Manulife Financial reports 2012 net income of $1.7 billion, core earnings of $2.2 billion, a strong regulatory capital ratio of
Manulife Financial reports 2012 net income of $1.7 billion, core earnings of
$2.2 billion, a strong regulatory capital ratio of 211 per cent, and record
insurance and wealth sales.
PR Newswire
TORONTO, Feb. 7, 2013
C$ unless otherwise stated
TSX/NYSE/PSE: MFC
SEHK:945
Substantive progress made on our strategic priorities in the fourth quarter of
2012:
* Developing our Asian opportunity to the fullest - Achieved record wealth
sales^1,2, more than double last year. Total insurance sales increased 20
per cent compared with fourth quarter 2011, with record insurance sales in
Indonesia driven by robust growth in both the agency and bank channels,
and double digit insurance sales growth in Hong Kong driven by agency
growth. We also enhanced our distribution network with additional
partners in Japan.
* Growing our wealth and asset management businesses in Asia, Canada, and
the U.S. - Manulife Asset Management had record institutional sales, we
launched the Strategic Income Fund in Japan, contributing to record^2
wealth sales in Asia; we achieved record mutual fund sales and assets
under management in Canada; and also generated record mutual fund and
401(k) sales and assets under management in the U.S., all contributing to
record funds under management^1 for the company as a whole.
* Continuing to build our balanced Canadian franchise - Maintained leading
market positions in group businesses with strong sales growth in both
Group Benefits and Group Retirement Solutions^3; record lending assets for
Manulife Bank; and completed the acquisition of Benesure Canada in early
January 2013.
* Continuing to grow higher ROE, lower risk U.S. businesses - Double digit
sales growth in life insurance over the fourth quarter of 2011; two
additional state approvals for Long-Term Care in-force re-pricing;
recorded $1.2 billion of positive net flows in mutual funds; and added new
mutual funds to platforms at key firms.
Highlights for the fourth quarter of 2012^4:
* Reported net income attributed to shareholders of $1,057 million.
* Delivered core earnings^1 of $537 million, slightly below 3Q12 due to the
impact of increased acquisition costs on higher wealth sales, higher
insurance sales expenses and systems costs in Asia, and increased macro
hedging costs.
* Generated strong insurance sales growth^5 of 49 per cent to $929 million.
* Delivered a 31 per cent increase in wealth sales to $10.4 billion.
* Strengthened MLI's MCCSR ratio by seven points over prior quarter.
* Achieved record funds under management^1 ("FUM") of $532 billion.
* Generated strong investment gains of $368 million, despite the fact that
the impact of equity markets and interest rates was almost neutral.
* Increased new business embedded value^1 ("NBEV") by 71 per cent to $245
million.
* Reported net income in accordance with U.S. GAAP^1 of $237 million.
_________________________________
^1 This item is a non-GAAP measure. See "Performance and Non-GAAP
Measures" below.
^2 Wealth sales were a record excluding sales of variable annuities.
^3 Based on quarterly LIMRA industry sales report as at September 30,
2012.
^4 Unless otherwise indicated, comparatives refer to the three month
period ended December 31, 2012 versus the three month period ended
December 31, 2011.
^5 Sales, premiums and deposits and funds under management growth
(decline) rates are quoted on a constant currency basis. Constant
currency is a non-GAAP measure. See "Performance and Non-GAAP Measures"
below.
TORONTO, Feb. 7, 2013 /PRNewswire/ - Manulife Financial Corporation ("MFC" or
"Manulife") announced today net income attributed to shareholders of $1,057
million, for the fourth quarter ended December 31, 2012, accompanied by strong
growth in insurance and wealth sales. Fully diluted earnings per common share
("EPS") was $0.56 and return on common shareholders' equity ("ROE") was 18.2
per cent for the fourth quarter ended December 31, 2012. For the full year,
Manulife reported net income attributed to shareholders of $1,736 million,
diluted EPS of $0.88 and ROE of 7.1 per cent.
In the fourth quarter of 2012 Manulife generated $537 million of core
earnings. Fully diluted core earnings per common share ("core EPS")^6 was
$0.28 and core return on common shareholders' equity ("core ROE")^6 was 9.0
per cent. For the full year, Manulife reported core earnings of $2,187
million, core EPS of $1.12 and core ROE of 9.1 per cent.
Donald Guloien, President and Chief Executive Officer, stated "We made
significant progress towards our strategic priorities in 2012 - we ended 2012
with record^7 annual sales in both our insurance and wealth businesses;
Manulife Asset Management added significant new institutional mandates; our
Asian franchise delivered strong growth by expanding our distribution
networks, including growing our bancassurance partnerships; and we generated
another all time record funds under management."
"Since 2010, we have enjoyed a positive progression in earnings and improved
our annual net income by $1.6 billion over 2011. We believe that Manulife is
well positioned to continue to deliver disciplined and sustainable growth to
meet our objectives of $4 billion in core earnings and 13 per cent core ROE by
2016^8," added Mr. Guloien.
Steve Roder, Chief Financial Officer, stated "We generated strong financial
results for the fourth quarter - we substantially increased sales in both our
insurance and wealth businesses and generated $1.1 billion of net income for
the period. As a result of our robust sales, we significantly increased our
new business embedded value. In addition, our Investment Division continued to
deliver solid investment gains. We ended the quarter with a strengthened
capital position of 211 per cent, a seven point improvement over the third
quarter."
"We are pleased with the strong income we generated this quarter, however
investment gains, and to a lesser extent tax items, were significant
contributors that cannot be counted on in the future. It is as a result of
this variability that we introduced the core earnings metric. Core earnings,
which this quarter were lower than net income, helps analysts and investors
assess our underlying earnings capacity," added Mr. Roder.
____________________________
This item is a non-GAAP measure. See "Performance and Non-GAAP
^6 Measures" below.
^7 Wealth sales were a record excluding sales of variable annuities.
^8 See "Caution regarding forward-looking statements" below.
Highlights for the Fourth Quarter of 2012 and Full Year 2012:
* Reported net income attributed to shareholders of $1,057 million for the
fourth quarter of 2012 and $1,736 million for the full year 2012:
* Fourth quarter earnings included strong investment gains of $368
million and $264 million of tax related gains that were considered
material and exceptional in nature. We released $182 million of
provisions related to prior years' uncertain tax positions on one
item and we reported a net release of $82 million related to interest
on a tax contingency for leasing transactions.
* Delivered core earnings of $537 million for the fourth quarter of 2012,
marginally below the third quarter of 2012, and delivered core earnings of
$2,187 million for the full year 2012:
* Compared with fourth quarter 2011, core earnings increased by $164
million. The increase was driven by a combination of increased fee
income on funds under management and the significant improvement in
new business margins as a result of pricing actions and improvement
in business mix which was partially offset by a number of items in
the fourth quarter 2012 that netted to a small negative.
* Compared with third quarter 2012, core earnings declined by $19
million, due to impact of increased acquisition costs on higher
wealth sales, higher insurance sales expenses and systems costs in
Asia, and increased macro hedging costs.
* Full year core earnings increased by $18 million compared with 2011.
The increase included a number of offsetting items. Improved new
business margins, increased fee income, higher scheduled release of
variable annuity guarantee margins and the non-recurrence of material
Property and Casualty Reinsurance claims were mostly offset by
additional macro equity hedging costs and amortization of unrealized
pension losses, in addition to higher business development and
project related expenses.
* Generated strong insurance sales growth of 49 per cent over the fourth
quarter of 2011 and delivered record insurance sales for 2012:
* Insurance sales were $929 million in the fourth quarter of 2012, an
increase of 49 per cent compared with fourth quarter of 2011 driven
by strong single premium sales in Group Benefits; a 20 per cent
increase in Asia insurance sales; and an improvement of 13 per cent
in U.S. sales, mainly driven by successful new product offerings with
favourable risk characteristics.
* Record insurance sales exceeded $3.3 billion for 2012, an increase of
33 per cent compared with 2011.
* Delivered a 31 per cent increase in wealth sales over the fourth quarter
of 2011 and record^9 wealth sales for 2012:
* Wealth sales of $10.4 billion in the fourth quarter of 2012 reflected
record sales in Asia which were more than double those in the fourth
quarter of 2011; record mutual fund sales and increased sales in
Group Retirement Solutions in Canada which were more than offset by
the decline in annuity sales and lower new loan volumes; and record
quarters for both mutual funds and 401(k) businesses in the U.S.
* Record^9 wealth sales were almost $36 billion for full year 2012, an
increase of four per cent compared with 2011, despite restrictions
placed on annuity sales by the Company.
* Strengthened The Manufacturers Life Insurance Company's ("MLI") Minimum
Continuing Capital and Surplus Requirements ("MCCSR") ratio by seven
points over September 30, 2012 to 211 per cent:
* The improvement in MLI's capital position from the end of the third
quarter of 2012 reflects the contribution from fourth quarter
earnings, reinsurance of a portion of the Japanese life business and
a $200 million preferred share issuance during the quarter.
* Further to the 2013 MCCSR Guideline, MLI's MCCSR ratio is estimated
to increase by approximately four points on a pro forma basis to 215
per cent as of January 1, 2013. The increase is attributable to
revisions to lapse risk required capital rules.
* Achieved record funds under management of $532 billion as at December 31,
2012.
* Continued to generate strong investment gains of $368 million during the
quarter, $50 million of which is included in core earnings. Fixed income
and alternative long-duration asset investing along with excellent credit
accounted for the vast majority of our investment gains for both the
quarter and the full year.
* Reported embedded value^10 of $38.0 billion as at December 31, 2012,
representing an increase of $1.9 billion over that reported at December
31, 2011. Increases in embedded value were driven by normal operating
activities including the impact of new business, offset by shareholder
dividends and depreciating foreign currencies relative to the Canadian
dollar.
* Generated new business embedded value^10 ("NBEV") of $245 million in the
fourth quarter of 2012, an increase of 71 per cent over the fourth
quarter of 2011.
* Received two additional state approvals on Long-Term Care price increases
on in-force retail business during the quarter bringing our total to 43
states.
* Reduced equity market sensitivities during the quarter by adding $250
million of equity future notional value to the macro hedging program and
adding approximately $700 million of in-force guarantee value to the
dynamic hedging program. A further $250 million of macro hedges were added
in January 2013 due to favourable market conditions.
* Reported net income in accordance with U.S. GAAP for the fourth quarter of
$237 million, or $820 million lower than our results under the Canadian
version of IFRS^11, and total equity in accordance with U.S. GAAP was $16
billion higher than under IFRS. The primary driver of the quarter's lower
U.S. GAAP earnings compared to IFRS earnings relates to variable annuity
accounting differences. For the full year 2012, net income attributed to
shareholders in accordance with U.S. GAAP was $2,557 million versus $1,736
million under IFRS.
____________________________
^9 Wealth sales were a record excluding sales of variable annuities.
^10 This item is a non-GAAP measure. See "Performance and Non-GAAP Measures"
below.
^11 The Canadian version of IFRS uses IFRS as issued by the International
Accounting Standards Board. However because IFRS does not have an
insurance contract measurement standard, we continue to use the Canadian
Asset Liability Method (CALM).
Quarterly Results Full Year Results
C$ millions
(unless
otherwise
stated) 4Q 2012 3Q 2012 4Q 2011 2012 2011
Net income
(loss)
attributed to
shareholders $ 1,057 $ (227) $ (69) $ 1,736 $ 129
Preferred
share
dividends 29 31 21 112 85
Common
shareholders'
net income
(loss) $ 1,028 $ (258) $ (90) $ 1,624 $ 44
Reconciliation
of core
earnings to
net income
(loss)
attributed to
shareholders:
Core
earnings^(1) $ 537 $ 556 $ 373 $ 2,187 $ 2,169
Investment
related
gains in
excess of
core
investment
gains 318 363 261 937 1,290
Core
earnings
plus
investment
related
gains in
excess of
core
investment
gains $ 855 $ 919 $ 634 $ 3,124 $ 3,459
Other
reconciling
items:
Direct
impact of
equity
markets and
interest
rates (18) (88) 153 (758) (1,064)
Changes in
actuarial
methods and
assumptions
(other than
URR) and
goodwill
impairment (87) (1,206) (663) (1,281) (1,416)
Other
items^(2) 307 148 (193) 651 (850)
Net income
(loss)
attributed
to
shareholders $ 1,057 $ (227) $ (69) $ 1,736 $ 129
Basic earnings
(loss) per
common share
(C$) $ 0.56 $ (0.14) $ (0.05) $ 0.90 $ 0.02
Diluted
earnings
(loss) per
common share
(C$) $ 0.56 $ (0.14) $ (0.05) $ 0.88 $ 0.02
Diluted core
earnings per
common share
(C$)^(1) $ 0.28 $ 0.29 $ 0.19 $ 1.12 $ 1.14
Return on
common
shareholders'
equity (ROE)
(%) 18.2% (4.5)% (1.6)% 7.1% 0.2%
Core ROE
(%)^(1) 9.0% 9.3% 6.1% 9.1% 9.1%
Funds under
management (C$
billions) ^
(1) $ 532 $ 515 $ 500 $ 532 $ 500
^(1) This item is a non-GAAP measure. See "Performance and Non-GAAP Measures"
below.
^(2) For a more detailed description see Sections B1 and B2 below.
SALES AND BUSINESS GROWTH ^
Asia Division
Robert Cook, Senior Executive Vice President and General Manager, Asia
Division, stated, "I am very pleased with our full year 2012 results - the
Asia Division achieved record^12 sales for both insurance and wealth
(excluding variable annuities) products. In addition, our fourth quarter
wealth sales were over $2 billion, a new record^12, and evidence that our
product diversification strategy is succeeding. We continue to successfully
build a diverse, multi-channel distribution platform across the region. In
2012, we secured and deepened strategically important distribution agreements
with key bank partners in Japan and Indonesia; achieved strong growth in our
professional agency force in several key markets; and successfully expanded
our presence in the Managing General Agent channel into the retail market in
Japan. We also became the first foreign owned life insurer to commence
operations in Cambodia, and we expanded our broad geographic footprint in
China with our 50th city license."
Asia Division's fourth quarter insurance sales were US$362 million, an
increase of 20 per cent compared with the same quarter of 2011. Full year
insurance sales of US$1.4 billion were 16 per cent higher than 2011.
* Indonesia reported record quarterly insurance sales of US$34 million, a 51
per cent increase compared with fourth quarter 2011, driven by strong
growth in both our agency and bank channels. The strong full year growth
of 46 per cent was driven by an expanded bancassurance channel which grew
140 per cent compared to 2011.
* Japan insurance sales for the fourth quarter of US$188 million were 36 per
cent higher than fourth quarter 2011. Strong sales of our increasing term
product in advance of price increases were partially offset by lower
cancer product sales which were impacted by tax changes implemented in the
first half of the year. Full year sales reached a record level of US$767
million, 11 per cent higher than record sales in 2011, a result of strong
cancer product sales in the first half of the year and increasing term
sales in the second half of 2012.
* Hong Kong fourth quarter insurance sales of US$65 million were 14 per cent
higher than fourth quarter 2011. Full year sales reached a record US$257
million, up 23 per cent over 2011. Sales growth over 2011 was primarily
driven by expanded agency distribution, as well as continued strong sales
throughout 2012 of our participating life product, including a run up of
sales prior to price increases in the second quarter of 2012.
* Asia Other insurance sales (excludes Hong Kong, Japan and Indonesia) for
the fourth quarter were US$75 million, or nine per cent below the same
period in 2011, while full year sales of US$302 million were 15 per cent
higher than 2011. The decline relative to the fourth quarter 2011 was due
to product changes in Taiwan. The full year sales growth over the prior
year was driven primarily by expanded agency distribution.
Asia Division's fourth quarter wealth sales were US$2.1 billion, more than
double sales in the fourth quarter of 2011. On a full year basis, wealth
sales of US$5.7 billion increased 36 per cent over 2011.
* Japan fourth quarter wealth sales of US$694 million were three times the
same period a year ago, and on a full year basis, sales of $1.7 billion
were more than double those of the prior year. Growth was fueled by the
successful launch of the Strategic Income Fund, which reported sales of
over US$550 million in the fourth quarter, and continued strong sales of
the Australian dollar denominated fixed annuity product.
* Indonesia achieved record wealth sales of US$449 million in the fourth
quarter, four times higher than fourth quarter 2011, and full year 2012
sales surpassed the US$1 billion milestone. Strong performance was
recorded in all product lines, with mutual fund sales seven times higher
than in 2011 and unit linked sales through our bank partners up 157 per
cent.
* Hong Kong fourth quarter wealth sales of US$321 million were 74 per cent
higher than the same period a year ago and included a successful start in
capturing transfer cases following the November launch of the Mandatory
Provident Fund's new Employee Choice Arrangement. Full year results of
US$792 million were down 15 per cent from 2011, primarily as a result of a
change in client preferences for bond funds over equity funds in 2012.
* Asia Other wealth sales (excludes Hong Kong, Japan and Indonesia) for the
fourth quarter were US$668 million, 78 per cent higher than the same
period a year ago, and full year sales of US$2.2 billion were up 13 per
cent over 2011. Strong mutual fund sales in Taiwan as well as unit linked
sales in the Philippines were the key contributors to the growth.
Asia Division continues to execute on our longer term growth strategy by
expanding agency and bank channel distribution capacity.
* Contracted agents ended the year at 53,700, a seven per cent increase from
the end of 2011 with significant growth in Hong Kong, Indonesia, the
Philippines and China.
* Bank channel total insurance and wealth sales, on an annualized premium
equivalent basis, were US$159 million in the fourth quarter. This
increase of 73 per cent compared with the same period in 2011 was
attributed to the expanded distribution in Indonesia, particularly our
exclusive agreement with Bank Danamon. In Japan, sales of mutual funds
through the bank channel picked up considerably as a result of the
successful launch of the Strategic Income Fund.
_______________________________
^12 Wealth sales were a record excluding sales of variable annuities.
