is on the Asia growth. I noticed that all sides of Japan growth has been very strong especially in Hong Kong, where some of your competitors or peers have seen a slowdown of mainly in Chinese visitors business has declined, but reported strong growth, and also in other Asia.

I try to understand how going forward in next 12 months this may change or whether we can see this momentum to continue?.

You're right that we have seen ongoing momentum in Hong Kong and out of Asia. And it's on the back of few things, and Roy alluded to a few of them. So one is, we have been investing in our agency channel both in terms of taking the absolute number of agents up, but also kind of focusing on the active agent ratio as well as on productivity.

Some of our banca partnerships, from a penetration perspective we still have low single digit penetration and there is still a lot of runway for us to be able to kind of tap into some of the opportunity on the banca partnerships. Importantly, we've been spending a lot of time investing in simplifying and digitizing our customer experiences.

On one side it has a positive impact on customer experience, but also it is - it has a knock on impact on our cost. And that in effect will also kind of lead to margin improvements as well as the momentum that you're mentioning about. So, we feel the foundation is tough in Asia, it's pretty solid.

And we have seen consistent growth over the past many quarter and feel pretty positive and confident about the future as well..

And Linda, as you mentioned, we've been absolutely bit more conservative in relation to our appetite for MCV in Hong Kong, and that's certainly put us in good state as that market has come, under challenge. So we think again that's been a driving force for our Hong Kong business.

That is the focus on the domestic Hong Kong market so that certainly helped..

And just on following on this Southeast Asia and we know that you had management change or challenge in Indonesia but I believe two quarters ago you got the new management CEO in Indonesia just want to get a quick update on Indonesia business where you are - are you seeing possible market share gain?.

Yes, so we have a new leader in Indonesia as you rightly pointed out and our first half and second quarter results included have been very, very strong the APE has been in higher teens and I am talking about the growth rate. The NBV margin is been in excess the NBV growth, sorry has been in excess of 50% in the first half of the year.

So we are seeing some very good traction on account of our focus on driving agency leveraging the bank partnerships and we have significant bank partnerships in Indonesia. We have Danamon, we have DBS who now have acquired the ANZ franchise. So that's starting to kind of yield very good returns to us.

So we feel again a pretty positive and clearly the new leader has made an impact over the last three quarters..

And may I just ask quick follow on question on shift back to North America. The 300 million projection of cost annual cost saving. I try to understand how - what are the assumptions behind this. Are these simply headcount reduction you will see the impact to go through your P&L.

And what may go wrong so that these projective savings cannot be realized?.

So the $300 million it’s actually relatively simply in terms of how we have calculated that benefit. There are three component that I’ll talk about in priority order.

The first is reduced employee costs, employee costs are the most significant cost to the organization and a key driver of the $300 million benefit is the - the voluntary programs that we have pushed in place in Canada and the U.S. So that will be part of the driver very transparent.

The second component will be real estate and again very simple conceptually we’re combining our head office footprints in the United States and in Canada into a single building in each market and that delivers cost savings.

Execution of those actions will be completed over the next 12 to 18 months so you'll see the benefit and the run rate by the end of 2019. And the third component which is relatively modest in the short-term and as a contribution to the overall $300 million by the end of 2019 it’s the consolidation of our legacy IT systems in the U.S.

The really important point there is that by consolidating our legacy IT systems in the United States its gives greater variability in the costs so it translates a fixed cost into more of a variable cost..

And I’ll just add that we’re very confident we deliver and execute against that $300 million site goal. And we’ll deliver a run rate on that in 2019 and beyond that we're already working on other initiatives to deliver against our bolder ambition of $1 billion worth of expense savings. Again we articulated at Investor Day.

So this is really a bigger and much stronger focus for the franchise. We’re seeing it through initiatives but as Phil highlighted earlier, we're seeing it just through the culture and focus on expense management and again in the quarter we delivered real strong expense containment with only 4% growth in our total expense base..

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

I just wanted to revisit your commentary on Asia and your quest for scale. Can you just may be just highlight for us the two sort of they will be more top of mind where you're closer to building scale and having a vast improvement in margin.

