20
1
9
Annual R
epo
rt
Manulife Financial Corporation
Our mission
Decisions made easier.
Lives made beter.
Our five
strategic priorities
Portfolio Optimization
We are actively managing our legacy businesses to
improve returns and cash generation while reducing risk.
Expense Efficiency
We are getting our cost structure into fighting shape
and simplifying and digitizing our processes to position
us for efficient growth.
Accelerate Growth
We are accelerating growth in our highest-potential
businesses.
Digital, Customer Leader
We are improving our customer experiences, using
digitization and innovation to put customers first.
High-Performing Team
We are building a culture that drives our priorities.
Learn more about the progress we are making on
our five strategic priorities on page 16.
Our values
Our values represent how we operate. They reflect our
culture, inform our behaviours, and help define how we
work together.
Obsess about customers
Do the right thing
Think big
Get it done together
Own it
Share your humanity
Who we arrre
Manulife Financial Corporation is a leading international financial services group that helps people make their decisions easier and
lives betterrr. With our global headquarters in Toronto, Canada, we operate as Manulife across our offices in Canada, Asia, and Europe,
and primarily as John Hancock in the United States. We provide financial advice, insurance, as well as wealth and asset management
solutions for individuals, groups, and institutions.
Manulife by the numbers
Core Earnings (C$ billions)
$6.0 billion
Total company core earnings grew 5% versus 2018, driven by
continued double-digit core earnings growth in Asia of 11%.
Assets Under Management and Administration (C$ billions)
$1,189 billion
$1.2 trillion in AUMA.
3.4
4.0
4.6
5.6
6.0
935
1,005
1,071
1,084
1,189
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Net Income Attributed to Shareholders (C$ billions)
New Business Value (C$ billions)
$5.6 billion
Delivered the highest net income result in the
company’s history in 2019.
2.2
2.9
2.1
4.8
5.6
$2.0 billion
15% increase in new business value from 2018,
with growth in all insurance segments.
1.0
1.2
1.4
1.7
2.0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Common Share Dividend (C$)
$1.00/sh// are
Announced a 12% dividend increase with our
2019 fourth quarter results.
66.5 ¢/sh 74.0 ¢/sh 82.0 ¢/sh 91.0 ¢/sh
$1.00/sh
$1.12/sh
2015
2016
2017
2018
2019
2020
pro-forma*
* The 2020 pro-forma dividend reflects four quarterly dividends of
$0.28 per share, consistent with the most recent dividend increase
declared February 12, 2020.
Note: Growth in core earnings, net income attributed to shareholders, assets
under management and administration (AUMA), and new business value are
presented on a constant exchange rate basis. AUMA values are reported as
at December 31. Total Shareholder Returns are for MFC (NYSE/USD).
1
Letter to shareholders from John Cassaday
Chairman of the Boarrrd
Fellow shareholders,
Your Board is committed to providing
guidance and oversight to management
in order to position Manulife for future
success. We endeavour to ensure the
company’s strategic plans and priorities
create value and align with our risk
appetite. Always doing the right thing for
our customers, shareholders, employees,
and other stakeholders is job one.
Team (ELLLT) , who led the company through
another year of successful transformation
guided by our six core values. Indeed, their
success was driven by the team’s ability
to consistently execute with excellence,
delivering steady and significant progress
against its strategy. This helped us deliver
a three-year total shareholder return of
27.6%. We did what we said we would do.
Looking back on 2019, we are proud of the
progress made by Roy Gori, President and
CEO, and Manulife’s Executive Leadership
Importantly, Manulife is keenly focused not
just on what it achieves, but also on how
it achieves success. Collectively, we are
stressing a culture of acting with integrity
and following words with actions. We are
confident that this tone from the top is
cascading through the organization.
Case in point of this leadership by example
is how the company manages expenses,
travel policies, and office plans. Roy and
the team have made it clear that everyone
plays a role in driving our efficiency
initiatives and ensured that new policies
put in place to manage expenses apply
to employees at all levels; travel policies
2 | 2019 Annual Report
are common across the board; and Roy
and the ELLLT were the first cohort to move
to open-plan seating in our headquarters
early last year when the company
transitioned its real estate plans to foster
collaboration and make even better use of
space. That is leadership.
True and lasting progress is often made in
small ways, and these examples give your
Board the utmost confidence that Manulife
is fostering the right culture and values as
it navigates its business transformation—
and importantly has the right people in
place to succeed.
Your Board’s activities
throughout 2019
Your Board spent much of the year
focused on examining the company’s
strategy, goals, and progress towards
its bold ambition of becoming the most
digital, customer-centric global company
in our industry. This included frequent
conversations with our Executive
Leadership Team members to ensure
we understood and could oversee all
areas of the business effectively.
During our meetings with the team
throughout the yearrr, in addition to our
regular business progress discussions,
we increased time spent on environmental,
social, and governance factors that impact
the business. These factors continue to
grow in prominence as more companies
grapple with the impact their operations
have on the world. As a responsible
corporate citizen, Manulife is keenly
aware of the need to deliver value to all
stakeholders, including our communities,
and to reduce our impact on the
environment. To that end, Manulife
Investment Management has signed its
name to the UN-sponsored Principles for
Responsible Investment. We are also a
founding member of Climate Action 100+,
a five-year initiative that includes more than
370 investors from around the world
responsible for more than US$35 trillion
in investor capital, making it the largest
investor-led collaborative initiative of its kind.
As noted earlierrr, an open, diverse, and
inclusive culture, anchored around values
that employees live and breathe every
day, is a key driver of success. Your Board
also dedicated significant time in 2019
to understanding how management is
strengthening and nurturing that culture
at Manulife. Along with ensuring that
leadership is accountably signalling
and modelling the right behaviour every
day, we learned about the investments
the company is making to ensure its
employees have the right skills training
and development opportunities available.
We onboarded two new directors in 2019
to ensure the Board continues to enhance
and diversify its skillset and broaden its
scope of experience. Julie Dickson, a
former Superintendent of the Office of the
Superintendent of Financial Institutions
(OSFI), Canada’s main financial services
regulatorrr, brings a depth of industry and
risk management experience to your
Board. Guy Bainbridge, a former partner
with global professional services firm
KPMG, has a wealth of audit expertise,
having served as a key audit leader for
several of the U.K.’s and Asia’s largest
financial institutions. We’re honoured
they’ve agreed to join our Board and look
forward to their many contributions in
serrrvice
of our company and its shareholders.
We are extremely proud of our track record
and remain fully committed to living by the
values that underpin our governance work.
Thank you
In closing, we would like to thank directors
Tom Jenkins and Lesley Webster who will
be retiring from our Board as of the end of
this year’s annual meeting. We appreciate
the many contributions they both made
during their terms.
We would also like to convey our deep
appreciation to Roy and his leadership
team on the numerous achievements
outlined in this annual report. Their
commitment to achieving success with
accountability and integrity is critical in
delivering on Manulife’s mission of making
decisions easier and lives better for the
customers, communities, employees,
and shareholders we serve.
And, we would like to thank every Manulife
employee around the world for the passion
they’ve shown in rallying around our
mission, strategy, and values, and for their
daily contributions to our customers and
our business.
As a new decade dawns, your Board would
like to thank you, our fellow shareholders,
for your trust, support, and open and
candid dialogue. Within the organization,
there is a palpable sense of energy,
excitement, and optimism about the
future. We look forward to serving you
in 2020 and beyond.
We were pleased once again to receive top
Sincerelyyy,
recognition in The Globe and Mail’s board
governance rankings this yearrr, scoring 100
points on their 100-point scale. While we
see our governance duties as simply doing
the job we’ve been appointed to do, awards
like this one serve as a great reminder we
must stay focused on doing the right thing.
John Cassaday
Chairman of the Board
3
Letter to shareholders from Roy Gori
Prrresident
and Chief Exxxecutive
OOfcer
Dear fellow shareholders,
Our mission, “Decisions made easierrr.
Lives made betterr,”r drives our 35,000
colleagues every day in serving our
customers, supporting our communities,
and delivering for our shareholders. It’s
why we provide products that help people
protect their families, live healthier lives,
and save for a more secure future. But we
know that having a mission statement that
4 | 2019 Annual Report
simply hangs on an office wall does not
define success. We must live it every day.
Sometimes, that means helping customers
file claims, submit forms, choose investments,
and plan for major life events. Other
times, it means being there in times of
need for our customers, especially when
they face unimaginable tragedy and loss.
That’s what happened in the aftermath of
the January 2020 plane crash of Ukrainian
International Airlines Flight PS752, which
took the lives of all 176 people on board.
Manulife customers were among the
passengers on that plane, and when the
news broke, our teams took action to pay
out claims as soon as possible.
As one of our employees said, a crisis
like this really brings you to your knees.
Howeverr,r the emotion we felt was nothing
compared to the overwhelming grief felt
by those who had lost family members that
day. We quickly searched our databases to
get a full view of the impacted customers
and their policies. Then, we reached out
directly to their families to let them know
we had everything in hand.
Kourosh Doustshenas lost his fiancée,
Drrr. Forough Khadem, and shared this after
speaking with our team: “She brought so
much life and joy into the world. I was
relieved that I had help in dealing with her
affairs during such a heartbreaking time.
It has been a true gift.”
We may not be able to ease the pain felt
by our customers in moments like this.
Howeverr,r supporting them by sharing our
humanity and always being there when
we’re needed most—that’s an example of
how our mission comes to life and how we
strive to be a caring, trustworthy, values-
driven organization that does what it says
and delivers on its promises.
Looking back on 2019, I’m proud to share
we posted another year of solid results.
We delivered on our commitments across
our five strategic priorities and
demonstrated our ability to consistently
execute as we transform Manulife into
the most digital, customer-centric global
company in our industry.
Serving our customers
We proudly served nearly 30 million
customers globally in 2019 as we
continued to provide compelling ways to
meet their needs. A great example is the
expansion of our behavioural insurance
offerings, Manulife Vitality, John Hancock
Vitalityyy, and ManulifeMOVE. These products
“ We know the key
to continued
success is
consistency and
executional
excellence in all
we do. It’s why
we will remain
steadfastly
focused on the
five strategic
priorities we
set out at the
start of our
transformation.”
embody our focus on making lives better
as they reward our customers for healthy
habits, like exercising and eating well. In
Asia, we introduced ManulifeMOVE in
Vietnam and Cambodia, and doubled
enrollment across the region. The
introduction of Manulife Vitality to our
Individual Health and Group Benefits
customers in Canada was met with great
enthusiasm. And in the U.S., we are
changing the lives of people with diabetes
with the launch of John Hancock Aspire,
which combines financial protection with
personalized diabetes support.
In our Global Wealth and Asset
Management business, we entered
into a joint venture agreement with
Mahindra Finance in India, with the goal
of becoming a leading provider of retail
investment solutions in that country.
And we launched an industry-first,
voice-enabled retirement product using
Alexa for customers in the U.S.
We also made steady progress in how we
are supporting our customers. In Canada,
we saw 3.9 million more claims submitted
digitally, and with our Group Benefits
business also moving to paperless claims,
we are on track to eliminate 4.2 million
cheques and benefits statements as well.
In Asia, we launched Hong Kong’s first
all-digital cashless service, which enables
customers to obtain speedy pre-approval
for most common claims, and we
expanded our eClaims platform across
the region. What’s most gratifying is
our customers’ feedback, with the
Net Promoter Scores in Asia increasing
as a result of these changes.
We set an ambitious goal of improving our
Net Promoter Scores (NPS) by 30 points
across the company by 2022, knowing
that passionate customers are more likely
to recommend Manulife and stay with us.
As we closed the yearrr, we were pleased
to see our NPS up 7points from our
2017 levels. By leveraging human-centred
design and technology, we’ll continue to
enhance our customer experience.
5
Engaging our employees
I am exceptionally proud of the
commitment and winning mindset of our
colleagues, as it’s their enthusiasm for
delivering for our customers that is fuelling
our success. As I shared with you last yearrr,
we’ve been challenging ourselves to bring
an insurgent mindset to all we do. Instead
of asking, “Does this process, product, or
policy work for our customers?” we are
asking, “Does this work as well as it
possibly can or is there a better way?” This
future-focused approach is encouraging
all of us to look for ways to continuously
improve what we do and we’re investing
in helping our colleagues build new skills
and capabilities to do that. Our focus on
making the future better is resonating
with our team, as we saw increased
engagement across the company last yearrr.
Actively cultivating a diverse and inclusive
workplace is also a key contributor to
engagement. When all employees are
inspired to bring their authentic and whole
selves to work, they get the opportunity
to thrive personally and professionally.
Through our employee resource groups,
we are sponsoring activities that enable us
to build closer connections, to learn about
each others’ perspectives, and to live our
“Share your humanity” value every day.
Our efforts earned us recognition on the
2019 Bloomberg Gender Equality Index
and as one of Canada’s Best Diversity
Employers for the past two years.
Tata, one of our colleagues in Indonesia,
had limited education, no work experience,
and was coping with a physical disability
when she applied for a direct marketing
position with Manulife. Her great attitude
and desire to assert her independence in
life made her a standout candidate and
she was invited to join our team. Since
she’s been with us, Tata has received
numerous awards, including being
nominated as a top colleague four times
in a row. In her own words, “To be
able to work in Manulife Indonesia is
truly a dream come true for me.”
Her story shows what’s possible when
passion meets opportunity to create
a unique company culture, and I firmly
believe our people and the teamwork
we’re building will continue to be a
competitive advantage for us globally.
Caring for our communities
There is no denying the impact of climate
change is significant and has implications
for every community and business globally.
To bring about sustained change, it’s clear
this will require all stakeholders to work
togetherrr. We’re proud to be doing our part,
with our colleagues taking steps to make
progress on many fronts, and we know
much still remains to be done.
We established a climate change working
group that reports to our Executive
Sustainability Council, whose mandate
includes identifying climate change risks
and opportunities across the organization.
We are proud to have served as a leading
arranger and provider of financing for the
renewable power sector in North America,
having invested over $13.6 billion in wind
and solar energy and energy efficiency
since 2002. We’re also sustainably
managing our real estate, timberrr, and
agriculture assets. For example, over
48 million square feet, or 80%, of our
global real estate portfolio has been
certified to a green building standard.
“ Our results in
2019 were strong
and we made
great progress
as measured by a
one- and three-year
Total Shareholder
Return of 49.2%
and 27.6%,
respectively—a
metric we have
worked hard
to improve.”
Manulife was the first global life insurer
to issue a green bond, and with two
issuances to date, our total outstanding
green bond issuance amount is now over
$1.0 billion. The environmental benefit
of our second, $600 million green
bond is 258,400 tons of carbon dioxide
emissions avoided annually, or 430 tons
per $1.0 million invested.
6 | 2019 Annual Report
Looking ahead, we are excited to
build on the momentum of our strong
achievements. We know the key to
continued success is consistency and
executional excellence in all we do. It’s
why we will remain steadfastly focused
on the five strategic priorities we set out
at the start of our transformation.
Our goal remains a bold one: to lead our
industry. It will require us to continue to
have an insurgent mindset, challenge
ourselves to look for new ways to support
our customers and our communities, all
while adapting as needed to address new
challenges and opportunities. We remain
confident that we have the right plan, the
right team, and the right mindset to
achieve our ambition.
Sincerely,
Roy Gori
President and Chief Executive Officer
Our commitment to sustainability extends
beyond environmental considerations.
From helping underserved communities in
Canada, to providing support for deserving
students through our Martin Luther King
scholarships in the U.S., to improving
financial literacy in the Philippines, we are
involved in a range of efforts designed to
help people learn and grow to fulfill their
aspirations. We’re also proud of the work
we have done globally in support of
important community needs, directly
making or helping to raise over $46 million
in community contributions, along with
our employees and agents volunteering
approximately 66,000 hours of service
to make a difference.
Identifying ways to help make the world a
better place will continue to be a key focus
for us. It’s also a personal passion for me,
our leadership team, and our Board, so we
are looking forward to continuing to build
on our progress in the year to come.
Delivering for our shareholders
Despite significant market volatility, global
trade tensions, and other geopolitical
events, we continued to sustainably grow
net income and core earnings, free up
capital so it can be put to best use, and
grow our highest-potential businesses
while maintaining discipline on costs.
We delivered top-quartile shareholder
returns in 2019. We achieved core
earnings of $6.0 billion and net income
attributed to shareholders of $5.6 billion,
increases of 5% and 14%, respectivelyyy,
over 2018. Our strong results were driven
by continued double-digit growth in core
earnings in Asia. New business value, at
$2.0 billion, was up 15% from 2018.
We released a total of $5.1 billion of
capital from our legacy businesses by
the end of 2019 and are pleased to
have achieved our 2022 target three
years ahead of schedule.
Thanks to the ongoing trust and
confidence of our customers around the
world, our assets continued to grow,
finishing the year at $1.2 trillion of assets
under management and administration.
This is up 13% from last year and up
almost 30% from five years ago.
Our results in 2019 were strong and we
made great progress as measured by a
one- and three-year Total Shareholder
Return of 49.2% and 27.6%,
respectively—a metric we have worked
hard to improve as we strive to consistently
deliver on our bold ambition and transform
Manulife into the most digital, customer-
centric global company in our industry.
Thank you
One of our values, “Get it done togetherrr,”
is an apt description for how we have been
able to accomplish so much in 2019. I am
incredibly grateful for the leadership,
positive mindset, and adaptability of our
team. We are also so fortunate to have the
counsel and support of our distinguished
Board members, whose experience and
guidance have helped us on many fronts.
I want to extend a special thank you to our
Chairman of the Board, John Cassadayyy,
for his continued dedication, candorrr, and
sound advice. I’’d also like to thank you,
fellow shareholders, for your ongoing trust
and confidence in Manulife and our team.
7
Caution regarding forward-looking statements
From time to time, Manulife Financial
Corporation (“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 harbou ” r
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 the Company’s
strategic priorities and 2022 targets
for net promoter score, employee
engagement, its highest potential
businesses, expense efficiency and
portfolio optimization, and 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 and actual results may differ
materially from those expressed or implied
in such statements. Important factors that
could cause actual results to differ
8 | 2019 Annual Report
n n l
materially from expectatio s i c ude but
are not limited to; 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 applicable in any of the
territories in which we operate; changes in
regulatory capital requirements; 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, actuarial methods
and embedded value 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 availabilityy,y 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; our ability to protect our
intellectual property and exposure to
claims of infringement; and our inability
to withdraw cash from subsidiaries.
