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Manulife Financial (NYSE:MFC)

Q4 2012 Earnings Call

February 07, 2013 2:00 pm ET

Executives

Anique Asher

Donald A. Guloien - Chief Executive Officer, President and Director

Stephen Bernard Roder - Chief Financial Officer and Senior Executive Vice President

Paul L. Rooney - Chief Operating Officer, Senior Executive Vice President, Chief Executive Officer of Manulife Canada Ltd. and President of Manulife Canada Ltd.

Cindy L. Forbes - Chief Actuary and Executive Vice President

Robert Allen Cook - Senior Executive Vice President and General Manager of Asia

Scott Sears Hartz - Executive Vice President of General Account Investments

Craig Richard Bromley - Executive Vice President of Japan Operations and General Manager of Japan Operations

Analysts

Peter D. Routledge - National Bank Financial, Inc., Research Division

Mario Mendonca - Canaccord Genuity, Research Division

Gabriel Dechaine - Crédit Suisse AG, Research Division

Tom MacKinnon - BMO Capital Markets Canada

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Darko Mihelic - Cormark Securities Inc., Research Division

John Aiken - Barclays Capital, Research Division

Michael Goldberg - Desjardins Securities Inc., Research Division

Sumit Malhotra - Macquarie Research

Operator

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the Manulife Financial Corporation 4Q '12 and 2012 Earnings Conference Call for Thursday, February 7, 2013. Your host for today will be Ms. Anique Asher. Ms. Asher, please go ahead.

Anique Asher

Thank you, and good afternoon. Welcome to Manulife's conference call to discuss our fourth quarter and full year 2012 financial and operating results.

Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investors Relations section of our website at manulife.com. As in prior quarters, our executives will be making some introductory comments. We will then follow with a question-and-answer session. Available to answer questions about their businesses are the heads of our U.S., Canada, Investments and General Account Investments.

Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are implied in making forward-looking statements, and actual results may differ materially from those expressed or implied.

For additional information about the material factors or assumptions applied and about the important factors that may actual -- 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.

[Operator Instructions] With that, I would like to turn it over to Donald Guloien, our President and Chief Executive Officer. Donald?

Donald A. Guloien

Thank you, Anique. Good afternoon, everyone, and thank you for joining us today. I'm joined on the call by our CFO, Steve Roder, as well as several members of our senior management team, including our Asia General Manager, Bob Cook; our U.S. General Manager, Craig Bromley; our Canadian General Manager, Marianne Harrison; our Chief Operating Officer, Paul Rooney; our Chief Investment Officer, Warren Thomson; our Executive Vice President, General Account Investments, Scott Hartz; our Chief Actuary, Cindy Forbes; our Chief Risk Officer, Rahim Hirji; and our Treasurer and Head of Investor Relations, Steve Moore.

Let us start the call today with some highlights of the progress that we made on our strategic priorities in 2012. We continued to develop our Asian opportunity to the fullest. And in the past year, we had record insurance sales of $1.4 billion and record wealth sales of $5.7 billion. We expanded our distribution platform across the region, securing and deepening strategically important distribution agreements with key partners in Japan and Indonesia, which contributed to record sales for the year. We became the first foreign-owned life insurer to commence operation in Cambodia. And we achieved strong growth in our professional agency force in several key markets ending the year with a record number of agents of over 53,000, representing an increase of more than 3,000 agents.

We also continued to grow our wealth and asset management businesses in Asia, Canada and the United States. Manulife asset management added significant new institutional mandates totaling over $7.8 billion, and gross fund flows of $33 billion into retail accounts. We ended 2012 with a total of 65, 4- and 5-star Morningstar-rated funds, an increase of 7 funds from 2011. In addition, we ended the year with an all-time record funds under management of $532 billion.

We continue to grow our balanced Canadian franchise. And in 2012, we lead the market in group business sales for most of the year. We set records in Group Benefits, with sales of over $1 billion, Affinity Markets with sales of over $100 million and Manulife Kansas mutual funds, recorded a deposit of $2.1 billion and assets under management of over $20 billion. Manulife Bank reported record-lending assets of $21 billion during 2012, and we expanded our distribution reach of welcoming new advisors, extending existing relationships and enhancing support to our distribution partners.

In the United States, we continued to grow our higher ROE, lower risk business. We achieved record sales in Retirement Plan Services of $6 billion, and mutual fund deposits of $13 billion, which contributed to record funds under management in both businesses of $72 billion and $42 billion, respectively, a total of $114 billion in these 2 businesses alone.

Life insurance sales increased 12% over 2011, largely driven by innovative new product offerings with a more attractive risk-reward profile for our shareholders. And we had significant success in gaining additional state approvals for in-force price increases on our long-term care business, bringing our total now to 43 states.

These successes are the result of both good execution and the considerable investment that we have made in distribution and branding. This morning, we announced our fourth quarter and full year 2012 financial results. Let me share some of the highlights with you.

As you can see on the chart, we've enjoyed a positive progression in our earnings. In 2010, we had a loss of $1.7 billion, a small gain in 2011, and we ended 2012 with net income of $1.7 billion, hopefully, this bodes very well for future years.

The net income of $1.7 billion was achieved despite basis changes of $1.1 billion and goodwill charges of $200 million. Core earnings in 2012 were $2.2 billion despite the increased expenses associated with additional hedging, specific investments in growth initiatives and significant additional strain caused by lower interest rates. And finally, on the top line, we ended 2012 with record sales in both our wealth and our insurance businesses.

As you already know, we achieved our 2014 equity and interest rate hedging targets 2 years ahead of schedule. And while this comes at a cost to both core earnings and net income, it substantially reduces the volatility in our earnings going forward. After year end, we have taken advantage of robust Japanese equity markets to do further hedging and now all markets, including Japan are hedged to target. From here on, we will be hedging on a strictly opportunistic basis in order to maintain our volatility within our targets.

The capital ratio for MCCSR of our primary operating company was 211% at the end of 2012, a 7-point improvement over the prior quarter. Movement in this ratio was further dampened by our significant hedging programs in place and is also estimated to increase by approximately 4 points on a pro forma basis from January 1 to 215% as a result of revisions to capital rules.

In conclusion, we are pleased with the progress we've made in 2012. As we embark on 2013, I'm confident that Manulife is very well positioned to deliver the disciplined and sustainable growth required to meet our 2016 objectives.

With that, I'll turn the call over to our CFO, Steve Roder, who will highlight our financial results and then open the call to your questions. Thank you.

