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Manulife Financial (NYSE:MFC)

Q3 2012 Earnings Call

November 08, 2012 2:00 pm ET

Executives

Anthony G. Ostler - Senior Vice President of Investor Relations

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

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

Cindy L. Forbes - Chief Actuary and Executive Vice President

Scott Sears Hartz - Executive Vice President of General Account Investments

Analysts

Tom MacKinnon - BMO Capital Markets Canada

Steve Theriault - BofA Merrill Lynch, Research Division

Mario Mendonca - Canaccord Genuity, Research Division

Gabriel Dechaine - Crédit Suisse AG, Research Division

Doug Young - TD Securities Equity Research

Robert Sedran - CIBC World Markets Inc., Research Division

Michael Goldberg - Desjardins Securities Inc., Research Division

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

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

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

Sumit Malhotra - Macquarie Research

Operator

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the November 8, 2012, Manulife Financial Q3 Financial Results Conference Call. Your host for today will be Mr. Anthony Ostler. Mr. Ostler, please go ahead.

Anthony G. Ostler

Thank you, Michael, and good afternoon. Welcome to Manulife's conference call to discuss our third quarter 2012 financial and operating results. Today's call will reference our earnings announcement, statistical package and webcast slides, which are available in the Investor Relations section of our website at manulife.com.

As in prior quarters, our executives will be making some introductory comments. We will then follow with a question-and-answer session. Available to answer questions about their businesses are the heads of the U.S., Canada and General Account Investments.

Today's speakers may make forward-looking statements within the meaning of securities legislation. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied. For additional information about the material factors or assumptions applied and about the important factors that may cause actual results to differ, please consult the slide presentation for this conference call and webcast available on our website, as well as the securities filings referred to in the slide entitled Caution Regarding Forward-Looking Statements. [Operator Instructions]

With that, I'd like to turn the call over to Donald Guloien, our President and Chief Executive Officer. Donald?

Donald A. Guloien

Thanks, Anthony. Good afternoon, everyone, and thank you for joining us today. I'm joined on the call today by Steve Roder, our CFO; as well as several other members of our senior management team, including our U.S. General Manager, Craig Bromley; as well as Jim Boyle, who has been working with Craig through the transition of our U.S. operations. I would like to take the opportunity today to personally thank Jim for his substantial contribution to John Hancock and to Manulife companies. He's very capably managed our U.S. operations through a period of significant challenge and change, and we will certainly miss him and his leadership.

We're also joined by our Canadian General Manager, Paul Rooney; Warren Thomson, our Chief Investment Officer; Scott Hartz, our Executive Vice President of General Account Investments; Cindy Forbes, our Chief Actuary; and Rahim Hirji, our Chief Risk Officer.

This morning, we announced our third quarter 2012 financial results. We've made significant progress towards the achievement of our strategic priorities this quarter. Let me share with you some of the highlights of that progress.

We delivered record insurance sales in Southeast Asia. Tracking ahead of expectations from our expanded distribution relationship with Bank Danamon in Indonesia, we further enhanced the distribution network with additional partners in Malaysia and Japan.

We had strong sales on our North American Mutual Fund business, and John Hancock Mutual Funds was designated the Preferred Fund Family by Edward Jones. This recognition affirms our position as a world-class provider of asset management services.

Our balanced Canadian franchise continued its steady advancement. Our group businesses led the industry in sales, delivered strong Affinity sales and record net assets in Manulife Bank. We further improved our business mix in the United States with the launch of redesigned, lower risk products in our Long-Term Care business. We also achieved record third quarter sales in the 401(k) business and generated positive net flows in mutual funds, which contribute to another record funds under management for the company. We achieved all this despite the macroeconomic climate.

I'm also very proud of the fact that we have now achieved our 2014 equity and interest-rate hedging targets, needless to say, 2 years ahead of schedule. As you know, this hedging comes at a cost, but it's a cost worth bearing as it substantially reduces the volatility of our earnings going forward. As you know, this quarter, we incurred a $1 billion charge for basis changes. As a reminder, these relate to products and businesses that are not a substantial part of our go-forward business plans and also relate to the macroeconomic environment. Steve will talk about these in more detail in a few moments. We also incurred a $200 million goodwill write-off associated with the Canadian Individual Insurance business largely due to the continued low interest rate environment.

At the request of analysts and investors, we introduced the core earnings metric to help investors better understand the long-term earnings capacity of our businesses. In the second quarter, we indicated a number of items over the past 2 years have impacted the achievability of our 2015 earnings targets. While the environment continues to put pressure on our businesses, we are making very substantial progress towards our strategic priorities and have increased our focus on improving the efficiency and effectiveness of our operations globally.

We have shifted our goal of $4 billion in net income by 2015 by roughly a year, and we are now targeting $4 billion of earnings -- core earnings in 2016. I say roughly a year because we're talking about core earnings as a metric for this target. And with other charges, the net income would understandably be slightly lower than that. So our target for 2016 is to deliver higher earnings with a higher degree of consistency and sustainability and significantly less macroeconomic volatility, and we're well along the path to achieving that. We look forward to updating you on our strategic and financial objectives at our Investor Day next week.

Let me conclude by saying that we are pleased that we continue to make substantial progress towards our strategic priorities ahead of schedule and on equity market and interest-rate hedging targets. The quarter was not without its challenges and the macroeconomic environment will continue to provide more challenges. Despite these continuing headwinds, we've been able to grow our businesses, improve our product mix and protect our margins. I'm confident that our strategies are the right ones and they will continue to yield results for shareholders.

With that, I turn it over to Steve Roder, who will highlight our financial results in more detail and then open up the call to more questions.

Stephen Bernard Roder

Thank you, Donald, and hello, everyone. Let's start on Slide 6, where we indicate the financial highlights for the third quarter of 2012. This quarter, we reported a net loss attributable to shareholders of $227 million, which largely reflected the impact of a $1 billion basis changes charge and a $200 million goodwill write-off. In terms of our operating performance, we reported core earnings of $556 million in the third quarter.

Insurance sales declined 8%, as expected, versus the third quarter of 2011 as a result of the non-recurrence of an event in the prior year in the U.S. We delivered a 4% increase in wealth sales over the third quarter of 2011 and generated new business embedded value of $178 million.

Investment gains this quarter were $413 million, $50 million of which is included in core earnings. We ended the quarter with an MCCSR ratio of 204%, and our capital position is further supported by our significant hedging programs.