Canadian Division
"In 2012, we continued to successfully build our diversified Canadian
franchise," said Marianne Harrison, Senior Executive Vice President and
General Manager, Canadian Division. "We achieved record full year sales in
several business lines, namely: Group Benefits, Manulife Mutual Funds and
Affinity Markets, and Group Retirement Solutions once again led the defined
contribution market in sales^13. We continued to drive our desired shift in
product mix, reducing the proportion of insurance and variable annuity sales
with guaranteed features. We expanded our distribution reach: welcoming new
advisors, extending existing relationships and enhancing support to our
distribution partners. On January 4th, 2013 we completed our acquisition of
Benesure Canada Inc., strategically positioning us as the leading provider of
mortgage creditor insurance through mortgage brokers in Canada."
Group Benefits and Group Retirement Solutions ("GRS") both led the Canadian
industry in sales in 2012^13. Group Benefits' full year sales exceeded $1
billion, an industry record, benefitting from strong single premium sales and
good growth across diverse market segments. Fourth quarter Group Benefits
sales of $333 million were more than three times higher than the fourth
quarter of 2011. GRS' full year sales of $1.1 billion increased 17 per cent
from 2011 levels, while fourth quarter sales of $223 million were 45 per cent
higher than the fourth quarter of 2011. Successful cross selling efforts
contributed to the strong sales growth in both group businesses.
Individual Wealth Management's fourth quarter sales of $2.3 billion increased
nine per cent from third quarter 2012 levels, reflecting record quarterly
deposits in Manulife Mutual Funds ("MMF"). Sales were eight per cent below
the fourth quarter of 2011, and full year sales were seven per cent below 2011
levels, reflecting our actions to moderate variable annuity sales in the
current macro-economic environment.
* Record quarterly MMF sales of $738 million in the fourth quarter of 2012
increased 61 per cent from the third quarter of 2012 and were more than
twice fourth quarter 2011 levels, driving full year sales to a record $2.1
billion. This strong momentum reflects our expanded distribution reach,
continued strong performance in balanced and fixed income fund categories,
and success of a number of funds launched in 2012. Year-over-year, MMF
was the fastest growing mutual fund franchise of the top ten fund
companies in Canada^14. Record MMF assets under management ("AUM") of over
$20 billion at December 31, 2012 increased 17 per cent over December 31,
2011, while the industry grew ten per cent according to IFIC^14.
* Manulife Bank had record assets of over $21 billion at December 31, 2012,
seven per cent higher than at the end of 2011, driven by strong client
retention and stable new lending volumes of $4.6 billion in 2012, modestly
below 2011 levels. New lending volumes of $1.1 billion for the fourth
quarter were consistent with third quarter 2012 levels and ten per cent
below the same period last year, reflecting the impact of the current
regulatory and competitive environment.
* Sales of variable annuity products of $379 million in the fourth quarter
and $2 billion for the year were significantly below the comparative 2011
levels, reflecting the anticipated impact of product changes throughout
the year. Fixed rate product sales also continued at lower levels,
reflecting the continued low interest rate environment.
Individual Insurance sales in 2012 continued to align with our strategy to
reduce new business risk, with a significantly lower proportion of sales with
guaranteed long-duration features compared to 2011. Manulife has led the
industry with changes to guaranteed long-duration products, the anticipated
impact of which was reflected in the year-over-year sales result. Fourth
quarter sales of recurring premium products of $58 million were 22 per cent
lower than the fourth quarter of 2011; full year sales declined by eight per
cent from 2011 levels. Fourth quarter single premium sales of $82 million were
modestly ahead of fourth quarter 2011 levels. Record full year single premium
product sales increased 16 per cent from 2011 levels, driven by continued
expansion in travel insurance.
______________________________
^13 Based on quarterly LIMRA industry sales report as at September 30, 2012.
Based on reporting from the Investment Funds Institute of Canada (IFIC)
^14 as at December 31, 2012.
U.S. Division
Craig Bromley, Senior Executive Vice President and General Manager, U.S.
Division, reported, "We are extremely pleased with our full year results, as
record fourth quarter and full year sales in Retirement Plan Services and
Mutual Funds contributed to record funds under management in both businesses.
We are entering 2013 with strong momentum and sales potential in these
businesses. In addition, fourth quarter insurance sales increased 13 per cent
over the fourth quarter of 2011, and included an increase in sales of products
with reduced risk and higher return potential."
Wealth management full year sales were US$20.2 billion, an increase of three
per cent compared with the prior year. The sales increases of 28 per cent in
John Hancock Retirement Plan Services ("JH RPS") and eight per cent in John
Hancock Mutual Funds ("JH Funds") were partially offset by lower annuity
product sales. Sales in the fourth quarter of 2012 were US$5.9 billion, an
increase of 31 per cent compared with the fourth quarter of 2011.
* JH RPS sales of US$2.0 billion in the fourth quarter of 2012 were a record
quarterly result and represented an increase of 44 per cent compared with
the fourth quarter 2011. JH RPS capitalized on the high plan turnover in
the market including the exit of a key competitor. For the full year, JH
RPS achieved record sales of US$6.0 billion, an increase of 28 per cent
over 2011. Together with favourable equity markets this helped drive
funds under management to a record US$72 billion as of December 31, 2012,
a 14 per cent increase from December 31, 2011. In addition, JH RPS'
"TotalCare" product, a full service group annuity launched in the third
quarter of 2012, has started to gain traction in the 401(k) market.
* JH Funds achieved record quarterly sales of US$3.7 billion in the fourth
quarter of 2012, a 54 per cent increase from fourth quarter 2011 and
record full year sales of US$13 billion with increases across all
channels. These results propelled funds under management as of December
31, 2012 to a record US$42 billion, a 24 per cent increase from December
31, 2011. A strong product line and success in adding our funds to
strategic partner recommended lists, as well as a focused sales and
marketing campaign, helped to drive these results. As of December 31,
2012, JH Funds offered 23 Four- or Five-Star Morningstar^15 rated equity
and fixed income mutual funds.
* The John Hancock Lifestyle and Target Date portfolios offered through our
mutual fund, 401(k), variable annuity and variable life products had
assets under management of US$80.0 billion as of December 31, 2012, a 13
per cent increase over December 31, 2011. As of December 31, 2012, John
Hancock was the fourth largest manager of assets in the U.S. for Lifestyle
and Target Date funds offered through retail mutual funds and variable
insurance products^16.
Insurance sales in the U.S. for the fourth quarter of 2012 increased 13 per
cent compared with the same period in the prior year, mainly driven by
successful new product offerings with favourable risk characteristics. Full
year sales were four per cent lower than 2011. We continued to execute on
strategies to reduce risk and increase margins.
* John Hancock Life ("JH Life") fourth quarter 2012 sales of US$163 million
were up 18 per cent over fourth quarter 2011. Newly launched products
continued to contribute to the sales success, with Protection UL sales of
US$65 million and Indexed UL sales of US$15 million. Full year sales of
US$543 million outpaced the prior year by 12 per cent and the business
successfully executed its transition to lower risk products.
* John Hancock Long-Term Care ("JH LTC") sales of US$10 million in the
fourth quarter declined 33 per cent compared with the same period in 2011,
reflecting the impact of price increases. Our new product, launched in 43
states as of December 2012, offers an innovative alternative to
traditional inflation options and is gaining traction in the market. Full
year sales of US$56 million were 61 per cent lower than 2011 due to the
non-recurrence of the 2011 Federal Long Term Care plan open enrollment
period and the price increases referred to above.
_______________________________
^15 For each fund with at least a 3-year history, Morningstar calculates a
Morningstar Rating based on a Morningstar Risk-Adjusted Return that
accounts for variation in a fund's monthly performance (including effects
of sales charges, loads and redemption fees), placing more emphasis on
downward variations and rewarding consistent performance. The top 10% of
funds in each category, the next 22.5%, 35%, 22.5% and bottom 10% receive
5, 4, 3, 2 or 1 star, respectively. The Overall Morningstar Rating for a
fund is derived from a weighted average of the performance associated
with its 3-, 5- and 10 year (if applicable) Morningstar Rating metrics.
Past performance is no guarantee of future results. The overall rating
includes the effects of sales charges, loads and redemption fees, while
the load-waived does not. Load-waived rating for Class A shares should
only be considered by investors who are not subject to a front-end sales
charge.
^16 Source: Strategic Insight. Includes Lifestyle and Lifecycle (Target Date)
mutual fund assets and fund-of-funds variable insurance product assets
(variable annuity and variable life).
Investment Division
Warren Thomson, Senior Executive Vice President and Chief Investment Officer,
said, "For the general fund, we continued to deliver strong investment gains
driven by credit experience which reflects the strength of our underwriting,
the positive impact of fixed income trading which included the redeployment of
treasuries into spread products, and the purchase of alternative long-duration
assets. The alternative long-duration assets originated during 2012 further
diversified our portfolio and continue to enhance our risk-adjusted returns.
The acquisitions were across various asset classes including real estate,
timberland, private equities, and infrastructure. We continue to focus our
acquisitions on high quality, good relative value assets."
"Manulife Asset Management experienced significant growth in 2012 across its
global franchise, with assets under management increasing by 12 per cent to
$237.6 billion," said Mr. Thomson. "Our strong investment performance is
yielding tangible results across many asset classes. We successfully launched
several new products which have enabled us to meet our retail clients' needs,
and we have been awarded new institutional mandates in North America and Asia
which have contributed to significant growth in institutional AUM. In the
fourth quarter we were awarded a substantial institutional fixed income
investment mandate."
Assets managed by Manulife Asset Management increased by $26.2 billion to
$237.6 billion as at December 31, 2012 from $211.4 billion as at December 31,
2011. At December 31, 2012, Manulife Asset Management had a total of 65 Four-
and Five-Star Morningstar rated funds, an increase of seven funds from
December 31, 2011. A broad array of investment awards were garnered in 2012 in
recognition of our strong investment performance that is being driven by our
continuing investment in portfolio management talent across our global
platform.
CORPORATE ITEMS
In a separate news release today, the Company announced that the Board of
Directors approved a quarterly shareholders' dividend of $0.13 per share on
the common shares of the Company, payable on and after March 19, 2013 to
shareholders of record at the close of business on February 20, 2013.
The Board of Directors approved that in respect of the Company's March 19,
2013 common share dividend payment date, the Company will issue common shares
in connection with the reinvestment of dividends and optional cash purchases
pursuant to the Company's Canadian Dividend Reinvestment and Share Purchase
Plan and its U.S. Dividend Reinvestment and Share Purchase Plan.
AWARDS & RECOGNITION
In New York, Manulife Financial was recognized by leading U.S. governance and
compliance publication, Corporate Secretary, as having the Best Overall
Corporate Governance in the International category at the annual Corporate
Governance Awards.
In Canada, the Women's Executive Network named Dr. Gail Cook-Bennett, Board
Chair and Lynda Sullivan, Group Chief Accounting Officer among its 2012
Canada's Most Powerful Women: Top 100 award winners. Dr. Gail Cook-Bennett was
also recognized by Women of Influence Inc. as a 2012 Canadian Diversity
Champion.
In Hong Kong, Manulife (International) Limited was designated Hong Kong's
"Company For Financial Planning Excellence of the Year" in the insurance
category at the South China Morning Post/Institute of Financial Planners Hong
Kong ("SCMP/IFPHK") Financial Planner Awards 2012 for the sixth consecutive
year.
In Thailand, Manulife Asset Management (Thailand) Co., Ltd. earned
"Outstanding Asset Management Company Award" at the Stock Exchange of Thailand
Awards 2012.
In Asia, five Manulife Asset Management fixed income fund managers (two based
in Hong Kong, two in the Philippines and one in Indonesia), were named among
the "most astute investors in Asian currency bonds" in The Asset's Benchmark
research survey for 2012.
Notes:
Manulife Financial Corporation will host a Fourth Quarter Earnings Results
Conference Call at 2:00 p.m. ET on February 7, 2013. For local and
international locations, please call 416-340-2216 and toll free in North
America please call 1-866-898-9626. Please call in ten minutes before the
call starts. You will be required to provide your name and organization to the
operator. A playback of this call will be available by 6:00 p.m. ET on
February 7, 2013 until February 21, 2013 by calling 905-694-9451 or
1-800-408-3053 (passcode: 6718073#).
The conference call will also be webcast through Manulife Financial's website
at 2:00 p.m. ET on February 7, 2013. You may access the webcast at:
www.manulife.com/quarterlyreports. An archived version of the webcast will be
available at 4:30 p.m. ET on the website at the same URL as above.
The Fourth Quarter 2012 Statistical Information Package is also available on
the Manulife Financial website at: www.manulife.com/quarterlyreports. The
document may be downloaded before the webcast begins.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is current as of February
7, 2013, unless otherwise noted. This MD&A should be read in conjunction with
the MD&A and audited consolidated financial statements contained in our 2011
Annual Report.
For further information relating to our risk management practices and risk
factors affecting the Company, see "Risk Factors" in our most recent Annual
Information Form, "Risk Management and Risk Factors" and "Critical Accounting
and Actuarial Policies" in the MD&A in our 2011 Annual Report and the "Risk
Management" note to the consolidated financial statements in our most recent
annual and interim reports.
Contents
A OVERVIEW D RISK MANAGEMENT AND RISK FACTORS UPDATE
1. Fourth quarter 1. General macro-economic risk factors
highlights
2. Full year highlights 2. Regulatory capital, actuarial and
accounting risks
3. Other items of note 3. Additional risks - Entities within the
MFC Group are interconnected which may
make separation difficult
4. Variable annuity and segregated fund
guarantees
B FINANCIAL HIGHLIGHTS 5. Publicly traded equity performance risk
1. Fourth quarter earnings 6. Interest rate and spread risk
(loss) analysis
2. Full year earnings
(loss) analysis
3. Premiums and deposits E ACCOUNTING MATTERS AND CONTROLS
4. Funds under management 1. Critical accounting and actuarial
policies
5. Capital 2. Actuarial methods and assumptions
6. U.S. GAAP results 3. Sensitivity of policy liabilities to
updates to assumptions
4. Goodwill impairment testing
C PERFORMANCE BY DIVISION 5. Future accounting and reporting changes
1. Asia
2. Canadian F OTHER
3. U.S. 1. Performance and non-GAAP measures
4. Corporate and Other 2. Key planning assumptions and
uncertainties
3. Caution regarding forward-looking
statements
A OVERVIEW
A1 Fourth quarter highlights
In the fourth quarter of 2012, we reported net income attributed to
shareholders of $1,057 million and core earnings^17 of $537 million.
Core earnings increased $164 million compared with the fourth quarter of 2011.
The increase was driven by a combination of increased fee income on funds
under management and the significant improvement in new business margins as a
result of pricing actions and improvement in business mix. In addition there
were a number of offsetting items in the fourth quarter 2012. The favourable
impact of the release of excess Property and Casualty Reinsurance provisions
($38 million) and certain tax items ($48 million) was offset by sales and
other incentive expenses ($32 million), systems and legal fees ($18 million)
and higher macro hedge costs ($43 million).
The difference between fourth quarter 2012 core earnings and net income
attributed to shareholders was a $520 million net gain, and consisted of:
* $318 million of investment related gains in excess of the $50 million
included in core earnings. Fixed income and alternative long-duration
asset investing along with excellent credit experience accounted for the
vast majority of our investment gains for both the quarter and the full
year;
* $264 million of favourable tax related changes that were considered
material and exceptional in nature. We released $182 million of
provisions related to prior years' taxes due to the resolution of prior
years' tax audits with respect to one item. In addition, we reported a net
release of $82 million related to interest on our tax contingency for
leasing transactions. As previously disclosed, the Company is an investor
in a number of leasing transactions and established provisions for
possible disallowance of the tax treatment and for interest on past due
taxes; and
* $100 million gain related to our hedged variable annuity guarantees, a
third of which relates to the change in provision for adverse deviation.
In addition, our equity fund results outperformed indices and the
tightening of corporate spreads had a favourable impact on our bond funds;
partially offset by charges of:
* $87 million primarily attributed to the estimated impact of modeling
refinements relating to a valuation systems conversion;
* $57 million ($78 million pre tax) restructuring charge for severance
related to the Company's Organizational Design Project. As outlined at the
November 2012 Investor Day, the project, started in 2012 and expected to
be completed in 2013, is designed to broaden the spans of control and
reduce the number of layers in the organization; and
* $18 million for the direct impact of equity markets and interest rates.
The Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio for
The Manufacturers Life Insurance Company ("MLI") closed the quarter at 211 per
cent compared with 204 per cent at the end of the third quarter. The MCCSR
ratio increased because, in addition to the contribution from the fourth
quarter earnings, we reinsured a portion of our Japan insurance risk, which
accounted for slightly more than two points of the increase, and we issued
$200 million of preferred shares.
Insurance sales^18 were $929 million in the fourth quarter of 2012, an
increase^19 of 49 per cent compared with fourth quarter of 2011 and included a
large Group Benefits sale. In Asia, fourth quarter insurance sales of US$362
million were up 20 per cent from the same quarter of 2011. In Canada, Group
Benefits sales for the quarter were three and a half times the same quarter of
the prior year and we reported lower but more profitable sales in Individual
Insurance. In the U.S., sales increased 13 per cent, mainly driven by
successful new product offerings with favourable risk characteristics.
Wealth sales of $10.4 billion in the fourth quarter of 2012 increased 31 per
cent compared with those in the fourth quarter of 2011. Wealth sales in Asia
were more than double those in the fourth quarter of 2011 with all countries
and territories contributing to the increase. In Canada, record mutual fund
sales and a 45 per cent increase in sales in Group Retirement Solutions were
more than offset by the decline in annuity sales and lower new loan volumes,
resulting in an overall reduction of four per cent compared with the fourth
quarter of 2011. In the U.S., wealth sales increased 31 per cent over those
in the fourth quarter of 2011. Both JH Funds and JH RPS reported record
quarterly sales.
A2 Full year highlights
We reported net income attributed to shareholders for the full year 2012 of
$1,736 million compared with $129 million in 2011. Core earnings^18 in 2012
were $2,187 million compared with $2,169 million in 2011.