Stephen Bernard Roder

Thank you, Donald. Hello, everyone. Let's start on Slide 6, where we indicate the financial highlights for the fourth quarter of 2012.

In the fourth quarter, we reported net income attributed to shareholders of approximately $1.1 billion, up from a loss of $69 million in the fourth quarter of last year. In terms of our operating performance, we reported core earnings of $537 million. We increased insurance sales by 49% and delivered an increase in wealth sales of 31% over the fourth quarter of 2011. And we generated new business embedded value of $245 million, an increase of 71% over the fourth quarter of 2011.

Investment gains this quarter continued to be strong at $368 million, $50 million, of which is included in core earnings. And we reported in-force embedded value of $38 billion as of December 31, 2012, an increase of $1.9 billion over the prior year.

Turning to Slide 7, you will see our progress on core earnings for the quarter and for the year. Our fourth quarter core earnings were $537 million, an increase of over $160 million from the same quarter a year ago. The main drivers of this relates to increased fee income on higher funds under management and a significant improvement in new business strain, reflecting pricing actions and improved business mix in 2012. Core earnings declined $19 million from the third quarter of 2012. I will talk in more detail regarding this on the next slide.

Full year core earnings for 2012 were $2.2 billion, in line with the prior year, as improved new business strain increased fee income and a non-recurrence of Property and Casualty Reinsurance claims were mostly offset by higher macro hedging costs and amortization of pension costs in addition to higher business developments and project-related expenses.

Fourth quarter net income of $1.1 billion represents a significant improvement over the $69 million loss in the same quarter last year. For the full year, we reported net income of $1.7 billion, a substantial improvement of $1.6 billion over last year's results.

On Slide 8, you can see the core earnings in the fourth quarter of 2012 were lower than the third quarter of 2012, largely as a result of a decline in core earnings in Asia due to higher acquisition costs on increased wealth sales, higher insurance sales expenses and systems costs. The notional value for our macro hedging program increased in the quarter resulting in higher expected hedging costs. These items were partially offset by a release of excess Property and Casualty Reinsurance provisions related to the Japan earthquake and tsunami, which we included in the corporate segments, and modest improvements to core earnings in Canada and the U.S.

Turning to Slide 9. You will note that the fourth quarter's reported income significantly benefited from $318 million of investment gains over and above the $50 million included in core earnings. Reported income also included $264 million in material and exceptional tax items related to prior year's. We also benefited from a $100 million gain related to our hedged variable annuity guarantees. Partially offsetting these benefits was an $87 million charge primarily related to some model refinements relating to a value -- valuation system conversion, and a $57 million restructuring charge for severance related to the company's Organizational Design Project that we announced at Investor Day.

On Slide 10 is our source of earnings. Expected profit on in-force increased 2% on a current constant currency basis largely due to higher fee income, partly offset by lower expected earnings on variable annuity businesses. New business strain increased as a result of the significant increase in wealth sales in the quarter, where we cannot defer acquisition expenses and a change in new business mix. Experience gains reflect favorable investment and variable annuity experience, as well as the release of Property and Casualty Reinsurance reserves, partly offset by experience losses on the macro hedge program. Management actions and changes in assumptions largely reflect expected macro hedging costs and of systems conversion which refines the modeling of policy liabilities.

While total earnings on surplus for the quarter was in line with the third quarter of 2012, core pretax earnings on surplus increased $33 million, largely due to a release of tax-related interest provisions, whereas noncore pretax earnings on surplus declined $34 million. Noncore earnings on surplus are primarily mark-to-market gains other than available-for-sale equities and seed money. Income taxes benefited from income earned in lower tax jurisdictions and the favorable impacts of material and exceptional tax items.

Turning to Slide 12 -- Slide 11, you will see that our total insurance sales for the fourth quarter were $929 million, up 49% over the fourth quarter of 2011. This was driven by record Group Benefits' sales in Canada, which were more than double prior year's levels, strong growth in Asia, including record sales in Indonesia, and a double-digit improvement in U.S. insurance sales, reflective of successful new lower risk product offerings. For the full year, we reported record insurance sales of $3.3 billion, with record set in a number of our businesses, including strong contributions for most territories in Asia.

Turning to Slide 12 on wealth sales. Fourth quarter, wealth sales of $10.4 billion increased 31% from the fourth quarter of 2011, due to record mutual fund sales in Asia, Canada and the U.S. and strong sales growth in our pension businesses in North America. Partially offsetting the growth were lower sales of variable and fixed annuity products, which is in line with our actions to restrict sales of these products.

For the full year, wealth sales of $36 billion were up 4% from the prior year and represent a new record, excluding the sale of variable annuities.

On Slide 13, you can see that our strong business growth is also reflected in our premiums and deposits, both on a costing and on an annual basis.

For wealth products, fourth quarter premiums and deposits of $17.5 billion increased 76% over the fourth quarter of 2011 and includes the closing of a substantial institutional mandate won by a Manulife Asset Management and strong results in our mutual fund and pension businesses. Insurance, premiums and deposits increased 18% in the fourth quarter to $6.6 billion, reflecting strong growth in Asia and Group Benefits in Canada. premiums and deposits in 2012 were 14% higher than in 2011.

Turning to Slide 14, you will see that the fourth quarter 2012 new business embedded value for Insurance and Wealth products increased 71% over the fourth quarter of 2011. We're very pleased with the fourth quarter growth in our NBEV over the prior year period as it demonstrates the successful execution of our strategies, including the repositioning of our product mix and repricing. This reaffirms that the profitability of our underlying new business continues to improve. On a full year basis, total new business embedded value was slightly over $1 billion, an increase of 7% over the prior year, reflecting pricing actions on our insurance business, partially offset by the higher cost of hedging for our VA business.

Turning to Slide 15, we reported in-force embedded value of $38 billion as of December 31, 2012, reflecting an approximate increase of $2 billion over the prior year. The increase was largely, driven by the interest on embedded value and the value of new business. Partially offsetting this increase were the impacts of shareholder dividends and an unfavorable currency movement in the year due to the strengthening of the Canadian dollar versus the U.S. dollar and the yen.

Turning our focus to the operating highlights of our divisions, beginning with the Asia Division on Slide 16. As discussed previously, core earnings for the Asia Division declined from the third quarter to $182 million. Core earnings were impacted by a number of nonrecurring items in the fourth quarter.

Sales results for the fourth quarter continued to be very robust. Fourth quarter wealth sales in Asia more than doubled prior year levels fueled by the successful launch of the Strategic Income Fund in Japan, record sales in Indonesia and the successful start of the Employee Choice Arrangement in Hong Kong.