Turning to Slide 7, you will see our core earnings for the last 5 quarters. Core earnings measures the underlying profitability of our business and removes mark-to-market accounting volatility as well as material and exceptional items. While this metric is relevant to how we manage our business and offers a consistent methodology, we want to point out that it is not insulated from macroeconomic factors, which can have a significant impact. We've defined core earnings to include up to $200 million of investment gains per annum. We will cap core investment gains included in core earnings based on year-to-date experience, i.e., there will be a cap at a maximum of $50 million in Q1, $100 million year-to-date in Q2, et cetera. Floor year-to-date investment gains included in core earnings will be 0. Our third quarter core earnings were $556 million, a decrease of $68 million from the third quarter of 2011 primarily due to higher pension and business development costs within the Corporate & Other division.

On Slide 8, you can see that core earnings decreased in the third quarter of 2012 as compared to the second quarter, largely related to Japan and Hong Kong. We have significant new business gains in the second quarter in those businesses in anticipation of product and tax changes, but these did not recur in the third quarter. Core earnings in the Canadian division improved sequentially due to growth in in-force earnings, favorable tax gains and improved new business strain.

U.S. core earnings also improved sequentially due to higher in-force earnings, lower new business strain and improved policyholder experience.

Corporate & Other core earnings were impacted by a one-time second quarter policyholder gain from the settlement of accident and health treaties.

Turning to Slide 9, you will note that the significant impacts on reported income relate to a $1 billion net charge for our annual review of our actuarial methods and assumptions and a goodwill charge of $200 million reflecting the impact of continued low interest rates on our Canadian Individual Insurance business. Partially offsetting these charges were investment gains of $413 million, $50 million of which have been included in core earnings in accordance with our new definition of core. The net loss, excluding the direct impact of equity markets and interest rates, was $139 million this quarter.

Turning to Slide 10, you will find the major components of the $1 billion basis changes charge. The largest of these relates to the impact of the current macroeconomic climate on our lapse and withdrawal assumptions for the U.S. Variable Annuity Guaranteed Minimum Withdrawal Benefits, as well as lapse assumptions for certain U.S. Universal Life products, and updates to bond fund return parameters for segregated fund guarantees. There is a further $244 million charge component for updates to the actuarial standards of practice related to equity calibration for stochastic models used to value segregated fund liabilities.

This was partially offset by a $358 million net favorable impact for a number of other items, both positive and negative. Positives relate to mortality and morbidity assumptions, net updates to expense assumptions, refinements to modeling of corporate spreads and refinements to the margins on our dynamically hedged Variable Annuity business, as well as a number of other refinements in the modeling of policy cash flows. Partially offsetting these favorable impacts were updated lapse assumptions in Japan and Canada and the net impact of refinements to the modeling of cash flows and updated assumed return assumptions for alternative assets.

On Slide 11 is our source of earnings. Expected profit on in-force increased due to the impact of markets on the release of segregated fund PfADs and a small portion related to the basis changes charge. The impact of new business decreased as the second quarter benefited from record sales in Japan and Hong Kong prior to tax and product changes. This was partly offset by an improvement in North American Insurance business mix. Experience gains reflect the favorable impact of higher equity markets and investment activity, partially offset by the impact of lower corporate spreads.

Management actions and changes in assumptions were adversely impacted by the basis changes charge this quarter, the write-down of goodwill and the expected cost of the macro hedge program. Earnings on surplus increased primarily as a result of mark-to-market gains on seed capital and available-for-sale equities. Income taxes benefited primarily from income earned in lower tax jurisdictions and losses in higher tax jurisdictions.

Turning to Slide 12, you will see our total insurance sales. Insurance sales were $596 million, down 8% over the prior year. This was primarily driven by the non-recurrence of an event in the U.S. in the third quarter of 2011. Excluding this, sales were in line with the prior period. The sequential decline in insurance sales reflects the declines in Hong Kong and Japan, respectively, post product and tax changes which I referred to earlier, as well as a single large case transaction that drove record Group Benefits sales in the second quarter.

Turning to Slide 13, you will see our total wealth sales. Wealth sales increased 4% versus the third quarter of 2011 primarily due to strong sales in Asia, driven by the continued success of fixed annuity product sales in Japan and increased bond fund sales at Manulife-TEDA, our China joint venture, as well as strong pension and mutual fund sales in North America. I'll provide more details for the divisions in a moment.

On slide 14, you can see the total premiums and deposits of $16.7 billion, which represented a 7% increase over the prior year period. Insurance premium and deposits were up 1% over the third quarter of 2011, reflecting strong in-force growth in Asia and Affinity in Canada, partially offset by a decrease at John Hancock Life. Wealth premiums and deposits increased 10% over the third quarter of 2011 driven by growth in Asia, as well as mutual fund and retirement businesses in North America.

Turning to Slide 15. We see the total new business embedded value for insurance and wealth was in line with the prior period. Insurance new business embedded value increased 36% due to repricing, as well as higher volumes and improved business mix at John Hancock Life. Wealth new business embedded value declined 35% primarily due to the impact of lower margins at Manulife Bank and lower sales of variable annuities. New business embedded value declined sequentially due to the reduction in insurance sales in Japan and Hong Kong, driven by product and tax changes in the second quarter of 2012, as well as the aforementioned single large case transaction in Group Benefits that did not recur in the third quarter of 2012.

On Slide 16, you will see our Asia division operating highlights for the third quarter. Our Asia division generated core earnings of USD 231 million driven by in-force earnings growth, largely offset by expenses related to expansion initiatives. The Asia division delivered insurance sales, which were in line with the prior year period. Record insurance sales in Southeast Asia were offset by expected lower sales in Japan due to product changes in the second quarter of 2012. Wealth sales in the region were 22% higher than the third quarter of the prior year due to the continued success of fixed annuity products in Japan and increased bond fund sales for Manulife-TEDA in China.

Asia annualized premium equivalents, excluding variable annuities, increased 6% over the third quarter of 2011 largely as a result of the strong wealth sales this quarter. However, they were down sequentially due to the expected lower insurance sales in Hong Kong and Japan, in line with the product and tax changes. Asia total weighted premium income, excluding variable annuities, increased 13% over the third quarter of 2011 due to strong persistency of our in-force business.

A couple of notable highlights in the third quarter. We're tracking ahead of our expectations in regard to our expanded distribution relationship with Bank Danamon in Indonesia and have further enhanced our distribution network with additional partners in Malaysia and Japan.

I would also like to draw your attention to our separate disclosure for Indonesia in the statistical information package. Effective from this quarter, we will be providing this additional disclosure.