The $18 million increase in full year core earnings compared with full year
2011 included a number of offsetting items. Improved new business margins,
increased fee income driven by higher funds under management, a higher
scheduled release of variable annuity guarantee margins driven by higher
equity markets, and the non-recurrence of material Property and Casualty
Reinsurance claim provisions were mostly offset by $81 million of costs
associated with additional equity futures in our macro equity hedging program
and higher pension costs related to amortization of prior years' unrealized
investment losses, in addition to higher business development and project
related expenses.
The difference between full year 2012 core earnings and full year net income
attributed to shareholders was a $451 million net charge. Charges included
$1,081 million for changes in actuarial methods and assumptions, $758 million
for the direct impact of equity markets and interest rates, $200 million for
the impairment of goodwill and $57 million related to restructuring. These
charges were partially offset by $937 million of investment related gains in
excess of the $200 million reported in core earnings and $708 million for the
tax items, major reinsurance and in-force product activities, as well as
income on variable annuity guarantee liabilities that are dynamically hedged
(details outlined in section B2 below).
Insurance sales exceeded $3.3 billion for the full year 2012, an increase of
33 per cent compared with 2011. Full year insurance sales in Asia increased
16 per cent versus 2011 with record sales levels in eight territories.
Insurance sales in Canada almost doubled year-over-year driven by record Group
Benefits sales. Canadian recurring premium insurance sales were eight per cent
lower than the prior year due to the implementation of de-risking strategies.
In the U.S., JH Life full year sales increased 12 per cent versus full year
2011 although overall U.S. insurance sales were four per cent lower as a
result of the Company's decision to raise prices and focus on new products
with favourable risk characteristics.
Wealth sales were almost $36 billion for full year 2012 and increased four
per cent compared with full year 2011 despite restrictions placed on annuity
sales by the Company. Asia reported strong growth throughout most of the
region with total wealth sales increasing 36 per cent over 2011. Wealth sales
in Japan more than doubled in 2012 while Indonesia exceeded the US$1 billion
mark in total wealth sales. In Canada, mutual fund sales achieved record
levels, while Group Retirement Solutions sales increased 17 per cent compared
with 2011. These increases in Canada were partially offset by the anticipated
reduction in annuity sales and lower new loan volumes. As a result, overall
Canadian wealth sales in 2012 were seven per cent lower than in full year
2011. U.S. wealth sales increased three per cent for the full year compared
to 2011. JH Funds and JH RPS reported record full year sales with year over
year increases of eight per cent and 28 per cent, respectively.
_____________________________
^17 Core earnings is a non-GAAP measure. See "Performance and non-GAAP
Measures" below
^18 This item is a non-GAAP measure. See "Performance and non-GAAP
Measures" below.
^19 Growth (declines) in sales, premiums and deposits and funds under
management is stated on a constant currency basis. Constant currency
basis is a non-GAAP measure. See "Performance and Non-GAAP Measures"
below.
A3 Other items of note
As disclosed in our second quarter 2012 release, we intend to update our
ultimate reinvestment rate ("URR") assumptions on a quarterly basis commencing
in the first quarter of 2013. If interest rates in 2013 were to remain at
December 31, 2012 levels, we would expect charges of in aggregate
approximately $400 million for the four quarters of 2013^20.
The 2013 MCCSR Guideline contains two changes that will each significantly
impact MLI's MCCSR ratio. Together the initial impact of the changes is
expected to be positive in the short term and neutral by the end of 2014.
* MLI's MCCSR ratio as of January 1, 2013 is expected to increase by
approximately four points on a pro forma basis as a result of a reduction
in lapse risk required capital in the 2013 MCCSR Guideline.
* MLI's MCCSR ratio is expected to decrease by approximately five points by
December 31, 2014 as a result of the introduction of the new accounting
standard for Employee Benefits (IAS 19R) effective January 1, 2013. The
standard will result in a charge to shareholders' equity of $595 million
($872 million pre-tax) primarily related to accumulated unrecognized net
actuarial losses on the Company's defined benefit pension plans. The
initial charge will be amortized into available capital for MCCSR purposes
by December 31, 2014 on a straight-line basis. Future actuarial gains and
losses related to these pension plans will be amortized over twelve
quarters^20.
_________________________
^20 See "Caution regarding forward-looking statements" below.
B FINANCIAL HIGHLIGHTS
C$ millions,
unless otherwise
stated, Quarterly Results Full Year Results
unaudited 4Q 2012 3Q 2012 4Q 2011 2012 2011
Net income
(loss)
attributed to
shareholders $ 1,057 $ (227) $ (69) $ 1,736 $ 129
Preferred share
dividends 29 31 21 112 85
Common
shareholders'
net income
(loss) $ 1,028 $ (258) $ (90) $ 1,624 $ 44
Reconciliation
of core earnings
to net income
(loss)
attributed to
shareholders:
Core
earnings^(1) $ 537 $ 556 $ 373 $ 2,187 $ 2,169
Investment
related gains
in excess of
core
investment
gains 318 363 261 937 1,290
Core earnings
plus investment
related gains in
excess of core
investment gains $ 855 $ 919 $ 634 $ 3,124 $ 3,459
Other items
to reconcile
core earnings
to net income
(loss)
attributed to
shareholders:
Direct impact
of equity
markets and
interest
rates (18) (88) 153 (758) (1,064)
Changes in
actuarial
methods and
assumptions
(other than
URR) and
goodwill
impairment (87) (1,206) (663) (1,281) (1,416)
Other items 307 148 (193) 651 (850)
Net income
(loss)
attributed to
shareholders $ 1,057 $ (227) $ (69) $ 1,736 $ 129
Basic earnings
(loss) per
common share
(C$) $ 0.56 $ (0.14) $ (0.05) $ 0.90 $ 0.02
Diluted earnings
(loss) per
common share
(C$) $ 0.56 $ (0.14) $ (0.05) $ 0.88 $ 0.02
Diluted core
earnings per
common share ^
(C$)^(1) $ 0.28 $ 0.29 $ 0.19 $ 1.12 $ 1.14
Return on common
shareholders'
equity 18.2% (4.5)% (1.6)% 7.1% 0.2%
U.S. GAAP net
income
attributed to
shareholders^(1) $ 237 $ 481 $ 339 $ 2,557 $ 3,674
Sales^(1)
Insurance
products $ 929 $ 596 $ 640 $ 3,349 $ 2,507
Wealth
products $ 10,439 $ 8,229 $ 8,141 $ 35,940 $ 34,299
Premiums and
deposits^(1)
Insurance
products $ 6,629 $ 5,597 $ 5,749 $ 24,221 $ 22,278
Wealth
products $ 17,499 $ 11,149 $ 10,168 $ 51,280 $ 43,783
Funds under
management ^ (C$
billions)^(1) $ 532 $ 515 $ 500 $ 532 $ 500
Capital ^ (C$
billions)^(1) $ 29.6 $ 28.5 $ 29.0 $ 29.6 $ 29.0
MLI's MCCSR
ratio 211% 204% 216% 211% 216%
This item is a non-GAAP measure. See "Performance and Non-GAAP Measures"
^(1) below.
B1 Fourth quarter earnings (loss) analysis
The table below reconciles the fourth quarter 2012 core earnings of $537
million to the reported net income attributed to shareholders of $1,057
million.
C$ millions, unaudited 4Q 2012 3Q 2012 4Q 2011
Core earnings
(losses)^(1)
Asia Division $ 180 $ 230 $ 213
Canadian Division 233 229 142
U.S. Division 293 288 189
Corporate & Other
(excluding expected
cost of macro hedges) (79) (117) (124)
Expected cost of macro
hedges^(2) (140) (124) (97)
Core investment related
gains 50 50 50
Core earnings $ 537 $ 556 $ 373
Investment related
gains in excess of core
investment gains 318 363 261
Core earnings plus
investment related
gains in excess of core
investment gains $ 855 $ 919 $ 634
Material and
exceptional tax related
items^(3) 264 - -
Income (charges) on
variable annuity
guarantee liabilities
that are dynamically
hedged^(4) 100 122 (193)
Change in actuarial
methods and
assumptions, excluding
URR^(5) (87) (1,006) 2
Restructuring charge
related to
organizational
design^(6) (57) - -
Direct impact of equity
markets and interest
rates (see table
below)^(7) (18) (88) 153
Goodwill impairment
charge - (200) (665)
Impact of major
reinsurance
transactions - 26 -
Net income (loss)
attributed to
shareholders $ 1,057 $ (227) $ (69)
^(1) Core earnings is a non-GAAP measure. See "Performance and Non-GAAP
Measures" below.
^(2) The fourth quarter 2012 net loss from macro equity hedges was $432
million and consisted of a $140 million charge related to the estimated
expected cost of the macro equity hedges relative to our long-term
valuation assumptions and a charge of $292 million because actual
markets outperformed our valuation assumptions. This latter amount is
included in the direct impact of equity markets and interest rates (see
table below).
^(3) In accordance with our definition of core earnings outlined in section
F1, the fourth quarter tax related items described in section A1 were
considered material and exceptional in nature and therefore not included
in core earnings. Please note that core earnings does include routine
type tax transactions and provisions.
^(4) Our variable annuity guarantee dynamic hedging strategy is not designed
to completely offset the sensitivity of policy liabilities to all risks
associated with the guarantees embedded in these products. The gain in
the fourth quarter 2012 was mostly because our equity fund results
outperformed indices, there was a gain on the release of provision for
adverse deviation associated with more favourable equity markets and the
tightening of corporate spreads had a favourable impact on our bond
funds. See the Risk Management section of our 2011 Annual MD&A.
^(5) The charge for the fourth quarter of 2012 is primarily related to the
estimated impact of modeling refinements relating to a valuation system
conversion in the U.S.
^(6) The restructuring charge relates to severance under the Company's
Organization Design Project. As outlined at the November Investor Day,
the project is designed to broaden the spans of control and reduce the
number of layers in the organization.
^(7) The direct impact of equity markets and interest rates is relative to
our policy liability valuation assumptions and includes changes to
interest rate assumptions as well as experience gains and losses on
derivatives associated with our macro equity hedges. We also include
gains and losses on the sale of AFS bonds as management may have the
ability to partially offset the direct impacts of changes in interest
rates reported in the liability segments.
The gain (loss) related to the direct impact of equity markets and interest
rates in the table above is attributable to:
C$ millions, unaudited 4Q 2012 3Q 2012 4Q 2011
Variable annuity guarantee
liabilities that are not dynamically
hedged $ 556 $ 298 $ 234
General fund equity investments
supporting policy liabilities^(1) 48 55 56
Macro equity hedges relative to
expected costs^(2) (292) (86) (250)
Fixed income reinvestment rates
assumed in the valuation of policy
liabilities^(3) (290) (330) 122
Sale of AFS bonds and derivative
positions in the Corporate & Other
segment (40) (25) (9)
Direct impact of equity markets and
interest rates $ (18) $ (88) $ 153
^(1) The impact on general fund equity investments supporting policy
liabilities includes the capitalized impact on fees for variable
universal life policies.
^(2) Gross equity exposure produced gains of $1,103 million in the fourth
quarter 2012, which were partially offset by charges from macro hedge
experience and dynamic hedges of $691 million.
^(3) The charge in fourth quarter 2012 for lower assumed fixed income returns
was driven by the unfavourable impact that the narrowing of swap spreads
relative to corporate spreads had on our reinvestment assumptions and
the decline in risk free rates in Asia.
B2 Full year earnings analysis
The table below reconciles the full year 2012 core earnings of $2,187 million
to the reported net income attributed to shareholders of $1,736 million.
C$ millions, unaudited
For the years ended December 31, 2012 2011
Core earnings (losses)^(1)
Asia Division $ 963 $ 938
Canadian Division 835 849
U.S. Division 1,085 1,005
Corporate & Other (excluding expected cost of macro
hedges) (407) (415)
Expected cost of macro hedges^(2) (489) (408)
Core investment related gains 200 200
Total Core earnings $ 2,187 $ 2,169
Investment related gains in excess of core investment
gains 937 1,290
Core earnings plus investment related gains above $ 3,124 $ 3,459
Change in actuarial methods and assumptions, excluding
URR^(3) (1,081) (751)
Direct impact of equity markets and interest rates^(4)
(see table below) (758) (1,064)
Goodwill impairment charge (200) (665)
Income (charges) on variable annuity guarantee liabilities
that are dynamically hedged^(5) 176 (1,153)
Impact of major reinsurance transactions, in-force product
changes and dispositions 210 303
Material and exceptional tax related items^(6) 322 -
Restructuring charge related to organizational design^(7) (57) -
Net income attributed to shareholders $ 1,736 $ 129
^(1) This item is a non-GAAP measure. See "Performance and Non-GAAP
Measures" below.
^(2) The 2012 net loss from macro equity hedges was $1,000 million and
consisted of a $489 million charge related to the estimated expected
cost of the macro equity hedges relative to our long-term valuation
assumptions and a charge of $511 million because actual markets
outperformed our valuation assumptions. The latter amount is included
in the direct impact of equity markets and interest rates (see table
below).
^(3) Of the full year 2012 $1,081 million charge for change in actuarial
methods and assumptions, $1,006 million was reported in the third
quarter as part of the comprehensive annual review of valuation
assumptions. The full year charges were broadly grouped into three
categories: (i) a charge of $244 million related to updates to
actuarial standards of practice, (ii) a charge of $1,120 million for
updates largely related to the current macro-economic climate, and
(iii) all other results of the annual review of assumptions netted to
a gain of $283 million.
^(4) The direct impact of equity markets and interest rates is relative to
our policy liability valuation assumptions and includes changes to
interest rate assumptions as well as experience gains and losses on
derivatives associated with our macro equity hedges. We also include
gains and losses on the sale of AFS bonds as management may have the
ability to partially offset the direct impacts of changes in interest
rates reported in the liability segments.
^(5) Our variable annuity guarantee dynamic hedging strategy is not
designed to completely offset the sensitivity of policy liabilities to
all risks associated with the guarantees embedded in these products.
See the Risk Management section of our 2011 Annual MD&A. The gain in
2012 mostly related to the same items as reported in fourth quarter
2012 above.
^(6) Included in the tax items are $264 million of material and exceptional
U.S. tax items reported in fourth quarter 2012 and $58 million for
changes to tax rates in Japan in the first quarter of 2012.
^(7) See fourth quarter table above.
The gain (loss) related to the direct impact of equity markets and interest
rates included in the table above is attributable to:
C$ millions, unaudited
For the years ended December 31, 2012 2011
Variable annuity guarantee liabilities that $
are not dynamically hedged $ 1,078 (1,092)
General fund equity investments supporting
policy liabilities^(1) 108 (214)
Macro equity hedges relative to expected
costs^(2) (511) 636
Lower fixed income reinvestment rates assumed
in the valuation of policy liabilities (740) (281)
Sale of AFS bonds and derivative positions in
the Corporate & Other segment (16) 324
Charges due to lower fixed income URR
assumptions used in the valuation of policy
liabilities (677) (437)
Direct impact of equity markets and interest $
rates $ (758) (1,064)
^(1) The impact on general fund equity investments supporting policy
liabilities includes the capitalized impact on fees for variable
universal life policies.
^(2) Gross equity exposure produced gains of $2,025 million in 2012, which
were partially offset by charges from macro hedge experience and dynamic
hedges of $1,174 million.
B3 Premiums and deposits ("P&D")
Premiums and deposits^21 for insurance products were $6.6 billion in the
fourth quarter of 2012, an increase of 18 per cent compared with the fourth
quarter of 2011. This included an increase of 39 per cent in Asia, 12 per
cent in Canada and nine per cent in the U.S. For the full year, P&D exceeded
$24 billion, an increase of eight per cent over 2011.
Premiums and deposits for wealth products were $17.5 billion in the fourth
quarter of 2012, an increase of $7.3 billion compared with the fourth quarter
of 2011. The strong result includes over $5 billion in institutional mandates
won by Manulife Asset Management. For the full year, P&D exceeded $51
billion, an increase of 16 per cent over 2011.
B4 Funds under management
Funds under management^21 at the end of 2012 were a record $532 billion, an
increase of $32 billion, or nine per cent on a constant currency basis,
compared with December 31, 2011. The increase was attributed to $44 billion
of favourable investment returns and $14 billion of net positive policyholder
cash flows, partially offset by the transfer of $7 billion of assets related
to the reinsurance of our U.S. fixed deferred annuity business, $11 billion
due to currency movements and $8 billion of non-policyholder cash outflows
(expenses, commissions, taxes and other items).
__________________________
This item is a non-GAAP measure. See "Performance and Non-GAAP Measures"
^21 below.
B5 Capital ^
MFC's total capital^22 as at December 31, 2012 was $29.6 billion, an increase
of $1.1 billion from September 30, 2012 and $0.6 billion from December 31,
2011. The increase from December 31, 2011 included net earnings of $1.7
billion and net capital raised of $0.2 billion, partially offset by $0.8
billion impact of the stronger Canadian dollar and cash dividends of $0.7
billion over the period.
As noted in section A1 above, MLI's MCCSR ratio closed the quarter at 211 per
cent compared with 204 per cent at the end of the third quarter.
B6 U.S. GAAP results
Net income attributed to shareholders in accordance with U.S. GAAP^22 for the
fourth quarter of 2012 was $237 million, compared with $1,057 million under
IFRS. For the full year 2012 net income attributed to shareholders in
accordance with U.S. GAAP was $2,557 million, $821 million higher than our
results under IFRS.