Insurance sales increased 20% over the fourth quarter of 2011, driven by record sales in Indonesia and increasing term sales in Japan, ahead of pricing increases.

Total annualized premium equivalents, excluding variable annuities, increased 46% versus the fourth quarter of 2011 driven by strong wealth sales. Total weighted premium income, excluding variable annuities, grew 42% versus the fourth quarter of 2011 due to sales growth and persistency. For the full year, Asia Division had record insurance sales and wealth sales, excluding variable annuities.

On Slide 17, you will see our Canadian Division operating highlights. Our Canadian division generated core earnings of $233 million in the fourth quarter of 2012, up 2% from the prior quarter. Insurance sales of $399 million in the fourth quarter were more than double the fourth quarter of 2011, largely due to record sales in Group Benefits.

In terms of wealth performance in the quarter, record mutual funds and strong Group Retirement Solutions sales were more than offset by actions taken to moderate variable annuity sales. Our group businesses in Canada continued to lead the industry. The Group Benefits' annual sales of over $1 billion is an industry record and the Group Retirement Solutions has led the industry in defined contribution sales for 11 consecutive quarters.

Manulife Bank also achieved record assets in the quarter, exceeding $21 billion. In terms of full year performance, Canadian Division more than doubled the Insurance sales in 2012, but wealth sales were down 7% versus the prior year, largely reflecting actions to moderate variable annuity sales.

Moving on to Slide 18 are the highlights for the U.S. division, which generated USD 297 million of core earnings in the fourth quarter of 2012, up 3% from the prior quarter. Fourth quarter wealth sales of USD 5.9 billion represented an increase of 31% from the fourth quarter of 2011, despite a 78% decrease in annuity sales over the same period. The increase in wealth sales reflected record mutual funds and Retirement Plan Services sales.

Fourth quarter insurance sales increased 13% from the same period of 2011, largely due to strong sales of successful new life product offerings. Wealth sales for the full year increased 3%, but were impacted by the decline in annuity sales. life insurance sales increased 12% on a full year basis, reflected the price increases and are focused on new products with more favorable risk characteristics.

Turning to Slide 19. Funds under management reached another all-time record of $532 billion as of December 31, 2012, driven by positive net policyholder flows and strong investment experience.

Slide 20 demonstrates that our investment portfolio continues to be high quality and well diversified. We continue to view this as a group strength.

Slide 21 speaks to the impact of net credit experienced on fourth quarter 2012 earnings. We had positive credit experience in the quarter, largely due to credit recoveries.

Slide 22 summarizes our equity market and interest rate risk sensitivities, which continue to be ahead of our 2014 risk reduction goals. In the fourth quarter, we further reduced our equity market sensitivity by adding $250 million of TOPIX futures notional value to our macro hedging program and approximately $700 million of guaranteed value to our dynamic hedging program.

Slide 23 summarizes our capital position for the Manufacturers Life Insurance Company. We ended the quarter with a capital ratio for our main operating company at 211%, an improvement of 7 points over the third quarter of 2012. The improvement in our capital position reflects strong earnings in the fourth quarter, the reinsurance of a portion of the Japanese life business, and a $200 million preferred share issuance executed during the quarter.

You will note that we expect a number of changes to materialize in the first quarter of 2013, reflective of the 2013 OSFI MCCSR guidelines. First, an estimated positive impact of 4 points due to amendments to lapse risk capital requirements. And second, the phasing over 8 quarters of the changes related to IAS 19R regarding pension obligations. These changes will reduce MLI's MCCSR ratio by 1 point by March 31, 2013 and by a further 4 points by the end of 2014.

Turning to Slide 24, I will now address 2 topics, which may be on the minds of our shareholders. The first topic is with regard to strain and expectations going forward. A major contributor to strain this quarter was our substantial increase in sales. Approximately half of the increase in strain over the third quarter will be attributed to the increased wealth sales in the fourth quarter. As you know, upfront acquisition costs for the mutual funds or pension sales are not deferred.

We expect that we will continue to see higher wealth strain as we continue to grow this business. The remainder of the increase in strain is largely attributed to changes in product mix in JH Life which we expect will return to more normal levels on a go-forward basis.

The second topic is with regard to outlook for our equity hedging program. Our objective is to maintain our equity risk within our target levels and continue to hedge opportunistically. In January, we added another $250 million notional of TOPIX hedges on an opportunistic basis. We have now hedged over 80% of our underlying exposure to the TOPIX index.

On Slide 25, in summary, in 2012, we've made substantive progress against our strategic priorities. We enjoyed positive progression in earnings since 2010, and improved 2012 net income by $1.6 billion as compared to 2011. We delivered core earnings of $2.2 billion, in line with 2011. We generated record annual insurance and wealth sales in 2012. We ended the year with MLI's MCCSR ratio at 211%, a 7-point improvement over third quarter 2012. We reported record funds under management of $532 billion. And we achieved our 2014 hedging targets more than 2 years ahead of schedule.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Peter Routledge of the National Bank Financial.

Peter D. Routledge - National Bank Financial, Inc., Research Division

A couple of questions just on Asia. First of all, in Indonesia, it looks to me like there was a loss for the quarter. Maybe you could explain what's driving that.

Stephen Bernard Roder

Yes. Peter, Steve, here. Indonesia, you may be aware, interest rates declined very substantially in the quarter. The decline was something in the region of 60 basis points. And so that loss in Q4 in Indonesia is very much attributable to the direct impact of the interest rates.

Peter D. Routledge - National Bank Financial, Inc., Research Division

So just -- on that, I mean, is that -- I mean, yes I did notice about the Indonesian 10-year rates. I mean, are we sort of in the cycle of URR charges every third or fourth quarter in that country?

Stephen Bernard Roder

No, I don't believe so. But I think the other impact in Indonesia was also we have very, very strong sales in Indonesia. So apart from the interest rate factor there's also a strain issue in Indonesia this quarter.

Peter D. Routledge - National Bank Financial, Inc., Research Division

And Japan you just had a blowout quarter in terms of mutual fund sales and the fixed annuity product, the Australian dollar product, what explains that boom in sales?