We're very pleased with our overall performance in Asia as we continue to execute on our strategy.

Moving on to Slide 17 in our Canadian division. We generated $229 million in core earnings in the third quarter, which reflected a decline of $30 million compared to the same period of 2011. While new business strain improved over the period, it was more than offset by normal variability in claims experience. Insurance sales declined 7% from the third quarter of 2011. This was largely due to the decline in group benefit sales reflecting normal business variability and product actions taken to shrink our individual insurance sales of guaranteed long duration products, consistent with our lower risk product strategy.

You will note that our Group Benefits business led the market in sales the first half of 2012. Further, Individual Insurance sales of non-guaranteed long duration products increased by 10%, while sales of guaranteed products declined.

Wealth sales declined marginally versus the prior year period despite solid gains in mutual fund and Group Retirement Solutions sales. Manulife Mutual Funds' gross sales increased 18% from the third quarter of 2011 and was the fastest-growing mutual fund complex over the past 12 months, as measured by assets under management. Manulife Bank continued to show solid growth, achieving record assets of over $21 billion.

And on Slide 18 are the highlights for the U.S. division, which generated USD 289 million of core earnings in the third quarter. This represented an increase of USD 24 million from the third quarter of the prior year primarily due to lower new business strain and a more favorable sales mix, which was partially offset by unfavorable policyholder experience.

Third quarter wealth sales increased 5% from the third quarter of 2011 despite a 59% decrease in annuity sales over the same period. Excluding annuity sales, third quarter wealth sales increased 12%. The increase in wealth sales reflects record third quarter sales in the 401(k) business and a 9% increase over the third quarter of 2011 in mutual fund sales. Additionally, we are very proud that John Hancock Mutual Funds has been designated a Preferred Fund Family by Edward Jones.

Third quarter insurance sales decreased 20% from the same period of 2011 largely due to an expected decline in Long-Term Care sales as a result of the non-recurrence of an open enrollment period in the federal government plan in the third quarter of 2011. Normalized for this, third quarter insurance sales increased 11% from the same period of 2011. Overall, we continue to be encouraged by John Hancock's performance.

Turning to Slide 19. Funds under management reached another all-time record of $515 billion as at September 30, 2012. The increase was driven mainly by positive net policyholder cash flows and investment gains, which were partially offset by the impact of currency movements.

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

Turning to Slide 21, you will see the credit impairments in the third quarter had no material impact on earnings. We see our strong underwriting discipline and credit experience as a corporate strength.

Turning to Slide 22. We're very proud to have achieved both our interest rate and equity hedging targets at least 2 years ahead of schedule. As expected, interest rate sensitivity increased primarily due to the anticipated change to a more conservative reinvestment scenario.

Moving on to Slide 23. This slide summarizes our capital position for MLI. We ended the quarter with a capital ratio for our main operating company at 204%. The MCCSR ratio was lower than the previous quarter largely due to the net loss in the quarter and an increase in required capital for asset and segregated fund guarantee risks.

Our capital position is further supported by our significant hedging programs. We have taken significant hedging actions over the past several years, which has desensitized our balance sheet to the macro environment, thereby attenuating the volatility in our core earnings.

We have spoken to you in the past about the impact of the so-called lower-for-longer interest rates, and on Slide 24, you will see some of the first and second order impacts of the lower-for-longer interest rate scenario.

We are taking the necessary actions to prudently grow our business in this challenging economic environment. As Donald discussed, there are a number of items over the past 2 years which have impacted the achievability of our 2015 targets. We are now targeting $4 billion in core earnings in 2016 based on our macroeconomic and other assumptions, and we will update you on our strategic and financial objectives at our Investor Day next week.

I'll now address 3 topics listed here on Slide 25, which may be on investors' minds. The first is the impact of Hurricane Sandy. As you all know, the Northeast coast of the U.S. was recently affected by Hurricane Sandy. Manulife has limited potential exposure to Hurricane Sandy through its property and casualty reinsurance business but only to insured losses, not economic losses. We are relieved that while many people have been significantly impacted by this hurricane, based on the size of the preliminary estimates of uninsured losses at this time, we do not expect any material impact as a result of Hurricane Sandy.

The second topic is the impact of Actuarial Guideline 38. Since our second quarter announcement, the AG 38 issue has largely resolved itself. The standards in regard to AG 38 have now been publicly clarified by the NAIC, and the impact for Manulife is only on John Hancock's statutory capital with no impact to MLI's MCCSR. While John Hancock is still in the process of finalizing the implementation of AG 38, we feel that any additional reserve amounts arising from this will be manageable within our current capital plans and not require additional capital to be downstreamed into the U.S.

Finally, the third topic is in regards to our credit spread sensitivity. As you would have seen in our disclosures, our sensitivity to a 50-basis-point decline in credit spreads has increased by 600 million as compared with the prior quarter. This increased sensitivity is largely driven by the fact that corporate spreads declined in the third quarter. Based on spreads at the end of the third quarter, a 50-basis-point decline in corporate spreads would result in a movement to a more conservative prescribed reinvestment scenario for policy evaluation. For this reason, the impact of changes to rates less than or more than the amounts indicated are unlikely to be linear.

By way of summary, despite the continued low interest rates in the third quarter of 2012, Manulife generated core earnings of $556 million under our new core earnings metric, achieved our equity market and interest rate hedging targets at least 2 years ahead of schedule and strengthened our reserves as part of our annual review of our actuarial methods and assumptions.

Prior to turning the call over to Q&A, I also wanted to take the opportunity to remind you all that we're hosting an Institutional Investor Day on Thursday, November 15, 2012, in Toronto, commencing at 10:00 a.m. Eastern time. Please join us there as it will give you an opportunity to hear directly from key executives about our operations and strategies for growth.

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

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Tom MacKinnon at BMO Capital.

Tom MacKinnon - BMO Capital Markets Canada

Donald, I asked you this question about capital last quarter, and I think you might have been around 211%, and you said you'd be comfortable if the ratio was to go down. And now we're at 204%, and I'm curious as to what your thoughts are. And is there any kind of an internal guideline or threshold that you look to in light of some of the regulatory headwinds you might be facing?

Donald A. Guloien

I will give you short answer, Tom. It's -- we're very comfortable, very, very comfortable, not the least of which is because of the amount of hedging that we've done. We've reduced the volatility by about 75%, a huge change. And other factors -- as we've been taking basis changes, we have strengthened our reserves. I think due to the interest rate movements alone, correct me if I'm off by a bit, but we've strengthened our reserves by the tune of -- and capital by something like $8.5 billion over the last 3 years in addition to the basis changes for everything from morbidity of long-term care to life insurance mortality and so on, you guys are familiar with them, so I'm feeling very, very comfortable with our capital levels.