As we are no longer reconciling our financial results under U.S. GAAP in our
consolidated financial statements, net income in accordance with U.S. GAAP is
considered a non-GAAP financial measure. A reconciliation of the major
differences in net income (loss) attributed to shareholders in accordance with
IFRS to net income attributed to shareholders in accordance with U.S. GAAP for
the fourth quarter and full year is as follows with the major differences
expanded upon below:
C$ millions,
unaudited Quarterly Results Full Year Results
For the
periods ended
December 31, 2012 2011^(1) 2012 2011^(1)
Net income
(loss)
attributed to
shareholders
in accordance
with IFRS $ 1,057 $ (69) $ 1,736 $ 129
Key earnings
differences:
For variable
annuity
guarantee
liabilities $ (668) $ 297 $ (1,225) $ 2,927
Related to the
impact of
mark-to-market
accounting and
investing
activities on
investment
income and
policy
liabilities (130) (179) 432 (120)
New business
differences
including
acquisition
costs (161) (64) (650) (322)
Charges due to
lower fixed
income
ultimate
reinvestment
rate
assumptions
used in the
valuation of
policy
liabilities
under IFRS - - 677 437
Changes in
actuarial
methods and
assumptions,
excluding URR (40) (53) 492 349
Goodwill
impairment
charge - 153 200 153
Changes
related to
major
reinsurance
transactions 5 5 60 (303)
Other
differences 174 249 835 424
Total earnings
differences $ (820) $ 408 $ 821 $ 3,545
Net income
attributed to
shareholders
in accordance
with U.S. GAAP $ 237 $ 339 $ 2,557 $ 3,674
^(1) Restated as a result of adopting Accounting Standards Update # 2010-26,
"Accounting for Costs Associated with Acquiring or Renewing Insurance
Contracts" ("ASU 2010-26") effective January 1, 2012 but requiring
application to 2011. The impact for fourth quarter 2011 was a net
decrease in earnings of $28 million (full year 2011 decrease of $48
million), all of which is included in "New business differences
including acquisition costs".
__________________________
This item is a non-GAAP measure. See "Performance and Non-GAAP Measures"
^22 below
Accounting for variable annuity guarantee liabilities
IFRS follows a predominantly "mark-to-market" accounting approach to measure
variable annuity guarantee liabilities while U.S. GAAP only uses
"mark-to-market" accounting for certain benefit guarantees. The U.S. GAAP
accounting results in an accounting mismatch between the hedged assets
supporting the dynamically hedged guarantees and the guarantees not accounted
for on a mark-to-market basis. Another difference is that U.S. GAAP reflects
the Company's own credit standing in the measurement of the liability. In the
fourth quarter of 2012, we reported a net loss of $12 million (2011 - $338
million gain) in our total variable annuity businesses under U.S. GAAP
compared with a gain of $656 million under IFRS (2011 - $41 million).
Investment income and policy liabilities
Under IFRS, accumulated unrealized gains and losses arising from fixed income
investments and interest rate derivatives supporting policy liabilities are
largely offset in the valuation of the policy liabilities. The fourth quarter
2012 IFRS impacts of fixed income reinvestment assumptions, general fund
equity investments, fixed income and alternative long-duration asset investing
totaled a net $126 million gain (2011 - gain of $457 million) compared with
U.S. GAAP net realized losses and other investment losses of $4 million (2011
- gain of $278 million).
Differences in the treatment of acquisition costs and other new business items
Acquisition costs that are related to and vary with the production of new
business are explicitly deferred and amortized under U.S. GAAP but are
recognized as an implicit reduction in insurance liabilities along with other
new business gains and losses under IFRS.
Total equity in accordance with U.S. GAAP^23 as at December 31, 2012 was
approximately $16 billion higher than under IFRS. Of this difference,
approximately $10 billion was attributable to the higher cumulative net income
on a U.S. GAAP basis. The remaining difference was primarily attributable to
the treatment of unrealized gains on fixed income investments and derivatives
in a cash flow hedging relationship which are reported in equity under U.S.
GAAP, but where the fixed income investments and interest rate derivatives are
supporting policy liabilities, these accumulated unrealized gains are largely
offset in the valuation of the policy liabilities under IFRS. The majority of
the difference in equity between the two accounting bases as at December 31,
2012 arose from our U.S. businesses.
A reconciliation of the major differences in total equity is as follows:
As at December 31,
C$ millions, unaudited 2012 2011^(1)
Total equity in accordance with IFRS $ 26,096 $ 24,879
Differences in shareholders' retained earnings
and participating policyholders' equity 9,793 8,869
Differences in Accumulated Other Comprehensive
Income attributable to:
(i) Available-for-sale securities and
other 4,967 4,473
(ii) Cash flow hedges 2,440 2,570
(iii) Translation of net foreign
operations^(2) (1,481) (1,309)
Differences in share capital, contributed
surplus and non-controlling interest in
subsidiaries 40 148
Total equity in accordance with U.S. GAAP $ 41,855 $ 39,630
^(1) 2011 equity has been restated to reflect the adoption of ASU # 2010-26.
Reflects the net difference in the currency translation account after
the reset to zero through retained earnings upon adoption of IFRS at
^(2) January 1, 2010.
__________________________
Total equity in accordance with U.S. GAAP is a non-GAAP measure. See
^23 "Performance and Non-GAAP Measures" below.
C PERFORMANCE BY DIVISION
C1 Asia Division
($ millions, Quarterly Results Full Year Results
unless
otherwise
stated)
Canadian 4Q 2012 3Q 2012 4Q 2011 2012 2011
dollars
Net income $ 682 $ 491 $ 285 $ 1,969 $ (48)
(loss)
attributed
to
shareholders
Core 180 230 213 963 938
earnings
Premiums and 4,403 2,944 2,625 13,461 10,303
deposits
Funds under 77.7 76.2 71.4 77.7 71.4
management
(billions)
U.S. dollars
Net income $ 689 $ 492 $ 279 $ 1,979 $ (62)
(loss)
attributed
to
shareholders
Core 182 231 209 963 950
earnings
Premiums and 4,441 2,958 2,567 13,477 10,422
deposits
Funds under 78.1 77.5 70.2 78.1 70.2
management
(billions)
Asia Division's net income attributed to shareholders was US$689 million for
the fourth quarter of 2012 compared with US$279 million for the fourth quarter
of 2011. The significant increase was primarily related to the direct impact
of equity markets and interest rates on variable annuity guarantee
liabilities. The US$27 million decrease in core earnings compared with the
fourth quarter of 2011 was attributable to the decline in higher margin cancer
product sales reported in 2011 partly offset by business growth across the
region.
The fourth quarter decline in core earnings compared with the third quarter
was a result of increased sales incentive expenses due to higher sales,
increased systems costs and investments in branding and communication, and
increased new business strain in Japan as a result of higher sales ahead of
price increases on the Increasing Term product. The increase in sales in Asia
should contribute to an increase in future period earnings.
Full year net income attributed to shareholders was US$1,979 million in 2012
compared with a loss of US$62 million for 2011. In 2012 we reported a gain of
US$915 million due to the direct impact of equity markets and interest rates
compared to a loss of US$1,186 million in 2011. The US$13 million increase in
core earnings compared with full year 2011 was attributable to growth in
in-force business across the region partially offset by an increase in
expenses related to expansion activities and the non-recurrence of
policyholder experience gains reported in 2011.
Premiums and deposits for the fourth quarter of 2012 were US$4.4 billion, up
75 per cent from the fourth quarter of 2011. Premiums and deposits for
insurance products of US$2.0 billion increased 39 per cent driven by higher
new business sales combined with in-force business growth across the region,
most notably in Japan. Wealth management premiums and deposits of US$2.5
billion increased 120 per cent, driven by higher mutual fund sales in Japan,
Indonesia and Taiwan, as well as higher pension sales in Hong Kong.
Funds under management as at December 31, 2012 were US$78.1 billion, an
increase of 16 per cent, on a constant currency basis, compared with December
31, 2011. Growth was driven by an increase in net policyholder cash flows of
$7 billion and favourable investment returns.
C2 Canadian Division^(1)
($ millions, unless Quarterly Results Full Year Results
otherwise stated)
Canadian dollars 4Q 2012 3Q 2012 4Q 2011 2012 2011
Net income attributed $ 251 $ 378 $ 246 $ 1,169 $ 927
to shareholders
Core earnings 233 229 142 835 849
Premiums and deposits 4,668 4,160 4,393 18,119 17,816
Funds under management 133.2 131.1 122.1 133.2 122.1
(billions)
^(1) The Company moved its International Group Program business unit from
U.S. Division to Canadian Division in 2012. Prior period results have
been restated to reflect this change.
Canadian Division's net income attributed to shareholders was $251 million for
the fourth quarter of 2012 compared with $246 million for the fourth quarter
of 2011. Core earnings increased by $91 million compared with the fourth
quarter of 2011 reflecting the positive impacts of improved new business
profitability as a result of pricing and product changes and favourable claims
and lapse experience. The fourth quarter of 2012 also benefited from a
release of tax provisions relating to the closure of a prior year's tax
filings. Excluded from core earnings in the fourth quarter of 2012 were $18
million of investment related gains (2011 - $104 million).
Full year net income attributed to shareholders was $1,169 million in 2012
compared to $927 million for 2011. Core earnings decreased by $14 million
compared with full year 2011. The favourable impact of improved new business
margins and business growth were more than offset by claims and lapse
experience and lower expense margins as a result of the change in business
mix. Excluded from core earnings in 2012 were gains of $35 million related to
the direct impact of equity markets and interest rates (2011 - $12 million);
other investment gains of $40 million (2011 - $66 million); a $137 million
gain related to the recapture of a reinsurance treaty (2011 - nil) and a $122
million reserve release related to in-force variable annuity product changes
(2011 - nil).
Premiums and deposits in the fourth quarter of 2012 were $4.7 billion, six per
cent higher than fourth quarter 2011 levels. The increase was driven by
record mutual funds deposits and strong Group Benefits insurance sales,
partially offset by lower variable annuity sales.
Funds under management were a record $133.2 billion as at December 31, 2012,
an increase of nine per cent or $11.1 billion compared with December 31,
2011. The increase reflects business growth across the division driven by the
wealth management businesses and Manulife Bank. Net increases in asset market
values as a result of lower interest rates and equity market appreciation also
contributed to the year-over-year increase.
C3 U.S. Division^(1),(2)
($ millions,
unless
otherwise
stated) Quarterly Results Full Year Results
Canadian
dollars 4Q 2012 3Q 2012 4Q 2011 2012 2011
Net income
attributed to
shareholders $ 724 $ 436 $ 505 $ 1,911 $ 621
Core earnings 293 288 189 1,085 1,005
Premiums and
deposits 9,661 8,510 8,210 35,944 34,412
Funds under
management
(billions)^(3) 292.6 287.2 279.6 292.6 279.6
U.S. dollars
Net income
attributed to
shareholders $ 731 $ 439 $ 493 $ 1,918 $ 614
Core earnings 297 289 184 1,088 1,018
Premiums and
deposits 9,743 8,552 8,025 35,967 34,807
Funds under
management
(billions)^(3) 294.1 292.0 274.9 294.1 274.9
^(1) The Company moved its International Group Program business unit to
Canadian Division in 2012. Prior period results have been restated to
reflect this change.
^(2) The Company moved its Privately Managed Accounts unit to Corporate and
Other in 2012. Prior period results have been restated to reflect this
change.
^(3) Reflects the impact of annuity reinsurance transactions in Q3 and Q2
2012.
U.S. Division's net income attributed to shareholders was US$731 million for
the fourth quarter of 2012 compared with US$493 million for the fourth quarter
of 2011. Core earnings for the fourth quarter of 2012 were US$297 million, an
increase of US$113 million compared with the fourth quarter of 2011.
Contributing to the increase were improved new business margins as a result of
price increases and business mix, higher fee income from higher average assets
under management and the impact of changes in assumptions related to uncertain
tax positions, partially offset by higher expenses. Items reconciling core
earnings to net income in the fourth quarter of 2012 included the direct
impact of equity markets and interest rates, other investment related items
and a portion of the tax related item discussed in section A1.
Full year net income attributed to shareholders was US$1,918 million in 2012
compared to US$614 million for 2011. Core earnings increased US$70 million
compared with 2011. Contributing to the increase were improved new business
margins and business mix, a lower effective tax rate as we released provisions
for uncertain tax positions, and higher fees from higher assets on the Wealth
Management business, partially offset by unfavourable policyholder experience.
Items reconciling core earnings to net income in 2012 included the direct
impact of equity markets and interest rates, other investment related gains
and losses and a portion of the tax items discussed in section A1.
In line with the 2010 in-force repricing efforts in our JH LTC business, the
Company has filed for premium rate increases with 50 state regulators. The
rate increases requested average approximately 40 per cent on the majority of
our in-force retail and group business. To date, approvals have been received
from 43 states.
Premiums and deposits for the fourth quarter of 2012 were US$9.7 billion, an
increase of 21 per cent from the fourth quarter of 2011. The increase was
primarily driven by higher sales of mutual funds, 401(k) plans and life
insurance, partially offset by lower sales of annuities. We announced our
decision to stop writing new fixed deferred annuity and variable annuity
business in the third quarter of 2012.
Funds under management as at December 31, 2012 were US$294.1 billion, up seven
per cent from December 31, 2011. The increase was due to positive investment
returns, the impact of lower interest rates on the market value of funds under
management and net sales in Wealth Asset Management, partially offset by
surrender and benefit payments in JH Annuities and the transfer of US$7.2
billion of assets related to the fixed deferred annuity reinsurance
transactions.
C4 Corporate and Other^(1)
($ millions, Quarterly Results Full Year Results
unless
otherwise
stated)
Canadian 4Q 2012 3Q 2012 4Q 2011 2012 2011
dollars
Net loss $ (600) $ (1,532) $ (1,105) $ (3,313) $ (1,371)
attributed
to
shareholders
Core (79) (117) (124) (407) (415)
losses
(excl.
macro
hedges and
core
investment
gains)
Expected (140) (124) (97) (489) (408)
cost of
macro
hedges
Core 50 50 50 200 200
investment
gains
Total core $ (169) $ (191) $ (171) $ (696) $ (623)
losses
Premiums and 5,396 1,132 688 7,977 3,530
deposits
Funds under 28.4 20.1 26.6 28.4 26.6
management
(billions)
^(1) As a result of the sale of the Life Retrocession business effective July
1, 2011, the Company moved its P&C Reinsurance business and run-off
variable annuity reinsurance business to Corporate and Other. In
addition, Corporate and Other has been restated to include the Privately
Managed Accounts business and Life Retrocession business for periods
prior to the sale.
Corporate and Other is composed of: Investment performance on assets backing
capital, net of amounts allocated to operating divisions and financing costs,
Investment Division's external asset management business, Property and
Casualty ("P&C") Reinsurance business, as well as run-off reinsurance
operations including variable annuities and accident and health.
For segment reporting purposes, the impact of updates to actuarial
assumptions, settlement costs for macro equity hedges and other non-operating
items are included in this segment's earnings.
Corporate and Other reported a net loss attributed to shareholders of $600
million for the fourth quarter of 2012 compared to a net loss of $1,105
million for the fourth quarter of 2011. Core losses were $169 million in the
fourth quarter of 2012 and $171 million in the fourth quarter of 2011.
Charges in the fourth quarter of 2012 not included in core earnings totaled
$431 million. These included: $292 million of net experience losses on macro
hedges, an $87 million charge for changes in actuarial methods and
assumptions, a $57 million restructuring charge ($78 million pre-tax) and $40
million of realized losses on AFS bonds and related interest rate swaps. In
addition, the classification of $50 million of investment gains is reported in
the Corporate and Other segment as a charge to non-core earnings and a gain to
core earnings. Partially offsetting these losses was a net gain of $95 million
primarily related to interest on a material and exceptional tax item.
The core losses of $169 million in the fourth quarter compared with $171
million in the fourth quarter of 2011. In the fourth quarter 2012 we released
$44 million of excess P&C reinsurance provisions related to events in 2011 and
added a $6 million provision for Hurricane Sandy. The P&C reinsurance items
were offset by higher than expected macro hedge costs of $43 million.
Corporate and Other reported a full year net loss attributed to shareholders
of $3,313 million in 2012 compared to a net loss of $1,371 million in 2011.
Core losses were $696 million in 2012 and $623 million in 2011.
Excluded from 2012 core losses were net charges of $2,617 million. Of this
amount, $1,215 million related to the direct impact of equity markets and
interest rates, largely comprising net experience losses from the macro equity
hedges and charges due to lower URR assumptions used in the valuation of
policy liabilities, $1,081 million related to changes in actuarial methods and
assumptions, other than URR, $200 million related to a goodwill impairment
charge, and $200 million was the offset to investment gains classified as core
earnings. The charges were partially offset by gains of $79 million largely
related to mark-to-market investment gains and tax related items, partially
offset by the restructuring charge noted above.
The $73 million increase in full year core losses was due to: increased
amortization of investment losses on the Company's pension plans, lower
investment income due to a combination of declining interest rates and lower
average assets, higher business development expenses and higher expected macro
hedging. Partially offsetting these items were the non-recurrence of $151
million P&C reinsurance charges in 2011 related to the Japan earthquake and
tsunami, the subsequent release in 2012 of $44 million in excess provisions
related to these events and lower accrued interest on tax provisions.
Premiums and deposits for the fourth quarter of 2012 were $5.4 billion,
compared with $0.7 billion for the fourth quarter 2011. In the fourth quarter
of 2012, Manulife Asset Management was awarded a substantial institutional
fixed income investment mandate.
Funds under management of $28.4 billion as at December 31, 2012 (December 31,
2011 - $26.6 billion) included assets managed by Manulife Asset Management on
behalf of institutional clients of $28.8 billion (2011 - $23.8 billion) and
$7.1 billion (2011 - $10.6 billion) of the Company's own funds, partially
offset by a $7.5 billion (2011 - $7.8 billion) total company adjustment
related to the reclassification on the balance sheet of derivative
liabilities. The decline in the Company's own funds primarily reflects an
increase in assets allocated to the operating divisions and the impact of the
stronger Canadian dollar.
D RISK MANAGEMENT AND RISK FACTORS UPDATE
This section provides an update to our risk management practices and risk
factors outlined in the MD&A in our 2011 Annual Report.
D1 General macro-economic risk factors
In our 2011 Annual Report, we outlined potential impacts of macro-economic
factors including the impact of a low interest environment.