Additional information about material risk
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 this document
under “Risk Management”, “Risk Factors”
and “Critical Accounting and Actuarial
Policies” and in the “Risk Management”
note to the Consolidated Financial
Statements as well as elsewhere in our
filings with Canadian and U.S. securities
regulators. The forward-looking
statements in this document 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, our future
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.
Manulife
Financial
Corporation
Table of
contents
Annual
Report
2019
10
Risk factors
Performance and Non-GAAP Measures
Investments
Risk Management
Management’s Discussion and Analysis
10 Manulife Financial Corporation
17 Asia
20 Canada
23 US
26 Global Wealth and Asset Management
29 Corporate and Other
31
36
57 Capital Management Framework
60 Critical Actuarial and Accounting Policies
70
86 Controls and Procedures
87
91 Additional Disclosures
103 Consolidated Financial Statements
108 Notes to Consolidated Financial Statements
179 Additional Actuarial Disclosures
181
181
182 Office Listing
183 Glossary of Terms
185
185 Dividend Information
Executive Leadership Team
Shareholder Information
Board of Directors
Table of Contents | Manulife Financial Corporation | 2019 Annual Report
9
Management’s Discussion and Analysis
This Management’s Discussion and Analysis (“MD&A”) is current as of February 12, 2020.
1. Manulife Financial Corporation
Manulife Financial Corporation is a leading international financial services group that helps people make their decisions
easier and lives better. With our global headquarters in Toronto, Canada, we operate as Manulife across our offices in
Canada, Asia, and Europe, and primarily as John Hancock in the United States. We provide financial advice, insurance,
and wealth and asset management solutions for individuals, groups and institutions. At the end of 2019, we had more
than 35,000 employees, over 98,000 agents, and thousands of distribution partners, serving almost 30 million customers.
At the end of 2019, we had $1.2 trillion (US$0.9 trillion) in assets under management and administration, and during
2019, we made $29.7 billion in payments to our customers. Our principal operations are in Asia, Canada and the United
States where we have served customers for more than 100 years. We trade as ‘MFC’ on the Toronto, New York, and the
Philippine stock exchanges, and under ‘945’ in Hong Kong.
Our reporting segments are:
■ Asia – providing insurance products and insurance-based wealth accumulation products in Asia.
■ Canada – providing insurance products, insurance-based wealth accumulation products, and banking services in Canada.
■ U.S. – providing life insurance products, insurance-based wealth accumulation products and has an in-force long-term care
insurance business and an in-force annuity business.
■ Global Wealth and Asset Management (“Global WAM”) – providing fee-based wealth solutions to our retail, retirement and
institutional customers around the world.
■ Corporate and Other – comprised of investment performance on assets backing capital, net of amounts allocated to operating
segments; financing costs; costs incurred by the corporate office related to shareholder activities (not allocated to operating
segments); our Property and Casualty (“P&C”) Reinsurance business; and run-off reinsurance business lines.
In this document, the terms “Company”, “Manulife”, “we” and “our” mean Manulife Financial Corporation (“MFC”) and its
subsidiaries. The term “MLI” means The Manufacturers Life Insurance Company and its subsidiaries.
a. Profitability
Profitability
As at and for the years ended December 31,
($ millions, unless otherwise stated)
Net income attributed to shareholders
Core earnings(1)
Diluted earnings per common share ($)
Diluted core earnings per common share ($)(1)
Return on common shareholders’ equity (“ROE”)
Core ROE(1)
Expense efficiency ratio(1)
2019
2018
2017
$ 5,602
$ 6,004
2.77
$
2.97
$
12.2%
13.1%
52.0%
$ 4,800 $ 2,104
$ 5,610 $ 4,565
0.98
$ 2.33 $
2.22
$ 2.74 $
5.0%
11.3%
55.4%
11.6%
13.7%
52.0%
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Our net income attributed to shareholders was $5.6 billion in 2019 compared with $4.8 billion in 2018. Net income
attributed to shareholders is comprised of core earnings1 (consisting of items we believe reflect the underlying earnings capacity of the
business), which amounted to $6.0 billion in 2019 compared with $5.6 billion in 2018, and items excluded from core earnings of $0.4
billion of net charges in 2019 compared with $0.8 billion of net charges in 2018.
The $0.8 billion increase in net income attributed to shareholders was due to growth in core earnings of $0.4 billion, the non-
recurrence of a 2018 restructuring charge, and higher investment-related experience gains. The direct impact of markets was a charge
of $0.8 billion in 2019 and a charge of $0.9 billion in 2018 – the 2019 amount included a $0.5 billion charge related to updated
Ultimate Reinvestment Rate (“URR”) assumptions issued by the Canadian Actuarial Standards Board (the “ASB”).
The $0.4 billion increase in core earnings was driven by in-force growth in Asia and Global WAM, higher new business, and higher
investment income and the non-recurrence of 2018 market losses on seed money investments in our surplus portfolio. These items
were partially offset by the impact on earnings of actions taken over the last 12 months to improve the capital efficiency of our legacy
businesses, unfavourable policyholder experience and the impact of lower new business volumes in Japan. Core earnings in 2019
included a net policyholder experience charge of $17 million post-tax ($55 million pre-tax) compared with gains of $38 million post-
tax ($64 million pre-tax) in 20182,3. Reinsurance and alternative long-durations assets (“ALDA”) portfolio mix actions to improve the
capital efficiency of our legacy businesses resulted in $116 million lower core earnings in 2019 compared with 2018.
1 This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
2 Policyholder experience includes gains of $83 million from the release of margins on medical policies in Hong Kong that have lapsed for customers who have opted to
change their existing policies to the new Voluntary Health Insurance Scheme (“VHIS”) products. These gains did not have a material impact on core earnings as they were
offset by new business strain.
3 Effective 2018, policyholder experience is being reported excluding minority interest. Comparative prior periods have been updated.
10
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Core earnings by segment is presented in the following table. See Asia, Canada, U.S., and Global WAM sections below.
For the years ended December 31,
($ millions)
Core earnings by segment(1),(2),(3)
Asia
Canada
U.S.
Global Wealth and Asset Management
Corporate and Other (excluding core investment gains)
Core investment gains(2),(4)
Total core earnings
2019
2018
2019 vs 2018
2017
% change(1)
$ 2,005
1,201
1,876
1,021
(499)
400
$ 6,004
$ 1,766
1,327
1,789
985
(657)
400
$ 5,610
11% $ 1,453
1,209
(9)%
1,609
2%
816
2%
(922)
24%
400
–
5% $ 4,565
(1) Percentage change is on a constant exchange rate basis. See “Performance and Non-GAAP Measures” below.
(2) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(3) 2018 comparatives for core earnings in each segment have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance
segments from the Corporate and Other segment.
(4) See note (2) in the table below.
The table below reconciles 2019, 2018 and 2017 net income attributed to shareholders to core earnings and provides further details
for each of the items excluded from core earnings.
For the years ended December 31,
($ millions)
Core earnings(1)
Items to reconcile core earnings to net income (loss) attributed to shareholders:
Investment-related experience outside of core earnings(2)
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities
Direct impact of equity markets and variable annuity guarantee liabilities(3)
Fixed income reinvestment rates assumed in the valuation of policy liabilities(4)
Sale of AFS bonds and derivative positions in the Corporate and Other segment
Changes to the ultimate reinvestment rate(5)
Risk reduction related items
Change in actuarial methods and assumptions(6)
Charge related to decision to change portfolio asset mix supporting our legacy businesses(7)
Reinsurance transactions(8)
Restructuring charge(9)
Tax-related items and other(10)
Total items excluded from core earnings
Net income attributed to shareholders
2019
2018
2017
$ 6,004
$ 5,610 $ 4,565
366
(778)
456
(1,130)
396
(500)
–
(21)
–
81
–
(50)
(402)
200
(857)
(928)
354
(283)
–
–
(51)
–
175
(263)
(14)
(810)
167
209
533
(200)
(41)
–
(83)
(35)
(1,032)
146
–
(1,916)
(2,461)
$ 5,602
$ 4,800 $ 2,104
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) In accordance with our definition of core earnings, we include up to $400 million of net favourable investment-related experience reported in a single year, as core
investment gains (see “Performance and Non-GAAP Measures” below). Items excluded from core earnings include net investment-related experience in excess of $400
million per annum or net unfavourable investment-related experience on a year-to-date basis. In 2019, we generated investment-related experience gains of $766
million, reflecting the favourable impact of fixed income reinvestment activities on the measurement of our policy liabilities, strong returns (including changes in fair
value) on ALDA, and strong credit experience. In 2018, investment-related experience gains of $600 million reflected the favourable impact of fixed income reinvestment
activities on the measurement of our policy liabilities and strong credit experience, partially offset by lower than expected returns (including changes in fair value) on
ALDA.
(3) In 2019, the net gains related to equity markets of $456 million included a gain of $443 million from gross equity exposure and a gain of $45 million from dynamic
hedging experience, partially offset by a charge of $32 million from macro hedge experience. In 2018, the net charge of $928 million included a charge of $1,718
million from gross equity exposure, partially offset by a gain of $767 million from dynamic hedging experience and a gain of $23 million from macro hedge experience.
(4) In 2019, the net charge due to fixed income reinvestment rates of $1,130 million was primarily due to the narrowing of corporate spreads, the impact of lower risk-free
rates and a steepening of the yield curve. In 2018, the $354 million net gain for fixed income reinvestment assumptions was driven primarily by the widening of
corporate spreads partially offset by movement in risk-free rates and increases in swap spreads that resulted in a decrease in the fair value of our swaps.
(5) In 2019, the ASB issued new assumptions with reductions to the URR and updates to the calibration criteria for stochastic risk-free rates. The updated standard included
a reduction of 15 basis points in the URR and a corresponding change to stochastic risk-free rate modeling and resulted in a $500 million charge. The long-term URR for
risk-free rates in Canada is prescribed at 3.05% and we use the same assumption for the U.S. Our assumption for Japan is 1.6%. The ASB does not anticipate an update
to this promulgation prior to the effective date of IFRS 17, expected to be 2022 at the earliest.
(6) See “Critical Actuarial and Accounting Policies – Review of Actuarial Methods and Assumptions” section below for further information on the 2019 and 2018 charges.
(7) The 2017 charge reflected a $1.0 billion post-tax charge related to our decision to reduce the allocation to ALDA in our portfolio asset mix supporting our North
American legacy businesses.
(8) The 2019 net gain of $81 million includes gains resulting from reinsurance transactions primarily related to our legacy businesses in Canada and the U.S. The 2018 net
gain of $175 million includes gains resulting from reinsurance transactions partly related to our legacy businesses in Canada and the U.S. as well.
(9) The 2018 charge of $263 million primarily related to the voluntary exit program in our Canadian operation transformation program and to our North American voluntary
early retirement program as well as costs to optimize our real estate footprint in the U.S. and Canada.
(10) Tax-related items and other charges in 2019 primarily related to a tax rate change in the province of Alberta, Canada. Charges in 2018 and 2017 primarily relate to U.S.
tax reform.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
11
Diluted earnings per common share was $2.77 in 2019, compared with $2.33 in 2018. Diluted core earnings per common share1
was $2.97 in 2019, compared with $2.74 in 2018. The changes in these measures were related to the increase in both net income
and core earnings, respectively. The diluted weighted average common shares outstanding was $1,962 million in 2019 and $1,988
million in 2018.
Return on common shareholders’ equity (“ROE”) for 2019 was 12.2%, compared with 11.6% for 2018 and core return on
shareholders’ equity (“core ROE”)1 was 13.1% in 2019 compared with 13.7% in 2018. The decrease in 2019 core ROE was
predominantly driven by the impact of lower interest rates and increased returns from equity markets on our available-for-sale (“AFS”)
holdings, increasing common shareholders’ equity.
Expense efficiency ratio was 52.0% for 2019, compared with 52.0% in 2018. General expenses included in core earnings (“core
general expenses”) and pre-tax core earnings both grew 3%.
b. Growth
Growth metrics
As at and for the years ended December 31,
($ millions, unless otherwise stated)
Asia APE sales
Canada APE sales
U.S. APE sales
Total APE sales(1)
Asia new business value
Canada new business value
U.S. new business value
Total new business value(1)
Wealth and asset management gross flows ($ billions)(1)
Wealth and asset management net flows ($ billions)(1)
Wealth and asset management assets under management and administration ($ billions)(1)
Total assets under management and administration ($ billions)(1)
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
2019
2018
2017
$ 4,278
1,057
702
6,037
1,595
237
218
2,050
114.2
(0.9)
681.4
1,188.9
$ 4,012 $ 3,747
1,366
603
5,716
1,201
191
51
1,443
122.0
18.3
609.0
1,071.3
975
553
5,540
1,443
207
98
1,748
119.0
1.6
608.8
1,083.5
Annualized premium equivalent (“APE”) sales1 were $6.0 billion in 2019, an increase of 7%2 compared with 2018. In Asia, APE
sales increased 4% as double-digit growth in Hong Kong and Asia Other3 was partially offset by lower sales in Japan due to a change
in tax rules on the corporate-owned life insurance (“COLI”) product. In Canada, APE sales increased 8% driven by higher Manulife Par
and small and mid-case group insurance sales, partially offset by variability in the large-case group insurance market. In the U.S., APE
sales increased 24% driven by domestic and international universal life sales.
New business value (“NBV”)1 was $2.0 billion in 2019, an increase of 15% compared with 2018. In Asia, NBV increased 8% to
$1,595 million with growth in Hong Kong and Asia Other, partially offset by a decline in Japan sales. In Canada, NBV of $237 million
was up 14% from 2018, driven by higher individual insurance sales. In the U.S., NBV doubled to $218 million, primarily as a result of
recent actions to improve margins, as well as higher sales and a more favourable product mix.
WAM gross flows1 of $114.2 billion were $4.8 billion or 6% lower than 2018 as lower retail and institutional asset management
flows were only partially offset by higher retirement flows. See “Global Wealth and Asset Management” section below for further
details.
WAM net outflows1 were $0.9 billion in 2019 compared with net inflows of $1.6 billion in 2018. Net inflows in Asia were $4.8
billion in 2019, compared with net inflows of $5.7 billion in 2018, driven by lower gross flows and higher redemptions in institutional
asset management, partially offset by lower retail redemptions. Net outflows in Canada were $3.6 billion in 2019 compared with net
inflows of $2.0 billion in 2018 driven by the decision by one institutional client in the third quarter of 2019 to internalize the
management of several large, primarily fixed income, mandates and the redemption of a large-case retirement plan in the second
quarter of 2019, partially offset by strong retail net inflows. Net outflows in the U.S. were $2.0 billion in 2019 compared with net
outflows of $6.1 billion in 2018, primarily due to lower retail redemptions amid improved equity market returns and the redemption
of three large-case retirement plans in the second quarter of 2018.
Assets under Management and Administration (“AUMA”)1
AUMA as at December 31, 2019 was $1.2 trillion, an increase of 13%, compared with December 31, 2018, primarily due to the
favourable impact of markets. The Global Wealth and Asset Management portion of AUMA as at December 31, 2019 was $681
billion, an increase of 16%, compared with December 31, 2018, driven by improved market returns which were partially offset by net
outflows of $0.9 billion.
1 This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
2 Percentage growth / declines in core general expenses, APE sales, gross flows, NBV, assets under management and administration, core earnings, assets under
management and core EBITDA are stated on a constant exchange rate basis. Constant exchange rate basis is a non-GAAP measure. See “Performance and Non-GAAP
Measures” below.
3 Asia Other excludes Japan and Hong Kong.
12
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Assets under Management and Administration
As at December 31,
($ millions)
General fund
Segregated funds net assets(1)
Mutual funds, institutional asset management and other(1),(2)
Total assets under management
Other assets under administration
Total assets under management and administration
2019
2018
2017
$ 378,527
343,108
321,826
$ 353,664 $ 334,222
324,307
289,559
313,209
292,200
1,043,461
145,397
959,073
124,449
948,088
123,188
$ 1,188,858
$ 1,083,522 $ 1,071,276
(1) Segregated fund assets, mutual fund assets and other funds are not available to satisfy the liabilities of the Company’s general fund.
(2) Other funds represent pension funds, pooled funds, endowment funds and other institutional funds managed by the Company on behalf of others.
Revenue
Revenue includes (i) premiums received on life and health insurance policies and fixed annuity products, net of premiums ceded to
reinsurers; (ii) investment income comprised of income earned on general fund assets, credit experience and realized gains and losses
on assets held in the Corporate segment; (iii) fee and other income received for services provided; and (iv) realized and unrealized
gains and losses on assets supporting insurance and investment contract liabilities and on our macro hedging program. Premium
equivalents from administrative services only (“ASO”), as well as deposits received by the Company on investment contracts such as
segregated funds, mutual funds and managed funds are not included in revenue; however, the Company does receive fee income
from these products, which is included in revenue. Fees generated from deposits and ASO premium and deposit equivalents are an
important part of our business and as a result, revenue does not fully represent sales and other activity taking place during the
respective periods.
For 2019, revenue before realized and unrealized investment gains and losses was $61.4 billion compared with $48.0 billion in 2018.
The increase was primarily due to the impact on ceded premiums in 2018 from U.S. legacy business transactions.
In 2019, the net realized and unrealized investment gains on assets supporting insurance and investment contract liabilities and on the
macro hedging program were $18.2 billion compared with losses of $9.0 billion for full year 2018. The 2019 gain was primarily due
to lower interest rates and higher equity markets. The losses in 2018 were driven by higher interest rates and a decline in equity
markets.
See “Impact of Fair Value Accounting” below.