Tom MacKinnon - BMO Capital Markets Canada

And maybe a follow-up here. You're talking about this efficiency and effectiveness. I don't know if you can elaborate as to what you got going there. Do we have to wait until this Investor Day to hear about it? And how's that going to help the core earnings get to the target that you've got, that what looks to be kind of mid-teens type growth going forward?

Donald A. Guloien

Yes. And we feel very comfortable with our targets. They're ambitious. They're appropriately ambitious, but there's a lot of very good quality business with good margins being put on the books, and we're pulling all the right levers to make that happen. As it relates specifically to efficiency and effectiveness, you're quite right. There will be more disclosure at our Investor Day. Basically, we have a series of programs that are designed to make sure that we're making best use of the expenses that we have. It goes to everything from procurement to organizational design to appropriate use of technology. And more and more, we're talking about leveraging across our businesses. We have 3 major geographies plus the Investment division as operating units. Within those geographies, we have businesses, and there's a little bit of a tendency here to run each one of them a bit like separate companies. And we're doing some very serious work -- have been doing over the past 6 to 9 months, talking about how we can work together to minimize costs and share certain overheads. And it's very productive stuff, and we anticipate that, that will add to the achievability of our targets 2016.

Operator

The next question is from Steve Theriault at Bank of America.

Steve Theriault - BofA Merrill Lynch, Research Division

I wanted -- Don, I wanted to ask about the targets. As you're bumping them out a year, is there any change to your expectations on returning capital to shareholders? As I recall, there was a $2 billion return of capital assumption. And is there any change to the mix of earnings? So that's to say, is the target for Asia still $1.5 billion and so on as you go down the line. And I didn't -- I admit I didn't understand your explanation surrounding roughly a year. If you could revisit that for a sec, I'd appreciate it.

Donald A. Guloien

Okay. I'll -- I'll let Steve. Why don't I deal with the last one first and Steve can deal with how we've modeled the capital being generated by the earnings of the business? The last one, basically, we think investors are most interested in core earnings because it gives you some sense of the earnings capacity of the organization. But when we had the last set of targets, I think it was actually slightly vague whether we're talking about net income or core earnings. I guess we would be talking probably more likely than not, historically we're talking about net income. But when we set the target, I don't want to have any risk that we're misleading people. We're moving to a core earnings measure. The difference between core earnings and net income on a normalized basis would be the amount of fixed charges that we have for things like preferred shares and other corporate costs. So net income, even if markets were exactly as we assumed and interest rates were exactly as we assumed and everything else was exactly as we assumed, you would expect net income to be a little lower than core earnings. We just want to be clear with people that we're moving it back essentially a little bit more than a year because the $4 billion is now on the core earnings measure as opposed to the net income measure. We don't want anybody accusing us of trying to slide that by.

Stephen Bernard Roder

It's Steve here. On your question about returning capital to shareholders. We have no current debate, discussion or intention to return capital to shareholders. I'm not sure where that reference came from, but currently, that is not on our agenda and doesn't feature in our thinking at this stage.

Donald A. Guloien

But I think the question is does it build up or in the model or does it build up or get paid out in dividends.

Stephen Bernard Roder

Right. Okay, so -- I mean, over the planning period, currently, you'll see that we have our gearing ratio at around 33%, and I think we've said publicly, we'd like that to be more around 25%. So I think that will be a priority for us over any intention to start returning capital to shareholders. So it's not -- I don't think you need to factor in anything of that type in the planning period.

Steve Theriault - BofA Merrill Lynch, Research Division

Well, correct me if I'm wrong, but I believe in November 2010, there was -- it was implied that there would be $2 billion of capital returned and that sort of went into the ROE formula to get you to a 13% ROE.

Donald A. Guloien

Yes, Steve, what I'd suggest is we'll take you through that on Investor Day and we can go into that in a fair bit of detail because I think there are, frankly, in the room, there are different interpretations of what was being said and it's pretty straightforward. I guess the other thing that I would point out is that the biggest determination, quite frankly, of what the return on equity is going to be in that year is not what the earnings is going be but what the denominator is going to be, and there's a lot of -- I've said this like an unbroken record, there's a lot of discussion going on about what capital formulas would be, everything from the impacts of Basel III possibly being implied, some aspects of it, to Solvency II, to whatever the Canadian regulators come up with their road map. I guess I'm more confident now than I have ever been that the changes to capital formulas -- OSFI laid out a very good roadmap. There's obviously pushes and pulls there, pluses and minuses. But I guess I'm becoming more convinced than ever that there's not going to be a dramatic change, either positive or negative, as it impacts our company. But I have to be careful because I can't promise you what the capital rules will be out 4 years.

Operator

The next question is from Mario Mendonca at Canaccord Genuity.

Mario Mendonca - Canaccord Genuity, Research Division

Steve, could you just help me think through the implied growth in your EPS when you think out to $4 billion or so, say, 4 years out from now. Would I be correct in suggesting that this is sort of mid-teens EPS growth on accumulate average growth rate basis? Is that an appropriate way to think about it?

Stephen Bernard Roder

Yes. I think that's a good way to think about it, Mario. I think you have it pretty much spot on there.

Mario Mendonca - Canaccord Genuity, Research Division

So to grow in the mid-teens over the next 4 years, would it be fair to say that this is something that emerges evenly over 4 years? Or is there a bit of a hockey stick in your 2016?

Stephen Bernard Roder

I think it would be better if we can take that to Investor Day, Mario, where I can get into a lot more detail at the Investor Day session.

Mario Mendonca - Canaccord Genuity, Research Division

Okay. And then 2 things that I think were important in preventing the company from getting to $4 billion in 2015 were things like the big assumption, the basis changes and those significant charges that played out, and also what Donald just referred to a moment ago, the more significant capital requirements, the changes in capital requirements, and Donald's already addressed that. So maybe Steve or Cindy or Donald, could you talk about what's your outlook for basis changes going forward? And I appreciate in asking that question that you can't be certain.

Stephen Bernard Roder

Right, okay, I think it's probably best if Cindy answers that directly. So we'll pass that over to Cindy, Mario.