In our Third Quarter 2012 Report to Shareholders, we disclosed that we have
shifted our objective of $4 billion in net income by 2015 by roughly a year,
and we are now targeting $4 billion in core earnings in 2016 based on our
macro-economic and other assumptions^24. Our revised objective uses a core
earnings target metric, which is consistent with measuring the underlying
profitability of our business.
_____________________
^24 See "Caution regarding forward-looking statements" below.
D2 Regulatory capital, actuarial and accounting risks
As outlined in our 2011 Annual Report, as a result of the recent financial
crisis, financial authorities and regulators in many countries are reviewing
their capital, actuarial and accounting requirements, and the changes may have
a material adverse effect on the Company's consolidated financial statements
and regulatory capital, both at transition and subsequently. We may be
required to raise additional capital, which could be dilutive to existing
shareholders, or to limit the new business we write. Subsequent updates to
regulatory and professional standards are outlined below.
* Changes to U.S. statutory accounting practices concerning actuarial
reserving standards for certain universal life ("UL") products pursuant to
Actuarial Guideline 38 ("AG38") have now been promulgated by the National
Association of Insurance Commissioners ("NAIC"). The new requirements for
in-force business will affect policies issued since July 1, 2005 and
in-force on December 31, 2012. The implementation of this standard
requires actuarial judgment and interpretation. To the extent that
regulatory guidance emerges that is different than our interpretations it
could have a material impact on our statutory reserves and local capital
position.
* On December 24, 2012, the Canadian Actuarial Standards Board ("ASB")
issued a Notice of Intent proposing to revise the Standards of Practice of
the Canadian Institute of Actuaries with respect to the economic
reinvestment assumptions and investment strategies utilized for long-tail
liability cash flows under the Canadian Asset Liability Method ("CALM").
The proposed changes are to incorporate calibration criteria for
stochastic interest rate models used for CALM, to revise the deterministic
scenarios to provide results comparable to those provided by the
stochastic methodology, to establish maximum assumed net risk premiums
which may include a possible revision to the 20 year horizon for
re-investing in corporate bonds and to establish limits on the extent to
which investment in alternative assets can be assumed. The ASB hopes to
issue an exposure draft by June 2013 and adopt the final standards in
2013, with a proposed effective date of October 15, 2013. The ASB
recognizes that this timetable is aggressive. Given the early stage of
the ASB review, the net impact of any changes in actuarial standards on
earnings and thus capital is unknown.
* Consistent with the high levels of regulatory activity internationally,
the NAIC has been reviewing reserving and capital methodologies as well as
the overall risk management framework. These reviews will affect U.S.
life insurers, including John Hancock, and could lead to increased
reserving and / or capital requirements for our business in the United
States.
* In 2010, the International Accounting Standards Board ("IASB") issued its
Insurance Contracts (Phase II) Exposure Draft and the U.S. Financial
Accounting Standards Board ("FASB") issued its Insurance Contract
Discussion paper. The IASB recently announced that it expects to issue a
limited re-exposure draft in 2013 and the FASB announced it expects to
issue an Exposure Draft in 2013. The final standards are not expected to
be effective until 2018. As previously outlined, the insurance industry in
Canada is working with OSFI and the federal government with respect to the
potential impact of these proposals on Canadian insurance companies, and
the industry is urging policymakers to ensure that any future accounting
and capital proposals appropriately consider the underlying business model
of a life insurance company and, in particular, the implications for
long-duration guaranteed products which are much more prevalent in North
America than elsewhere.
D3 Additional risks - Entities within the MFC Group are interconnected which
may make separation difficult
There have been inquiries relating to the sale or spin-off of all or a part of
our U.S. Division. We remain committed to our U.S. Division. In addition,
linkages between MFC and its subsidiaries, including our U.S. operations, may
make it difficult to dispose of or separate a subsidiary within the group by
way of spin-off or similar transaction. See the Company's Annual Information
Form - "Risk Factors - Additional risks - Entities within the MFC Group are
interconnected which may make separation difficult". In addition to the
possible negative consequences outlined in such disclosure, other negative
consequences could include a requirement for significant capital injections,
and increased net income and capital sensitivities of MFC and its remaining
subsidiaries to market declines.
D4 Variable annuity and segregated fund guarantees
As at December 31, 2012, approximately 67 per cent of the value of our
variable annuity and segregated fund guarantee value was either dynamically
hedged or reinsured, an increase from 65 per cent at September 30, 2012. The
business dynamically hedged at December 31, 2012 comprises 63 per cent of the
variable annuity guarantee values, net of amounts reinsured. During the
quarter, an additional $700 million of in-force business was dynamically
hedged and for the full year we added a total of $1,500 million of in-force
guarantee value to the program. All material amounts of new business continue
to be hedged at issue.
The table below shows selected information regarding the Company's variable
annuity and segregated funds guarantees gross and net of reinsurance and the
business dynamically hedged.
Variable annuity and segregated fund guarantees
As at December 31, 2012 September 30, 2012
(C$ Guarantee Amount Guarantee Amount
millions) value Fund value at risk^(4) value Fund value at risk^(4)
Guaranteed
minimum
income
benefit^(1) $ 6,581 $ 4,958 $ 1,630 $ 6,707 $ 5,062 $ 1,654
Guaranteed
minimum
withdrawal
benefit 65,481 58,659 7,183 65,210 58,538 7,107
Guaranteed
minimum
accumulation
benefit 20,380 21,468 1,383 21,846 22,182 2,089
Gross living
benefits^(2) $ 92,442 $ 85,085 $ 10,196 $ 93,763 $ 85,782 $ 10,850
Gross death
benefits^(3) 13,316 10,622 2,206 13,764 11,365 2,315
Total gross
of
reinsurance
and hedging $ 105,758 $ 95,707 $ 12,402 $ 107,527 $ 97,147 $ 13,165
Living
benefits
reinsured $ 5,780 $ 4,358 $ 1,427 $ 5,837 $ 4,410 $ 1,433
Death
benefits
reinsured 3,673 3,140 709 3,821 3,249 770
Total
reinsured $ 9,453 $ 7,498 $ 2,136 $ 9,658 $ 7,659 $ 2,203
Total, net
of
reinsurance $ 96,305 $ 88,209 $ 10,266 $ 97,869 $ 89,488 $ 10,962
Living
benefits
dynamically
hedged $ 55,464 $ 52,585 $ 4,528 $ 54,600 $ 51,876 $ 4,288
Death
benefits
dynamically
hedged 5,453 3,945 558 5,353 4,063 485
Total
dynamically
hedged $ 60,917 $ 56,530 $ 5,086 $ 59,953 $ 55,939 $ 4,773
Living
benefits
retained $ 31,198 $ 28,142 $ 4,241 $ 33,326 $ 29,496 $ 5,129
Death
benefits
retained 4,190 3,537 939 4,590 4,053 1,060
Total, net
of
reinsurance
and dynamic
hedging $ 35,388 $ 31,679 $ 5,180 $ 37,916 $ 33,549 $ 6,189
^(1) Contracts with guaranteed long-term care benefits are included in this
category.
^(2) Where a policy includes both living and death benefits, the guarantee in
excess of the living benefit is included in the death benefit category
as outlined in footnote (3).
^(3) Death benefits include stand-alone guarantees and guarantees in excess
of living benefit guarantees where both death and living benefits are
provided on a policy.
^(4) Amount at risk (in-the-money amount) is the excess of guarantee values
over fund values on all policies where the guarantee value exceeds the
fund value. This amount is not currently payable. For guaranteed
minimum death benefit, the net amount at risk is defined as the current
guaranteed minimum death benefit in excess of the current account
balance. For guaranteed minimum income benefit, the net amount at risk
is defined as the excess of the current annuitization income base over
the current account value. For all guarantees, the net amount at risk is
floored at zero at the single contract level.
As at
December 31, 2012 2011
(C$ Guarantee Amount Guarantee Amount
millions) value Fund value at risk^(4) value Fund value at risk^(4)
Guaranteed
minimum
income
benefit^(1) $ 6,581 $ 4,958 $ 1,630 $ 7,518 $ 5,358 $ 2,163
Guaranteed
minimum
withdrawal
benefit 65,481 58,659 7,183 66,655 56,954 9,907
Guaranteed
minimum
accumulation
benefit 20,380 21,468 1,383 23,509 23,030 2,813
Gross living
benefits^(2) $ 92,442 $ 85,085 $ 10,196 $ 97,682 $ 85,342 $ 14,883
Gross death
benefits^(3) 13,316 10,622 2,206 15,202 11,614 3,232
Total gross
of
reinsurance
and hedging $ 105,758 $ 95,707 $ 12,402 $ 112,884 $ 96,956 $ 18,115
Living
benefits
reinsured $ 5,780 $ 4,358 $ 1,427 $ 6,491 $ 4,622 $ 1,871
Death
benefits
reinsured 3,673 3,140 709 4,360 3,430 1,104
Total
reinsured $ 9,453 $ 7,498 $ 2,136 $ 10,851 $ 8,052 $ 2,975
Total, net
of
reinsurance $ 96,305 $ 88,209 $ 10,266 $ 102,033 $ 88,904 $ 15,140
Living
benefits
dynamically
hedged $ 55,464 $ 52,585 $ 4,528 $ 55,522 $ 50,550 $ 6,346
Death
benefits
dynamically
hedged 5,453 3,945 558 5,133 3,461 739
Total
dynamically
hedged $ 60,917 $ 56,530 $ 5,086 $ 60,655 $ 54,011 $ 7,085
Living
benefits
retained $ 31,198 $ 28,142 $ 4,241 $ 35,669 $ 30,170 $ 6,666
Death
benefits
retained 4,190 3,537 939 5,709 4,723 1,389
Total, net
of
reinsurance
and dynamic
hedging $ 35,388 $ 31,679 $ 5,180 $ 41,378 $ 34,893 $ 8,055
^(1) Contracts with guaranteed long-term care benefits are included in this
category.
^(2) Where a policy includes both living and death benefits, the guarantee in
excess of the living benefit is included in the death benefit category
as outlined in footnote (3).
^(3) Death benefits include stand-alone guarantees and guarantees in excess
of living benefit guarantees where both death and living benefits are
provided on a policy.
^(4) Amount at risk (in-the-money amount) is the excess of guarantee values
over fund values on all policies where the guarantee value exceeds the
fund value. This amount is not currently payable. For guaranteed
minimum death benefit, the net amount at risk is defined as the current
guaranteed minimum death benefit in excess of the current account
balance. For guaranteed minimum income benefit, the net amount at risk
is defined as the excess of the current annuitization income base over
the current account value. For all guarantees, the net amount at risk is
floored at zero at the single contract level.
The policy liabilities established for these benefits were $7,948 million at
December 31, 2012 (September 30, 2012 - $9,461 million) and include the policy
liabilities for both the hedged and the unhedged business. For unhedged
business, policy liabilities were $2,695 million at December 31, 2012
(September 30, 2012 - $3,521 million). The policy liabilities for the hedged
block were $5,253 million at December 31, 2012 (September 30, 2012 - $5,940
million). Policy liabilities decreased over the quarter largely due to the
favourable impact of the increase in equity markets.
Caution related to sensitivities
In this document, we have provided sensitivities and risk exposure measures
for certain risks. These include sensitivities due to specific changes in
market prices and interest rate levels projected using internal models as at a
specific date, and are measured relative to a starting level reflecting the
Company's assets and liabilities at that date and the actuarial factors,
investment returns and investment activity we assume in the future. The risk
exposures measure the impact of changing one factor at a time and assume that
all other factors remain unchanged. Actual results can differ significantly
from these estimates for a variety of reasons including the interaction among
these factors when more than one changes, changes in actuarial and investment
return and future investment activity assumptions, actual experience differing
from the assumptions, changes in business mix, effective tax rates and other
market factors, and the general limitations of our internal models. For these
reasons, the sensitivities should only be viewed as directional estimates of
the underlying sensitivities for the respective factors based on the
assumptions outlined below. Given the nature of these calculations, we cannot
provide assurance that the actual impact on net income attributed to
shareholders or on MLI's MCCSR ratio will be as indicated.
D5 Publicly traded equity performance risk
As a result of our dynamic and macro hedging program, as at December 31, 2012,
we estimate that approximately 72 to 83 per cent of our underlying earnings
sensitivity to a 10 per cent decline in equity markets would be offset by
hedges. The lower end of the range is based on the dynamically hedged assets
that exist at December 31, 2012 and assumes re-balancing of equity hedges for
dynamically hedged variable annuity liabilities at 5 per cent intervals and
the upper end of the range assumes the performance of the dynamic hedging
program would completely offset the loss from the dynamically hedged variable
annuity guarantee liabilities. The range at September 30, 2012 was 67 to 78
per cent. We have achieved our stated goal to have approximately 75 per cent
of the underlying earnings sensitivity to equity markets offset by hedges by
the end of 2014.
As outlined in our 2011 Annual Report, the macro hedging strategy is designed
to mitigate public equity risk arising from variable annuity guarantees not
dynamically hedged and from other products and fees. In addition, our variable
annuity guarantee dynamic hedging strategy is not designed to completely
offset the sensitivity of policy liabilities to all risks associated with the
guarantees embedded in these products (see MD&A in our 2011 Annual Report).
The tables below show the potential impact on net income attributed to
shareholders resulting from an immediate 10, 20 and 30 per cent change in
market values of publicly traded equities followed by a return to the expected
level of growth assumed in the valuation of policy liabilities. The potential
impact is shown before and after taking into account the impact of the change
in markets on the hedge assets. The potential impact is shown assuming that
(a) the change in value of the hedge assets completely offsets the change in
the dynamically hedged variable annuity guarantee liabilities, including the
provisions for adverse deviation and (b) that the change in value is not
completely offset. In the fourth quarter 2012 we refined our methodology
related to the estimated amount that would not be completely offset. The
refinement in methodology assumes that provision for adverse deviation is not
offset and that the hedge assets are based on the actual position at the
period end. (Previously the methodology assumed that for a 10, 20 and 30 per
cent decrease in the market value of equities, the profit from the hedge
assets offsets 80, 75 and 70 per cent, respectively, of the loss arising from
the change in the policy liabilities associated with the guarantees
dynamically hedged. For a 10, 20 and 30 per cent market increase in the market
value of equities, the loss on the dynamic hedges was assumed to be 120, 125
and 130 per cent of the gain from the dynamically hedged variable annuity
guarantee liabilities, respectively.)
While we cannot reliably estimate the amount of the change in dynamically
hedged variable annuity guarantee liabilities that will not be offset by the
profit or loss on the dynamic hedge assets, we make certain assumptions for
the purposes of estimating the impact on shareholders' net income. It is also
important to note that these estimates are illustrative, and that the hedge
program may underperform these estimates, particularly during periods of high
realized volatility and/or periods where both interest rates and equity market
movements are unfavourable.
Potential impact on net income attributed to shareholders
arising from changes to public equity returns ^(1)
As at December 31, 2012
(C$ millions) -30% -20% -10% 10% 20% 30%
Underlying
sensitivity to
net income
attributed to
shareholders^(2)
Variable
annuity
guarantees $ (5,640) $ (3,510) $ (1,580) $ 1,260 $ 2,220 $ 2,930
Asset based
fees (270) (180) (90) 90 180 270
General fund
equity
investments^(3) (380) (260) (130) 120 230 350
Total
underlying
sensitivity $ (6,290) $ (3,950) $ (1,800) $ 1,470 $ 2,630 $ 3,550
Impact of hedge
assets
Impact of macro
hedged assets $ 2,010 $ 1,340 $ 670 $ (670) $ (1,340) $ (2,010)
Impact of dynamic
hedge assets
assuming the
change in the
value of the
hedge assets
completely
offsets the
change in the
dynamically
hedged variable
annuity guarantee
liabilities^(4) 3,070 1,890 820 (600) (1,000) (1,300)
Total impact of
hedge assets
assuming the
change in value
of the dynamic
hedge assets
completely
offsets the
change in the
dynamically
hedged variable
annuity guarantee
liabilities^(4) $ 5,080 $ 3,230 $ 1,490 $ (1,270) $ (2,340) $ (3,310)
Net impact
assuming the
change in the
value of the
hedged assets
completely
offsets the
change in the
dynamically
hedged variable
annuity guarantee
liabilities^(4) $ (1,210) $ (720) $ (310) $ 200 $ 290 $ 240
Impact of
assuming that the
provisions for
adverse deviation
for dynamically
hedged
liabilities are
not offset and
that the hedging
program
rebalances at 5%
market
intervals^(5) (710) (470) (190) (10) (50) (70)
Net impact
assuming the
change in value
of the dynamic
hedge assets does
not completely
offset the change
in the
dynamically
hedged variable
annuity guarantee
liabilities, as
described
above^(5) $ (1,920) $ (1,190) $ (500) $ 190 $ 240 $ 170
Percentage of
underlying
earnings
sensitivitiy to
movements in
equity markets
that is offset by
hedges if dynamic
hedge assets
completely offset
the change in the
dynamically
hedged variable
annuity guarantee
liability 81% 82% 83% 86% 89% 93%
Percentage of
underlying
earnings
sensitivity to
movements in
equity markets
that is offset by
hedge assets if
dynamic hedge
assets do not
completely offset
the change in the
dynamically
hedged variable
annuity guarantee
liability^(5) 69% 70% 72% 87% 91% 95%
^(1) See "Caution related to sensitivities" above.
^(2) Defined as earnings sensitivity to a change in public equity markets
including settlements on reinsurance contracts, but before the offset
of hedge assets or other risk mitigants.
^(3) This impact for general fund equities is calculated as at a
point-in-time and does not include: (i) any potential impact on public
equity weightings; (ii) any gains or losses on public equities held in
the Corporate and Other segment; or (iii) any gains or losses on public
equity investments held in Manulife Bank. The sensitivities assume that
the participating policy funds are self-supporting and generate no
material impact on net income attributed to shareholders as a result of
changes in equity markets.
^(4) Best estimate liabilities and associated provisions for adverse
deviation.
^(5) Represents the impact of re-balancing equity hedges for dynamically
hedged variable annuity guarantee liabilities at 5% market intervals.