Stephen Bernard Roder

Well, we've found a product that the Japanese market seems to particularly like, which is Strategic Income Funds. We have some fresh management in Japan, we've taken a fresh look at what's available in our Investment Division locker. They like the look of these products. And they were successful in securing some excellent distribution of that product through one of the major banks, in particular, but also more broadly than that and that product has really taken off in Q4. And in fact, we're feeling very good about that. At the same time, the Australian dollar product has continued to trade -- or sell particularly well, in addition to that. So it would appear that the Japanese consumer is increasingly interested in non-yen-denominated assets.

Peter D. Routledge - National Bank Financial, Inc., Research Division

Yes, does that worry you at all in terms of tariff?

Stephen Bernard Roder

Oh, no. Paul?

Paul L. Rooney

No, I think the Japanese consumers are very familiar with taking a variety of different kinds of currency risks. And they manage that risk in their overall asset allocation, which predominantly remains extremely safe and extremely yen-oriented, being deposits in Japanese banks.

Peter D. Routledge - National Bank Financial, Inc., Research Division

So they're not -- they're just getting diversification there, not shorting their own country?

Donald A. Guloien

No -- I mean, no. I mean, the vast majority. Japanese hold a huge amount in cash deposits and they're seeking to diversify. What this really speaks to, which Steve identified, is the strength of the Japanese wealth management market, the huge amount of savings, it's all sitting in cash and when you have a good product, good distribution alignment, you can sell a lot. Those sales continue past the end of the quarter. This product we just launched. At the start of December, we sold 800 million to date of this. We're selling it all around the world in great numbers, not just Japan, but it's a unique offering in Japan and it performed extremely well.

Operator

Our next question is from Mario Mendonca of Canaccord Financial.

Mario Mendonca - Canaccord Genuity, Research Division

One sort of detailed question. The -- Steve, the run-off business essentially, which I think is just your U.S. annuity business, first, is that -- is it appropriate to say that, that's the only business that's in run-off? And if so, could you talk about what the core earnings were from that business alone in 2012?

Stephen Bernard Roder

Mario, great question. I can't give you that information now. We, the business that you described is indeed one of our major run-off businesses, but it's not the only one. There will be others around the group. And as we go forward, we are looking at whether we can improve the dislodging [ph] in relation to that. It's a work in progress at the moment.

Mario Mendonca - Canaccord Genuity, Research Division

So just for the business as a whole and maybe not for this particular business, could you give us maybe ballpark percentage of what your total earnings are -- were in 2012 that may have come from that collection of run-off businesses?

Donald A. Guloien

Well, Mario, the -- when they talk about run-off we're not selling the new business, for instance, the variable annuity. We -- Steve just want to isolate variable annuity because we've also kept back very significant sales of no-lapse guarantee universal life in the United States, we also cut back very significant in long-term peer sales. Now to argue your point, the earnings from those things will not disappear for a very long period of time, nor will the capital allocated to them, right? We allocate a lot of capital to them, so this continues for a very long period of time. I can say -- tell you that I will be safely retired and doing all kinds of different things before there's any significant denudation of profit coming from those lines of businesses. They go for a very long period of time, which gives us lots of time to build up the earnings strain from other businesses, which is exactly what our business plan for most of them.

Mario Mendonca - Canaccord Genuity, Research Division

Okay, then just perhaps related then, the core result was up about 3% year-over-year or 2012 versus 2011, the core earnings, about 3%. Now to get to your $4 billion, and this is where the noncore comes in or the nonrun-off business comes in. To get to the $4 billion it does imply a rather meaningful acceleration in that earnings growth over the next 4 years. Is there anything you can give us on maybe the cost-cutting initiative that are in place to make that $4 billion a little bit more maybe a little more probable?

Donald A. Guloien

Well, it's a component but it's not the major component by far. We've invested a heck of a lot in the business as you can see the growth -- I mean, when you see new business embedded value in the quarter, up 70%, the other investments that have been made -- I mean, Steve we're quite open where we missed on the course, generally because we've made investments in the future. That is all reaping exactly what we want to have happen, which is increased sales for the right kind of products and that better margins.

Stephen Bernard Roder

Mario, I think the other thing I'd say is that I don't think anything has changed significantly or materially even from the Investor Day. So the fact that we have a narrow miss on call this quarter but we, frankly, have a very, very strong quarter on sales and also on new business embedded value, we're exactly where we were at November Investor Day in terms of our forward-looking plan, ambitions, if you like. In fact, I'd say, are probably rather encouraged because of the strength of the new business embedded value.

Mario Mendonca - Canaccord Genuity, Research Division

So maybe perhaps new business embedded value and the strength of your wealth sales. Those are the things you'd point me to in saying you still feel good about that $4 billion?

Donald A. Guloien

And the strength of the insurance sales. In all of the products that have now been repriced and de-risked for the benefit of our shareholders, right? So all of those things.

Stephen Bernard Roder

I think the other thing, Mario, your -- the question around the expense project, that's continuing on target. There's a lot of momentum in it. We're very happy with where we're going. You see we took a restructuring charge this quarter, which has to do deal with the organizational redesign aspects of that. And no reason to sort of change our expectations around any of that at this time.

Operator

Our next question is from Gabriel Dechaine from Credit Suisse.

Gabriel Dechaine - Crédit Suisse AG, Research Division

Just a little bit of a follow-up on Mario's questions there. I guess if we're supposed to be looking at sales more intently as an indication of your future profitability, can you put it into context like the earnings emergence from the sales that we're seeing today will come in x number of years, hopefully, shorter than what it would have been in the old days for Manulife. Is there a way to kind of give some timing on that? And then I've got a follow-up.

Stephen Bernard Roder

Okay. I think I'll start. It's a difficult question to answer succinctly because it depends on the nature of the products and the product, each product has its own profile of earnings emergence. And also, I mean, the accounting is also different, so we made a point and in relation to mutual funds, for example, we can't defer the upfront costs in relation to mutual funds and pensions. So we've had some strain in the quarter related to the these outstanding sales results related to mutual funds. But that will pay dividends in future as we have earnings from funds under management and the content of those will depend on what happens within the -- in the markets. In relation to the life products, well some of those continues to be products that will give us earnings over a very long period of time. But I'll just ask Cindy if she wants to add anything further on that and whether life is, particularly different from what it was 3 or 4 years ago?

Cindy L. Forbes

Thank you, Steve. No -- Gabriel, it's Cindy. No, I -- our life sales would have the same earnings trajectory and pattern that they would have had a number -- a few years ago. So there would be no change.

Stephen Bernard Roder

I mean, Gabriel, I think the new business embedded value number is important here. It's not just the sales, but it's also the margin that's attached to those sales and so the strength of that number is -- it might -- to me, personally it's the number I'm probably most pleased with in the quarter.