Reading from my question - maybe I’ll just let you answer then I’ll give you sort of idea as to why I am asking it?.

Let me start and then I will ask Anil to sort of jump in but again we see obviously Asia as a huge opportunity for us from a growth perspective.

And as I mentioned while in fact as we mentioned at Investor Day in Asia we talked about the fact that four years ago we only had three markets where we had more than $100 million dollars worth of annual IPE sales and now we have more than seven markets.

So we’ve really been on a drive towards getting scale in the markets where we have actually been sub scale. To answer your question specifically Darko, the big driving force is for us on that journey has been bancassurance and agency.

And then more recently our assets on the digital front, but again I just would like to just reinforce on the bancassurance front and obviously we secured the DVS deal, but we've also got quite extensive portfolio of bancassurance, exclusive bancassurance agreement across our portfolio in Asia.

And we’re really working very hard to ensure that we monetize that opportunity. And as I mentioned earlier, we only just penetrated 5% of the 17 million customers that are part of the exclusive agreement. So we think there is a lot of upside to continue down the path of executing on the banking front.

And then again on agency we see growth in two ways one is through the absolute growth of the agency bulk and then secondly through improvement in productivity.

So we again have been executing against that and delivering against that game plan, but we think that we can step that up and take that to new level together with the focus on shifting the product mix to more profitable products. But Anil I am sure you’ve got some other comments that he could add to that..

Yes, so Darko on which markets we believe we’re at scale I think Hong Kong is one of them and we’ve spoken about it. And again the margins that you see in Hong Kong kind of reflects some of the scale benefit that kind of following through.

Singapore again is a good example and again on the bank of the DBS partnership, I mean these were number seven, number eight player not to far back and we now in quarter one are the number one insurance player in the Singapore market.

So that's a good evidence of some of the scale that we are starting to attend in some of the critical markets in Asia..

I guess the concern or the way I would sort of think about this is that with the DBS deal, you're just gaining share or sorry gaining scale but those benefits sort of tear off as we go forward. So without some sort of an inorganic move, the concern is that Asia's earnings growth could slow.

And I guess that - but me no, I can revisit that again with you but I mean that’s the crux of my angle on Asia it’s almost as though we’re still benefiting from DBS just proportionately but that should peter off as we go into 2019 and 2020..

I mean it’s different in different markets Darko and the beauty about our channel mix is that we have a pretty diversified channel mix across agency and across bank. So we are not overwhelming the kind of dependent on one or the other.

So for example in Hong Kong, as we were explaining agency is a key driver whereas in Singapore it’s the DBS partnership. So, it’s slightly different in different markets and I guess that is where the mix and the balance that we have in our distribution channel comes through..

And let me just follow up with - I guess a stupid modeling question just a sort of - could you peak my curiosity with one of the things I saw on the sub pack. When I look at Canada, sales in every single category is down year-over-year, and I realize there is a large case sale last year that didn’t repeat.

I'm just curious would all these sales reductions across-the-board why are commissions actually up 8%.

And is there some sort of - I don’t and a cruel thing that happens at the end of the year given the current state of sales?.

It’s Mike, let me talk about sales. I think from a commission perspective, we continue to play renewal commissions on a big portion of the block.

So it’s not going to be completely related to some of the sales that we see, but we are - the big driver in the drop in sales in Canada was a very high large case sale that we had in the previous year and there is natural volatility in that part of the market.

But you've also seen that our insurance business, is a bid insurance sales have been down as we repriced and really tried to focus on the quality of the business and the margins that we are getting on those business.

We are pleased with that and that it showing up now in our business gains and our new business value, which is starting to form very well, but we do want to continue to grow our volumes and we recently announced our reentry into PAR, which we think we're quite pleased with the early response we had to that.

So we are expecting that to be quite positive on the individual perspective, but certainly, I think your core question around are we happy to have sales declining, no we are not. We wanted to get to the point where we were comfortable with the risk in the margins that we have and now it's all about growing our volumes..

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

Thank you, Operator. We'll be available after the call if there is any follow up questions. And have a good morning everyone. Take care..

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