Revenue
For the years ended December 31,
($ millions)
Gross premiums
Premiums ceded to reinsurers
Net premium income
Investment income
Other revenue
Revenue before realized and unrealized investment gains and losses
Realized and unrealized investment gains and losses on assets supporting insurance and investment
contract liabilities and on the macro hedge program
Total revenue
c. Financial Strength
Financial strength metrics
As at and for the years ended December 31,
($ millions, unless otherwise stated)
MLI’s LICAT total ratio(1)
Financial leverage ratio
Consolidated capital(2)
Book value per common share ($)
Book value per common share excluding accumulated other comprehensive income (“AOCI”) ($)
2019
2018
2017
$ 41,059
(5,481)
35,578
15,393
10,399
61,370
$ 39,150 $ 36,361
(8,151)
28,210
13,649
10,746
52,605
(15,138)
24,012
13,560
10,428
48,000
18,200
(9,028)
5,718
$ 79,570
$ 38,972 $ 58,323
2019
2018
2017
140%
25.1%
$ 57,369
$ 23.25
$ 19.94
143%
28.6%
n/a
30.3%
$ 56,010 $ 50,659
$ 21.38 $ 18.89
$ 18.23 $ 16.83
(1) The Life Insurance Capital Adequacy Test (“LICAT”) framework replaced the Minimum Continuing Capital and Surplus Requirements (“MCCSR”) framework on
January 1, 2018.
(2) This item is a Non-GAAP measure. See “Performance and Non-GAAP Measures” below.
The Life Insurance Capital Adequacy Test (“LICAT”) total ratio for MLI was 140% as at December 31, 2019, compared with
143% as at December 31, 2018. The three percentage point decline from December 31, 2018 was primarily driven by the narrowing
of corporate spreads and $2.0 billion of capital redemptions1, partially offset by the decrease in risk-free rates and actions to release
capital in our North American legacy businesses.
1 For LICAT, the $2.0 billion of redemptions includes the $0.5 billion redeemed in January 2020 (announced in December 2019) as the LICAT ratio reflects all the actual and
announced capital redemptions.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
13
MFC’s financial leverage ratio decreased to 25.1% as at December 31, 2019 from 28.6% as at December 31, 2018, driven by net
income attributed to shareholders net of dividends, the redemption of $1.5 billion of securities, and the increase in values of AFS
securities, partially offset by the net impact of share buybacks and issuance of shares for the dividend reinvestment program, and the
impact of a stronger Canadian dollar compared with the U.S. dollar.
Consolidated capital1 was $57.4 billion as at December 31, 2019 compared with $56.0 billion as at December 31, 2018, an increase
of approximately $1.4 billion. The increase was primarily driven by net income attributed to shareholders net of dividends of $3.5
billion and a net increase in accumulated other comprehensive income (“AOCI”) of $0.2 billion, partially offset by capital redemptions
of $1.5 billion and the net impact of share buybacks and issuance of shares for the dividend reinvestment program of $0.6 billion. The
net increase in AOCI was due to the impact of lower interest rates and higher equity markets on assets classified as AFS, mostly offset
by the impact of a stronger Canadian dollar compared to the U.S. dollar.
Book value per common share as at December 31, 2019 was $23.25, an increase of 9% compared with $21.38 as at
December 31, 2018, and the book value per common share excluding AOCI was $19.94 as at December 31, 2019, an increase of 9%
compared with $18.23 as at December 31, 2018. The increase in the book value per common share was primarily driven by net
income attributed to shareholders net of dividends and a net increase in AOCI, partially offset by the net impact of share buybacks
and issuance of shares for the dividend reinvestment program. The number of common shares outstanding was 1,949 million as at
December 31, 2019 and 1,971 million as at December 31, 2018.
d. Impact of Fair Value Accounting
Fair value accounting policies affect the measurement of both our assets and our liabilities. The difference between the reported
amounts of our assets and liabilities determined as of the balance sheet date and the immediately preceding balance sheet date in
accordance with the applicable fair value accounting principles is reported as investment-related experience and the direct impact of
equity markets and interest rates and variable annuity guarantees, each of which impacts net income.
We reported $18.2 billion of net realized and unrealized investment gains in investment income in 2019 (2018 – losses of $9.0
billion).
As outlined under “Critical Actuarial and Accounting Policies” below, net insurance contract liabilities under IFRS are determined using
Canadian Asset Liability Method (“CALM”), as required by the Canadian Institute of Actuaries (“CIA”). The measurement of policy
liabilities includes the estimated value of future policyholder benefits and settlement obligations to be paid over the term remaining on
in-force policies, including the costs of servicing the policies, reduced by the future expected policy revenues and future expected
investment income on assets supporting the policies. Investment returns are projected using the current asset portfolios and projected
reinvestment strategies. Experience gains and losses are reported when current period activity differs from what was assumed in the
policy liabilities at the beginning of the period. We classify gains and losses by assumption type. For example, current period investing
activities that increase (decrease) the future expected investment income on assets supporting the policies will result in an investment-
related experience gain (loss). See description of investment-related experience in “Performance and Non-GAAP Measures” below.
As noted in “Critical Actuarial and Accounting Policies – Future Accounting and Reporting Changes” below, IFRS 17 is expected to
replace IFRS 4, and therefore CALM, in 2022 at the earliest (as per the IASB exposure draft published in June 2019, with potential for
further deferral currently under consideration). The new standard will materially change insurance contract measurement and the
timing of recognition of earnings. While there will be many changes, two items of note are:
■ Under IFRS 17, the discount rate used to estimate the present value of insurance contract liabilities is based on the characteristics of
the liability, whereas under CALM we use current and projected asset returns supporting insurance contract liabilities to value the
liabilities (see “Critical Actuarial and Accounting Policies – Determination of Policy Liabilities – Investment Returns” below). The
difference in the discount rate approach also impacts the timing of investment-related experience earnings emergence. Under
CALM, investing activities impact reported investment-related experience (see “Performance and Non-GAAP measures” section
below). Under IFRS 17, the impact of investing activities will emerge over the life of the asset.
■ Under IFRS 17, new business gains are recorded on the balance sheet (in the contractual service margin component of the insurance
contract liability) and are amortized into income as services are provided. Under CALM, new business gains (and losses) are
recognized in income immediately. In 2019, we reported $819 million (post-tax) of new business gains in net income attributed to
shareholders (2018 – $746 million).
e. Public Equity Risk and Interest Rate Risk
At December 31, 2019, the impact of a 10% decline in equity markets was estimated to be a charge of $520 million and the impact
of a 50 basis point decline in interest rates, across all durations and markets, on our earnings was estimated to be a charge of $100
million. See “Risk Management” and “Risk Factors” below.
f. Impact of Foreign Exchange Rates
We have worldwide operations, including in Canada, the United States and various markets in Asia, and generate revenues and incur
expenses in local currencies in these jurisdictions, all of which are translated into Canadian dollars. The bulk of our exposure to foreign
exchange rates is to movements in the U.S. dollar.
1 This item is a Non-GAAP measure. See “Performance and Non-GAAP Measures” below.
14
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Items impacting our Consolidated Statements of Income are translated to Canadian dollars using average exchange rates for the
respective quarterly period. For items impacting our Consolidated Statements of Financial Position, period end rates are used for
currency translation purpose. The following table provides the most relevant foreign exchange rates for 2019 and 2018.
Exchange rate
Average(1)
U.S. dollar
Japanese yen
Hong Kong dollar
Period end
U.S. dollar
Japanese yen
Hong Kong dollar
Quarterly
Full Year
4Q19
3Q19
2Q19
1Q19
4Q18
2019
2018
1.3200
0.0122
0.1687
1.3204 1.3377 1.3295 1.3204
0.0123 0.0122 0.0121 0.0117
0.1686 0.1706 0.1694 0.1687
1.3269
0.0122
0.1693
1.2958
0.0117
0.1654
1.2988
0.0120
0.1668
1.3243 1.3087 1.3363 1.3642
0.0123 0.0121 0.0121 0.0124
0.1689 0.1676 0.1702 0.1742
1.2988
0.0120
0.1668
1.3642
0.0124
0.1742
(1) Average rates for the quarter are from Bank of Canada which are applied against Consolidated Statements of Income items for each period. Average rate for the full year
is a 4-point average of the quarterly average rates.
Net income attributed to shareholders and core earnings from the Company’s foreign operations are translated to Canadian dollars,
and in general, our net income attributed to shareholders and core earnings benefit from a weakening Canadian dollar and are
adversely affected by a strengthening Canadian dollar. However, in a period of losses, the weakening of the Canadian dollar has the
effect of increasing the losses. The relative impact of foreign exchange in any given period is driven by the movement of currency rates
as well as the proportion of earnings generated in our foreign operations.
Changes in foreign exchange rates, primarily due to the strengthening of the U.S. dollar compared with the Canadian dollar,
increased core earnings by approximately $100 million in 2019 compared with 2018. The impact of foreign currency on items
excluded from core earnings does not provide relevant information given the nature of these items.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
15
g. Strategic priorities progress update
Manulife’s mission – Decisions made easier. Lives made better – guided our business throughout 2019. Our focused efforts produced
solid results on our five strategic priorities.
Strategic priorities 2022 Targets1
2019 Performance
Highlights on our progress
1. Portfolio
Optimization
■ Release a total of $5
billion in capital from
legacy businesses
■ Medium-term target
■ Achieved $2.2 billion from a reduction in the allocation to ALDA in
achieved 3 years ahead
of schedule
the portfolio asset mix supporting legacy business
■ $2.4 billion from reinsurance and other actions in our North
■ Delivered $5.1 billion of
American Legacy businesses
cumulative capital
benefits, including $2.1
billion in 2019
■ $0.5 billion related to real estate transactions to reduce lease
renewal risk
2. Expense
Efficiency
■ Achieve a 50% expense
■ Expense efficiency ratio
efficiency ratio
■ Deliver $1 billion in
expense efficiencies
of 52% in 2019,
compared to 52% in
2018
■ Cumulative expense
efficiencies of $700
million in pre-tax annual
savings, including $400
million in 2019
■ Modest core general expense growth of 3%, less than half the
historic average, reflecting the impact of our expense efficiency
initiatives
■ Executed voluntary exit and early retirement programs for eligible
staff in North America
■ Consolidated our real estate footprint
■
Implemented automation, robotic solutions, and leveraged artificial
intelligence to adjudicate less complex transactions
■ Renegotiated various contracts with third-party vendors
3. Accelerate
Growth
■ Generate two-thirds of
core earnings from
highest potential
businesses2
4. Digital,
Customer
Leader
■
Improve Net Promoter
Score by 30 points, as
compared to a baseline
of +1 in 2017
■ 57% of our core
■ Core earnings from highest potential businesses outpaced other
earnings in 2019 were
generated from highest
potential businesses,
compared to 55% in
2018
businesses by almost 11%
■ Entered into a long-term strategic partnership with HaoDF.com in
mainland China and agreed to enter into a joint venture with
Mahindra Finance in India.
■ Expanded our behavioural insurance product base through the
launch of ManulifeMOVE insurance program in Vietnam and
Cambodia, and the John Hancock Aspire program in the U.S.
■ rNPS score of +8, a +7
■
point improvement from
the 2017 baseline and a
-1 point decline from the
+9 improvement in 2018
Implemented relational net promotor score (“rNPS”) systems in all
markets
■ Recognized as the best life insurance company for digital
transformation in Vietnam
■ Launched an end-to-end online insurance platform in collaboration
■ 2019 scores remain
with DBS Bank for the Singapore market
competitive with global
benchmarks
■ Launched a voice-enabled retirement product using Alexa (industry
first)
5. High
■ Achieve top quartile
■ 8 point improvement
Performing
Team
employee engagement
compared to global
financial services and
insurance peers
compared to 2018 score
■ 2019 employee
engagement was close to
the median of our
designated peer group
■ >90% participation in the employee engagement survey
■ Crowd-sourced and implemented employee ideas to automate
■
repetitive tasks
Integrated our performance rewards to equally recognize work
contributions and living our values
■ Conducted leadership training focused on “winning teams” and
“transformation ready leadership”
■ Received Bloomberg Gender-Equality Index, Best Company to Work
for in Asia, Canada’s Best Diversity Employers
1 See “Caution regarding forward-looking statements” above.
2 Asia, Global WAM, group insurance in Canada, and behavioural insurance products
16
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
2. Asia
Our Asia segment is a leading provider of insurance products and insurance-based wealth accumulation products, driven
by a customer-centric strategy and leveraging the asset management expertise and products managed by our Global
Wealth and Asset Management segment. Present in many of Asia’s largest and fastest growing economies, we are well
positioned to capitalize on the attractive underlying demographics of the region, underpinned by a rigorous focus on
creating value for our customers, employees and shareholders.
We have insurance operations in 11 markets: Japan, Hong Kong, Macau, Singapore, mainland China, Vietnam, Indonesia,
the Philippines, Malaysia and Cambodia and have recently received licence to start operations in Myanmar.1
We have a diversified multi-channel distribution network, including over 95,000 contracted agents and 100 bank
partnerships. We also work with many independent agents, financial advisors and brokers. Among our bancassurance
partnerships we have eight exclusive partnerships, including a long-term partnership with DBS Bank across Singapore,
Hong Kong, mainland China and Indonesia, that give us access to almost 15 million bank customers.
In 2019, Asia contributed 33% of the Company’s core earnings from operating segments and, as at December 31, 2019, accounted
for 10% of the Company’s assets under management and administration.
a. Profitability
Asia reported net income attributed to shareholders of $1,935 million in 2019 compared with $1,704 million in 2018. Net income
attributed to shareholders is comprised of core earnings, which was $2,005 million in 2019 compared with $1,766 million in 2018,
and items excluded from core earnings, which amounted to a net charge of $70 million for 2019 compared with a net charge of $62
million in 2018.
Expressed in U.S. dollars, the presentation currency of the segment, net income attributed to shareholders was US$1,457 million in
2019 compared with US$1,317 million in 2018 and core earnings were US$1,511 million in 2019 compared with US$1,363 million in
2018. Items excluded from core earnings are outlined in the table below and amounted to a net charge of US$54 million in 2019 and
a net charge of US$46 million in 2018.
Core earnings in 2019 increased 11% compared with 2018, after adjusting for the impact of changes in foreign currency exchange
rates. Core earnings increased by 26% in Hong Kong and 18% in Asia Other and declined by 19% in Japan. Hong Kong and Asia
Other core earnings benefited from higher new business volumes and in-force business growth and in Japan, core earnings were
impacted by lower new business volumes. Additionally, Asia core earnings benefited from improved policyholder experience in Hong
Kong and Japan. Note, this improvement in policyholder experience does not include the impact on policyholder experience from sales
of the recently-launched VHIS products in Hong Kong. These sales did not have a material current period impact on core earnings as
experience gains from the release of margins for customers who opted to change their existing medical coverage to the new VHIS
product were offset by new business strain.
The table below reconciles net income attributed to shareholders to core earnings for Asia for 2019, 2018 and 2017.
For the years ended December 31,
($ millions)
Core earnings(1),(2)
Items to reconcile core earnings to net income attributed to
shareholders:
Investment-related experience related to fixed income
trading, market value increases in excess of expected
alternative assets investment returns, asset mix changes
and credit experience
Direct impact of equity markets and interest rates and
variable annuity guarantee liabilities(3)
Change in actuarial methods and assumptions
Reinsurance transactions
Other(4)
Canadian $
US $
2019
2018
2017
2019
2018
2017
$ 2,005
$ 1,766
$ 1,453
$ 1,511
$ 1,363
$ 1,121
195
(258)
(7)
–
–
284
(375)
27
5
(3)
242
12
166
–
(39)
147
(196)
(5)
–
–
219
(287)
21
4
(3)
186
2
132
–
(31)
Net income attributed to shareholders(2)
$ 1,935
$ 1,704
$ 1,834
$ 1,457
$ 1,317
$ 1,410
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) 2018 comparatives for core earnings and net income attributed to shareholders have been updated to reflect the 2019 methodology for allocating capital and interest on
surplus to our insurance segments from the Corporate and Other segment.
(3) The direct impact of markets in 2019 was a charge of US$196 million and included a charge of US$174 million related to fixed income reinvestment rates and a charge of
US$88 million related to changes to the URR, partially offset by a gain of US$66 million related to equity markets and variable annuity guarantee liabilities. The charge in
2018 primarily related to the impact of equity markets on general fund equity investments supporting policy liabilities.
(4) Other items in 2017 included restructuring costs in Thailand.
b. Growth
(all percentages quoted are on a constant exchange rate basis)
Annualized premium equivalent (“APE”) sales in 2019 were US$3,224 million, representing an increase of 4% compared with
2018. Higher sales in Hong Kong and Asia Other were partially offset by lower sales in Japan. In Japan, APE sales in 2019 were
US$835 million, a decrease of 24% compared with 2018 due to changes in COLI product tax rules. Hong Kong APE sales in 2019
1
In 2019, we made the decision to exit Thailand, and have reached an agreement to sell the operation, subject to regulatory approval.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
17
were US$859 million, an increase of 33% compared with 2018, driven by the success of our recently-launched VHIS and Qualifying
Deferred Annuity products, as well as participating products launched at the beginning of the year. Asia Other APE sales in 2019 were
US$1,530 million, a 14% increase compared with 2018 driven by strong growth in China, Vietnam and Malaysia.
New business value (“NBV”) was US$1,202 million in 2019, an increase of 8% compared with 2018. We experienced growth
across all of our businesses in Asia, except Japan. In Japan, NBV in 2019 was US$259 million, a decrease of 22% compared with 2018
due to lower APE sales. In Hong Kong, NBV in 2019 was US$536 million, an increase of 28% compared with 2018 driven by higher
sales. Asia Other NBV in 2019 was US$407 million, an increase of 13% compared to 2018, with growth in most of our markets. The
new business value margin (“NBV margin”)1 was 39.8% in 2019, an increase of 1.8 percentage points compared with 2018.
APE Sales and NBV
For the years ended December 31,
($ millions)
Annualized premium equivalent sales(1)
New business value(1)
Canadian $
US $
$
2019
4,278
1,595
2018
2017
2019
2018
2017
$
4,012 $ 3,747
1,201
1,443
$ 3,224
1,202
$ 3,094 $ 2,887
926
1,112
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Assets under Management
Asia’s assets under management were US$93.4 billion as at December 31, 2019, an increase of US$14.2 billion or 17% compared
with December 31, 2018, driven by net customer inflows of US$10.2 billion and market growth during 2019.