Donald A. Guloien

Absolutely. The margin -- and I'm glad you got there Steve -- the margin is much higher on them and the downside risk has been significantly attenuated with the products that we were selling in the past, hopefully we'll see a huge benefit to shareholders.

Gabriel Dechaine - Crédit Suisse AG, Research Division

Okay, my follow-up is similar but more focused on Asia, so if Bob or Steve want to take this one. I see the strain coming as a negative for the second quarter in a row, got strong level of sales but in Q2, high-volume of sales triggered a big gain. So I'm just wondering if there's something fundamentally shifting in the mix of the sales in Asia, maybe commission levels are going up in Indonesia, for example. And then relatedly, there is cost that you're investing in systems and branding, is going to be dialing back this year so that we start seeing the earnings coming out of Asia because we've seen the top line for a while now but not so much the earnings.

Stephen Bernard Roder

Okay. Well, let me start on that and then I'll hand off to Bob if he give you some more color. So, first of all, the strain issues this quarter were largely in Japan and Indonesia, and do reflect some very significant insurance and wealth sales. But the wealth sales in particular gives us immediate strain problems. So going forward, we're thinking about how we can give investors better a transparency over our strain data, and we'll be working on that, so that's one aspect. You referred specifically to the branding issue. The branding that we noted in our release was very largely related to what was going on in the Hong Kong market. You may be aware that on the 1st of December this year, basically employees were given the choice of where to take their mandatory provident fund privilege, and we have been a very substantial winner from that. And unfortunately, the costs of the branding do not qualify the deferral. So we had to take a certain amount on the chin on that. However, the assets that are now under our management in that space have increased as a consequence and will benefit the future income. But I'll stop there and then I'll pass off to Bob and see what else he'd like to tell you.

Robert Allen Cook

Yes, and I guess I would add that in the Appendix slides that you have, you can see an 8-quarter history of core earnings from Asia. And clearly, the fourth quarter was an outlier. And our expectation going forward is for a run rate that more reflects the other 7 quarters of history that you see there. Steve is correct that the product mix is the reason why in some quarters last year you saw new business gains and in other -- the last 2 quarters you saw business strain. With the decline in interest rates around the region, the number of products in the portfolio that produce new business gains is significantly reduced over what it was historically. So I don't think we're going to see those kind of results in the future. And in Q4, we had a particular surge in sales in a product in Japan that produces strain, whereas sales increased prior to a planned repricing of the product. Now on the expense side, there will always be some portion of our branding expenses that are more heavily concentrated in Q4 for tactical marketing reasons. But, as Steve said, that was exacerbated this year because of the member choice launch in Hong Kong. And I think that I'll stop there.

Operator

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

Tom MacKinnon - BMO Capital Markets Canada

A couple of questions. The reinsuring of the portion of the insurance business in Japan. Obviously it helped the MCCSR, but you can't get something for nothing, so there's got to be some impact on future core earnings, if you will, in that segment or is there, and what that would be -- what would that be?

Stephen Bernard Roder

Yes, Tom, absolutely right. There no free lunch, right? So it benefited our MCCSR ratio by about 2.5% and we've probably given up about $9 million of annual income on that I think, Cindy, correct?

Cindy L. Forbes

That's correct, Steve.

Tom MacKinnon - BMO Capital Markets Canada

Okay. And then what was driving the decision to -- it looks like you got a release from the provision for the Japan tsunami of $44 million and that was offset by an increasing provision for Sandy at $6 million, so this $38 million of kind of one-timers sitting in that core, if you will, this quarter, is that correct?

Stephen Bernard Roder

Yes, that is correct. I'll just start off with the tsunami and then just talk about the sort of core impact. So you're correct. We set up provisions in relation to the cost claims in relation to the Japanese tsunami and earthquake. And our assessment now based on the information that we have is that we can -- we should appropriately release those provisions so we can see how those claims are developing. And at the same time, we set up a small provision in relation to Sandy. We still think that, by and large, we're not being impacted by Sandy because the estimates of the insured loss on an industry basis still means the vast majority of our exposures are not triggered, and so there's a net benefit there. If you look at the core, this is one of the items within core of a one-off nature, this core. This is one of the beneficial ones. Bob's talked about some of the others, that are going in the opposite direction. We -- I would say, in a big picture we probably got pretty much a breakeven on the one-offs this quarter and the real sort of quarter-on-quarter core story, if you like, in terms of why they're called non-increases is strain. So it's a strain story and it's associated with the very strong sales quarter we have.

Tom MacKinnon - BMO Capital Markets Canada

And the credit experience gain of $26 million, that's a -- is that -- that's in the core as well?

Stephen Bernard Roder

No, that's in...

Tom MacKinnon - BMO Capital Markets Canada

That's not in the core?

Stephen Bernard Roder

No, that's not in core. That's in investment gains. Remember, we capped those at $50 million a quarter.

Tom MacKinnon - BMO Capital Markets Canada

No -- okay, that's included then. That's not investment gain, these are credit experience gains, but that's included in that? Okay.

Stephen Bernard Roder

It's part of the $386 million and we've got -- we have recoveries this quarter which relates to provisions set up.

Tom MacKinnon - BMO Capital Markets Canada

And the restructuring charges, we had some last year that were kind of not -- that were not included in core and then there's some more that are a lot higher this quarter. Like when do they -- when do those stop? And just trying to get a feel for...

Stephen Bernard Roder

Okay, so the -- I'm not from last year, Tom, to be frank. Just looking to see if anyone else remember that. U.S., sorry. It's Q4 2000...

Tom MacKinnon - BMO Capital Markets Canada

No, sorry. Last quarter, not last year, last quarter.

Stephen Bernard Roder

Last quarter. Okay. Well, let's do with the current charge. So the current charge is related to the organizational redesign aspects. So this is basically us reducing the number of layers in our organization to make it more efficient and nimble, and also widening expense control. And as a consequence of that, we have some people who've left the organization leaving the costs associated with that. And we've basically taken a charge that taken into consideration what we've already done and what we're expecting to do over the coming, say, 2 or 3 months. Now I'm not saying that's the end of it. And there may be some bits and pieces as we go forward, as we get further into the E&E project and we start to get some infrastructural redesign executed. I'm not sure what else will come along. I think in 2013, if you take E&E and org redesign together, I -- for the 2013 accounting year, I suspect the whole thing will be pretty neutral because of we will need to invest in some of the E&E projects and also because we won't get the full year benefit of some of the organizational redesign work that we've been doing. But it will add to future years. I think it will add to future years, yes. So by the end of next year, we should be able to articulate...