Also represents the impact of changes in markets on provisions for
adverse deviation that are not hedged, but does not include any impact
in respect of other sources of hedge ineffectiveness e.g. basis risk,
realized volatility and equity, interest rate correlations different
from expected among other factors. For presentation purposes, numbers
are rounded.
Potential impact on net income attributed to shareholders
arising from changes to public equity returns ^(1)
As at September 30, 2012
(C$ millions) -30% -20% -10% 10% 20% 30%
Underlying sensitivity to
net income attributed to
shareholders^(2)
Variable
annuity
guarantees $ (5,950) $ (3,730) $ (1,690) $ 1,360 $ 2,450 $ 3,300
Asset based
fees (270) (180) (90) 90 180 270
General fund
equity
investments^(3) (320) (210) (110) 100 200 300
Total
underlying
sensitivity $ (6,540) $ (4,120) $ (1,890) $ 1,550 $ 2,830 $ 3,870
Impact of hedge
assets
Impact of macro
hedged assets $ 1,860 $ 1,240 $ 620 $ (620) $ (1,240) $ (1,860)
Impact of dynamic
hedge assets
assuming the
change in the
value of the
hedge assets
completely
offsets the
change in the
dynamically
hedged variable
annuity guarantee
liabilities^(4) 3,180 1,960 860 (620) (1,060) (1,380)
Total impact of
hedge assets
assuming the
change in value
of the dynamic
hedge assets
completely
offsets the
change in the
dynamically
hedged variable
annuity guarantee
liabilities^(4) $ 5,040 $ 3,200 $ 1,480 $ (1,240) $ (2,300) $ (3,240)
Net impact
assuming the
change in the
value of the
hedged assets
completely
offsets the
change in the
dynamically
hedged variable
annuity guarantee
liabilities^(4) $ (1,500) $ (920) $ (410) $ 310 $ 530 $ 630
Impact of
assuming that the
provisions for
adverse deviation
for dynamically
hedged
liabilities are
not offset and
that the hedging
program
rebalances at 5%
market
intervals^(5) (760) (500) (210) (40) (90) (130)
Net impact
assuming the
change in value
of the dynamic
hedge assets does
not completely
offset the change
in the
dynamically
hedged variable
annuity guarantee
liabilities^(5) $ (2,260) $ (1,420) $ (620) $ 270 $ 440 $ 500
Percentage of
underlying
earnings
sensitivitiy to
movements in
equity markets
that is offset by
hedges if dynamic
hedge assets
completely offset
the change in the
dynamically
hedged variable
annuity guarantee
liability 77% 78% 78% 80% 81% 84%
Percentage of
underlying
earnings
sensitivity to
movements in
equity markets
that is offset by
hedge assets if
dynamic hedge
assets do not
completely offset
the change in the
dynamically
hedged variable
annuity guarantee
liability^(5) 65% 66% 67% 83% 84% 87%
^(1) See "Caution related to sensitivities" above.
^(2) Defined as earnings sensitivity to a change in public equity markets
including settlements on reinsurance contracts, but before the offset of
hedge assets or other risk mitigants.
^(3) This impact for general fund equities is calculated as at a point-in-time
and does not include: (i) any potential impact on public equity
weightings; (ii) any gains or losses on public equities held in the
Corporate and Other segment; or (iii) any gains or losses on public
equity investments held in Manulife Bank. The sensitivities assume that
the participating policy funds are self-supporting and generate no
material impact on net income attributed to shareholders as a result of
changes in equity markets.
^(4) Best estimate liabilities and associated provisions for adverse deviation
^(5) Represents the impact of re-balancing equity hedges for dynamically
hedged variable annuity guarantee liabilities at 5% market intervals.
Also represents the impact of changes in markets on provisions for
adverse deviation that are not hedged, but does not include any impact in
respect of other sources of hedge ineffectiveness e.g. basis risk,
realized volatility and equity, interest rate correlations different from
expected among other factors. For presentation purposes, numbers are
rounded.
Potential impact on net income attributed to
shareholders arising from changes to public equity
returns ^(1)
As at December 31,
2011
(C$ millions) -30% -20% -10% 10% 20% 30%
Underlying sensitivity
to net income attributed
to shareholders^(2)
Variable annuity $ $ $
guarantees (6,080) (3,830) (1,780) $ 1,490 $ 2,720 $ 3,690
Asset based fees (260) (180) (80) 90 180 260
General fund equity
investments^(3) (300) (200) (110) 100 200 300
Total underlying $ $ $
sensitivity (6,640) (4,210) (1,970) $ 1,680 $ 3,100 $ 4,250
Impact of hedge
assets
Impact of macro $
hedged assets $ 1,420 $ 950 $ 470 $ (470) $ (950) (1,420)
Impact of dynamic hedge
assets assuming the
change in the value of
the hedge assets
completely offsets the
change in the
dynamically hedged
variable annuity
guarantee
liabilities^(4) 3,170 1,980 900 (710) (1,240) (1,610)
Total impact of hedge
assets assuming the
change in value of the
dynamic hedge assets
completely offsets the
change in the
dynamically hedged
variable annuity
guarantee $ $ $
liabilities^(4) $ 4,590 $ 2,930 $ 1,370 (1,180) (2,190) (3,030)
Net impact assuming the
change in the value of
the hedged assets
completely offsets the
change in the
dynamically hedged
variable annuity
guarantee $ $
liabilities^(4) (2,050) (1,280) $ (600) $ 500 $ 910 $ 1,220
Impact of assuming that
the provisions for
adverse deviation for
dynamically hedged
liabilities are not
offset and that the
hedging program
rebalances at 5% market
intervals^(5) (700) (460) (200) (10) (20) (30)
Net impact assuming the
change in value of the
dynamic hedge assets
does not completely
offset the change in the
dynamically hedged
variable annuity
guarantee $ $
liabilities^(5) (2,750) (1,740) $ (800) $ 490 $ 890 $ 1,190
Percentage of underlying
earnings sensitivitiy to
movements in equity
markets that is offset
by hedges if dynamic
hedge assets completely
offset the change in the
dynamically hedged
variable annuity
guarantee liability 69% 70% 70% 70% 71% 71%
Percentage of underlying
earnings sensitivity to
movements in equity
markets that is offset
by hedge assets if
dynamic hedge assets do
not completely offset
the change in the
dynamically hedged
variable annuity
guarantee liability^(5) 59% 59% 59% 71% 71% 72%
^(1) See "Caution related to sensitivities" above.
^(2) Defined as earnings sensitivity to a change in public equity markets
including settlements on reinsurance contracts, but before the offset of
hedge assets or other risk mitigants.
^(3) This impact for general fund equities is calculated as at a point-in-time
and does not include: (i) any potential impact on public equity
weightings; (ii) any gains or losses on public equities held in the
Corporate and Other segment; or (iii) any gains or losses on public
equity investments held in Manulife Bank. The sensitivities assume that
the participating policy funds are self-supporting and generate no
material impact on net income attributed to shareholders as a result of
changes in equity markets.
^(4) Best estimate liabilities and associated provisions for adverse
deviation.
^(5) Represents the impact of re-balancing equity hedges for dynamically
hedged variable annuity guarantee liabilities at 5% market intervals.
Also represents the impact of changes in markets on provisions for
adverse deviation that are not hedged, but does not include any impact in
respect of other sources of hedge ineffectiveness e.g. basis risk,
realized volatility and equity, interest rate correlations different from
expected among other factors. For presentation purposes, numbers are
rounded.
Potential impact on MLI's MCCSR ratio arising from public equity returns
different than the expected return for policy liability valuation^(1),(2)
Impact on MLI MCCSR ratio
percentage points -30% -20% -10% +10% +20% +30%
December 31, 2012 (17) (11) (5) 1 2 6
September 30, 2012 (20) (12) (6) 1 1 1
December 31, 2011 (27) (15) (7) 2 3 4
^(1) See "Caution related to sensitivities" above.
^(2) The potential impact is shown assuming that the change in value of the
hedge assets does not completely offset the change in the dynamically
hedged variable annuity guarantee liabilities, including the provisions
for adverse deviation. The estimated amount that would not be completely
offset assumes that provision for adverse deviation is not offset and
that the hedge assets are based on the actual position at the period
end.
The following table shows the notional value of shorted equity futures
contracts utilized for our variable annuity guarantee dynamic hedging and our
macro equity risk hedging strategies.
As at December 31, September 30, December 31,
C$ millions 2012 2012 2011
For variable annuity $ 9,500 $ 9,800 $ 10,600
guarantee dynamic
hedging strategy
For macro equity risk 7,800 7,300 5,600
hedging strategy
Total $ 17,300 $ 17,100 $ 16,200
During the quarter, we added approximately $700 million of guarantee value to
our dynamic hedging program in respect of segregated fund guarantee business.
We rebalanced our dynamic hedging program in light of favourable equity market
increases, as well as for the impact of the actuarial basis changes.
In the macro hedging program approximately $250 million of notional value of
additional equity futures were put in place during the quarter.
D6 Interest rate and spread risk
As at December 31, 2012, the sensitivity of our quarterly net income
attributed to shareholders to a 100 basis point parallel decline in interest
rates was a charge of $400 million, ahead of our 2014 year end goal of a
charge of $1.1 billion. The $200 million decrease in sensitivity from
September 30, 2012 was attributable to risk reduction actions in our U.S.
dollar exposures.
The 100 basis point parallel decline includes a change of one per cent in
current government, swap and corporate rates for all maturities across all
markets with no change in credit spreads between government, swap and
corporate rates, and with a floor of zero on government rates and corporate
spreads, relative to the rates assumed in the valuation of policy liabilities,
including embedded derivatives. Based on interest rates at the end of the
third and fourth quarters of 2012, a 100 basis point decline in interest rates
would result in a movement to a different prescribed reinvestment scenario for
policy liability valuation in some jurisdictions, which would produce a higher
reserve. The potential earnings impact of a 100 basis point decline in the
third and fourth quarters includes approximately $400 and $200 million,
respectively, related to the impact of the scenario change. This amount would
be expected to reduce over time, should risk free rates remain unchanged, as
the ultimate reinvestment rate moves toward current risk free rates. Further,
as the sensitivity to a 100 basis point decline in interest rates includes the
impact of the change in prescribed reinvestment scenarios, the impact of
changes to interest rates for less than, or more than, the amounts indicated
are unlikely to be linear. For variable annuity guarantee liabilities that
are dynamically hedged, it is assumed that interest rate hedges are rebalanced
at 20 basis point intervals.
The income impact does not allow for any future potential changes to the URR
assumptions or other potential impacts of lower interest rate levels, for
example, increased strain on the sale of new business, lower interest earned
on our surplus assets, or updates to actuarial assumptions related to variable
annuity bond fund calibration. It also does not reflect potential management
actions to realize gains or losses on AFS fixed income assets held in the
surplus segment in order to partially offset changes in MLI's MCCSR ratio due
to changes in interest rate levels.
Potential impact on net income attributed to shareholders and MLI's MCCSR
ratio of an immediate one per cent parallel change in interest rates relative
to rates assumed in the valuation of policy liabilities^(1),(2),(3),(4)
As at December 31, 2012 September 30, 2012 December 31, 2011
-100bp +100bp -100bp +100bp -100bp +100bp
Net income
attributed
to
shareholders
(C$
millions):
Excluding $ (400) $ 200 $ (600) $ 200 $ (1,000) $ 700
change in
market value
of AFS fixed
income
assets held
in the
surplus
segment
From fair 800 (700) 900 (800) 800 (700)
value
changes in
AFS assets
held in
surplus, if
realized
MLI's MCCSR
ratio
(Percentage
points):
Before (16) 10 (17) 9 (18) 13
impact of
change in
market value
of AFS fixed
income
assets held
in the
surplus
segment^(5)
From fair 5 (5) 5 (5) 5 (5)
value
changes in
AFS assets
held in
surplus, if
realized
^(1) See "Caution related to sensitivities" above.
^(2) Includes guaranteed insurance and annuity products, including variable
annuity contracts as well as adjustable benefit products where benefits
are generally adjusted as interest rates and investment returns change,
a portion of which have minimum credited rate guarantees. For
adjustable benefit products subject to minimum rate guarantees, the
sensitivities are based on the assumption that credited rates will be
floored at the minimum.
^(3) The amount of gain or loss that can be realized on AFS fixed income
assets held in the surplus segment will depend on the aggregate amount
of unrealized gain or loss. The table above only reflects the impact of
the change in the unrealized position, as the total unrealized position
will depend upon the unrealized position at the beginning of the period.
^(4) Sensitivities are based on projected asset and liability cash flows at
the beginning of the quarter adjusted for the estimated impact of new
business, investment markets and asset trading during the quarter. Any
true-up to these estimates, as a result of the final asset and liability
cash flows to be used in the next quarter's projection, are reflected in
the next quarter's sensitivities. Impact of realizing 100% of market
value of AFS fixed income is as of the end of the quarter.
^(5) The impact on MLI's MCCSR ratio includes both the impact of lower
earnings on available capital as well as the increase in required
capital that results from a decline in interest rates. The potential
increase in required capital accounted for 11 of the 16 points impact of
a 100 bp decline in interest rates on MLI's MCCSR ratio.
The following table shows the potential impact on net income attributed to
shareholders resulting from a change in credit spreads and swap spreads over
government bond rates for all maturities across all markets with a floor of
zero on the total interest rate, relative to the spreads assumed in the
valuation of policy liabilities.
Potential impact on net income attributed to shareholders arising from changes
to corporate spreads and swap spreads^(1),(2),(3)
C$ millions December 31, September 30, December 31,
As at 2012 2012 2011
Corporate
spreads^(4)
Increase $ 500 $ 600 $ 500
50 basis
points
Decrease (1,000) (1,200) (900)
50 basis
points
Swap spreads
Increase $ (600) $ (700) $ (600)
20 basis
points
Decrease 600 700 600
20 basis
points
^(1) See "Caution related to sensitivities" above.
^(2) The impact on net income attributed to shareholders assumes no gains or
losses are realized on our AFS fixed income assets held in the surplus
segment and excludes the impact arising from changes in off-balance sheet
bond fund value arising from changes in credit spreads. The sensitivities
assume that the participating policy funds are self-supporting and
generate no material impact on net income attributed to shareholders as a
result of changes in corporate spreads.
^(3) Sensitivities are based on projected asset and liability cash flows at
the beginning of the quarter adjusted for the estimated impact of new
business, investment markets and asset trading during the quarter. Any
true-up to these estimates, as a result of the final asset and liability
cash flows to be used in the next quarter's projection, are reflected in
the next quarter's sensitivities.
^(4) Corporate spreads are assumed to grade to an expected long-term average
over five years.
Based on spreads at the end of the third and fourth quarters, a 50 basis point
decline in corporate spreads would result in a movement to a different
prescribed reinvestment scenario for policy liability valuation in some
jurisdictions, which would produce a higher reserve. The potential earnings
impact of a 50 basis point decline in the third and fourth quarter includes
approximately $700 and $400 million, respectively, related to the impact of
the scenario change. This amount would be expected to reduce over time, should
risk free rates remain unchanged, as the ultimate reinvestment rate moves
toward current risk free rates. Further, as the sensitivity to a 50 basis
point decline in corporate spreads includes the impact of the change in
prescribed reinvestment scenarios, the impact of changes to corporate spreads
for less than, or more than, the amounts indicated are unlikely to be linear.
E ACCOUNTING MATTERS AND CONTROLS
E1 Critical accounting and actuarial policies
Our significant accounting policies under IFRS are described in note 1 to our
Consolidated Financial Statements for the year ended December 31, 2011. The
critical accounting policies and the estimation processes related to the
determination of insurance contract liabilities, fair values of financial
instruments, the application of derivative and hedge accounting, the
determination of pension and other post-employment benefit obligations and
expenses, and accounting for income taxes and uncertain tax positions are
described on pages 65 to 73 of our 2011 Annual Report.
E2 Actuarial methods and assumptions
As noted in section A1 above, in the fourth quarter we reported a charge of
$87 million for the impact of changes to actuarial methods and assumptions.
The charge was primarily attributed to model refinements related to the
estimated impact of a U.S. Life policy valuation system conversion on the
measurement of policy liabilities.
The following table summarizes the significant items contained in the fourth
quarter changes to Actuarial Methods and Assumptions.
C$ millions To To Net Income
Attributed
Assumption Policy Liabilities to Shareholders
Model refinements related to the $ 218 $ (141)
estimated impact of a systems
conversion
Other (65) 54
Net impact $ 153 $ (87)
In the third quarter, the Company completed its annual review of actuarial
methods and assumptions which resulted in a charge of $1,006 million to net
income attributed to shareholders. This amount is explained in our Third
Quarter 2012 Report to Shareholders. See also Section B2 above.
E3 Sensitivity of policy liabilities to updates to assumptions
When the assumptions underlying our determination of policy liabilities are
updated to reflect recent and emerging experience or change in outlook, the
result is a change in the value of policy liabilities which in turn affects
income. The sensitivity of after-tax income to updates to asset related
assumptions underlying policy liabilities is shown below, assuming that there
is a simultaneous update to the assumption across all business units.
For updates to asset related assumptions, the sensitivity is shown net of the
corresponding impact on income of the change in the value of the assets
supporting liabilities. In practice, experience for each assumption will
frequently vary by geographic market and business and assumption updates are
made on a business/geographic specific basis. Actual results can differ
materially from these estimates for a variety of reasons including the
interaction among these factors when more than one changes, changes in
actuarial and investment return and future investment activity assumptions,
actual experience differing from the assumptions, changes in business mix,
effective tax rates and other market factors, and the general limitations of
our internal models.
Most participating business is excluded from this analysis because of the
ability to pass both favourable and adverse experience to the policyholders
through the participating dividend adjustment.
We have updated our disclosure to show the estimated impact on net income for
the next five years and the following five years from changes in ultimate
fixed income reinvestment rates ("URR") driven by changes in risk free rates.