Cindy L. Forbes

It's Cindy. Clearly, we really can't give you an outlook for future basis changes. Certainly, when we look at each of our assumptions when we're doing our basis review, we are unbiased. Our goal is to be unbiased in our review and to take into account where we think experience is going as well. Certainly, this quarter, when you saw the basis changes for Q3, there were a number of elements that drove those basis changes. A lot of them were macroeconomic. You really can't forecast what the future macroeconomic environment is going to be. Also, some charges for changes in actuarial practice, and we've highlighted in our prior MD&A scenarios where actuarial practices might change in the future. So those are things that are beyond our control. And then in terms of other updates, as we go through our assumption review, you see that this quarter, we actually had a release, a small release from those assumption updates. We're showing that overall. They were on balance. It was a positive. So I think that in terms of future outlook, when we try to set our assumptions in an unbiased way, trying to ensure that we are taking into account all the information we have so as to ensure that unless experience develops differently than what we expected, we wouldn't see additional basis changes on that item. But we can't really talk or can't really predict what the future develops.

Donald A. Guloien

Mario, I'm going to add to Cindy because it would be hard for Cindy to pat herself on the back, but Cindy has undertaken an extremely thorough review. And again she can't predict things that will change on a future basis. As you know, in part of the basis changes, we had a change to the regime that's applied to the termination of certain liabilities, and she can't predict that sort of thing. She can't predict the macro things. But we have had a very, very thorough review of our key assumptions, and I guess I'm more comfortable than ever with the handle that she has on that.

Operator

The next question is from Gabriel Dechaine at Crédit Suisse.

Gabriel Dechaine - Crédit Suisse AG, Research Division

I just want to ask. I guess the focus a lot of times is on these longer-term targets. I'm as interested or even more interested in nearer-term earnings growth. Just wondering if the Investor Day, you're going to highlight some of the more blocking and tackling kind of actions you could be taking to generate earnings growth like higher pricing -- I think it was touched upon in the Canadian Individual Insurance sector -- or maybe some specific targets on cost reduction. Because I think that kind of discussion helps get away from "the stock only works if rates go up" kind of thing that I'm sure you're tired of hearing about.

Donald A. Guloien

Gabriel, I'll try and Steve might want to fill in. That blocking and tackling is stuff that we have been doing over the past 3 years, quite frankly. And we've raised the prices on a huge variety of products across the company, made others more capital efficient by product design changes and features and benefits and so on. And we have been cutting costs in the appropriate places, and we'll be doing more of that. That has happened. It's going to find its way into earnings. Though the challenge that we've had quite frankly is not generating the core earnings, right, because if you were to project -- go back to a question that Mario asked about the compound growth rate and earnings, if you took it from last year's very modest earnings to $4 billion, you'd get a very high number. Let's put it right out there. Frankly, the issues that have bedeviled us are a series of basis changes that have taken place over the past 4 years. And the impact of lowering interest rates on us, which caused us to reprice and change products, take more strain and have reserve hits. Absent those 2 things, the story in terms of the underlying is actually pretty positive. I will mention one other factor, and this is a good news and bad news story. The good news is we've achieved hedging 2 years ahead of plan. The bad news is, that has a cost. Hedging has a cost. So I think all shareholders should feel good that we have dramatically reduced the volatility of our earnings by being able to opportunistically hedge at the right times. But that hedging does have a cost, and that does reduce our core earnings. So the underlying growth in earnings is there, but it has been set back by the macroeconomic changes, the faster-than-expected hedging, which is a positive but does have a cost in the short term, not in the long term, and the basis changes that hopefully will reduce in size, if not eliminate.

Gabriel Dechaine - Crédit Suisse AG, Research Division

I appreciate that. And just the last one here. Also, I guess, maybe not so earnings-related but capital management. Is there any stuff here, your -- ideas you're toying around with now because a few of your peers in the U.S., especially the big -- well, they're not run-off books but they're legacy businesses, ways to enhance value or spin off capital sooner than expected from the VA book, for example? Some companies are playing around with an enhanced surrender options to their -- or offers to their policyholders, stuff like that. And then also on the Long-Term Care, I noticed that the repricing, you've got 41 states approved. You don't give a number anymore about how actual pricing approvals compare to your 40% targeted increase.

Donald A. Guloien

Well, let's see. I'll take some of those and, Steve, I'm sure will fill in. On the last one, we want to get 100% of what we've applied for. We have a legitimate right. We have a legal right to get that. But as you know, it can be a political process getting that through the states, but we have a legal right. So we want to get 100% of the increases that we've applied for, and we've had a very, very good track record of getting the increases we've applied for in virtually all of the states. We want to get it all. Now we are practical people. And when Cindy made the assumptions for the basis change, she had to realistically predict that we might not get them all at once and that we might not get all of them. But we certainly don't want to let any states off the hook for that, giving us 100%. But I guess I can say quite comfortably that we're not particularly worried that we made the wrong assumptions. And when Cindy made those basis changes, she called it right and we're increasingly comfortable with that. But we hope to get 100% of the increases, and that would be a really good news story. And again, we have a legal right to that. Steve, do you want to deal with the other part?

Stephen Bernard Roder

Yes. On the first part of the question, that we're probably referring to the VA block, we continue to look at the practicality and the desirability of various courses of actions. We're not so proud that we won't study what other people do and how they managed to progress in their endeavors. So that's of great interest to us, but we have nothing to declare at this moment. We just continue to look at the options available to us and execute in accordance with the best interest of our shareholders.

Operator

The next question is from Doug Young at TD Securities.

Doug Young - TD Securities Equity Research

I guess just 2 quick questions, hopefully. Steve, you made a comment -- there's 2 comments you made in your prepared remarks. One, I think, and correct me if I'm wrong, you alluded to or mentioned the changes to your -- or return updates to your non-fixed income return assumptions. I just wanted to get clarification on what that -- what actually that was related to. And the second was in the U.S. division, you talked about unfavorable policyholder behavior in the quarter. Just wondering if you can elaborate on that as well.

Stephen Bernard Roder

Okay, I think I'm going to ask Cindy to take that.

Cindy L. Forbes

Sure. So in terms of the updates to non-fixed income assumptions every year, as part of the annual basis change, we review our return assumptions and adjust them based upon our own outlook for the returns that we'd earn on future deals, as well as for any -- the application of CIA standards with respect to the return assumptions. This year, there were some assumptions that went up and some assumptions that went down. So nothing really material in terms of the overall impact, as you saw in the basis change disclosure in terms of the entire impact of the NFI returns and other changes to cash. We're modeling just under $200 million post-tax in terms of its impact. So a number of changes both to the assumptions and how we model cash flows for a relatively modest impact on reserves. And then I guess, the second part of your question was about unfavorable policyholder experience in the U.S. We have said in the past that we have had some ongoing claims losses on LTC, and that continued this quarter at about a similar level, and an improvement on our U.S. Life. There's still some small claims losses on the U.S. Life business.