Tom MacKinnon - BMO Capital Markets Canada

But the benefit would be in core and the cost would be outside of core, is that the way you're going to disclose it?

Stephen Bernard Roder

Yes. But it's [indiscernible].

Tom MacKinnon - BMO Capital Markets Canada

Perfect.

Donald A. Guloien

No, no. The account -- technically, the benefit is in annuity. It will reoccur year-over-year. Remember, the purpose of core is to demonstrate the earnings capacity of the company. Once you paid the one-time cost of reducing costs, that's a gift that keeps on giving in terms of its contribution earnings. Absolutely appropriate. I mean you wouldn't have us keep that out of core 20 years from now.

Stephen Bernard Roder

Get it out of net income, unfortunately, Tom. [indiscernible] in net income. You got away for doing that. But no, that's -- the purpose is to make it understandable.

Operator

Our next question is from Joanne Smith of Scotia Capital.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

I just want to go back to Japan for a minute. And you talked about the fact you have this very good new mutual fund, the Strategic Income Fund, that's being very well received in the market there. You also talked about the Aussie dollar fixed annuity product. Can you tell me how much of you -- of the volume that you've seen in terms of the growth is being driven through banks?

Stephen Bernard Roder

We're just -- I'll ask Bob to answer that one.

Robert Allen Cook

I would say of the total wealth sales, the 80% is coming from banks and the balance from securities firm. Of the mutual funds itself, it's almost all coming from banks.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Okay. How do you modulate the amount of volume that you're getting there so that the Aussie dollar fixed annuity product doesn't become disproportionately large relative to the other products that you're selling in Japan? Because from what -- the way that I'm thinking about it is -- some other companies are talking earlier today about you need to be very careful about the bank channel because a lot of volume can come in, in a very short period of time. And so some other companies modulate that volume via pricing mechanisms?

Robert Allen Cook

Yes, I mean, we would set our pricing on a regular basis too. I mean, it accounted for, as I say, maybe 20% of our total wealth sales in Japan. So it's not a huge chunk of the sales that you're seeing there. And we would monitor our competitive position constantly so that we don't get swamped by a business at a low margin.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Okay, great. And also, the other question that I have with respect to the strain. I know this is probably not something that you could really answer, but maybe you could help us think about what level of normalized strain, assuming that these types of volumes that you reported in the fourth quarter are not necessarily sustainable. Let's just say that the 40%, 30% growth in insurance and wealth sales modulates -- moderates to something like 15% or 20%, the $146 million in new business strain, how do we think about that number and where that goes from here?

Donald A. Guloien

Joanne, the thing is the terms of that is what happens in interest rates. As Steve said earlier, the combination of high sales with interest rates dropping in Indonesia, I mean, anytime that happens, we will have strain show up. The most important part that you don't understand is where our valuation works, because once we've taken that strain the future profit emergence is just like in the other product, right? So we take all the adjustment in the first year and that will produce a stream of earnings just as good as any other product in the future, assuming conditions, of course, don't change. So any time you have a rapid downward movement in interest rates, you can expect an increase in strain. The other aspect, as Steve touched on earlier, which is we talked about the mutual fund business and it's a really good example but, well, it isn't necessarily negative in the first year, but it certainly doesn't contribute much because of the upfront cost. But in all subsequent years, it will produce a very substantial benefit, which is why everyone who looks at that business, looks at it on an EBITDA basis, we don't do it because it's not a significant part of our accounts, but you can rest assured with the kind of volumes that we're generating, we're generating a big storehouse of future earnings.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Okay, okay. I guess maybe we can attempt it in a different fashion. The new business embedded value is certainly indicative of the future profits of the business. So did we talk about yet -- maybe some somebody else asked this in a little bit different way, have we talked about how that new business embedded value emerges into earnings over time?

Cindy L. Forbes

Joanne, this is Cindy. We don't normally talk about that so I can't give you an answer on the call today in terms of how earnings emerge from new business embedded value. But I think that you can -- there's nothing about business were writing today that will be different than what that was written in the past. So I wouldn't expect a huge change in the emergence of earnings, maybe slightly different because of the volume of mutual funds.

Donald A. Guloien

Well, in fact they have better margins, right?

Cindy L. Forbes

And they have better margins.

Donald A. Guloien

So I think it is better in the past because the risk...

Cindy L. Forbes

Well, it's higher, but not the timing, sorry.

Donald A. Guloien

Right.

Cindy L. Forbes

I wasn't very clear. The timing wouldn't be much different, obviously, higher because of the higher margins.

Operator

Our next question is from Darko Mihelic of Cormark Securities.

Darko Mihelic - Cormark Securities Inc., Research Division

Just 2 real simple questions. The first is, Steve, after all is said and done here, should we expect anything different with respect to your tax rate on a go-forward basis? And secondly, I just want to understand, sorry to circle back on strain, but rates went lower in Indonesia and Japan and it's causing some strain. Am I also to understand then that you're really not considering any pricing action whatsoever in Asia?

Stephen Bernard Roder

Well, let me start off with that one, Darko. Regarding the tax rate, no, we don't expect any particular change to our tax rate. I think we have given an indication previously of what we would regard as a normalized average effective tax rate for us every quarter is different because it's depends where the earnings emerge. But no, there's no fundamental change there. Regarding on repricing, we've actually carried out a significant amount of repricing activity. But maybe Bob would like to comment some more.

Robert Allen Cook

Yes -- no, I mean, just to clarify, the increased strain in Japan was the result of kind of the last round of sales of a product that has now been repriced.

Darko Mihelic - Cormark Securities Inc., Research Division

Okay. And in Indonesia, it doesn't sound like there was any contemplation there of any changes in pricing there, is that correct?

Robert Allen Cook

Well, in Indonesia, there's kind of an ongoing plan for a gradual repricing of the portfolio in recognition that we really don't expect interest rates to go back up in Indonesia given the ongoing strong performance of the economy of that country.

Donald A. Guloien

So what, rate dropped about 60 basis points. So anytime you have a sudden drop, you're going to end up with an increase in strain. But again, the earnings profile of the future is as good as any other product.

Darko Mihelic - Cormark Securities Inc., Research Division

Well, I guess what I'm also trying to dig around on is, I mean, your sales numbers look great, and maybe perhaps part of that could be that your pricing relatively aggressively versus competitors in Asia. I just want to get a sense of whether or not you're kind of holding back on some price increases to just keep the sales numbers coming in?