Assets under Management(1)
As at December 31,
($ millions)
General fund(2)
Segregated funds
Canadian $
US $
2019
2018
2017
2019
2018
2017
$ 100,418
20,968
$ 88,776 $ 72,777
18,917
19,333
$ 77,304
16,138
$ 65,075 $ 58,009
15,074
14,176
Total assets under management
$ 121,386
$ 108,109 $ 91,694
$ 93,442
$ 79,251 $ 73,083
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) The 2018 comparative for general fund assets under management has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our
insurance segments from the Corporate and Other segment.
Revenue
Total revenue in 2019 of US$21.6 billion increased US$6.4 billion compared with 2018, of which US$5.3 billion related to a net
increase in realized and unrealized investment gains and losses, primarily due to the impact of the decline in interest rates and
improvement in equity markets in 2019. Revenue before net realized and unrealized investment gains and losses increased US$1.1
billion compared with 2018 due to an increase in net premium income. The net premium income increase was primarily driven by the
growth of new and in-force business in Hong Kong and Asia Other, partly offset by a decline in new business in Japan.
Revenue
For the years ended December 31,
($ millions)
Gross premiums
Premiums ceded to reinsurers
Net premium income
Investment income(1)
Other revenue
Revenue before net realized and unrealized investment
gains and losses
Net realized and unrealized investment gains and losses(2)
Canadian $
US $
2019
2018
2017
2019
2018
2017
$ 20,724
(717)
$ 18,768 $ 16,215
(503)
(656)
$ 15,620
(540)
$ 14,483 $ 12,500
(384)
(507)
20,007
2,570
1,215
23,792
4,881
18,112
2,355
1,296
15,712
2,000
934
21,763
(2,053)
18,646
2,044
15,080
1,938
917
17,935
3,670
13,976
1,817
1,000
12,116
1,543
719
16,793
(1,599)
14,378
1,563
Total revenue
$ 28,673
$ 19,710 $ 20,690
$ 21,605
$ 15,194 $ 15,941
(1) The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments
from the Corporate and Other segment.
(2) See “Financial Performance – Impact of Fair Value Accounting” above.
1 This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
18
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
c. Strategic Highlights
Asia continues to be a core driver of growth for Manulife, supported by a clear strategy, a focus on execution, a strong team, and a
diversified footprint in 11 markets with a compelling economic backdrop. We operate in many of the fastest growing markets in the
world, and middle-class emergence, combined with an estimated doubling of household wealth in Asia from 2015 to 20251, will
continue to drive demand for financial solutions.
We continued to accelerate our growth by expanding our distribution reach and we implemented several changes to enhance
customer experience. In 2019, we:
■
Increased the number of agents by 20% to over 95,000. Our number of Million Dollar Round Table agents has increased to 3,500,
up by 25% over 2018.
■ Continued our momentum in bancassurance as we entered into a cooperation agreement in Vietnam. As noted above, we have
eight exclusive bancassurance partnerships, including a major pan-Asia partnership with DBS Bank, giving us access to almost 15
million bank customers; and
■ Launched Manulife Financial Advisors Company, a wholly owned independent agency in Japan, which will distribute Manulife
insurance solutions as well as select products from other insurance providers.
We grew our customer base to more than 11 million customers and saw positive momentum in rNPS, achieving an overall score of
9.4. We became much more digital and customer-centric, rolling out a number of key customer initiatives and advanced our digital
strategy. In 2019, we:
■ Launched an analytics-supported online end-to-end platform in collaboration with DBS Bank, where customers can purchase
insurance solutions directly in Singapore;
■ Enhanced our eClaims platform in Hong Kong, Japan and Vietnam to include more types of claims, increased the claims submission
threshold and improved the efficiency of claims processing;
■ Launched our ManulifeMOVE behavioral insurance program in Vietnam and Cambodia and increased the number of eligible
products and retail partners available on the platform.
■ We ended 2019 with over 500,000 policyholders enrolled in ManulifeMOVE in Asia, double the number of policyholders enrolled at
the end of 2018; and
■ Entered into a long-term strategic partnership in mainland China with HaoDF.com to explore opportunities for innovative products
and services allowing us to expand on our distribution reach.
We made progress on building our high performing team. Our overall employee engagement score improved, contributing to the
year-on-year improvement for the wider group. We secured talent in key leadership roles, appointing General Managers in Hong
Kong, the Philippines and Indonesia.
1 Source: Asia household wealth in 2015 – Economic Intelligence Unit; and in 2025 – Manulife & Oliver Wyman estimates
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
19
3. Canada
Our Canada segment is a leading financial services provider, offering insurance products, insurance-based wealth
accumulation products and banking services, and leveraging the asset management expertise and products managed by
our Global Wealth and Asset Management segment. The comprehensive solutions we offer target a broad range of
customer needs and foster holistic long-lasting relationships.
We offer financial protection solutions to middle- and upper-income individuals, families and business owners through a
combination of competitive products, professional advice and quality customer service. We provide group life, health and
disability insurance solutions to Canadian employers, with more than 23,000 Canadian businesses and organizations
entrusting their employee benefit programs to Manulife’s Group Insurance. We also provide life, health and specialty
products, such as travel insurance, through advisors, sponsor groups and associations, as well as direct-to-customer. We
continue to increase the proportion of products with behavioural insurance features.
Manulife Bank offers flexible debt and cash flow management solutions as part of a customer’s overall financial plan.
Products include savings and chequing accounts, GICs, lines of credit, investment loans, mortgages and other specialized
lending programs, offered through financial advisors supported by a broad distribution network.
In 2019, Canada contributed 19% of the Company’s core earnings from operating segments and, as at December 31, 2019,
accounted for 13% of the Company’s assets under management and administration.
a. Profitability
Canada’s full year 2019 net income attributed to shareholders was $1,122 million compared with $982 million in 2018. Net income
attributed to shareholders is comprised of core earnings, which was $1,201 million in 2019 compared with $1,327 million in 2018,
and items excluded from core earnings, which amounted to a net charge of $79 million for 2019 compared with a net charge of
$345 million in 2018. Items excluded from core earnings are outlined in the table below.
The $126 million or 9% decrease in core earnings was driven by less favourable policyholder experience, the non-recurrence of the
2018 gain from the release of provisions for uncertain tax positions and the impact on earnings of actions taken over the last 12
months to improve the capital efficiency of our legacy businesses. These items were partially offset by higher Manulife Bank core
earnings, gains from the second phase of our segregated fund transfer program and improved margins across individual insurance
due to the success of Manulife Par.
The table below reconciles net income attributed to shareholders to core earnings for Canada for 2019, 2018 and 2017.
For the years ended December 31,
($ millions)
Core earnings(1),(2)
Items to reconcile core earnings to net income attributed to shareholders:
Investment-related experience related to fixed income trading, market value increases in excess of
expected alternative assets investment returns, asset mix changes and credit experience
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities(3)
Change in actuarial methods and assumptions
Charge related to decision to change portfolio asset mix supporting our legacy businesses
Reinsurance transactions
Tax-related items and other(4)
Net income attributed to shareholders(2)
2019
2018
2017
$ 1,201
$ 1,327 $ 1,209
477
(414)
(108)
–
(30)
(4)
240
(307)
(370)
–
102
(10)
(99)
(227)
36
(343)
–
(22)
$ 1,122
$ 982 $ 554
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) 2018 comparatives for core earnings and net income attributed to shareholders have been updated to reflect the 2019 methodology for allocating capital and interest on
surplus to our insurance segments from the Corporate and Other segment.
(3) The direct impact of markets in 2019 was a charge of $414 million and included a charge of $270 million related to fixed income reinvestment rates and a charge of
$254 million related to changes to the URR, partially offset by a gain of $110 million related to the direct impact of equity markets and variable annuity guarantee
liabilities. The charge in 2018 is primarily related to direct impact of equity markets and variable annuity guarantee liabilities and fixed income reinvestment rates.
(4) The 2019 charge of $4 million relates to the impact of tax rate changes in the province of Alberta, Canada. The 2018 and 2017 charges of $10 million and $22 million,
respectively, included integration and acquisition items.
b. Growth
APE sales were $1,057 million in 2019, an increase of $82 million or 8% compared with 2018. Individual insurance APE sales in 2019
of $396 million increased $107 million or 37% compared with 2018 due to higher par product sales. Group insurance APE sales in
2019 of $449 million decreased $7 million or 2% compared with 2018, due to variability in large-case group insurance market,
partially offset by higher small and mid-size business sales. Annuities APE sales in 2019 of $212 million decreased $18 million or 8%
compared with 2018 due to our focus on lower risk segregated fund products.
Sales
For the years ended December 31,
($ millions)
APE sales(1)
2019
2018
2017
$ 1,057
$ 975
$ 1,366
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
20
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Manulife Bank average net lending assets were $21.9 billion in 2019, up $0.9 billion or 4% from 2018.
Assets under Management
Assets under management of $151.3 billion as at December 31, 2019 increased by $9.3 billion or 7% from $141.9 billion at
December 31, 2018, due to business growth and the favourable impact of markets.
Assets under Management(1)
As at December 31,
($ millions)
General fund(2)
Segregated funds
Total assets under management
2019
2018
2017
$ 115,613
35,645
$ 108,607
33,306
$ 108,160
36,460
$ 151,258
$ 141,913
$ 144,620
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) The 2018 comparative for general fund assets under management has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our
insurance segments from the Corporate and Other segment.
Revenue
Total revenue of $19.6 billion in 2019 increased $6.0 billion from $13.6 billion in 2018. Revenue before net realized and unrealized
investment gains and losses of $14.8 billion in 2019 decreased $0.2 billion from $15.0 billion in 2018. The decrease in other revenue
from changes made to reinsurance agreements in 2019 and lower large single premium deposits in group insurance was partially
offset by higher investment income.
Revenue
For the years ended December 31,
($ millions)
Gross premiums
Premiums ceded to reinsurers
Net premium income
Investment income(1)
Other revenue
Revenue before net realized and unrealized investment gains and losses
Net realized and unrealized investment gains and losses(2)
Total revenue
2019
2018
2017
$ 10,667
(1,592)
$ 10,974
(1,547)
$ 10,124
(5,359)
9,075
4,597
1,088
14,760
4,849
9,427
4,119
1,446
14,992
(1,394)
4,765
3,958
1,862
10,585
602
$ 19,609
$ 13,598
$ 11,187
(1) The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments
from the Corporate and Other segment.
(2) See “Financial Performance – Impact of Fair Value Accounting” above.
c. Strategic Highlights
In 2019, we continued to revitalize and modernize our business by further expanding our product offerings and continuing to build
customer-centric digital platforms. We executed several significant actions on our legacy business and successfully executed on our
expense reduction strategy to strengthen financial results and improve the risk-return profile in our home market. Our Canada
segment remains focused on building and fostering holistic long-lasting relationships by expanding and integrating our insurance,
insurance-based wealth accumulation and banking solutions to meet customers’ needs and by leveraging the strength of our group
franchise.
We are revitalizing our business by expanding our product offerings and modernizing our delivery process. In 2019, we:
■ Launched an additional par product to expand our participating customer solutions;
■
Introduced the Group Insurance Manulife Vitality program, the first evidence-rich program of its kind in Canada, designed to
encourage participants to make healthy choices using proven behavioural science;
■ Continued to focus on improving the health of Canadians and launched a new two-step opioid management program focused on
prevention and early intervention;
■ Enhanced our Group Benefits small business offering, providing improved product design, which includes improved pricing and an
updated advisor experience;
■ Launched our new digital All-In Banking Package, coupled with Manulife’s first ever artificial intelligence-driven chatbot, helping
Canadians develop better financial habits and improve their financial well-being; and
■ Launched a new advertising campaign, “A little can do a lot” encouraging Canadians to improve their financial habits by taking
little steps to achieve big goals.
We executed on a number of initiatives to expand our digital capabilities focused on providing personalized customer service. In 2019,
we:
■ Launched a new tool providing customers with access to virtual medical consultations anytime and anywhere;
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
21
■ Continued to digitize our operations and achieved over four million robotics-processed transactions, making it easier for our
customers to do business with us;
■ Partnered with Blink, an Ireland-based travel insurtech, to offer our travel insurance customers a real-time travel disruption solution;
and
■ Won the 2018 International Service Excellence Award as the Customer Service Project of the Year for our Life Moments initiative
supporting Canadians during life’s biggest events.
We are also focused on optimizing capital in our legacy businesses and in 2019 we released approximately $450 million of capital. In
2019, we entered into two new reinsurance transactions and renegotiated some of our existing reinsurance agreements to reduce risk
and free up a total of $325 million of capital. These transactions included reinsuring the mortality and lapse risk on a portion of our
Canadian legacy term and universal life policies, mortality risk on some of our Par business as well as longevity risk on our Canadian
individual annuities block. In addition, we introduced the second phase of our segregated fund transfer program, providing an
opportunity to some of our legacy segregated fund customers to convert their policy to a less capital-intensive product which offers
them increased flexibility and higher potential returns. The program along with other initiatives released approximately $125 million of
capital. Legacy optimization initiatives in the Canada segment have contributed approximately $1.0 billion of cumulative capital
benefit through December 31, 2019, including $450 million in 2019.
22
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
4. U.S.
Our U.S. segment provides a range of life insurance products, insurance-based wealth accumulation products, and has an
in-force long-term care insurance business and an in-force annuity business.
The insurance products we offer are designed to provide estate, business and income-protection solutions for high net
worth, emerging affluent markets and the middle market, and to leverage the asset management expertise and products
managed by our Global Wealth and Asset Management business. Behavioural insurance features are standard on all our
new insurance product offerings. The primary distribution channel is licenced financial advisors, with some
direct-to-consumer insurance business. With the support from our direct-to-consumer capabilities, we aim to establish
lifelong customer relationships that benefit from our holistic protection and wealth product offerings in the future.
Our in-force long-term care insurance policies provide coverage for the cost of long-term services and support.
Our in-force annuity business includes fixed deferred, variable deferred, and payout products.
In 2019, U.S. contributed 31% of the Company’s core earnings from operating segments and, as at December 31, 2019, accounted
for 20% of the Company’s assets under management and administration.
a. Profitability
U.S. reported net income attributed to shareholders of $1,428 million in 2019 compared with net income attributed to shareholders
of $2,291 million in 2018. Net income attributed to shareholders is comprised of core earnings, which was $1,876 million in 2019
compared with $1,789 million in 2018, and items excluded from core earnings, which amounted to a net charge of $448 million in
2019 compared with a net gain of $502 million in 2018.
Expressed in U.S. dollars, the functional currency of the segment, 2019 net income attributed to shareholders was US$1,074 million
compared with a net income attributed to shareholders of US$1,768 million in 2018 and core earnings were US$1,414 million in
2019 compared with US$1,380 million in 2018. Items excluded from core earnings are outlined in the table below and amounted to a
net charge of US$340 million in 2019 compared with a net gain of US$388 million in 2018.
The US$34 million increase in core earnings was driven by the impact of higher sales volumes and improved product margins and a
true-up of prior year tax provisions partially offset by actions taken over the last 12 months to improve the capital efficiency of our
legacy businesses and policyholder experience losses in 2019 compared with small gains in 2018 across all businesses.
The table below reconciles net income attributed to shareholders to core earnings for the U.S. for 2019, 2018 and 2017.
For the years ended December 31,
($ millions)
Core earnings(1),(2)
Items to reconcile core earnings to net income attributed to
shareholders:
Investment-related experience related to fixed income trading,
market value increases in excess of expected alternative
assets investment returns, asset mix changes and credit
experience
Direct impact of equity markets and interest rates and variable
annuity guarantee liabilities(3)
Change in actuarial methods and assumptions
Charge related to decision to change portfolio asset mix
supporting our legacy businesses
Reinsurance transactions
Tax-related items and other(4)
Canadian $
US $
2019
2018
2017
2019
2018
2017
$ 1,876
$ 1,789
$ 1,609
$ 1,414
$ 1,380
$ 1,241
66
(693)
71
–
111
(3)
17
236
286
–
68
(105)
343
505
(245)
(689)
–
(2,724)
49
(525)
54
–
84
(2)
10
191
219
–
51
(83)
263
384
(195)
(542)
–
(2,143)
Net income (loss) attributed to shareholders(2)
$ 1,428
$ 2,291
$ (1,201)
$ 1,074
$ 1,768
$
(992)
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) The 2018 comparatives for core earnings and net income (loss) attributed to shareholders have been updated to reflect the 2019 methodology for allocating capital and
interest on surplus to our insurance segments from the Corporate and Other segment.
(3) The direct impact of markets in 2019 was a charge of US$525 million and included a charge US$621 million related to fixed income reinvestment rates and a charge of
US$98 million related to changes to the URR, partially offset by a gain of US$194 million related to the direct impact of equity markets and variable annuity guarantee
liabilities. The gain in 2018 is primarily related to fixed income reinvestment rates partially offset by charges from the direct impact of equity markets and variable annuity
guarantee liabilities.
(4) Tax-related items and other in 2019 was fees related to legacy transactions. Charges in 2018 and 2017 primarily relate to U.S. tax reform.
b. Growth
U.S. APE sales in 2019 of US$530 million increased 24% compared with 2018, driven primarily by higher domestic and international
universal life sales. Higher domestic universal life sales included the benefit of sales in advance of anticipated regulatory changes. Sales
of products with the John Hancock Vitality PLUS feature in 2019 were US$188 million, an increase of 86% compared with 2018.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
23
Sales
For the years ended December 31,
($ millions)
APE sales(1)
Canadian $
2019
2018
2017
2019
US $
2018
2017
$ 702
$ 553
$ 603
$ 530
$ 426
$ 464
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Assets under Management
U.S. assets under management of US$177 billion as at December 31, 2019 increased by 8% from December 31, 2018. The increase
was driven by the favourable impact of markets partially offset by the continued run-off of our annuities business, and the reinsurance
of the New York portion of the payout annuity block in 2019.
Assets under Management(1)
As at December 31,
($ millions)
General fund(2)
Segregated funds
Canadian $
US $
2019
2018
2017
2019
2018
2017
$ 153,731
76,625
$ 150,772
72,874
$ 150,837
77,998
$ 118,364
58,996
$ 110,520
53,420
$ 120,237
62,174
Total assets under management
$ 230,356
$ 223,646
$ 228,835
$ 177,360
$ 163,940
$ 182,411
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) The 2018 comparatives for general fund assets under management have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to
our insurance segments from the Corporate and Other segment.