The table below shows the potential impact on annual net income attributable
to shareholders where the URR is determined assuming that risk free rates
remain at their starting December 31, 2012 levels. It also shows the potential
impact if the URR were determined using risk free rates that are assumed to
immediately rise or immediately fall by 50 basis points and then stay at these
new levels. We also provide pro-forma estimates as at December 31, 2011
developed using our previously disclosed URR sensitivities. For these
pro-forma estimates we assume that assets, liabilities and the interest rate
environment are those which were used to value reserves at that time.
Canadian actuarial standards of practice require that reserves be at least as
great as the largest value produced by a set of prescribed reinvestment
scenarios. The impacts below assume that the URR changes implied by these
shocks do not change which reinvestment scenario produces the largest reserve.
Potential impact on aggregate net income over the next five years and the
following five years net income attributed to shareholders arising from
potential changes to the fixed income ultimate reinvestment rates ("URR") ^(1)
As at December 31,
C$ millions 2012 2011
For the periods 2013-2017 2018-2022 2012-2016 2017-2021
Risk free rates remain at December 31,
2012 and December 31, 2011 levels,
respectively. $ (1,600) $ (300) $ (2,100) $ (500)
Risk free rates rise 50 bp immediately
from their December 31, 2012
or December 31, 2011, levels
respectively, and then remain at those
new levels thereafter. $ (900) $ (0) $ (1,300) $ (200)
Risk free rates fall 50 bp immediately
from their December 31, 2012
or December 31, 2011, levels,
respectively, and then remain at those
new levels thereafter. $ (2,200) $ (500) $ (2,700) $ (700)
^(1) Current URRs in Canada are 1.00% per annum and 3.00% per annum for
short and long-term bonds, respectively, and in the U.S. are 0.80%
per annum and 3.60% per annum for short and long-term bonds,
respectively. Since the URRs are based upon a five and ten year
rolling average of government bond rates and the URR valuation
assumptions are currently higher than the December 31, 2012
government bond rates, continuation of current rates or a further
decline could have a material impact on net income. However, for
this sensitivity, we assume the URRs decline with full and immediate
effect.
Potential impact on net income attributed to shareholders arising from changes
to asset related assumptions supporting actuarial liabilities, excluding the
fixed income ultimate reinvestment rate discussed above
C$ millions Increase (decrease) in after-tax income
As at December 31, 2012 September 30, 2012 December 31, 2011
Asset related
assumptions
updated
periodically
in valuation
basis changes Increase Decrease Increase Decrease Increase Decrease
100 basis
point change
in future
annual
returns for
public
equities^(1) $ 800 $ (900) $ 900 $ (800) $ 900 $ (900)
100 basis
point change
in future
annual
returns for
alternative
long-duration
assets^(2) 3,900 (4,000) 4,000 (3,900) 4,200 (3,800)
100 basis
point change
in equity
volatility
assumption
for
stochastic
segregated
fund
modeling^(3) (300) 300 (300) 300 (300) 300
^(1) The sensitivity to public equity returns above includes the impact
on both segregated fund guarantee reserves and on other policy
liabilities. For a 100 basis point increase in expected growth
rates, the impact from segregated fund guarantee reserves is $500
million (September 30, 2012 - $600 million). For a 100 basis point
decrease in expected growth rates, the impact from segregated fund
guarantee reserves is $(600) million (September 30, 2012 - $(600)
million). Expected long-term annual market growth assumptions for
public equities pre-dividends for key markets are based on long-term
historical observed experience and compliance with actuarial
standards. The growth rates for returns in the major markets used in
the stochastic valuation models for valuing segregated fund
guarantees are 7.6% per annum in Canada, 7.6% per annum in the U.S.
and 5.3% per annum in Japan. Growth assumptions for European equity
funds are market-specific and vary between 5.8% and 7.85%.
^(2) Alternative long-duration assets include commercial real estate,
timber and agricultural real estate, oil and gas, and private
equities. The increase of $100 million in sensitivity from September
30, 2012 to December 31, 2012 is primarily related to the drop in
corporate spreads during the quarter, reducing the rate at which
funds can be reinvested in.
^(3) Volatility assumptions for public equities are based on long-term
historic observed experience and compliance with actuarial
standards. The resulting volatility assumptions are 17.15% per annum
in Canada and 17.15% per annum in the U.S. for large cap public
equities, and 19% per annum in Japan. For European equity funds, the
volatility assumptions vary between 16.15% and 18.35%.
E4 Goodwill impairment testing
In the third quarter of 2012, we reported a charge of $200 million related to
goodwill, associated with the Individual Insurance business in Canada and
driven by the low interest rate environment.
The Company completed its 2012 goodwill and intangible assets tests in the
fourth quarter of 2012, and as a result, management concluded that there was
no further impairment of goodwill or intangible assets with indefinite lives.
E5 Future accounting and reporting changes
There are a number of accounting and reporting changes issued under IFRS
including those still under development by the International Accounting
Standards Board ("IASB") that will impact the Company beginning in 2013 and
later. A summary of the most recently issued new accounting standards is as
follows:
Effective Measurement /
Topic date Presentation Expected impact
IFRS 10, IFRS 11, IFRS 12 (and Jan 1, 2013 Measurement and Not expected to
related amendments) disclosure have a significant
and amendments to IAS 27, and impact.
IAS 28 regarding
consolidation, disclosures and
related matters
IFRS 13 "Fair Value Jan 1, 2013 Measurement and Not expected to
Measurement" disclosure have a significant
impact.
Amendments to IAS 1 Jan 1, 2013 Presentation Not expected to
"Presentation of Financial have a significant
Statements" impact.
Amendments to IAS 19 "Employee Jan 1, 2013 Measurement See below
Benefits"
IFRS 9 "Financial Instruments" Jan 1, 2015 Measurement Currently
assessing.
Expected impact of amendments to IAS 19 "Employee Benefits": The new standard
will result in an increase in the defined benefit liability, primarily related
to unrecognized net actuarial losses on the Company's pension and other
post-employment benefit plans with an offsetting charge to opening Accumulated
Other Comprehensive Income ("AOCI"). Upon adoption, 2012 net income will be
retrospectively restated primarily to remove the amortization of unrecognized
net actuarial losses. This has the impact of increasing ROE by 0.6 per cent.
Future actuarial gains and losses related to these plans will adjust the
amount of AOCI.
Below is a summary of the expected impacts of the amendments as at and for the
year ended December 31, 2012. These adjustments will be recognized in 2013 by
restating 2012 to reflect the impact of the amendments.
Other post-
employment.
(C$ million) Pension plans benefits Total
Increase (decrease) in defined $ 872 $ $ 839
benefit liability (33)
Increase (decrease) in (277) (266)
deferred tax liability 11
Increase (decrease) in AOCI (669) 15 654
Increase (decrease) in 2012 74 67
net income (7)
F Other
F1 Performance and Non-GAAP Measures
We use a number of non-GAAP financial measures to measure overall performance
and to assess each of our businesses. Non-GAAP measures include: Core
Earnings; Net Income in Accordance with U.S. GAAP; Total Equity in Accordance
with U.S. GAAP; Core ROE; Core Earnings Per Share; Constant Currency Basis;
Premiums and Deposits; Funds under Management; Capital; Embedded Value; New
Business Embedded Value; and Sales. Non-GAAP financial measures are not
defined terms under GAAP and, therefore, with the exception of Net Income in
Accordance with U.S. GAAP and Total Equity in Accordance with U.S. GAAP (which
are comparable to the equivalent measures of issuers whose financial
statements are prepared in accordance with U.S. GAAP), are unlikely to be
comparable to similar terms used by other issuers. Therefore, they should not
be considered in isolation or as a substitute for any other financial
information prepared in accordance with GAAP.
Core earnings (losses) is a non-GAAP measure which we use to better understand
the long-term earnings capacity and valuation of the business. Core earnings
excludes the direct impact of changes in equity markets and interest rates as
well as a number of other items, outlined below, that are considered material
and exceptional in nature. While this metric is relevant to how we manage our
business and offers a consistent methodology, it is not insulated from
macro-economic factors, which can have a significant impact.
Any future changes to the core earnings definition referred to below, will be
disclosed.
Items that are included in core earnings are:
1. Expected earnings on in-force, including expected release of provisions
for adverse deviation, fee income, margins on group business and spread
business such as Manulife Bank and asset fund management.
2. Macro hedging costs based on expected market returns.
3. New business strain.
4. Policyholder experience gains or losses.
5. Acquisition and operating expenses compared to expense assumptions used in
the measurement of policy liabilities.
6. Up to $200 million of investment gains reported in a single year, which
are referred to as "core investment gains".
7. Earnings on surplus other than mark-to-market items. Gains on
available-for-sale ("AFS") equities and seed money investments are
included in core earnings.
8. Routine or non-material legal settlements.
9. All other items not specifically excluded.
10. Tax on the above items.
11. All tax related items except the impact of enacted or substantially
enacted income tax rate changes.
Items excluded from core earnings are:
1. The direct impact of equity markets and interest rates, consisting of:
* Income (charges) on variable annuity guarantee liabilities not
dynamically hedged.
* Gains (charges) on general fund equity investments supporting policy
liabilities and on fee income.
* Gains (losses) on macro equity hedges relative to expected costs.
The expected cost of macro hedges is calculated using the equity
assumptions used in the valuation of policy liabilities.
* Gains (charges) on higher (lower) fixed income reinvestment rates
assumed in the valuation of policy liabilities, including the impact
on the fixed income ultimate reinvestment rate ("URR").
* Gains (charges) on sale of AFS bonds and open derivatives not in
hedging relationships in the Corporate and Other segment.
2. The earnings impact of the difference between the net increase (decrease)
in variable annuity liabilities that are dynamically hedged and the
performance of the related hedge assets. Our variable annuity dynamic
hedging strategy is not designed to completely offset the sensitivity of
policy liabilities to all risks or measurements associated with the
guarantees embedded in these products for a number of reasons, including:
provisions for adverse deviation, fund performance, the portion of the
interest rate risk that is not dynamically hedged, realized equity and
interest rate volatilities and changes to policyholder behaviour.
3. Net investment related gains in excess of $200 million per annum or net
losses on a year-to-date basis. Investment gains (losses) relate to fixed
income trading, alternative long-duration asset returns, credit experience
and asset mix changes. These gains and losses are a combination of
reported investment experience as well as the impact of investing
activities on the measurement of our policy liabilities. The maximum of
$200 million per annum to be reported in core earnings compares with an
average of over $80 million per quarter of investment gains reported since
first quarter 2007.
4. Mark-to-market gains or losses on assets held in the Corporate and Other
segment other than gains on AFS equities and seed money investments in new
segregated or mutual funds.
5. Changes in actuarial methods and assumptions, excluding URR.
6. The impact on the measurement of policy liabilities of changes in product
features or new reinsurance transactions, if material.
7. Goodwill impairment charges.
8. Gains or losses on disposition of a business.
9. Material one-time only adjustments, including highly unusual/extraordinary
and material legal settlements or other items that are material and
exceptional in nature.
10. Tax on the above items.
11. Impact of enacted or substantially enacted income tax rate changes.
The following table summarizes for the past eight quarters core earnings and
net income (loss) attributed to shareholders.
Total Company
Quarterly Results
C$ millions, 2012 2011
unaudited
For the quarter 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
Core earnings
(losses)
Asia Division $ 180 $ 230 $ 286 $ 267 $ 213 $ 220 $ 253 $ 252
Canadian 233 229 201 172 142 259 233 215
Division
U.S. Division 293 288 247 257 189 260 266 290
Corporate &
Other (excluding
expected cost of (79) (117) (83) (128) (124) (58) (8) (225)
macro hedges and
core investment
gains)
Expected cost of (140) (124) (118) (107) (97) (107) (104) (100)
macro hedges
Core investment 50 50 50 50 50 50 50 50
gains
Total core $ 537 $ 556 $ 583 $ 511 $ 373 $ 624 $ 690 $ 482
earnings
Investment
related gains in 318 363 51 205 261 236 323 470
excess of core
investment gains
Core earnings
plus investment
related gains in $ 855 $ 919 $ 634 $ 716 $ 634 $ 860 $ 1,013 $ 952
excess of core
investment gains
Other items to
reconcile core
earnings to net
income (loss)
attributed to
shareholders
Income
(charges) on
variable
annuity
guarantee 100 122 (269) 223 (193) (900) (52) (8)
liabilities
that are
dynamically
hedged
Impact of
major
reinsurance
transactions, - 26 112 122 - - - -
in-force
product
changes
Direct impact
of equity
markets and (18) (88) (727) 75 153 (889) (439) 111
interest rates
(see table
below)
Change in
actuarial
methods and (87) (1,006) - 12 2 (651) (32) (70)
assumptions,
excluding URR
Goodwill
impairment - (200) - - (665) - - -
charge
Gain (loss) on
sale of Life - - (50) - - 303 - -
Retrocession
Business
Tax items and
restructuring
charge related 207 - - 58 - - - -
to
organizational
design
Net income
(loss) $ $ (227) $ $ $ $ (1,277) $ 490 $ 985
attributed to 1,057 (300) 1,206 (69)
shareholders
Direct impact of
equity markets
and interest
rates:
Income (charges)
on variable
annuity
liabilities that $ 556 $ 298 $ (758) $ 982 $ 234 $ (1,211) $ (217) $ 102
are not
dynamically
hedged
Gains (charges)
on general fund
equity
investments 48 55 (116) 121 56 (227) (73) 30
supporting
policy
liabilities and
on fee income
Gains (losses)
on macro equity
hedges relative (292) (86) 423 (556) (250) 882 142 (138)
to expected
costs
Gains (charges)
on higher
(lower) fixed
income
reinvestment (290) (330) 305 (425) 122 (567) (28) 192
rates assumed in
the valuation of
policy
liabilities
Gains (charges)
on sale of AFS
bonds and
derivative (40) (25) 96 (47) (9) 301 107 (75)
positions in the
Corporate
segment
Charges due to
lower fixed
income URR
assumptions used - - (677) - - (67) (370) -
in the valuation
of policy
liabilities
Direct impact of
equity markets $ $ (88) $ $ 75 $ 153 $ (889) $ (439) $ 111
and interest (18) (727)
rates
Asia Division
Quarterly Results
C$ millions, 2012 2011
unaudited
For the 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
quarter
Asia Division $ $ $ 286 $ 267 $ $ 220 $ 253 $
core earnings 180 230 213 252
Investment
related gains
in excess of 33 12 28 (18) 47 126 7 24
core
investment
gains
Core earnings
plus
investment
related gains $ $ $ 314 $ 249 $ $ 346 $ 260 $
in excess of 213 242 260 276
core
investment
gains
Other items
to reconcile
core earnings
to net income
(loss)
attributed to
shareholders
Income
(charges)
on variable
annuity
guarantee 9 11 (18) 3 (16) (3) (11) (1)
liabilities
that are
dynamically
hedged
Direct
impact of
equity 460 238 (611) 819 41 (1,055) (221) 76
markets and
interest
rates
Tax items - - - 40 - - - -
Net income
(loss) $ $ $ $ (712) $ 28 $
attributed to 682 491 (315) 1,111 285 351
shareholders
Canadian Division
Quarterly Results
C$ millions, 2012 2011
unaudited
For the quarter 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
Canadian
Division core $ 233 $ 229 $ 201 $ 172 $ 142 $ 259 $ 233 $ 215
earnings
Investment
related gains
in excess of (31) 20 (115) 116 72 (47) 67 252
core investment
gains
Core earnings
plus investment
related gains $ $ $ 86 $ 288 $ $ 212 $ $
in excess of 202 249 214 300 467
core investment
gains
Other items to
reconcile core
earnings to net
income (loss)
attributed to
shareholders
Income
(charges) on
variable
annuity
guarantee 45 38 (74) 41 (67) (204) - (7)
liabilities
that are
dynamically
hedged
Impact of
major
reinsurance
transactions, - - 137 122 - - - -
in-force
product
changes
Direct impact
of equity
markets and 4 91 74 (134) 99 (100) (36) 49
interest
rates
Net income
(loss) $ $ $ 223 $ 317 $ $ $ $
attributed to 251 378 246 (92) 264 509
shareholders
U.S. Division
Quarterly Results
C$ millions, 2012 2011
unaudited
For the 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
quarter
U.S. Division $ 293 $ 288 $ 247 $ $ 189 $ 260 $ $
core earnings 257 266 290
Investment
related gains
in excess of 365 346 154 153 158 215 259 225
core
investment
gains
Core earnings
plus
investment
related gains $ 658 $ 634 $ 401 $ $ 347 $ 475 $ $
in excess of 410 525 515
core
investment
gains
Other items to
reconcile core
earnings to
net income
(loss)
attributed to
shareholders
Income
(charges) on
variable
annuity
guarantee 46 73 (177) 179 (110) (693) (41) -
liabilities
that are
dynamically
hedged
Impact of
major - 26 (25) - - - - -
reinsurance
transactions
Direct
impact of
equity (150) (297) (22) (15) 268 (810) (55) 200
markets and
interest
rates
Tax items 170 - - - - - - -
Net income
(loss) $ 724 $ 436 $ 177 $ $ 505 $ (1,028) $ $
attributed to 574 429 715
shareholders
Corporate and Other
Quarterly Results
C$ millions, 2012 2011
unaudited
For the quarter 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
Corporate &
Other core
losses
(excluding $ $ (117) $ $ $ (124) $ (58) $ (8) $
expected cost of (79) (83) (128) (225)
macro hedges and
core investment
gains)
Expected cost of (140) (124) (118) (107) (97) (107) (104) (100)
macro hedges
Core investment 50 50 50 50 50 50 50 50
gains
Total core $ $ (191) $ $ $ (171) $ (115) $ $
losses (169) (151) (185) (62) (275)
Investment
related losses
in excess of (49) (15) (16) (46) (16) (58) (10) (31)
core investment
gains
Core losses plus
investment
related losses $ $ (206) $ $ $ (187) $ (173) $ $
in excess of (218) (167) (231) (72) (306)
core investment
gains
Other items to
reconcile core
earnings to net
income (loss)
attributed to
shareholders
Direct impact
of equity (332) (120) (168) (595) (255) 1,076 (127) (214)
markets and
interest rates
Change in
actuarial
methods and (87) (1,006) - 12 2 (651) (32) (70)
assumptions,
excluding URR
Goodwill
impairment - (200) - - (665) - - -
charge
Gain (loss) on
sale of Life - - (50) - - 303 - -
Retrocession
Business
Tax items and
restructuring
charge related 37 - - 18 - - - -
to
organizational
design
Net income
(loss) $ $ (1,532) $ $ $ (1,105) $ 555 $ $
attributed to (600) (385) (796) (231) (590)
shareholders
Net income in accordance with U.S. GAAP is a non-GAAP profitability measure.