Donald A. Guloien

No, to the contrary. I think we have shown a pattern, not only in Asia but in North America. As you know, we've been, in fact, leading the pack in terms of raising prices. The notion of strain most of the companies in Asia report strictly on an embedded value basis so that's all the attention paid to. And some of our competitors have been quite a bit slower to react to lower rates than we have. So no, we are very committed to maintaining adequate margins on the products.

Operator

Our next question is from John Aiken of Barclays Capital.

John Aiken - Barclays Capital, Research Division

Any disclosures we saw in the impact that foreign exchange had on embedded value, and you come back into it from the -- on the expected profit from in-force. I have to assume that a lot of this has to do with the depreciation of the Japanese yen. So with the continued depreciation of the Canadian dollar against the yen, particularly since year end, how does this shade your outlook for being able to achieve the financial goals in 2016, given the fact that Japan continues to be a major contributor to the Asian earnings?

Donald A. Guloien

Yes, John, I'll deal with the second part of your question. It's a relatively small impact in terms of 2016 earnings, one that's entirely manageable. In fact, with the increase in sales in Japan and other places, we'd expect to wash out. In terms of how it impacted the quarter, I'll turn it over to Steve.

Stephen Bernard Roder

Yes, there was no material impact in the fourth quarter and regarding the Japanese yen. Regarding the outlook, as you know, John, we don't hedge the foreign-exchange based future income streams. We don't think that's what our shareholders want us to do, so we will have wins and losses depending on how the Canadian dollar moves against other currencies. But the U.S. dollar and the Japanese yen, in particular, they were -- therefore, given the decline in the Japanese yen year-to-date, right now we probably expect a minor negative on that in Q1 I think stand. But Having said that, I think it pales in comparison with what happens in relation to equity markets and our sales activity there. We don't see it as a major factor.

Operator

Our next question is from Michael Goldberg of Desjardins Securities.

Michael Goldberg - Desjardins Securities Inc., Research Division

I'd like to get back to the run-off variable annuity, I guess, from the States. And, Don, you said that earnings are going to continue to emerge here for years into the future. But could there be a time when it's run off to an extent that it's worth selling the remaining contracts? Or is it so blended in with the rest of the U.S. wealth business that there isn't any infrastructure expense issue to be considered?

Donald A. Guloien

Yes. Good question, Michael. It runs off gradually over time, with lots of stance, notice and so on. As we said before, when we reprice, especially, with a very conservative basis, the Canadian reserve is applied to it, there are likely very substantial gains in this business going into the future. And that's not to say that end-to-end it's been a great experience. But after having bolstered reserves and all the things that we have done, we would like, our shareholders to get the benefits of that, having rate capital, we've done all of the things that we've done to support that business to get the benefit when the earnings emerge it's very substantial. The other part of your question in terms of its relation to the other business. You're absolutely right. That business was sold by the Manulife Companies in some cases with capital maintenance agreement and so on. So if one did want to sell it, it would actually be a more complicated transaction trying to disentangle it from the rest of the business and you can mention all kinds of implications. But the real core story here is that there's a lot of profitability that is deferred into the future and I would hate to deny shareholders the benefit of getting those earnings that they so justly deserve. And this business is very, very well provided for and very, very high likelihood of returning both earnings and capital to their benefit in the future, so I'm not anxious to sell it.

Michael Goldberg - Desjardins Securities Inc., Research Division

I was just trying to see if it was possible. By selling it, to accelerate the realization of that value?

Donald A. Guloien

No, you're right. I mean, you -- but you'd give up a stream of profits associated with it. And in an extreme situation, yes, one could sell those businesses. I mean, we see an indication of that in other places. And that can be done, but in our opinion, that is not in the interest of the shareholders. It's also, we have to be aware of the policyholder implication. We sell a lot of things through distribution channels in the United States. They sell a variety of products. They sell life insurance, they sell 401(k) products, they sell mutual funds for us. And for us to announce that one portion of business that they've sold in the past that we no longer want to be associated with the guarantees associated with those so we're passing those guarantees to another organization, especially if it wasn't as well capitalized as we are. They bought it from us, they bought it from us in the first instance. They look to us to be their provider on a whole a range of products. It's an issue that would have to be dealt with our distributors, if we were to do that. So for all those reasons, the sale of variable annuities, we've had our challenges with it, but it's well-provided for and it's also provides us with a great platform to sell the other things that we are selling currently through those same channels of distribution.

Michael Goldberg - Desjardins Securities Inc., Research Division

On the Long-Term Care in the U.S., you're now up to 43 states that have approved the rate increases on the in-force business. Are you in a position where you can say anything now about your -- about how you feel about the strengthening that you did some time ago of your reserves and your PfADs as to whether it was too much, too little or just right?

Donald A. Guloien

Well, that's pretty definitive. And as you've looked at the PfADs, I mean, people know that it's a number with a certain number of digits with it. To say day it's just right would be a strong statement. But we're very, very comfortable with what we've taken, the reserving action. We're also very pleased. This is, here, our right, our legal right to increase prices if experience justifies them. And we're very pleased that 43 states have agreed with us that what we're asking for is reasonable and provided for by the legislation. It makes you feel good about the Long-Term Care, the ability to do that. We're still watching the experience on the existing block. And it hasn't been so favorable. It's not a big issue, it's not something that has us concerned, but we release anything we'd want to make sure we've got it exactly right. And I guess quite, frankly, I'd rather have the next price increase from all the states, not just for 43 from all the states before we'd be sure about the right number is going forward.

Michael Goldberg - Desjardins Securities Inc., Research Division

Okay. And I guess the one other question I have is on the total of $368 million of gains. As you said there's $26 million of credit, and then 2 other components are yield enhancements and origination of alternate investments and as you know, I kind of think of the origination of the alternate investments as being an ongoing sort of unique item for Manulife, is there any way that you can break out the remaining -- the remainder between the yield enhancement and the origination of alternative investments in the gains?