Revenue
Total revenue in 2019 of US$18.5 billion increased US$18.0 billion compared with 2018. Revenue before net realized and unrealized
investment gains and losses was US$12.2 billion, an increase of US$7.3 billion compared with 2018 primarily due to the impact on
premiums ceded to reinsurers in 2018 when we reinsured substantially all of our legacy individual and group payout annuity business
(the portion related to the New York business closed in 2019).
Revenue
For the years ended December 31,
($ millions)
Gross premium income
Premiums ceded to reinsurers
Net premium income
Investment income(1)
Other revenue
Revenue before items noted below
Net realized and unrealized investment gains and
losses(2)
Total revenue
Canadian $
US $
2019
2018
2017
2019
2018
2017
$ 9,588
(3,204)
$ 9,335
(12,961)
$ 9,939
(2,317)
$ 7,227
(2,414)
$ 7,201
(9,878)
$ 7,667
(1,786)
6,384
7,140
2,654
16,178
(3,626)
7,291
2,542
6,207
7,622
7,382
3,040
4,813
5,382
2,000
18,044
12,195
(2,677)
5,624
1,966
4,913
5,881
5,689
2,341
13,911
8,416
(5,621)
3,274
6,320
(4,423)
2,495
$ 24,594
$
586
$ 21,318
$ 18,515
$ 490
$ 16,406
(1) The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments
from the Corporate and Other segment.
(2) See “Financial Performance – Impact of Fair Value Accounting” above.
c. Strategic Highlights
At John Hancock, we are focused on building more holistic and long-lasting customer relationships by offering innovative products
and solutions and making it easier for customers to do business with us. We are focused on revitalizing our insurance business by
expanding our product offerings, modernizing the delivery process, enhancing customer experience, and opportunistically evaluating
potential adjacent market expansion.
In 2019, we:
■ Continued to redefine insurance and how we interact with customers through our behavioural insurance offerings; behavioural
insurance is increasingly recognized as a differentiator as evidenced by our Customer Net Promoter Score of 30 and number of
enrollees;
■ Achieved increased sales of policies with the John Hancock Vitality PLUS rider for four consecutive quarters.
■ Launched the John Hancock Aspire program – life insurance designed for people living with diabetes that builds on the success of
■
John Hancock Vitality;
Improved the new business profitability of our brokerage life insurance business by improving pricing, reducing expenses, and
enhancing our focus on sales support and training resulting in the highest new business value reported over the past ten years; and
■ Continued to validate our direct-to-consumer offerings through testing and innovation, incorporating what we learned to build a
cohesive direct channel as we seek to develop deeper relationships with our customers.
24
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
We continued to actively manage our legacy businesses and maintain sharp focus on expenses across all business lines. In 2019, we:
■ Completed legacy optimization initiatives in the U.S. segment that contributed over $1.4 billion of cumulative capital benefits
through December 31, 2019, including $775 million in 2019;
■ Made progress on our portfolio optimization initiative, completing two new reinsurance transactions on universal life blocks that
■
resulted in a capital benefit of $265 million;
Initiated an Annuity Guaranteed Minimum Withdrawal Benefit offer program for consumers that released nearly $77 million of
capital in 2019 with larger capital releases expected in future years;1
■ Built upon the capital initiatives taken last year, by completing the reinsurance of the New York portion of individual and group
payout annuity policies. These transactions along with the impacts from the sale of ALDA enabled by the reinsurance generated
cumulative capital benefits of $810 million through the end of the year with another $90 million expected to be realized early in
20201; and
■ Continued to make progress in securing long-term care premium rate increases and introduced an innovative cost-sharing option to
our long-term care customers to manage premium costs.
1 See “Caution regarding forward-looking statements” above.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
25
5. Global Wealth and Asset Management
Our Global Wealth and Asset Management segment serves individual investors and institutional clients in three business
lines: Retirement, Retail and Institutional Asset Management. We have operations in 19 markets1, and leverage our Asia,
Canada and U.S. segments.
Retirement provides financial advice, investment products and electronic record-keeping services to over seven million
individual participants in North America and Asia. In North America, our Canadian Group Retirement business focuses on
providing retirement solutions through defined contribution and defined benefit plans; and in the United States, John
Hancock Retirement Plan Services provides employer sponsored retirement plans and services personal retirement
accounts for former client employees. In Asia, we provide retirement offerings to employers and individuals, including
Mandatory Provident Fund (“MPF”) schemes and administration in Hong Kong.
Retail distributes investment funds through intermediaries in North America, Europe and Asia, and operates a
manager-of-managers model, which identifies and sources investment strategies across the world, both proprietary and
external. In Canada, we also provide personalized investment management, private banking and estate solutions to
affluent clients.
Institutional Asset Management provides investment management solutions to over 700 institutional clients (such as
pension plans, foundations, endowments and financial institutions) globally across major asset classes including equities,
fixed income, and alternative assets (including real estate, timberland, farmland, private equity/debt, infrastructure, and
liquid alternatives). In addition, we also offer multi-asset investment management solutions for a broad range of clients’
investment needs.
In 2019, Global WAM contributed 17% of the Company’s core earnings from operating segments and, as at December 31, 2019,
accounted for 57% of the Company’s assets under management and administration.
a. Profitability
Global WAM’s 2019 net income attributed to shareholders was $1,022 million compared with $954 million in 2018, core earnings
were $1,021 million in 2019 compared with $985 million in 2018. Items excluded from core earnings are outlined in the table below
and amounted to a net gain of $1 million in 2019 compared with a net charge of $31 million in 2018.
Core earnings increased $36 million or 2% on a constant exchange rate basis driven by higher average asset levels partially offset by a
higher effective tax rate due to geographical business mix, net of tax benefits.
The table below reconciles net income attributed to shareholders to core earnings for the Global WAM segment for 2019, 2018 and
2017.
For the years ended December 31,
($ millions)
Core earnings(1)
Asia
Canada
U.S.
Core earnings
Items to reconcile core earnings to net income attributed to shareholders:
Tax-related items and other(2)
Net Income attributed to shareholders
2019
2018
2017
$ 289
319
413
1,021
$ 257
266
462
985
1
(31)
$ 210
253
353
816
262
$ 1,022
$ 954
$ 1,078
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) The 2018 charge of $31 million primarily relates to the integration of businesses acquired from Standard Chartered and the 2017 net gain of $262 million includes the
impact related to tax reform of $308 million partially offset by the integration of businesses acquired from Standard Chartered of $46 million.
In 2019, core EBITDA2 for Global WAM was $1,536 million, $515 million higher than core earnings. In 2018, core EBITDA was
$1,497 million, $512 million higher than core earnings. The increase in core EBITDA of $39 million or 1% on a constant exchange rate
basis was driven by higher average asset levels, as mentioned above.
Core EBITDA
For the years ended December 31,
($ millions)
Core earnings(1)
Amortization of deferred acquisition costs and other depreciation
Amortization of deferred sales commissions
Core income tax expense (recovery)
Core EBITDA(1)
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
2019
$ 1,021
311
81
123
$ 1,536
2018
2017
$ 985
301
98
113
$ 816
344
99
167
$ 1,497
$ 1,426
1 United States, Canada, Japan, Hong Kong, Macau, Singapore, Taiwan, Indonesia, Vietnam, Malaysia, the Philippines, the United Kingdom, Ireland, Switzerland, and
mainland China. In addition, we have timberland/farmland operations in Australia, New Zealand, Chile and Brazil.
2 This item is a Non-GAAP measure. See “Performance and Non-GAAP Measures” below.
26
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
b. Growth
Gross Flows and Net Flows
In 2019, gross flows of $114.2 billion were $4.8 billion or 6% lower than 2018 as lower retail and institutional asset management
flows more than offset higher retirement flows. In retail, gross flows were $3.8 billion or 8% lower than 2018 due to lower industry
flows into active strategies and investor preference for conservative fixed income exposures in the U.S. and lower flows into mainland
China retail money market funds in Asia. In institutional asset management, gross flows were $4.8 billion or 25% lower than 2018 as
we had several large fundings in 2018. In retirement, gross flows were $3.8 billion or 6% higher than 2018, with growth across all
geographies, driven by higher new plan sales and recurring contributions. WAM net outflows were $0.9 billion compared with net
inflows of $1.6 billion in 2018. The decrease was driven by a decision by one institutional client in Canada to internalize the
management of several large, primarily fixed income, mandates in 3Q19 totaling $8.5 billion. This was partially offset by higher retail
net inflows across all geographies amid improved market returns and higher retirement gross flows as mentioned above.
Asia WAM
■ Gross flows in Asia in 2019 were $21.0 billion, a decrease of 11% compared with 2018. The decline was driven by lower gross
flows in institutional asset management due to large contributions from existing and new clients in 2018, and in retail, from lower
mainland China money market funds, partially offset by higher gross flows in retirement.
■ Net inflows in 2019 were $4.8 billion in 2019 compared with net inflows of $5.7 billion in 2018, driven by lower gross flows as
noted above and higher redemptions in institutional asset management, partially offset by lower redemptions of mainland China
retail money market funds.
Canada WAM
■ Gross flows in Canada in 2019 were $24.1 billion, an increase of 4% compared with 2018, driven by higher retail gross flows
from strong sales across the product line-up and higher new plan sales and recurring contributions in retirement. This was partially
offset by the non-recurrence of several large fundings in institutional asset management in 2018.
■ Net outflows in 2019 were $3.6 billion compared with net inflows of $2.0 billion in 2018. The decline was primarily driven by a
decision by one institutional client in Canada to internalize the management of several large, primarily fixed income, mandates in
3Q19 totaling $8.5 billion and a redemption of a large-case retirement plan of $1.4 billion. This was partially offset by higher gross
flows as mentioned above and lower retail redemptions.
U.S. WAM
■ Gross flows in the U.S. in 2019 were $69.1 billion, a decrease of 7% compared with 2018. The decline was primarily driven by
lower industry flows into active strategies and investor preference for conservative fixed income exposures in retail and the funding
of several large mandates in institutional asset management in 2018. This was partially offset by higher new plan sales and
recurring contributions in retirement.
■ Net outflows in 2019 were $2.0 billion, compared with net outflows of $6.1 billion in 2018, improving for the fourth consecutive
quarter. Compared with 2018, net outflows declined by $4.1 billion, primarily due to a lower retail redemption rate amid improved
market returns and lower plan departures in retirement. This was partially offset by lower gross flows as mentioned above.
Gross Flows and Net Flows(1)
For the years ended December 31,
($ millions)
Gross flows
Net flows
2019
2018
2017
$ 114,246
(879)
$ 119,002
1,563
$ 121,969
18,280
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Assets under Management and Administration
In 2019, AUMA for our wealth and asset management businesses were $681 billion, 16% higher than December 31, 2018 on a
constant exchange rate basis. AUMA increased $74 billion from improved market returns. This was partially offset by an asset
disposition of $1.4 billion and net outflows of $0.9 billion.
Assets under Management and Administration(1)
For the years ended December 31,
($ billions)
Balance January 1,
Acquisitions/Dispositions
Net flows
Impact of markets and other
Balance December 31,
2019
$ 609
(1)
(1)
74
$ 681
2018
$ 609
1
2
(3)
$ 609
2017
$ 554
–
18
37
$ 609
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
27
Revenue
Total revenue in 2019 of $5,595 billion increased 1% compared with 2018, driven by higher average asset levels.
Revenue
As at December 31,
($ millions)
Fee income
Investment income
Total revenue
2019
2018
2017
$ 5,562
33
$ 5,472
(9)
$ 5,158
42
$ 5,595
$ 5,463
$ 5,200
c. Strategic Highlights
Leveraging our integrated business model and global scale, we have a clear strategy to pursue high-growth opportunities in the most
attractive markets globally through our three business lines: Retirement, Retail and Institutional Asset Management. Our strategy
involves becoming a global retirement leader by supporting financial wellness; expanding our presence in regional retail mutual fund
distribution across the globe; leveraging a multi-manager model; and providing differentiated active asset management capabilities
across high-performing equity and fixed income strategies, outcome-oriented solutions and alternative assets.
We executed on a number of initiatives to accelerate growth in our franchise. In 2019, we:
■ Agreed to enter into a joint venture with Mahindra Finance in India. Manulife Investment Management will enter India for the first
time through this joint venture which aims to become a premier provider of retail investment solutions;
■ Maintained our position as the number one Mandatory Pension Fund scheme sponsor in Hong Kong, based on assets under
management and net cash flows1;
■ Launched our first private equity fund-of-funds product with $2 billion in commitments to the Manulife Private Equity Partners, L.P.
(MPEP). This is part of an ongoing effort to provide specialized asset management solutions for global investors. The fund is backed
by a global group of institutional and high-net-worth investors from Europe, North America, and Asia; and
■ Received top scores (A+ and A) in all submitted categories from the United Nations-supported Principles for Responsible Investment
(PRI) annual Environmental, Social and Governance (ESG) assessment report for 2018.
We continued to make progress on our digital customer leader strategy. In 2019, we:
■
Introduced a unified global brand for Manulife’s Global Wealth & Asset Management businesses: Manulife Investment
Management, to better serve our investors worldwide. This unified presence will provide customers and intermediaries with a more
consistent, seamless experience in our various investment management businesses;
■ Completed the centralization and modernization of our Global Wealth & Asset Management operations, technology and data
platforms through the Global Optimization program, utilizing state of the art technology to deliver a robust digital experience for
our stakeholders;
■ Expanded our personal advice offering by signing an agreement with Morningstar Investment Management LLC to offer
Morningstar’s advisor managed account services to registered investment advisor (“RIA”) firms and their advisors for their
retirement plan clients;
■ Launched Manulife InvestChoice in Hong Kong, a digitally enabled wrap account service consolidating and managing specially
selected mutual fund products provided by Manulife Investment Management and other fund houses; and
■ Launched a new retail investments website in Canada which houses our complete suite of solutions in one place and features an
extensive investment resource and education hub.
1 Market share of assets under management and net cash flows by scheme sponsor as reported in the Mercer MPF Market Share Reports for March 31, June 30,
September 30, and December 31, 2019.
28
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
6. Corporate and Other
Corporate and Other is comprised of investment performance on assets backing capital, net of amounts allocated to the
operating segments; financing costs; costs incurred by the corporate office related to shareholder activities (not allocated
to the operating segments); our P&C Reinsurance business; as well as our run-off reinsurance operation, including
variable annuities and accident and health.
For segment reporting purposes, settlement costs for macro equity hedges and other non-operating items are included in
Corporate and Other earnings. This segment is also where we reclassify favourable investment-related experience to core
earnings from items excluded from core earnings, subject to certain limits (see “Performance and Non-GAAP Measures”
below). In each of the operating segments, we report all investment-related experience in items excluded from core
earnings.
a. Profitability
Corporate and Other reported net income attributed to shareholders of $95 million in 2019 compared with a net loss attributed to
shareholders of $1,131 million in 2018. The net income (loss) attributed to shareholders was comprised of core loss and items
excluded from core loss. The core loss was $99 million in 2019 compared with a core loss of $257 million in 2018. Items excluded
from core loss amounted to a net gain of $194 million in 2019 compared with a net charge of $874 million in 2018.
The $158 million lower core loss was primarily related to gains from the favourable impact of markets on seed money investments in
new segregated and mutual funds compared to charges from the decline in markets in 2018, as well as higher investment income and
lower interest on external debt. These increases were partially offset by lower gains on AFS equities, higher withholding taxes on
future U.S. remittances and the non-recurrence of a net release of P&C provisions in 2018.
The items excluded from core earnings are outlined below.
The table below reconciles the net income (loss) attributed to shareholders to the core loss for Corporate and Other for 2019, 2018
and 2017.
For the years ended December 31,
($ millions)
Core loss excluding core investment gains(1)
Core investment gains(2)
Total core loss(2)
Items to reconcile core loss to net loss attributed to shareholders:
Direct impact of equity markets and interest rates(3)
Changes in actuarial methods and assumptions
Investment-related experience related to mark-to-market items(4)
Reclassification to core investment gains above
Restructuring charge(5)
Tax-related items and other(6)
$
2019
(499)
400
(99)
588
23
27
(400)
–
(44)
$
2018
(657)
400
(257)
(411)
6
59
(400)
(263)
135
2017
$ (922)
400
(522)
(83)
8
81
(400)
–
755
Net income (loss) attributed to shareholders(1)
$
95
$ (1,131)
$ (161)
(1) The 2018 comparatives for core loss excluding core investment gains and net loss attributed to shareholders have been updated to reflect the 2019 methodology for
allocating capital and interest on surplus to our insurance segments from the Corporate and Other segment
(2) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(3) The direct impact of markets in 2019 included gains of $396 million (2018 – charges of $284 million) related to the sale of AFS bonds. Other gains of $192 million in
2019 were mostly from fixed income investment supporting a portion of the capital in Asia that are classified as fair value through profit and loss reported as surplus
investment in Asia.
(4) Investment-related experience includes mark-to-market gains or losses on ALDA assets other than gains on AFS equities and seed money investments in new segregated
or mutual funds.
(5) Please see “Manulife Financial Corporation – Profitability” above for explanation of the restructuring charge.
(6) Tax-related items and other charges in 2019 are due to a tax rate change in the province of Alberta, Canada.
Revenue
Revenue of $1,099 million in 2019 compared with a loss of $385 million in 2018 primarily related to investment income. The increase
in investment income includes $1,024 million related to AFS equities, seed capital and AFS bonds.
Revenue
For the years ended December 31,
($ millions)
Net premium income
Investment income (loss)(1)
Other revenue(2)
Revenue before net realized and unrealized investment gains and losses and on the macro
hedge program
Net realized and unrealized investment gains and losses(3) and on the macro hedge program
Total revenue
2019
$ 112
1,073
(120)
1,065
34
2018
$ 98
(211)
(328)
(441)
56
2017
$ 110
285
(247)
148
(220)
$ 1,099
$ (385)
$
(72)
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
29
(1) The 2018 comparative for investment income has been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance segments
from the Corporate and Other segment.
(2) Includes a consolidation adjustment related to asset management fees earned by Manulife Investment Management from affiliated business (the offset to the
consolidation adjustment is investment expense).