Doug Young - TD Securities Equity Research

And just a follow-up, the NFI, there's no -- is there any update in terms of the changes the CIA might be looking at related to the return assumptions for NFI? And then just second, can you quantify that negative impact of -- I forget what it was last quarter, on the LTC claims?

Cindy L. Forbes

I think it was -- last quarter, LTC was around $20 million pretax and a similar level this quarter. The -- in terms of the CIA, there's nothing that has been announced by the CIA in terms of -- or the actual standards court in terms of looking at non-fixed income assumptions. But we included the disclosure again about possible future changes to actuarial standards or accounting standards just because we -- well, at least, I do hear sometimes amongst the actuarial community some discussions around that topic, but there's nothing that's been announced.

Operator

The next question is from Robert Sedran at CIBC.

Robert Sedran - CIBC World Markets Inc., Research Division

I just actually want to follow up on a couple of questions. First off, if you do manage to get the 100% of the price increases that Donald mentioned on the Long-Term Care, would you anticipate releasing some reserves back into earnings or keeping the excess in case experience turns negative again? And how much latitude do you have in that regard?

Donald A. Guloien

Well, Cindy at the -- call them as she sees. But I think you put your finger on exactly the nub of the problem or the nub of the decision is we were making a call a couple of years ago as to what this would ultimately be, what the gross change would be because of the mortality and lapse differences and so on and then how much we could get out of the price increases. And a lot of assumptions were made. We're obviously very pleased with our progress against those assumptions. When it gets to the stage where there are overages, we have to assess again whether we've got it right. And when you've got some small, admittedly small experience losses still coming through, Cindy will recalibrate that out a couple of years. Is that right, Cindy?

Cindy L. Forbes

Yes, that's correct, Donald. So yes, we'll review -- in next year's assumption review, we'll look at our experience on the approvals, and we'll also take another look at our mortality and morbidity experience on LTC.

Robert Sedran - CIBC World Markets Inc., Research Division

Okay. And just to follow up on some of the discussion on experience losses or policyholder behavior in the U.S., I'm just curious at if I look at it in aggregate, the experience on nonmarket factors this quarter -- mortality, lapse expense and the like -- was it a drag on the core numbers overall?

Cindy L. Forbes

Yes. It was to some degree a drag on the core numbers, but not that material, especially not with respect to policyholder experience.

Operator

The next question is from Michael Goldberg at Desjardins Securities.

Michael Goldberg - Desjardins Securities Inc., Research Division

I know that with the core earnings number that you're using that you want to take items contributing to volatility out of the measure. But having said that, is there anything in the high total investment gains in the third quarter that's irregular? Or is it just that the gains or losses can be volatile? And just adding to that, could you clarify where the gains came from in the third quarter, like which asset classes? And under what circumstances gains could either stay high or alternately fall back?

Stephen Bernard Roder

Okay. We're going to ask Scott Hartz to take that question, Michael.

Scott Sears Hartz

Sure. Generally there's sort of 3 major sources of investment gains. The first one would be a credit experience. And as Stephen went through this quarter, that was pretty neutral. Losses came in right where we had price for assumed in our valuation. And so it is all a question of how the experience is emerging relative to our valuation assumption. So on credit, neutral for the quarter. Another big driver is how is our non-fixed income performing relative to those assumptions we talked a little earlier about what we do assume for non-fixed income returns, and so how was the experience in the quarter? And that's been a positive. Of course, that will knock around a bit, right? And you're going to have good quarters and bad quarters and hence, you want to dampen some of that volatility in core. And then a third big one, which was big -- probably the biggest component this quarter, was just what investments did you source? What returns are you getting on those relative to what you would have assumed in your valuation, both fixed income and non-fixed income? And so we had a particularly favorable quarter for that, this quarter, and so investment gains were high this quarter. We would not expect them to be that high on a run-rate basis.

Michael Goldberg - Desjardins Securities Inc., Research Division

I'm not sure I understand the third component.

Scott Sears Hartz

Okay. So there's a couple of pieces to it. If we're assuming a certain mix of non-fixed income, and fixed income and within fixed income, if we achieve higher yields, which is essentially higher spreads than we had assumed in valuation, you get the PV of that extra spread back through and put into income. On the non-fixed income side, if we source more of that, that's a higher-return asset, that will lead to investment gains as well.

Operator

The next question is from Joanne Smith at Scotia Capital.

Donald A. Guloien

I want to make sure we satisfied Michael's question there.

Anthony G. Ostler

The question -- his first question was about variability in core. That's for Steve. There was a question on investment gains and there was a question on variability of core. But I think Michael was wondering if our core is not a stable number. Our core is not a stable number. It does have natural fluctuations from quarter-to-quarter.

Donald A. Guloien

No, I think his question was actually are there conditions that would lead you to believe that there would be a higher amount of gains. I mean, I'll try and start at that, Michael. I think we're in, for us, a pretty good cycle right now. We're -- the guys are putting out money at higher spreads and returns than what is embedded in our valuation assumptions. But investment markets are fickle and could turn the other way. That's why we have a number. Some of you might view it as conservative. I think it's actually quite reasonable. The 50 a quarter baked into our core assumption, if you want to believe over the next little while in a favorable environment we can do better than that, I wouldn't quarrel with you. I would just not tell you to go and annualize 400 like this quarter and expect that to continue. If that were to happen, I'd be a very happy guy, but I just wouldn't bake that into your models.

Operator

The next question is from Joanne Smith at Scotia Capital.

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

I just want to get a little bit more into the basis charge. And I appreciate all of the things around things that are outside of your control, macroeconomic events and other, changes in interest rates, et cetera. But I also realize that there has been an industry-wide misrepresentation, not necessarily intentionally but definitely mistakes made on assumptions regarding policyholder behavior, lapse rates and withdrawal utilization. And so what I think that we're trying to get comfort with, at least the people that I've talked to are trying to get comfort with is, we've had a number of these and not necessarily with respect to variable annuities but certainly across-the-board with respect to assumption revisions, not all of them related to macroeconomic events. And I just want to get some comfort that we're in a good place right now because your calculation, Donald, was $8.5 billion of reserve charges. My calculation is a little less than that; it's $6 billion. And I just wanted to know where we stand going forward. I understand that macroeconomic conditions are not under your control, but other things are, and there's a level of conservatism that I would like to see it built into these new numbers.