Donald A. Guloien

Well, Michael, maybe I should explain the process because I think this is one that has the capacity to sort of confuse a lot of people in what are these gains. And I think you understand this better than most, I know that for a fact, but when the premiums come in, we price against a long-term return. And let me just use a fun number, I'll take 5%. So we assume that we're going to invest in a blended investment that'll produce 5%, that's strictly a hypothetical number. When the cash flow starts coming in, unfortunately, we don't have investments ready to go. The ideal world would be a premium comes in and we have an investment available that very second to match it off and we will be able to achieve our targeted yield. What tends to happen though is the cash flows will come in and we park in treasuries for the time being or cash in some cases and wait for the right investment opportunity. That may take 30 days, that could take 2 months, it could take 3 months, it could take a year to find the right investments that will achieve our target mix. What happens is when we bring in the cash flow, we take a hit to earnings either a loss or a reduction in the amount of earnings that we would assume. And then when we find the right asses to bring it up to our target mix, we get the benefit of it at that time. That's mainly what that reflects, is us is putting it to use. And we said it before on the call in many occasions that we're sitting on way more treasuries than we would like to have. People have complemented us on our safe credit mix that we've tried to save. But that isn't where we want to be. We would rather have that money put to use in our target asset mix. And in the fourth quarter, we were able to do that in considerable measure and that was what contributed to the earnings.

Michael Goldberg - Desjardins Securities Inc., Research Division

Okay, you didn't answer my question, Don.

Donald A. Guloien

Yes, how much came of it from that?

Michael Goldberg - Desjardins Securities Inc., Research Division

How much came from yield enhancements versus origination of alternative investments, because I know the credit is $26 million?

Scott Sears Hartz

Yes, and -- Michael, it's Scott Hartz. We don't actually have a terrific attribution of that the way we calculate it. So I feel a little reluctant to give you a number. I mean, we're working on doing that. But I would just reemphasize Donald's point that over the longer term, the alternative assets, we have a certain mix and you wouldn't expect in the long term those gains to be repeatable, some quarters we'll originate -- we'll have good originations, in some quarters we won't. So there'll be positives and negatives there, but as far as an attribution goes, it's a little difficult the way we calculate it to back out an attribution. It really is how the whole mix of assets you put on the books varied versus your reserve assumptions. To break it out by component is a bit difficult.

Donald A. Guloien

That's why we cap, Michael, in core earnings calculation. We number it $50 million, somewhat arbitrarily because we don't want people taking that $368 million and multiplying by 4 and annualize because we're being very clear with people that was an exceptional quarter that is not likely a repeatable event. I mean it'll happen sometime in the future, who knows when. But it might be a long time before the number gets that big. I know you like to -- you believe that we have superior investing capability and you'd like to figure out what the more repeatable portion is and break that down and I'm telling you, that very difficult to do.

Michael Goldberg - Desjardins Securities Inc., Research Division

Okay. My last question concerns John Hancock Retirement Plan Services. And you know that there was departure of a key competitor that benefited your sales this quarter. How much was the benefit and I guess this is just a one-time item?

Craig Richard Bromley

Well, this is Craig Bromley. The RPS business had higher sales yes, in part, because of the transaction than our competitor, but in general, there is more movement in the market right now due to greater disclosure of fees. So figuring out exactly how much is related to the transaction and how much is related to sort of general movement in the industry is very difficult. But I would say that we expect that to, this kind of high sales volume, to actually continue as the industry continues to basically relook at all of their plans and change providers. So I wouldn't expect a big drop-off or anything like that in the sales.

Donald A. Guloien

Yes, Michael, I guess I'd add to that, we've invested a huge amount in trying to develop the capability to take that 401(k) business upscale into bigger case sizes and you should expect and hold us accountable for showing increasing 401(k) sales every quarter going into the future.

Operator

And now our next question is from Sumit Malhotra of Macquarie Capital Markets.

Sumit Malhotra - Macquarie Research

Two quick numbers questions, please. First off, just to return to the investment gains. Don, you said that you chose the $50 million number somewhat arbitrarily. And if I -- in terms of, equity and core, and if I look back at this line over the past couple of years, it's consistently been higher than that number so maybe this is more for Steve. Under what circumstances would you consider increasing the amount of investment gains that you include in the core calculation? And the second part of that is, correct me if I'm wrong, but the investment gains are obviously being used as somewhat an offset to the interest rate sensitivity. With that having come down substantially, are you effectively of the view that the realization of the gains is going to be lower going forward?

Donald A. Guloien

Sumit, I'll let handle the first. I think what he'll do is tell you how we derived the $50 million based on historical observations and then not a lot more than that. But the second one, I -- we're not understanding it at all. There's no offset there against the interest rate impacts. Could you help us with that second part of the question?

Scott Sears Hartz

Yes, and it's Scott. There is a component. When we did REVs, which we did largely in 2010 and 2011 we were able to release PfADs when we de-risked the interest risk we were able to release PfADs and that went into investment gains, so it was a component when you look back over the past 3 years the gains have been very high. Our component, not so much in this past year, but in the prior 2 years has been due to the derisking of the interest rate and surely will not continue going forward because we're very comfortable with where we are there.

Stephen Bernard Roder

Just on the first question, Sumit. The, we've gotten the $50 million by averaging the gains from the first quarter of 2007 and that average came in at $80 million. And we wanted to ensure that whatever we include in core earnings was included conservatively relative to that. So it's almost referenced to the subjectivity around that was -- we chose $50 million. We could've chosen $60 million, but it's $50 million. Terms of where we change that going forward, no, absolutely not until we have a very significant different evidence upon, which to make such change. I think it would inappropriate to do that.

Sumit Malhotra - Macquarie Research

And the second one, the last one is around the use of reinsurance, you mentioned the reinsurance in Japan this quarter and I believe you had a similar move in the U.S. a couple of quarters back. With the MCCSR now comfortably above 210%, could you give me an idea, is the use of reinsurance in 2013 likely to be limited by Manulife now that the capital seems to be in very good shape?

Stephen Bernard Roder

Well, I think will go to the look for opportunities where we believe that the net benefit to shareholders makes such a transaction appropriate. So if we can get the pickup in our MCCSR ratio and the amount of earnings we give up is tolerable to us and the effective cost of the transaction is therefore desirable, then we're open-minded to doing more of that. But we have nothing on the blocks at this moment. But that is not to say we won't have similar, small transactions to that nature going forward.

Donald A. Guloien

And you should not assume that the only motivation for doing any reinsurance transactions is capital relief. In fact, the biggest transaction that we executed in 2012 was designed to release us from a risk. It's not one on everybody's mind right now, but we talked before about the way these SPDA locks work and they can be very, very difficult in the time of rapidly rising interest rates. Again that is not something that people see happening in the next 12 months, but when it happens we may not get a lot of notice of that, so we would just as soon not have that risk because it's not a good risk-reward profile for investors.

Operator

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

Anique Asher

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

Operator

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

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