(3) See “Manulife Financial Corporation – Impact of Fair Value Accounting” above.
b. Strategic Highlights
Our P&C Reinsurance business provides substantial retrocessional capacity for a very select clientele in the property and casualty
reinsurance market. The business is largely non-correlated to Manulife’s other businesses and helps diversify our overall business mix.
We manage the risk exposure of this business in relation to the total Company balance sheet risk and volatility as well as the prevailing
market pricing conditions. The business is renewable annually, and we currently estimate our exposure limit in 2020 for a single event
to be approximately US$275 million (net of reinstatement premiums) and for multiple events to be approximately US$475 million (net
of all premiums).
30
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
7. Investments
Our investment philosophy for the General Fund is to invest in an asset mix that optimizes our risk adjusted returns and matches the
characteristics of our underlying liabilities. We follow a bottom up approach which combines our strong asset management skills with
an in-depth understanding of the characteristics of each investment. We invest in a diversified mix of assets, including a variety of
alternative long-duration asset classes. Our diversification strategy has historically produced superior risk adjusted returns while
reducing overall risk. We use a disciplined approach across all asset classes, and we do not chase yield in the riskier end of the fixed
income or alternative asset market. Our risk management strategy is outlined in the “Risk Management” section below.
a. General Fund Assets
As at December 31, 2019, our General Fund invested assets totaled $378.5 billion compared with $353.7 billion at the end of 2018.
The following table shows the asset class composition as at December 31, 2019 and December 31, 2018.
As at December 31,
($ billions)
Cash and short-term securities
Debt Securities and Private Placement Debt
Government bonds
Corporate bonds
Securitized / asset-backed securities
Private placement debt
Mortgages
Policy loans and loans to bank clients
Public equities
Alternative Long-Duration Assets (“ALDA”)
Real Estate
Infrastructure
Timberland and Farmland
Private Equity
Oil & Gas
Other ALDA
Leveraged Leases and Other
2019
2018
Carrying value % of total
Fair value
Carrying value % of total
Fair value
$ 20.3
5 $ 20.3
$ 16.2
5 $ 16.2
73.4
121.3
3.4
38.0
49.4
8.2
22.8
12.9
8.9
4.7
6.4
3.2
1.7
3.9
20
32
1
10
13
2
6
4
2
1
2
1
0
1
73.4
121.3
3.4
41.8
51.5
8.2
22.8
14.3
9.0
5.2
6.4
3.3
1.7
3.9
70.0
112.7
2.9
35.7
48.4
8.2
19.2
12.8
8.0
4.5
6.8
3.4
0.8
4.1
20
32
1
10
14
2
5
4
2
1
2
1
0
1
70.0
112.7
2.9
36.1
48.6
8.2
19.2
13.9
8.1
5.1
6.8
3.5
0.8
4.1
Total general fund invested assets
$ 378.5
100 $ 386.5
$ 353.7
100 $ 356.2
The carrying values for invested assets are generally equal to their fair values, however, mortgages and private placement debt are
carried at amortized cost; loans to bank clients are carried at unpaid principal balances less allowance for credit losses; real estate held
for own use is carried at cost less accumulated depreciation and any accumulated impairment losses; private equity investments,
including power and infrastructure and timber, are accounted for as associates using the equity method, or at fair value; and oil and
gas investments are carried at cost using the successful efforts method. Certain government and corporate bonds and public equities
are classified as AFS, with the remaining classified as “fair value through profit or loss”.
Shareholders’ accumulated other comprehensive pre-tax income (loss) at December 31, 2019 consisted of a $1,626 million gain for
bonds (2018 – loss of $272 million) and a $350 million gain for public equities (2018 – gain of $42 million). Included in the
$1,626 million gain for bonds was a $497 million loss related to the fair value hedge basis adjustments on AFS bonds (2018 – loss of
$540 million).
b. Debt Securities and Private Placement Debt
We manage our high-quality fixed income portfolio to optimize yield and quality while ensuring that asset portfolios remain diversified
by sector, industry, issuer, and geography. As at December 31, 2019, our fixed income portfolio of $236.1 billion (2018 – $221.3
billion) was 98% investment grade and 75% was rated A or higher (2018 – 98% and 75%, respectively). Our private placement debt
holdings provide diversification benefits (issuer, industry, and geography) and, because they often have stronger protective covenants
and collateral than debt securities, they typically provide better credit protection and potentially higher recoveries in the event of
default. Geographically, 25% is invested in Canada (2018 – 27%), 47% is invested in the U.S. (2018 – 46%), 4% is invested in
Europe (2018 – 3%) and the remaining 24% is invested in Asia and other geographic areas (2018 – 24%).
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
31
Debt Securities and Private Placement Debt – by Credit Quality(1)
As at December 31,
($ billions)
AAA
AA
A
BBB
BB
B & lower, and unrated
2019
Private
placement
debt
% of
Total
Total
$ 1.1 $ 37.2
39.8
98.5
54.7
2.9
3.0
5.5
14.3
14.1
0.9
2.1
16
17
42
23
1
1
Debt
securities
$ 36.1
34.3
84.2
40.6
2.0
0.9
2018
Private
placement
debt
% of
Total
Total
$ 1.2 $ 37.3
37.1
91.3
51.0
2.3
2.3
5.0
13.3
14.0
0.7
1.5
17
17
41
23
1
1
Debt
securities
$ 36.1
32.1
78.0
37.0
1.6
0.8
Total carrying value ($ billions)
$ 198.1
$ 38.0 $ 236.1
100
$ 185.6
$ 35.7 $ 221.3
100
(1) Reflects credit quality ratings as assigned by Nationally Recognized Statistical Rating Organizations (“NRSRO”) using the following priority sequence order: S&P Global
Ratings (“S&P”), Moody’s Investors Services (“Moody’s”), DBRS Limited (“DBRS”), Fitch Ratings Inc. (“Fitch”), and Japan Credit Rating. For those assets where ratings by
NRSRO are not available, disclosures are based upon internal ratings as described in the “Risk Management” and “Risk Factors” sections below.
Debt Securities and Private Placement Debt – by Sector
As at December 31,
Per cent of carrying value
Government and agency
Utilities
Financial
Industrial
Consumer (non-cyclical)
Energy – Oil & Gas
Energy – Other
Consumer (cyclical)
Securitized (MBS/ABS)
Telecommunications
Basic materials
Technology
Media and internet and other
Total per cent
2019
Private
placement
debt
Total
Debt
securities
2018
Private
placement
debt
12
41
6
5
1
7
1
1
2
–
–
33
19
13
8
8
5
4
3
2
2
2
1
–
38
14
16
810 8
613 7
4
4
3
2
2
1
1
1
11
44
5
4
2
7
1
1
2
–
–
Debt
securities
37
15
15
810
614
5
4
3
2
2
2
1
–
Total
33
19
14
4
4
3
2
2
2
1
1
100
100
100
100
100
100
Total carrying value ($ billions)
$ 198.1
$ 38.0 $ 236.1
$ 185.6
$ 35.7 $ 221.3
As at December 31, 2019, gross unrealized losses on our fixed income holdings were $0.6 billion or 0.3% of the amortized cost of
these holdings (2018 – $4.5 billion or 2.0%). Of this amount, $71 million (2018 – $278 million) related to debt securities trading
below 80% of amortized cost for more than 6 months. Securitized assets represented $4 million of the gross unrealized losses and
none of the amounts trade below 80% of amortized cost for more than 6 months (2018 – $52 million and none, respectively). After
adjusting for debt securities supporting participating policyholder and pass-through products and the provisions for credit included in
the insurance and investment contract liabilities, the potential impact to shareholders’ pre-tax earnings for debt securities trading at
less than 80% of amortized cost for greater than 6 months was approximately $48 million as at December 31, 2019 (2018 – $62
million).
32
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
c. Mortgages
As at December 31, 2019, our mortgage portfolio of $49.4 billion represented 13% of invested assets (2018 – $48.4 billion and 14%,
respectively). Geographically, 65% of the portfolio is invested in Canada (2018 – 63%) and 35% is invested in the U.S. (2018 – 37%).
As shown below, the overall portfolio is also diversified by geographic region, property type, and borrower. Of the total mortgage
portfolio, 15% is insured (2018 – 15%), primarily by the Canada Mortgage and Housing Corporation (“CMHC”) – Canada’s AAA
rated government-backed national housing agency, with 33% of residential mortgages insured (2018 – 35%) and 2% of commercial
mortgages insured (2018 – 2%).
As at December 31,
($ billions)
Commercial
Retail
Office
Multi-family residential
Industrial
Other commercial
Other mortgages
Manulife Bank single-family residential
Agricultural
Total mortgages
2019
2018
Carrying value % of total
Carrying value
% of total
$ 8.8
8.9
5.4
2.5
3.2
28.8
20.1
0.5
18
18
11
5
6
58
41
1
$ 8.4
8.7
5.3
2.8
3.0
28.2
19.6
0.6
17
18
11
6
6
58
41
1
$ 49.4
100
$ 48.4
100
Our commercial mortgage loans are originated with a hold-for-investment philosophy. They have low loan-to-value ratios, high debt-
service coverage ratios, and as at December 31, 2019 there were no loans in arrears. Geographically, of the total commercial
mortgage loans, 41% are in Canada and 59% are in the U.S. (2018 – 39% and 61%, respectively). We are diversified by property
type and largely avoid risky market segments such as hotels, construction loans and second liens.
Non-CMHC Insured Commercial Mortgages(1)
As at December 31,
Loan-to-Value ratio(2)
Debt-Service Coverage ratio(2)
Average duration (years)
Average loan size ($ millions)
Loans in arrears(3)
2019
2018
Canada
62%
1.48x
4.8
$17.7
0.00%
U.S.
56%
1.87x
6.5
$18.0
0.00%
Canada
63%
1.44x
4.8
$16.0
0.00%
U.S.
57%
1.85x
6.2
$19.1
0.00%
(1) Excludes Manulife Bank commercial mortgage loans of $361 million (2018 – $234 million).
(2) Loan-to-Value and Debt-Service Coverage are based on re-underwritten cash flows.
(3) Arrears defined as over 90 days past due in Canada and over 60 days past due in the U.S.
d. Public Equities
As at December 31, 2019, public equity holdings of $22.8 billion represented 6% (2018 – $19.2 billion and 5%) of invested assets
and, when excluding assets supporting participating policyholder and pass-through products, represented 2% (2018 – 1%) of
invested assets. The portfolio is diversified by industry sector and issuer. Geographically, 27% (2018 – 28%) is held in Canada; 36%
(2018 – 36%) is held in the U.S.; and the remaining 37% (2018 – 36%) is held in Asia, Europe and other geographic areas.
Public Equities – classified by type of product-line supported
As at December 31,
($ billions)
Participating Policyholders
Pass-through products
Corporate and Other segment(1)
Non-participating products
Total public equities
2019
2018
Carrying value
% of total
Carrying value
% of total
$ 11.6
5.4
4.6
1.2
$ 22.8
51
24
20
5
100
$ 9.3
4.7
4.1
1.1
$ 19.2
48
25
21
6
100
(1) Includes $3.4 billion of AFS equities and $1.2 billion of seed money investments in new segregated and mutual funds.
e. Alternative Long-Duration Assets (“ALDA”)
Our ALDA portfolio is comprised of a diverse range of asset classes with varying degrees of correlations. The portfolio typically consists
of private assets representing investments in varied sectors of the economy which act as a natural hedge against future inflation and
serve as an alternative source of asset supply to long-term corporate bonds. In addition to being a suitable match for our long-
duration liabilities, these assets provide enhanced long-term yields and diversification relative to traditional fixed income markets. The
vast majority of our ALDA are managed in-house.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
33
As at December 31, 2019, ALDA of $37.8 billion represented 10% (2018 – $36.2 billion and 10%) of invested assets. The fair value of
total ALDA was $39.9 billion at December 31, 2019 (2018 – $38.2 billion). The carrying value and corresponding fair value by sector
and/or asset type are outlined above (see table in the section “General Fund Assets”).
Real Estate
Our real estate portfolio is diversified by geographic region; of the total fair value of this portfolio, 43% is located in the U.S., 43% in
Canada, and 14% in Asia as at December 31, 2019 (2018 – 43%, 42%, and 15%, respectively). This high-quality portfolio has
virtually no leverage and is primarily invested in premium urban office towers, concentrated in cities with stable growth, and highly
diverse economies, in North America and Asia. The portfolio is well positioned with an average occupancy rate of 94% (2018 – 94%)
and an average lease term of 5.7 years (2018 – 5.8 years). During 2019, we executed 1 acquisition representing $0.1 billion market
value of commercial real estate assets (2018 – 1 acquisition and $0.3 billion). As part of the portfolio optimization initiatives,
$0.4 billion of commercial real estate assets were sold during 2019.
The composition of our real estate portfolio based on fair value is as follows:
As at December 31,
($ billions)
Company Own-Use
Office – Downtown
Office – Suburban
Industrial
Residential
Retail
Other
Total real estate(1)
2019
2018
Fair value
% of total
Fair value
% of total
$ 3.3
5.6
1.7
1.0
1.9
0.4
0.4
$ 14.3
23
39
12
7
13
3
3
100
$ 3.2
5.2
1.8
0.8
1.6
0.4
0.9
$ 13.9
23
37
13
6
12
2
7
100
(1) These figures represent the fair value of the real estate portfolio. The carrying value of the portfolio was $12.9 billion and $12.8 billion at December 31, 2019 and
December 31, 2018, respectively.
Infrastructure
We invest both directly and through funds in a variety of industry specific asset classes, listed below. The portfolio is well-diversified
with over 350 portfolio companies. The portfolio is predominately invested in the U.S. and Canada, but also in the United Kingdom,
Europe, South America and Australia. Our power and infrastructure holdings are as follows:
As at December 31,
($ billions)
Power generation
Transportation (including roads, ports)
Electric and gas regulated utilities
Electricity transmission
Water distribution
Midstream gas infrastructure
Maintenance service, efficiency and social infrastructure
Telecommunications/Tower
Other Infrastructure
Total infrastructure
2019
2018
Carrying value
% of total
Carrying value
% of total
$ 3.9
2.1
1.0
0.1
0.1
0.5
0.2
0.7
0.3
$ 8.9
44
24
12
1
1
6
2
8
2
100
$ 3.7
1.6
1.1
0.2
0.2
0.4
0.1
0.4
0.3
$ 8.0
47
20
14
2
2
5
2
5
3
100
Timberland & Farmland
Our timberland and farmland assets are managed by a proprietary entity, Hancock Natural Resources Group (“HNRG”). In addition to
being the world’s largest timberland investment manager for institutional investors,1 with timberland properties in the U.S., New
Zealand, Australia, Chile and Canada, HNRG also manages farmland properties in the U.S., Australia and Canada. The General Fund’s
timberland portfolio comprised 22% of HNRG’s total timberland assets under management (“AUM”) (2018 – 26%). The farmland
portfolio includes annual (row) crops, fruit crops, wine grapes, and nut crops. The General Fund’s holdings comprised 40% of HNRG’s
total farmland AUM (2018 – 39%).
Private Equities
Our private equity portfolio of $6.4 billion (2018 – $6.8 billion) includes both directly held private equity and private equity funds.
Both are diversified across vintage years and industry sectors.
Oil & Gas
This category is comprised of $1.0 billion (2018 – $1.1 billion) in our conventional Canadian oil and gas properties managed by our
subsidiary, NAL Resources, and various other oil and gas private equity interests of $2.2 billion (2018 – $2.3 billion). Production mix for
conventional oil and gas assets in 2019 was approximately 36% crude oil, 47% natural gas, and 17% natural gas liquids (2018 –
36%, 45%, and 19%, respectively). Private equity interests are a combination of both producing and mid-streaming assets.
In 2019, the carrying value of our oil and gas holdings decreased $0.2 billion and the fair value decreased by $0.2 billion.
1 Based on the global timber investment management organization ranking in the RISI International Timberland Ownership and Investment Database.
34
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
f. Investment Income
For the years ended December 31,
($ millions, unless otherwise stated)
Interest income
Dividend, rental and other income(1)
Impairments
Other, including gains and losses on sale of AFS debt securities
Investment income before realized and unrealized gains on assets supporting insurance and investment contract
liabilities and on macro equity hedges
Realized and unrealized gains and losses on assets supporting insurance and
investment contract liabilities and on macro equity hedges
Debt securities
Public equities
Mortgages and private placements
Alternative long-duration assets and other investments
Derivatives, including macro equity hedging program
Total investment income
(1) Rental income from investment properties is net of direct operating expenses.
In 2019, the $33.6 billion of investment income (2018 – $4.5 billion) consisted of:
2019
2018
$ 11,488
2,988
56
861
$ 11,081
2,829
(164)
(186)
15,393
13,560
11,528
2,870
(36)
1,262
2,576
18,200
(5,994)
(1,444)
(28)
662
(2,224)
(9,028)
$ 33,593
$ 4,532
■ $15.4 billion of investment income before net realized and unrealized gains on assets supporting insurance and investment contract
liabilities and on macro equity hedges (2018 – $13.6 billion); and
■ $18.2 billion of net realized and unrealized gains on assets supporting insurance and investment contract liabilities and on macro
equity hedges (2018 – losses of $9.0 billion).
The $1.8 billion increase in net investment income before unrealized and realized gains was due to gains of $0.9 billion on surplus
assets mainly from the sale of government bonds (compared with $0.2 billion losses in 2018) and $0.4 billion higher interest income
primarily from increased income on debt securities.
Net realized and unrealized gains on assets supporting insurance and investment contract liabilities and on the macro hedge program
was a gain of $18.2 billion for full year 2019 compared with a loss of $9.0 billion for full year 2018. The full year 2019 gain largely
resulted from interest rate decreases in both North America and Asia. The 10-year government bonds for the U.S., Canada, and Hong
Kong decreased 77 bps, 27 bps, and 24 bps, respectively. Additional gains were driven by positive equity markets performance as all
major indices were up during the year. The S&P 500 increased 28.9% and S&P/TSX 19.1%.