It shows what the net income would have been if the Company had applied U.S.
GAAP as its primary financial reporting basis. We consider this to be a
relevant profitability measure given our large U.S. domiciled investor base
and for comparability to our U.S. peers who report under U.S. GAAP.
Total equity in accordance with U.S. GAAP is a non-GAAP measure. It shows what
the total equity would have been if the Company had applied U.S. GAAP as its
primary financial reporting basis. We consider this to be a relevant measure
given our large U.S. domiciled investor base and for comparability to our U.S.
peers who report under U.S. GAAP.
Core return on common shareholders' equity ("Core ROE") is a non-GAAP
profitability measure that presents core earnings available to common
shareholders as a percentage of the capital deployed to earn the core
earnings. The Company calculates core return on common shareholders' equity
using average common shareholders' equity.
Core earnings per share is core earnings available to common shareholders
expressed per weighted average common share outstanding.
The Company also uses financial performance measures that are prepared on a
constant currency basis, which exclude the impact of currency fluctuations and
which are non-GAAP measures. Quarterly amounts stated on a constant currency
basis in this report are calculated, as appropriate, using the income
statement and balance sheet exchange rates effective for the fourth quarter of
2012.
Premiums and deposits is a non-GAAP measure of top line growth. The Company
calculates premiums and deposits as the aggregate of (i) general fund
premiums, net of reinsurance, reported as premiums on the Consolidated
Statement of Income, (ii) adding back the premiums ceded related to FDA
coinsurance, (iii) premium equivalents for administration only group benefit
contracts, (iv) premiums in the Canadian Group Benefits reinsurance ceded
agreement, (v) segregated fund deposits, excluding seed money, (vi) mutual
fund deposits, (vii) deposits into institutional advisory accounts, and (viii)
other deposits in other managed funds.
Premiums and Quarterly Results Full Year Results
deposits
C$ millions 4Q 2012 3Q 2012 4Q 2011 2012 2011
Net premium $ 5,012 $ 2,187 $ 4,540 $ 10,734 $ 17,504
income
Deposits from 5,537 5,539 5,575 22,993 21,689
policyholders
Premiums and $ 10,549 $ 7,726 $ 10,115 $ 33,727 $ 39,193
deposits per
financial
statements
Add back 2 1,799 - 7,229 -
premiums
ceded
relating to
FDA
coinsurance
Investment 59 40 126 212 289
contract
deposits
Mutual fund 6,117 4,335 3,309 18,843 16,640
deposits
Institutional 5,376 1,106 627 7,744 2,807
advisory
account
deposits
ASO premium 706 673 666 2,819 2,679
equivalents
Group 1,180 967 941 4,430 3,754
benefits
ceded
premiums
Other fund 139 100 133 497 699
deposits
Total $ 24,128 $ 16,746 $ 15,917 $ 75,501 $ 66,061
premiums and
deposits
Currency - (61) (372) (454) 53
impact
Constant $ 24,128 $ 16,685 $ 15,545 $ 75,047 $ 66,114
currency
premiums and
deposits
Funds under management is a non-GAAP measure of the size of the Company. It
represents the total of the invested asset base that the Company and its
customers invest in.
Funds under
management
(C$ millions) As Dec 31, 2012 Sept 30, 2012 Dec 31, 2011
at
Total invested $ 229,928 $ 224,761 $ 226,520
assets
Segregated funds 207,985 205,685 195,933
net assets
Funds under $ 437,913 $ 430,446 $ 422,453
management per
financial
statements
Mutual funds 59,979 55,705 49,399
Institutional 26,692 21,597 21,652
advisory accounts
(excluding
segregated funds)
Other funds 7,358 6,849 6,148
Total fund under $ 531,942 $ 514,597 $ 499,652
management
Currency impact - 1,563 (10,991)
Constant currency $ 531,942 $ 516,160 $ 488,661
funds under
management
Capital The definition we use for capital, a non-GAAP measure, serves as a
foundation of our capital management activities at the MFC level. For
regulatory reporting purposes, the numbers are further adjusted for various
additions or deductions to capital as mandated by the guidelines used by
OSFI. Capital is calculated as the sum of (i) total equity excluding AOCI on
cash flow hedges and (ii) liabilities for preferred shares and capital
instruments.
Capital
(C$ millions) As Dec 31, 2012 Sept 30, 2012 Dec 31,
at 2011
Total equity $ 26,096 $ 24,961 $ 24,879
Add AOCI loss on 50 58 91
cash flow hedges
Add liabilities 3,501 3,495 4,012
for preferred
shares and capital
instruments
Total capital $ 29,647 $ 28,514 $ 28,982
Embedded value is a measure of shareholders' value embedded in the current
balance sheet of the Company, excluding any value associated with future new
business.
New business embedded value ("NBEV") is the change in shareholders' economic
value as a result of sales in the reporting period. NBEV is calculated as the
present value of expected future earnings, after the cost of capital, on
actual new business sold in the period using future mortality, morbidity,
policyholder behaviour, expense and investment assumptions that are consistent
with the assumptions used in the valuation of our policy liabilities.
The principal economic assumptions used in the NBEV calculations in the fourth
quarter were as follows:
Canada U.S. Hong Kong Japan
MCCSR ratio 150% 150% 150% 150%
Discount rate 8.50% 8.50% 9.25% 6.25%
Jurisdictional income tax rate 26% 35% 16.5% 33%
Foreign exchange rate n/a 0.983671 0.126912 0.012138
Yield on surplus assets 4.50% 4.50% 4.50% 2.00%
Sales are measured according to product type:
For total individual insurance, sales include 100 per cent of new annualized
premiums and 10 per cent of both excess and single premiums. For individual
insurance, new annualized premiums reflect the annualized premium expected in
the first year of a policy that requires premium payments for more than one
year. Sales are reported gross before the impact of reinsurance. Single
premium is the lump sum premium from the sale of a single premium product,
e.g. travel insurance.
For group insurance, sales include new annualized premiums and administrative
services only premium equivalents on new cases, as well as the addition of new
coverages and amendments to contracts, excluding rate increases.
For individual wealth management contracts, all new deposits are reported as
sales. This includes individual annuities, both fixed and variable; mutual
funds; college savings 529 plans; and authorized bank loans and mortgages.
For group pensions/retirement savings, sales of new regular premiums and
deposits reflect an estimate of expected deposits in the first year of the
plan with the Company. Single premium sales reflect the assets transferred
from the previous plan provider. Sales include the impact of the addition of a
new division or of a new product to an existing client. Total sales include
both new regular and single premiums and deposits.
F2 Key Planning Assumptions and Uncertainties
Manulife's 2016 management objectives do not constitute guidance and are based
on certain key planning assumptions, including: current accounting and
regulatory capital standards; no acquisitions; equity market and interest rate
assumptions consistent with our long term assumptions, and favourable
investment experience included in core earnings^25.
_____________________
Interest rate assumptions based on forward curve as of June 30, 2012.
Core earnings includes up to $200 million per annum of investment
^25 gains.
F3 Caution regarding forward-looking statements
From time to time, MFC makes written and/or oral forward-looking statements,
including in this document. In addition, our representatives may make
forward-looking statements orally to analysts, investors, the media and
others. All such statements are made pursuant to the "safe harbour"
provisions of Canadian provincial securities laws and the U.S. Private
Securities Litigation Reform Act of 1995. The forward-looking statements in
this document include, but are not limited to, statements with respect to our
2016 management objectives for core earnings and core ROE, potential future
charges related to URR assumptions if current low interest rates persist,
changes in MLI's MCCSR ratio and additional risks regarding entities within
the MFC group that are interconnected which may make separation difficult.
The forward-looking statements in this document also relate to, among other
things, our objectives, goals, strategies, intentions, plans, beliefs,
expectations and estimates, and can generally be identified by the use of
words such as "may", "will", "could", "should", "would", "likely", "suspect",
"outlook", "expect", "intend", "estimate", "anticipate", "believe", "plan",
"forecast", "objective", "seek", "aim", "continue", "goal", "restore",
"embark" and "endeavour" (or the negative thereof) and words and expressions
of similar import, and include statements concerning possible or assumed
future results. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, such statements involve risks and
uncertainties, and undue reliance should not be placed on such statements and
they should not be interpreted as confirming market or analysts' expectations
in any way. Certain material factors or assumptions are applied in making
forward-looking statements, including in the case of our 2016 management
objectives for core earnings and core ROE, the assumptions described under
"Key Planning Assumptions and Uncertainties" in our 2011 Annual Report and in
this document and actual results may differ materially from those expressed or
implied in such statements. Important factors that could cause actual results
to differ materially from expectations include but are not limited to: the
factors identified in "Key Planning Assumptions and Uncertainties" in our 2011
Annual Report and in this document and under "Risk Management and Risk Factors
Update" in this document; general business and economic conditions (including
but not limited to the performance, volatility and correlation of equity
markets, interest rates, credit and swap spreads, currency rates, investment
losses and defaults, market liquidity and creditworthiness of guarantors,
reinsurers and counterparties); changes in laws and regulations; changes in
accounting standards; our ability to execute strategic plans and changes to
strategic plans; downgrades in our financial strength or credit ratings; our
ability to maintain our reputation; impairments of goodwill or intangible
assets or the establishment of provisions against future tax assets; the
accuracy of estimates relating to morbidity, mortality and policyholder
behaviour; the accuracy of other estimates used in applying accounting
policies and actuarial methods; our ability to implement effective hedging
strategies and unforeseen consequences arising from such strategies; our
ability to source appropriate assets to back our long dated liabilities; level
of competition and consolidation; our ability to market and distribute
products through current and future distribution channels; unforeseen
liabilities or asset impairments arising from acquisitions and dispositions of
businesses; the realization of losses arising from the sale of investments
classified as available-for-sale; our liquidity, including the availability of
financing to satisfy existing financial liabilities on expected maturity dates
when required; obligations to pledge additional collateral; the availability
of letters of credit to provide capital management flexibility; accuracy of
information received from counterparties and the ability of counterparties to
meet their obligations; the availability, affordability and adequacy of
reinsurance; legal and regulatory proceedings, including tax audits, tax
litigation or similar proceedings; our ability to adapt products and services
to the changing market; our ability to attract and retain key executives,
employees and agents; the appropriate use and interpretation of complex models
or deficiencies in models used; political, legal, operational and other risks
associated with our non-North American operations; acquisitions and our
ability to complete acquisitions including the availability of equity and debt
financing for this purpose; the disruption of or changes to key elements of
the Company's or public infrastructure systems; environmental concerns; and
our ability to protect our intellectual property and exposure to claims of
infringement. Additional information about material factors that could cause
actual results to differ materially from expectations and about material
factors or assumptions applied in making forward-looking statements may be
found in the body of this document as well as under "Risk Factors" in our most
recent Annual Information Form, under "Risk Management", "Risk Management and
Risk Factors" and "Critical Accounting and Actuarial Policies" in the
Management's Discussion and Analysis in our most recent annual report, under
"Risk Management and Risk Factors Update" and "Critical Accounting and
Actuarial Policies" in the Management's Discussion and Analysis in our most
recent interim report, in the "Risk Management" note to consolidated financial
statements in our most recent annual and interim reports and elsewhere in our
filings with Canadian and U.S. securities regulators. The forward-looking
statements in this documents are, unless otherwise indicated, stated as of the
date hereof and are presented for the purpose of assisting investors and
others in understanding our financial position and results of operations as
well as our objectives and strategic priorities, and may not be appropriate
for other purposes. We do not undertake to update any forward-looking
statements, except as required by law.
Consolidated Statements of Income (Loss)
(Canadian $ in millions
except per share For the three months ended For the years ended
information, unaudited)
December 31 December 31
2012 2011 2012 2011
Revenue
Net premium income ^1 $ 5,012 $ 4,540 $ 10,734 $ 17,504
Investment income
Investment income 2,095 2,034 8,792 10,367
Realized/ unrealized
gains (losses) on
assets supporting (1,600) 1,360 3,050 15,870
insurance and
investment contract
liabilities ^2
Other revenue 1,690 1,765 7,356 7,242
Total revenue $ 7,197 $ 9,699 $ 29,932 $ 50,983
Contract benefits and
expenses
To contractholders and
beneficiaries
Death, disability and $ 2,282 $ 2,224 $ 9,527 $ 9,213
other claims
Maturity and surrender 1,472 1,375 5,058 5,403
benefits
Annuity payments 838 802 3,244 3,164
Policyholder dividends
and experience rating 257 302 1,092 1,080
refunds
Net transfers from (185) (130) (718) (299)
segregated funds
Change in insurance 39 4,364 13,442 27,934
contract liabilities ^2
Change in investment 26 35 87 64
contract liabilities
Ceded benefits and (1,526) (1,325) (5,924) (4,918)
expenses
Change in reinsurance 154 (1,486) (8,065) (1,852)
assets ^1
Net benefits and claims $ 3,357 $ 6,161 $ 17,743 $ 39,789
General expenses 1,277 1,134 4,531 4,061
Investment expenses 297 273 1,091 1,001
Commissions 1,012 987 3,932 3,813
Interest expense ^3 119 288 967 1,249
Net premium taxes 78 72 299 257
Goodwill impairment - 665 200 665
Total contract benefits $ 6,140 $ 9,580 $ 28,763 $ 50,835
and expenses
Income before income $ 1,057 $ 119 $ 1,169 $ 148
taxes
Income tax recovery 22 (174) 523 97
(expense)
Net income (loss) $ 1,079 $ (55) $ 1,692 $ 245
Less: Net income
attributed to
non-controlling 2 14 59 27
interest in
subsidiaries
Net income
(loss) attributed to 20 - (103) 89
participating
policyholders
Net income (loss)
attributed to $ 1,057 $ (69) $ 1,736 $ 129
shareholders
Preferred share dividends (29) (21) (112) (85)
Common shareholders' net $ 1,028 $ (90) $ 1,624 $ 44
income (loss)
Basic earnings (loss) per $ 0.56 $ (0.05) $ 0.90 $ 0.02
common share
Diluted earnings (loss) $ 0.56 $ (0.05) $ 0.88 $ 0.02
per common share
^1 On June 29, 2012 and September 25, 2012 the Company entered into
coinsurance agreements to reinsure 89 per cent of its book value fixed
deferred annuity business. Under the terms of the agreements, the Company
will maintain responsibility for servicing of the policies and some of the
assets and has retained the remaining exposure. The premiums ceded relating to
FDA coinsurance were $2 miliion and $7,229 million for Q4 2012 and full year
2012, respectively.
^ 2 The volatility in realized/unrealized gains on assets supporting insurance
and investment contract liabilities relates primarily to the impact of
interest rates changes on bond and fixed income derivative positions as well
as interest rate swaps supporting the dynamic hedge program. These items are
mostly offset by changes in the measurement of our policy obligations. For
fixed income assets supporting insurance and investment contracts, equities
supporting pass through products and derivatives related to variable annuity
hedging programs, the impact of realized/ unrealized gains on the assets is
largely offset in the change in insurance and investment contract liabilities.
^3 Q4 2012 includes the release of interest provision related to tax
contigency.
Consolidated Statements of Financial Position
(Canadian $ in millions, unaudited)
As at December 31
Assets 2012 2011 ^
Invested assets
Cash and short-term securities $ 13,484 $ 12,813
Securities
Bonds 119,281 120,487
Stocks 11,995 10,243
Loans
Mortgages 35,082 35,023
Private placements 20,275 20,294
Policy loans 6,793 6,827
Bank loans 2,142 2,288
Real estate 8,513 7,466
Other invested assets 12,363 11,079
Total invested assets $ 229,928 $ 226,520
Other assets
Accrued investment income $ 1,802 $ 1,802
Outstanding premiums 1,009 781
Derivatives 14,707 15,472
Goodwill and intangible assets 5,113 5,442
Reinsurance assets 18,681 10,728
Deferred tax asset 3,148 1,757
Miscellaneous 3,683 3,542
Total other assets $ 48,143 $ 39,524
Segregated funds net assets $ 207,985 $ 195,933
Total assets $ 486,056 $ 461,977
Liabilities and Equity
Policy liabilities
Insurance contract liabilities $ 199,588 $ 190,366
Investment contract liabilities 2,424 2,540
Bank deposits 18,857 18,010
Deferred tax liability 694 766
Derivatives 7,206 7,627
Other liabilities 14,253 12,341
$ 243,022 $ 231,650
Long-term debt 5,452 5,503
Liabilities for preferred shares and capital 3,501 4,012
instruments
Segregated funds net liabilities 207,985 195,933
Total liabilities $ 459,960 $ 437,098
Equity
Issued share capital
Preferred shares $ 2,497 $ 1,813
Common shares 19,886 19,560
Contributed surplus 257 245
Shareholders' retained earnings 3,178 2,501
Shareholders' accumulated other comprehensive income (369) 96
(loss)
Total shareholders' equity $ 25,449 $ 24,215
Participating policyholders' equity 146 249
Non-controlling interest in subsidiaries 501 415
Total equity $ 26,096 $ 24,879
Total liabilities and equity $ 486,056 $ 461,977
SOURCE Manulife Financial Corporation
Contact:
Media inquiries:
Laurie Lupton
(416) 852-7792
laurie_lupton@manulife.com
Investor Relations:
Steven Moore
(416) 926-6495
steven_moore@manulife.com
Anique Asher
(416) 852-9580
anique_asher@manulife.com
Sponsored Links
Advertisement
Advertisements
Sponsored Links
Advertisement
Rate this Page