Donald A. Guloien

Joanne, I think you made some very fair comments. I mean, I'm not saying -- parsing every word. And one of the first words you used to characterize it, I disagree with, as the rates are [indiscernible], but it is pretty clear that the industry as a whole has been optimistic around certain policyholder behavior assumptions, whether it's lapse rates on term to 100 products going back in Canada to No-Lapse Guaranteed Universal Life products in United States or Long-Term Care products, similarly, I think, optimistic about morbidity impacts on Long-Term Care, VA utilization rates, all those things. And we've taken a very serious look at that. We've done all kinds of analyses on where we have historically gotten it wrong and where there is a proclivity of people perhaps to be too optimistic when they price a product and have pushed really hard back against that. Some would accuse us of maybe pushing back too hard. When we make those analyses, that gets reflected in our valuation assumptions, and Cindy has reflected that, and it shows up in the basis changes. By the way, just not to confuse anybody the $8.5 billion I related to was total capital related to interest rates alone. That's total capital employed, so both numerator and denominator effects. The basis changes themselves, I think it's actually a similar number but is a different number. We think we've come to grips with those as our comments indicate. But we can't guarantee that it will be such, and Cindy clearly isn't doing that. I think the biggest thing that the industry had no experience with is what would happen to variable annuity lapse rates in the case of a severe market downfall and I guess somewhat naïvely assumed that the lapse rate would go down as people got more of the money but not enough and clearly didn't figure that in. And I guess you could criticize them after the fact, you could say who really predicted that markets would go down such an amount and for such a sustained period of time and I guess at the time that these things were priced didn't consider it as seriously as they might have? Having said that, I guess I was in this job no more than a matter of weeks when we took our first -- we announced our first big adjustment to those variable annuity lapse rates. We have made some subsequent adjustments, but they are much less significant in magnitude. As more information comes in, Cindy will reflect it. I have no reason to believe that we're uncomfortable with the assumption that we have now, but that's not to promise that, that will be the case for all time. There could be other adjustments. But the adjustments that we have been making have been smaller and smaller because I think we got it pretty close to right the first time. And as new experience emerges, we reflect that. I think the most important lesson is not to repeat the mistakes of the past. And it doesn't take a very talented actuary to price a product and make ridiculously optimistic assumptions around things that people have no knowledge or experience on, and I'm not suggesting that, that happened. But I have seen products priced with, not at our company but other places, with assumptions that you just can't believe are true. And an unfortunate reality of this business is those show up over time. They can maybe take 10 years to manifest themselves. We have dealt with many of the challenges that we've seen in a very direct, quick, forthright basis. And I guess I'd like to believe that they're all behind us, but that would probably be naïve as well. But I got to believe that [indiscernible].

Cindy L. Forbes

Right. And so Joanne, this is Cindy. In terms of this year's review, for example, of the U.S. variable annuity lapses and withdrawal benefit utilization, we really did look at only the post-financial crisis data to inform our assumptions, so that's what -- when you talk about layering in conservatism, that was one thing that we did to ensure that we were looking at post-financial crisis data only. Now it's limited. So that's why when we say we're not sure how experience might develop in the future, we say that because we didn't have a lot of data to base our assumptions on because we didn't have that much post financial crisis. But on the other hand, we may find that we were overly conservative as well. We also did look at how our assumptions compared to other variable annuity writers in the U.S. through a survey, and we were on the conservative end of what other carriers are using. So that kind of analysis gives some comfort that we're trying to be unbiased, that we're trying to look at relevant experience, and we're trying to ensure that our assumptions are set appropriately.

Operator

The next question is from Andre Hardy at RBC Capital Markets.

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Don or/and Steve, when you look at your target for 2016, you, I'm sure, are also planning net income. Is it fair to say that the net income that you're foreseeing for the next few years is below your core income?

Donald A. Guloien

Yes, because of some of the fixed charges. If you assume that everything else worked exactly according to [indiscernible], because of the fixed charges associated with the preferred debt, preferred shares and so on, it would be a little bit lower, so yes.

Stephen Bernard Roder

The other factor there would be the URR. So URR is not included in core income -- core earnings. So we would be expecting to mechanically take a URR charge on a go-forward in the way we've previously indicated. So that will be the other factor. On the other hand, if we were able to maintain our average investment gains run rate, if you like, based on the average of the last 20 quarters or so, that would probably give us investment gains of more like 80. And we've only baked 50 into core. So there may be an offset in that respect. It depends on how we perform in the investment markets.

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

And your answer, Steve, leads me to where I was going. Because it used to be fairly easy to say, well, we kind of know what the URR will be. But if interest rates rises that amount, say 50 basis points, we'll have enough offset from the IRR to offset the URR. But with the new disclosures on interest rate sensitivity to the upside and, assuming the world's a better place, the negative impact of tighter corporate spreads, it's hard to imagine a scenario where your IFRS earnings would exceed your core earnings for the next few years. And that's what I'm trying to understand. What scenario would lead to Manulife for the first time in quite a while having reported earnings in excess of theoretical core earnings?

Stephen Bernard Roder

Okay. I think what you're referring to perhaps is the length of time it would take for the mechanical URR process to kind of work through and be a benefit -- beneficial to us.

Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division

Well, that piece hasn't changed, Steve. What seems to have changed is the upside to some other factors that has gone away as hedging has become more aggressive.

Cindy L. Forbes

I can try to answer or give my perspective at least on your question. The -- we talked about in our disclosure a little bit about the [indiscernible] of the Canadian reserving system, where we have to test our reserves on non-prescribed scenarios and how in the -- when rates go down or spreads go down, we end up on a scenario that has interest rates flat and spreads flat for the remainder of the lifetime of the business versus our normal reserve scenario, which includes the ultimate reinvestment rates. And that's why you're seeing -- you're not seeing the same symmetry in the upside and the downside. But I think you could probably assume that we would adjust our hedging as our reserve scenarios change as well. So I wouldn't necessarily look only at the asymmetry of this quarter's disclosure. Also, with respect to the URR, and I should clarify that we only hit that alternate reserve scenario once rates fall on certain amounts. So our current scenario is -- or reserve scenario is one that's based upon grading to an ultimate reinvestment rate. And then so I -- and then the other part I was going to say about the URR is that you would see lower URR charges if interest rates went up. So you would see an offset on URR charges as well.