Fair value accounting policies affect the measurement of both our assets and our liabilities. Refer to “Financial Performance” above.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
35
8. Risk Management
This section provides an overview of our overall risk management approach and more specific strategies for our principal risks. A more
detailed description of specific risks which may affect our results of operations or financial condition may be found in the “Risk
Factors” section below.
a. Enterprise Risk Management Framework
Delivering on our mission “Decisions made easier. Lives made better”, our ambition is to transform into the most digital, customer-
centric global company in our industry, while delighting our customers, engaging our employees, and delivering superior returns for
our shareholders. The activities required to achieve these results involve elements of risk taking.
Our approach to risk management is governed by our Enterprise Risk Management (“ERM”) Framework.
Risk Identification
Materialized Risks
Non-Materialized Risks
Analysis and
Assessment
Assessment of
Risk Appetite
Culture
Management Framework
Response
Management of Principal Risks
Stress Testing
Risk Capital Management
Risk Appetite and Limit Management
Evolving Risk Program
Our ERM Framework provides a structured approach to risk taking and risk management activities across the enterprise, supporting
our long-term revenue, earnings and capital growth strategy. It is communicated through risk policies and standards, which are
intended to enable consistent design and execution of strategies across the organization. We have a common approach to managing
all risks to which we are exposed, and to evaluating potential directly comparable risk-adjusted returns on contemplated business
activities. Our risk policies and standards cover:
■ Risk roles and authorities – Assignment of accountability and delegation of authority for risk oversight and risk management at
various levels within the Company, as well as accountability principles;
■ Governance and strategy – The types and levels of risk the Company seeks given its strategic plan, the internal and external
environment, and risk appetite which drives risk limits and policies;
■ Execution – Risk identification, measurement, assessment and mitigation which enable those accountable for risks to manage and
monitor their risk profile; and
■ Evaluation – Validation, back testing and independent oversight to confirm that the Company generated the risk profile it
intended, root cause analysis of any notable variation, and any action required to re-establish desired levels when exposures
materially increase to bring exposures back to desired levels and achieve higher levels of operational excellence.
Our risk management practices are influenced and impacted by external and internal factors (such as economic conditions, political
environments, technology and risk culture), which can significantly impact the levels and types of risks we might face in pursuit of
strategically optimized risk taking and risk management. Our ERM Framework incorporates relevant impacts and mitigating actions as
appropriate.
Three Lines of Defense Model
A strong risk culture and a common approach to risk management are integral to Manulife’s risk management practices.
Management is responsible for managing risk within risk appetite and has established risk management strategies and monitoring
practices. Our approach to risk management includes a “three lines of defense” governance model that segregates duties among risk
taking activities, risk monitoring and risk oversight, and establishes appropriate accountability for those who assume risk versus those
who oversee risk.
Our first line of defense includes the Chief Executive Officer (“CEO”), Segment and Business Unit General Managers and Global
Function Heads. In our matrix reporting model, the Segment General Managers are ultimately accountable for their business results,
the risks they assume to achieve those results, and for the day-to-day management of the risks and related controls, and the Global
Function Heads are accountable for the management of the risks and related controls for their function.
36
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
The second line of defense is comprised of the Company’s Chief Risk Officer (“CRO”), the Global Risk Management (“GRM”)
function, the Company’s Chief Compliance Officer and the Global Compliance Office, and other global oversight functions.
Collectively, this group provides independent oversight of risk taking and risk management activities across the enterprise. Risk
oversight committees, through broad-based membership, also provide oversight of risk taking and risk management activities.
The third line of defense is Audit Services, which provides independent, objective assurance that controls are effective and appropriate
relative to the risk inherent in the business and that risk mitigation programs and risk oversight functions are effective in managing
risks.
b. Culture
To enable the achievement of our mission and strategic priorities, we are committed to a set of shared values, which reflect our
culture, inform our behaviours, and help define how we work together:
■ Obsess about customers – Predict their needs and do everything in our power to satisfy them.
■ Do the right thing – Act with integrity and do what we say.
■ Think big – Anything is possible. We can always find a better way.
■ Get it done together – We’re surrounded by an amazing team. Do it better by working together.
■ Own it – Feel empowered to make decisions and take action to deliver our mission.
■ Share your humanity – Build a supportive, diverse and thriving workplace.
Risk Culture Vision – Within this context, we strive for a risk aware culture, where individuals and groups are encouraged, feel
comfortable and are proactive in making transparent, balanced risk-return decisions that are in the long-term interests of the
Company.
Risk Culture Framework – We have set a framework of desired behaviours to foster a strong risk aware culture. The framework is
assessed against a set of qualitative and quantitative indicators and regularly reported to the Board and executive leadership, with the
intent to continuously identify opportunities to increase risk awareness across all geographies, businesses and layers of management
and staff.
We believe that risk culture is strengthened once desired organizational behaviours and attitudes are reinforced through effective
application of our corporate values. As such, we communicate key elements of our values through a risk lens to build a strong risk
aware culture, including:
■ Transparency – Encourage an environment where we can get it done together by openly discussing the strengths, weaknesses and
potential range of outcomes of an issue, proposal or initiative and making informed decisions. Escalate issues before they become
significant problems.
■ Risk appetite – Once we have assessed a risk or situation, establish a risk appetite and own that decision. Establish appropriate
limits and associated delegated authority so we can confidently execute our strategy within our risk appetite.
■ Learn – Use mistakes and failures as learning moments and share what was learned; think big by sharing beyond teams and
business units. Seek out lessons learned from throughout the organization in order to continuously improve and grow our business
the right way.
■ Incentives – Align personal incentives with our goals and how we want to execute our plan. When things go wrong, share our
humanity by planning our reaction and maintaining a supportive environment to ensure appropriate incentives for continued
transparency and lessons learned.
c. Risk Governance
The Board of Directors oversees our culture of integrity and ethics, strategic planning, risk management, and corporate governance,
among other things. The Board of Directors carries out its responsibilities directly and through its four standing committees:
■ Risk Committee – Oversees the management of our principal risks, and our programs, policies and procedures to manage those
risks.
■ Audit Committee – Oversees internal control over financial reporting and our finance, actuarial, internal audit and global
compliance functions, serves as the conduct review committee, reviews our compliance with legal and regulatory requirements and
oversees the performance, qualifications and independence of our external auditors.
■ Management Resources and Compensation Committee – Oversees our global human resources strategy, policies, programs,
management succession, executive compensation, and pension plan governance.
■ Corporate Governance and Nominating Committee – Develops our governance policies, practices and procedures, among
other things.
The CEO is directly accountable to the Board of Directors for our results and operations and all risk taking activities and risk
management practices required to achieve those results. The CEO is supported by the CRO as well as by the Executive Risk Committee
(“ERC”). Together, they shape and promote our risk culture, guide risk taking throughout our global operations and strategically
manage our overall risk profile. The ERC, along with other executive-level risk oversight committees, establishes risk policies, guides
risk taking activity, monitors significant risk exposures and sponsors strategic risk management priorities throughout the organization.
Global Risk Management, under the direction of the CRO, establishes and maintains our ERM Framework and oversees the execution
of individual risk management programs across the enterprise. Global Risk Management seeks to ensure a consistent enterprise-wide
assessment of risk, risk based capital and risk-adjusted returns across all operations.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
37
The ERC approves and oversees the execution of the Company’s enterprise risk management program. It establishes and presents for
approval to the Board of Directors the Company’s risk appetite and enterprise-wide risk limits and monitors our overall risk profile,
including key and emerging risks and risk management activities. As part of these activities, the ERC monitors material risk exposures,
endorses and reviews strategic risk management priorities, and reviews and assesses the impact of business strategies, opportunities
and initiatives on our overall risk position. The ERC is supported by a number of oversight sub-committees including:
■ Credit Committee – Establishes credit risk policies and risk management standards of practice and oversees the credit risk
management program. Also monitors the Company’s overall credit risk profile and approves large individual credits and
investments.
■ Product Oversight Committee – Oversees insurance risk and reviews risks in new product and new business reinsurance
initiatives. Also monitors product design, new product pricing, and insurance risk exposures and trends.
■ Global Asset Liability Committee – Oversees market and liquidity risk for insurance products, hedging, and asset liability
management programs and strategies. Also monitors market risk profile, risk exposures, risk mitigation activities and compliance
with related policies.
■ Operational Risk Committee – Oversees operational risk appetite, exposures and associated governance, risk processes, risk
management activities and compliance with related policies.
We also have segment risk committees, each with mandates similar to the ERC except with a focus at the segment as applicable.
d. Risk Appetite
The Company’s strategic direction drives overall risk appetite. All risk taking activities are managed within the Company’s overall risk
appetite, which defines the amount and types of risks the Company is willing to assume in pursuit of its objectives. It is comprised of
three components: overall risk taking philosophy, risk appetite statements, and risk limits and tolerances.
Risk Philosophy – Manulife is a global financial institution offering insurance, wealth and asset management products and other
financial services. As we work each day to deliver on our mission “Decisions made easier. Lives made better”, our ambition is to
transform into the most digital, customer-centric global company in our industry, while delighting our customers, engaging our
employees, and delivering superior returns for our shareholders.
The activities required to achieve these results are guided by our values and involve elements of risk taking. As such, when making
decisions about risk taking and risk management, the Company places a priority on the following risk management objectives:
■ Safeguarding the commitments and expectations established with our customers, creditors, shareholders and employees;
■ Supporting the successful design and delivery of customer solutions;
■ Prudently and effectively deploying the capital invested in the Company by shareholders with appropriate risk/return profiles;
■ To invest wealth and asset management’s customer assets consistent with their objectives, including investment risks and returns;
■ Protecting and/or enhancing the Company’s reputation and brand; and
■ To maintain the Company’s targeted financial strength rating.
We aim to only accept risks we can appropriately analyze and monitor. Risk management is an important factor in determining the
success of our Company by providing a framework to mitigate exposures within the risk appetite and effectively deploying our capital
towards appropriate risk/return profiles. As an integrated component of our business model, risk management assists the Company in
achieving our objectives and encourages organizational learning.
Risk Appetite Statements – At least annually, we establish and/or reaffirm that our risk appetite and the Company’s strategy are
aligned. The risk appetite statements provide ‘guideposts’ on our appetite for identified risks, any conditions placed on associated risk
taking and direction for where quantitative risk limits should be established. The Company’s risk appetite statements are as follows:
■ Manulife accepts a total level of risk that provides a very high level of confidence to meeting customer obligations while targeting
an appropriate overall return to shareholders over time;
■ Manulife values innovation and encourages initiatives intended to advance the Company’s ambition to be a digital, customer-centric
market leader;
■ Capital market risks are acceptable when they are managed within specific risk limits and tolerances;
■ The Company believes a diversified investment portfolio reduces overall risk and enhances returns; therefore, it accepts credit and
alternative long-duration asset related risks;
■ The Company pursues product risks that add customer and shareholder value where there is competence to assess and monitor
them, and for which appropriate compensation is received;
■ Manulife accepts that operational risks are an inherent part of the business when managed within thresholds and tolerances of key
risk indicators and will protect its business and customers’ assets through cost-effective operational risk mitigation; and
■ Manulife expects its officers and employees to act in accordance with the Company’s values, ethics and standards; and to protect its
brand and reputation.
Risk Limits and Tolerances – Risk limits and tolerances are established for risks within our risk classification framework that are
inherent in our strategies in order to define the types and amount of risk the Company will assume. Risk tolerance levels are set for
risks deemed to be most significant to the Company and are established in relation to economic capital, earnings-at-risk and
regulatory capital required. The purpose of risk limits is to cascade the total Company risk appetite to a level that can be effectively
managed. Manulife establishes standalone risk limits for risk categories to avoid excessive concentration in any individual risk category
and to manage the overall risk profile of the organization.
38
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
e. Risk Identification, Measurement and Assessment
We have a common approach and process to identify, measure, and assess the risks we assume. We evaluate all potential new
business initiatives, acquisitions, product offerings, reinsurance arrangements, and investment and financing transactions on a
comparable risk-adjusted basis. Segments and functional groups are responsible for identifying and assessing key and emerging risks
on an ongoing basis. A standard inventory of risks is used in all aspects of risk identification, measurement and assessment, and
monitoring and reporting.
Risk exposures are evaluated using a variety of measures focused on both short-term net income attributed to shareholders and long
term economic value, with certain measures used across all risk categories, while others are applied only to some risks or a single risk
type. Measures include stress tests such as sensitivity tests, scenario impact analyses and stochastic scenario modeling. In addition,
qualitative risk assessments are performed, including for those risk types that cannot be reliably quantified.
We perform a variety of stress tests on earnings, regulatory capital ratios, economic capital, earnings-at-risk and liquidity that consider
significant, but plausible events. We also perform other integrated, complex scenario tests to assess key risks and the interaction of
these risks.
Economic capital and earnings-at-risk provide measures of enterprise-wide risk that can be aggregated and compared across business
activities and risk types. Economic capital measures the amount of capital required to meet obligations with a high and pre-defined
confidence level. Our earnings-at-risk metric measures the potential variance from quarterly expected earnings at a particular
confidence level. Economic capital and earnings-at-risk are both determined using internal models.
f. Risk Monitoring and Reporting
Under the direction of the CRO, GRM oversees a formal process for monitoring and reporting on all significant risks at the Company-
wide level. Risk exposures are also discussed at various risk oversight committees, along with any exceptions or proposed remedial
actions, as required.
On at least a quarterly basis, the ERC and the Board’s Risk Committee reviews risk reports that present an overview of our overall risk
profile and exposures across our principal risks. The reports incorporate both quantitative risk exposure measures and sensitivities, and
qualitative assessments. The reports also highlight key risk management activities and facilitate monitoring compliance with key risk
policy limits.
Our Chief Actuary presents the results of the Dynamic Capital Adequacy Test to the Board of Directors annually. Our Chief Auditor
reports the results of internal audits of risk controls and risk management programs to the Audit Committee semi-annually.
Management reviews the implementation of key risk management strategies, and their effectiveness, with the Board Risk Committee
annually.
g. Risk Control and Mitigation
Risk control activities are in place throughout the Company to seek to mitigate risks within established risk limits. We believe our
controls, which include policies, procedures, systems and processes, are appropriate and commensurate with the key risks faced at all
levels across the Company. Such controls are an integral part of day-to-day activity, business management and decision making.
GRM establishes and oversees formal review and approval processes for product offerings, insurance underwriting, reinsurance,
investment activities and other material business activities, based on the nature, size and complexity of the risk taking activity involved.
Authorities for assuming risk at the transaction level are delegated to specific individuals based on their skill, knowledge and
experience.
h. Emerging Risks
The identification and assessment of our external environment for emerging risks is an important aspect of our ERM Framework, as
these risks, although yet to materialize, could have the potential to have a material adverse impact on our operations and/or business
strategies. We also consider taking advantage of opportunities identified to improve our competitiveness and ultimately our financial
results.
Our Emerging Risk Framework facilitates the ongoing identification, assessment and monitoring of emerging risks, and includes:
maintaining a process that facilitates the ongoing discussion and evaluation of potential emerging risks with senior business and
functional management; reviewing and validating emerging risks with the ERC; creating and executing on responses to each emerging
risk based on prioritization; and monitoring and reporting on emerging risks on a regular basis to the Board’s Risk Committee.
Regulatory Capital
OSFI’s LICAT capital regime applies to our business globally on a group consolidated basis. We continue to meet OSFI’s capital
requirements and maintain capital in excess of regulatory capital expectations. No material changes in LICAT rules are anticipated for
2020 and 2021 as OSFI is focusing its efforts on assessing potential changes to the regulatory framework to align with the IFRS 17
accounting changes expected in 2022, at the earliest.
At its annual meeting in November 2019, the International Association of Insurance Supervisors (“IAIS”) adopted a risk based global
Insurance Capital Standard (“ICS”), that will be further developed over a five-year monitoring period beginning in 2020. While broadly
supportive of the goals of ICS, OSFI stated that it did not support the ICS design for the monitoring period, citing that it was ‘not fit
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
39
for purpose for the Canadian market’. Without the OSFI consent, the IAIS rules will not apply in Canada or to Canadian companies on
a group-wide basis although some regulators may use the ICS framework for calculating capital in their specific markets. As the ICS
methodology and its applicability will be evolving, we will be monitoring the developments.
The IAIS has also been developing a holistic framework to assess and mitigate insurance sector systemic risk, which includes reviewing
the activities of insurers. It is not yet known how these proposals will affect capital or other regulatory requirements and Manulife’s
competitive position given that several key items of the framework remain under discussion.
Regulators in various jurisdictions in which we operate have embarked on reforming their respective capital regulations. The impact of
these changes remains uncertain and we have been actively involved in industry discussions.
IFRS 17 and IFRS 9
IFRS 17 and IFRS 9 are expected to be effective for insurance companies in 2022 and potentially delayed until 2023. The final date is
expected to be issued by the IASB in mid-2020.
IFRS 17 will replace IFRS 4 “Insurance Contracts” and will materially change the timing of the recognition of earnings and therefore
equity. Furthermore, the requirements of the new standard are complex and will necessitate significant enhancements to finance
infrastructure and processes and could impact business strategy. IFRS 9 will impact the measurement and timing of investment
income.
Risks related to the new standards include:
■ The impact on regulatory capital. In addition to the impact on timing of recognition of earnings and equity, the regulatory
capital framework in Canada is currently aligned with IFRS. OSFI has stated that it intends to maintain capital frameworks consistent
with current capital policies and to minimize potential industry-wide capital impacts. To achieve this outcome, we anticipate that
OSFI will amend LICAT guidelines for IFRS 17 and is in the process of consulting directly with affected stakeholders.
■ The impact on our business strategy as a result of temporary volatility. The treatment of the discount rate and new business
gains under IFRS 17 could create material temporary volatility in our financial results and depending on the LICAT treatment, on our
capital position. The Company’s capital position and income for accounting purposes could be significantly influenced by prevailing
market conditions, resulting in volatility of reported results, which may require changes to business strategies and the introduction
of new non-GAAP measures to explain our results. The impact to business strategy could include changes to hedging and
investment strategy, product strategy and the use of reinsurance and, as a result, could impact our exposures to other risks such as
counterparty risk and liquidity risk.
■ The impact on tax. In certain jurisdictions, including Canada, the implementation of IFRS 17 could have a material effect on tax
positions and other financial metrics that are dependent upon IFRS accounting values.