Donald A. Guloien

Yes, the other thing I'd say on rate, and we don't quantify it because of the difficulty of all the moving parts in it, and I think you can appreciate it. But we've talked about this before, and it's really important for people to get this, is that our economic sensitivity to low interest rates is much more significant than what you see in that 1 quarter move. And things like strain will disappear. Hedging programs become more effective. We can shift more from a macro hedging to dynamic hedging, which has inherently less cost. There's a whole variety of knock-on impacts. If you anticipate, as I personally do that interest rates will gradually go up as the economy improves, there are a whole series of knock-on positive benefits to our company that are not captured in that 1 quarter impact of rates of the first-order impact analysis because it's impossible to capture them all. The question came up in the previous quarter, and I can't remember which. Somebody said, if you got to the stage where you had no exposure at all through rising interest rates, on that measure, would you feel upset? And as I said then, and we all agree on the management team, is that that's a pretty crude measure of our overall intra-sensitivity. In fact, we would not be upset at all if that went to a 0 sensitivity number because we have far greater economic sensitivity than is depicted by that 1 quarter movement because it affects through a whole variety of mechanisms, as Cindy said, the URR and a whole host of other things -- I've just given you some off the top of my head -- that would improve in an overall higher interest rate scenario.

Operator

The next question is from Peter Routledge at National Bank Financial.

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

Just a quick clarifying question to start. The MCCSR drop, it seemed to be due to a fall in retained earnings and currency translation. That's really the drop in the Canadian dollar -- pardon me, in the U.S. dollar relative to the Canadian dollar. Does that really explain the majority of the drop in MCCSR?

Cindy L. Forbes

Well, yes, the majority of the decline in the MCCSR would be related to the earnings this quarter relative to the fact that we pay shareholder dividends and have other expenses, so it's sort of a combination of those things.

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

But the currency translation took a big chunk out of retained earnings, right?

Cindy L. Forbes

It did, but let me continue and I'll answer your question. But actually the currency translation doesn't have a large impact on the MCCSR ratio because while when you're looking at that disclosure, you're looking at 1/2 of the balance sheet. We're pretty balanced in terms of our currency exposure between assets and liabilities and, therefore, it tends to be a bit of a wash.

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

Okay, okay. And then, Donald, just a quick question, not technically on the basis changes but looking back over your tenure or even prior to your tenure, policies were written and there just weren't enough reserves put up, and you inherited that mess. And you've been cleaning up that mess pretty diligently for the last 3 years. You didn't -- my interpretation, you didn't say we're done cleaning up the mess with this basis change this quarter. Can you envision sometime in the next 2 years where you just plant the flag and say, "You know what, I can't predict the future, but we're done cleaning up the mess from the 2000"?

Donald A. Guloien

Well, I can't agree with the supposition of the question about a mess or something. Manulife is a very fine company, and there are certain things you wish were done better or differently, but I can't agree with a mess depiction. But having said that, and I'd also be saying that this is not unique to our company. There's a lot of companies that have had hiccups on some of the pricing of these products. But having said that, I guess, I'm going to be very cautious on making any forward projections there, I guess. Cindy's done a fantastic job of educating me on the intricacies of the work that they do. And I guess, the thing that people have to know is when you're dealing with a balance sheet of $180 billion of which, whatever, 70% of it is reserves, that if you make a very small assumption change, given that it's applied to literally billions and billions of dollars of cash flows down the road, remember that's -- whatever our reserve amount is today, that is the present value of numbers that exist over a 40, 50-year period. So you can imagine the staggering size of those numbers, that very small assumption changes can make very big impacts. And so new and emerging data or changes to guidelines, some of the things that went through, changes to actuarial guidelines and procedures, that would sound pretty benign, when compounded by the size of our overall reserves and cash flows can produce the big present value number. So you're never going to get any sort of guarantee from me that these things will stop. All I can say is this has been a very rigorous process. I guess there are some people -- there are some people who gave prognostication of what was going on in the variable annuity market, talking about utilization rates and so on. Some of that has proven to be true, but the vast majority of some of those people's views has not come true. I mean, we haven't seen outrageously bad behavior on utilization rates or lapse rates and so on. So I guess I'm comforted by that as well. But you'll never get a promise from me that there won't be significant basis changes. I think that would just be inappropriate. I guess the other point is, we have callers on the line that are from all over the world. And this recalibration that takes place is not uniquely Canadian custom, but the size of it and the degree of the assumptions that the Chief Actuary has to review and update on an annual basis is far more complete than is done in other accounting jurisdictions. And that's -- I would imagine other companies have the very same issues that we have but are just dealing with it over a longer period of time.

Operator

The next question is from Sumit Malhotra at Macquarie Capital Markets.

Sumit Malhotra - Macquarie Research

In the interest of time, I'll try and keep it to 2 brief numbers questions. Probably easiest if I give them both to Steve Roder. Steve, just on impact of new business or strain. You obviously talked about last quarter we would see some of the benefits in Asia reversed, and that played out. So just kind of looking through the numbers though, it seemed like some of that benefit was found in U.S. insurance this quarter. It didn't look like your sales level was materially different, but you had a noticeable drop in strain. I saw something in the notes about repricing efforts, although it didn't seem to have the same impact in Canada. Can you talk a little bit about that? And then maybe more holistically, is the overall level of strain we see for the company this quarter what you would consider to be more normalized?

Stephen Bernard Roder

Yes. So you're correct, the strain increase from 70 to 117, which you can see in our source of earnings, so that was a playing out of the Asian phenomenon that we kind of flagged up last quarter, partially offset by some benefit particularly in the U.S. on repricing. So that's absolutely right. And we would say right now, a strain number that we might expect in the short term for us would probably be around about where we are now, possibly improving somewhat. So the 117 may be a bit heavy but somewhere around 100. We think that's probably about where we are. Going forward, we would like to reduce the insurance component of that over our planning horizon. But for now, that's a reasonable assumption for your spreadsheet, I think. Cindy, do you want to add to that at all? No, she's -- Cindy's happy.

Sumit Malhotra - Macquarie Research

Okay. I know this is a very big company and things are going to bounce around from quarter-to-quarter. It just seemed like the drop in the U.S. was quite beneficial. I wouldn't have thought that would be a run rate number, if you will.

Stephen Bernard Roder

Well, yes. I mean, I think overall, I think the spreadsheet number of 100, as I say, we think that's a good run rate number for now.

Operator

There are no further questions. I would like to turn the conference back over to you, Mr. Ostler.

Anthony G. Ostler

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

Operator

Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to hang up their lines at this time, and thank you for your participation.

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