■ The impact on operational readiness. The adoption of IFRS 17 poses significant operational challenges for the insurance industry
as there is yet to be a complete commercially viable system solution. The standard introduces complex estimation techniques,
computational requirements and disclosures which necessitate a major transformation to the Company’s systems along with
actuarial and financial reporting processes. Once a system solution is available, significant efforts are required from insurers to
integrate it into their financial reporting environment, perform impact studies, and educate and socialize the potential impacts with
stakeholders. These risks are increased by the fact that the revised Standard is not expected to be issued until mid-2020, just
six months prior to the start of the potential comparative period and transition date.
■ The impact of inconsistencies in timing of adoption between various jurisdictions. Based on responses to the IASB’s
exposure draft, the European Financial Reporting Group is recommending an effective date of January 1, 2023. Unlike our
international peers, Canadian insurers are required to file in accordance with IFRS as issued by the IASB and therefore could be one
of the first jurisdictions to adopt the standard if the date remains January 1, 2022. The difference in adoption dates could result in
risk of interpretations and application issues being dealt with under inconsistent timelines, increasing the risk of jurisdictional
reporting differences and post adoption changes for the first movers.
As a global insurer with subsidiaries in Asia, different effective dates will require us to maintain more than one set of books to
support consolidated financial statements and for local entity reporting. Although early adoption is permitted, our local entities
would be required to choose between alignment with the consolidated financial statements of the Canadian parent or
comparability with local competitors, in order to avoid maintaining two sets of books.
The CLHIA as well as Manulife and other Canadian and international insurers responded to the IASB’s 2019 exposure draft and
highlighted the risk related to key jurisdictions adopting IFRS 17 on different timelines. Adopting the standard in Canada before it is
adopted by Europe and the UK has the potential for changes to interpretation of IFRS 17 during or subsequent to our adoption.
This could result in significant revisions to our actuarial and accounting policies and estimates and changes to our systems.
Our extensive enterprise-wide implementation program incorporates resources to implement appropriate changes to policies and
processes, education to internal and external stakeholders, sourcing appropriate data and deploying system solutions. Our governance
model and close contact with industry working groups helps to manage the risks noted above.
40
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
i. General Macro-Economic Risk Factors
The global macro-economic environment has a significant impact on our financial plans and ability to implement our business
strategy. The macro-economic environment can be significantly impacted by the actions of both the government sector (including
central banks) and the private sector. The macro-economic environment may also be affected by natural and human-made
catastrophes.
Our business strategy and associated financial plans are developed by considering forecasts of economic growth, both globally and in
the specific countries we operate. Actual economic growth can be significantly impacted by the macro-economic environment and
can deviate significantly from forecast, thus impacting our financial results and the ability to implement our business strategy.
Changes in the macro-economic environment can also have a significant impact on financial markets, including movements in interest
rates, spreads on fixed income assets and returns on public equity and ALDA assets. Our financial plan, including income projections,
capital projections, and valuation of liabilities are based on certain assumptions with respect to future movements in interest rates and
spreads on fixed income assets, and expected future returns from our public equity and ALDA investments. Actual experience is highly
variable and can deviate significantly from our assumptions, thus impacting our financial results. In addition, actual experience that is
significantly different from our assumptions and/or changes in the macro-economic environment may result in changes to the
assumptions themselves which would also impact our financial results.
Specific changes in the macro-economic environment can have very different impacts across different parts of the business. For
example, a rise in interest rates is generally beneficial to us in the long-term but can adversely affect valuations of some ALDA assets,
especially those that have returns dependent on contractual cash flows, such as real estate.
The spending and savings patterns of our customers could be significantly influenced by the macro-economic environment and could
have an impact on the products and services we offer to our customers.
Customer behaviour and emergence of claims on our liabilities can be significantly impacted by the macro-economic environment. For
example, a prolonged period of economic weakness could impact the health and well-being of our customers and that could result in
increased claims for certain insurance risks.
The following sections describe the risk management strategies for each of our five principal risk categories: strategic risk, market risk,
credit risk, product risk and operational risk.
j. Strategic Risk
Strategic risk is the risk of loss resulting from the inability to adequately plan or implement an appropriate business strategy, or to
adapt to change in the external business, political or regulatory environment.
Risk Management Strategy
The CEO and Executive Leadership Team establish and oversee execution of business strategies and have accountability to identify and
manage the risks embedded in these strategies. They are supported by a number of processes:
■ Strategic business, risk and capital planning that is reviewed with the Board of Directors, Executive Leadership Team, and the ERC;
■ Performance and risk reviews of all key businesses with the CEO and annual reviews with the Board of Directors;
■ Risk based capital attribution and allocation designed to encourage a consistent decision-making framework across the
organization; and
■ Review and approval of significant acquisitions and divestitures by the CEO and, where appropriate, the Board of Directors.
Reputation risk is the risk that the Company’s corporate image may be eroded by adverse publicity, about real or perceived issues, as a
result of business practices of Manulife or its representatives potentially causing long-term or even irreparable damage to the
Company’s franchise value. Reputation risk arises from both internal and external environmental factors, and cannot be managed in
isolation from other risks, but only as an integral part of the Company’s integrated risk management approach.
The CEO and Executive Leadership Team are ultimately responsible for our reputation; however, our employees and representatives
are responsible for conducting their business activities in a manner that upholds our reputation. This responsibility is executed through
an enterprise-wide reputation risk policy that specifies the oversight responsibilities of the Board of Directors and the responsibilities of
executive management, communication to and education of all directors, officers, employees and representatives, including our Code
of Business Conduct and Ethics, and application of guiding principles in conducting all our business activities.
Environmental, Social and Governance Risks
Environmental, social and governance (“ESG”) risks may impact our investments, underwriting, or operations, and may create
financial, operational, legal, reputational, or brand value risks for Manulife.
In 2019, oversight of Manulife’s ESG framework was added to the mandate of the Board’s Corporate Governance and Nominating
Committee. Manulife’s Executive Sustainability Council, which consists of members of the Executive Leadership Team, is responsible
for integrating sustainability into Manulife’s business and for performance on ESG metrics. It meets at least quarterly and provides
quarterly updates to the Corporate Governance and Nominating Committee. The Council is supported by a Sustainability Centre of
Expertise consisting of professionals from multiple businesses and functional areas.
Please refer to our “2018 Sustainability Report and Public Accountability Statement” for information on our ESG priorities and
performance.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
41
Environment
Manulife supports the recommendations of the Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (“TCFD”).
Governance
The Environment pillar – including matters related to climate change – is a component of Manulife’s ESG framework, overseen by the
Corporate Governance and Nominating Committee. Climate-related risks and opportunities are also considered by the Board’s Risk
Committee through the ongoing monitoring and reporting of emerging risks.
In 2019, the Executive Sustainability Council initiated a review of Manulife’s ESG framework, which included assessing the definitions
of climate-related metrics and targets. Progress on ESG-related matters, including climate-related matters, is reported to the Corporate
Governance and Nominating Committee at least quarterly.
The Chief Risk Officer, a member of the Executive Sustainability Council, chairs the Climate Change Working Group and is responsible
for overseeing the approach and risk management activities, on climate-related matters.
Risk Management
Our definition of climate-related risk is aligned with the TCFD definition and is the risk of loss and/or reputational damage resulting
from the inability to adequately plan for the impacts of climate change or the transition to a lower-carbon economy through
mechanisms, such as industry regulations, government interventions, and shifts in consumer preferences. We view climate-related risk
as a type of strategic risk, since climate change impacts can manifest themselves through any of our existing principal risks.
In 2019, Global Risk Management initiated the review of key policies and standards to enhance the integration of climate-related risk
taking activities into the ERM framework to ensure that they are managed in a manner consistent with our common approach to risk
management (refer to section “e – Risk Identification, Measurement and Assessment” above). This review included procedures,
protocols and due diligence standards of business and functional units that invest and manage real assets, such as Manulife
Investment Management’s (“MIM”) real estate arm, NAL Resources, and Hancock Natural Resource Group.
Some examples of our climate-related risk management activities include monitoring industry and regulatory developments and
engaging with investee companies to encourage better disclosures. For example, MIM’s public markets team engages some of the
world’s largest emitters on climate-related risks and opportunities as part of the collaborative industry program Climate Action 100+.
Strategy
Manulife is a long-term oriented underwriter and investor. Therefore, long-term climate-related risks and opportunities, including
changes in the physical environment and policy and technological changes associated with the transition to a lower-carbon economy,
are strategically relevant.
In 2019, Manulife initiated the climate-related risk identification process across businesses, geographies, and time horizons. For
example, we identified the need and defined the plan to systematically analyze the impact of climate change on our mortality and
morbidity assumptions. Actuarial impacts of climate change are not yet sufficiently researched in the insurance industry, yet vector-
borne diseases, extreme weather, and altered food systems could impact morbidity and/or mortality assumptions of life insurance
companies over the long-term.
The Property and Casualty Reinsurance business is a smaller part of our underwriting portfolio, and it may experience business risks
associated with the increased frequency and severity of catastrophic weather events. This reinsurance business is subject to annual
repricing which acts as a mitigant to this risk over the medium and long-term.
Manulife performed a series of climate change simulations to gain insight into the impact of climate-related risks on investment
portfolios. The review included utilizing the Dutch Central Bank’s macroeconomic scenarios to inform considerations in investment
decision making and capital management. Following MIM’s identification of climate change as a business risk, MIM tested a climate
scenario risk tool jointly with industry peers convened by the United Nations’ Environment Programme – Finance Initiative.
Finally, Manulife sees a business opportunity in enabling clients to invest in decarbonization. We invest general fund assets and third-
party client funds in renewable energy, green buildings, and sustainably-managed forestry, and offer diversified investment funds that
offer exposure to low-carbon opportunities.
Information gathering and analysis is underway to establish the impact of identified climate-related risks and opportunities on our
businesses and inform our strategic approach.
Metrics
Since 2010, Manulife has reported its greenhouse gas emissions to CDP (formerly the Carbon Disclosure Project). Manulife reports
direct emissions (scope 1) from assets with operational control, namely real estate operations, NAL Resources and Hancock Natural
Resource Group; indirect emissions from purchased or acquired fuel sources (scope 2); and emissions from business travel, cloud
services, and landfill waste (scope 3). Emissions are calculated according to the accounting standard Greenhouse Gas Protocol. Since
2017, a third-party has been engaged to conduct an annual limited assurance procedure of our emissions calculation.
As part of our update of our ESG framework, work is underway to assess other relevant climate risk-related metrics and targets.
42
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
k. Market Risk
Market risk is the risk of loss resulting from market price volatility, interest rate change, credit and swap spread changes, and adverse
foreign currency rate movements. Market price volatility primarily relates to changes in prices of publicly traded equities and
alternative long-duration assets. Liquidity risk, which we manage as a form of market risk, is the risk of not having access to sufficient
funds or liquid assets to meet both expected and unexpected cash outflows and collateral demands.
IFRS 7 Disclosures
The shaded text and tables in this section and the following section (“Market Risk Sensitivities and Market Risk Exposure Measures”)
of this MD&A represent our disclosure on market and liquidity risk in accordance with IFRS 7, “Financial Instruments – Disclosures”,
and include a discussion on how we measure risk and our objectives, policies and methodologies for managing these risks. Therefore,
the following shaded text and tables represent an integral part of our audited annual Consolidated Financial Statements for the years
ended December 31, 2019 and December 31, 2018. The fact that certain text and tables are considered an integral part of the
Consolidated Financial Statements does not imply that the disclosures are of any greater importance than the sections not part of the
disclosure. Accordingly, the “Risk Management” disclosure should be read in its entirety.
Market Risk Management Strategy
Market risk management strategy is governed by the Global Asset Liability Committee which oversees the overall market and liquidity
risk program. Our overall strategy to manage our market risks incorporates several component strategies, each targeted to manage
one or more of the market risks arising from our businesses. At an enterprise level, these strategies are designed to manage our
aggregate exposures to market risks against limits associated with earnings and capital volatility.
The following table outlines our key market risks and identifies the risk management strategies which contribute to managing these
risks.
Risk Management Strategy
Product design and pricing
Variable annuity guarantee dynamic hedging
Macro equity risk hedging
Asset liability management
Foreign exchange management
Liquidity risk management
Key Market Risk
Alternative
Long-Duration
Asset
Performance
Risk
✓
Interest Rate
and Spread
Risk
✓
✓
✓
✓
Publicly
Traded Equity
Performance
Risk
✓
✓
✓
✓
Foreign
Exchange Risk
✓
✓
✓
✓
✓
Liquidity Risk
✓
✓
✓
✓
✓
✓
Publicly Traded Equity Performance Risk – To manage publicly traded equity performance risk from our insurance and annuity
businesses, we primarily use a variable annuity guarantee dynamic hedging strategy which is complemented by a general macro equity
risk hedging strategy, in addition to asset liability management strategies. Our strategies employed for variable annuity guarantee
dynamic hedging and macro equity risk hedging expose the Company to additional risks. See “Risk Factors” below.
Interest Rate and Spread Risk – To manage interest rate risk, we primarily employ asset liability management strategies to manage
the duration of our fixed income investments in our insurance segments and our Corporate and Other segment by executing interest
rate hedges.
ALDA Performance Risk – We seek to limit concentration risk associated with ALDA performance by investing in a diversified basket
of assets including commercial real estate, timber, farmland, private equities, infrastructure, and oil and gas assets. We further
diversify risk by managing investments against established investment and risk limits.
Foreign Exchange Risk – Our policy is to generally match the currency of our assets with the currency of the liabilities they support.
Where assets and liabilities are not currency matched, we seek to hedge this exposure where appropriate to stabilize our capital
positions and remain within our enterprise foreign exchange risk limits through the use of financial instruments such as derivatives.
Liquidity Risk – Our liquidity risk management framework is designed to provide adequate liquidity to cover cash and collateral
obligations as they come due, and to sustain and grow operations in both normal and stressed conditions. Refer to “Liquidity Risk
Management Strategy” below for more information.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
43
Product Design and Pricing Strategy
Our policies, standards, and guidelines with respect to product design and pricing are designed with the objective of aligning our
product offerings with our risk taking philosophy and risk appetite, and in particular, that incremental risk generated from new sales
aligns with our strategic risk objectives and risk limits. The specific design features of our product offerings, including level of benefit
guarantees, policyholder options, fund offerings and availability restrictions as well as our associated investment strategies, help to
mitigate the level of underlying risk. We regularly review and modify key features within our product offerings, including premiums
and fee charges with a goal of meeting profit targets and staying within risk limits. Certain of our general fund adjustable benefit
products have minimum rate guarantees. The rate guarantees for any particular policy are set at the time the policy is issued and
governed by insurance regulation in each jurisdiction where the products are sold. The contractual provisions allow crediting rates to
be re-set at pre-established intervals subject to the established minimum crediting rate guarantees. The Company may partially
mitigate the interest rate exposure by setting new rates on new business and by adjusting rates on in-force business where permitted.
In addition, the Company partially mitigates this interest rate risk through its asset liability management process, product design
elements, and crediting rate strategies. New product initiatives, new reinsurance arrangements and material insurance underwriting
initiatives must be reviewed and approved by the CRO or key individuals within risk management functions.
Hedging Strategies for Variable Annuity and Other Equity Risks
The Company’s exposure to movement in public equity market values primarily arises from insurance liabilities related to variable
annuity guarantees and general account public equity investments.
Dynamic hedging is the primary hedging strategy for variable annuity market risks. Dynamic hedging is employed for new variable
annuity guarantees business when written or as soon as practical thereafter.
We seek to manage public equity risk arising from unhedged exposures in our insurance liabilities through our macro equity risk
hedging strategy. We seek to manage interest rate risk arising from variable annuity business not dynamically hedged within our asset
liability management strategy.
Variable Annuity Dynamic Hedging Strategy
The variable annuity dynamic hedging strategy is designed to hedge the sensitivity of variable annuity guarantee policy liabilities and
available capital to fund performance (both public equity and bond funds) and interest rate movements. The objective of the variable
annuity dynamic hedging strategy is to offset, as closely as possible, the change in the economic value of guarantees with the profit
and loss from our hedge asset portfolio. The economic value of guarantees moves in close tandem, but not exactly, with our variable
annuity guarantee policy liabilities, as it reflects best estimate liabilities and does not include any liability provisions for adverse
deviations.
Our variable annuity hedging program uses a variety of exchange-traded and over-the-counter (OTC) derivative contracts to offset the
change in value of variable annuity guarantees. The main derivative instruments used are equity index futures, government bond
futures, currency futures, interest rate swaps, total return swaps, equity options and interest rate swaptions. The hedge instruments’
positions against policy liabilities are continuously monitored as market conditions change. As necessary, the hedge asset positions will
be dynamically rebalanced in order to stay within established limits. We may also utilize other derivatives with the objective to improve
hedge effectiveness opportunistically.
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 profit (loss) on the hedge instruments will not completely offset
the underlying losses (gains) related to the guarantee liabilities hedged because:
■ Policyholder behaviour and mortality experience are not hedged;
■ Provisions for adverse deviation in the policy liabilities are not hedged;
■ A portion of interest rate risk is not hedged;
■ Credit spreads may widen and actions might not be taken to adjust accordingly;
■ Fund performance on a small portion of the underlying funds is not hedged due to lack of availability of effective exchange-traded
hedge instruments;
■ Performance of the underlying funds hedged may differ from the performance of the corresponding hedge instruments;
■ Correlations between interest rates and equity markets could lead to unfavourable material impacts;
■ Unfavourable hedge rebalancing costs can be incurred during periods of high volatility from equity markets, bond markets and/or
interest rates. The impact is magnified when these impacts occur concurrently; and
■ Not all other risks are hedged.
44
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Macro Equity Risk Hedging Strategy
The objective of the macro equity risk hedging program is to maintain our overall earnings sensitivity to public equity market
movements within our Board approved risk appetite limits. The macro equity risk hedging program is designed to hedge earnings
sensitivity due to movements in public equity markets arising from all sources (outside of dynamically hedged exposures). Sources of
equity market sensitivity addressed by the macro equity risk hedging program include:
■ Residual equity and currency exposure from variable annuity guarantees not dynamically hedged;
■ General fund equity holdings backing non-participating liabilities; and
■ Unhedged provisions for adverse deviation related to variable annuity guarantees dynamically hedged.
Asset Liability Management Strategy
Our asset liability management strategy is designed to help ensure that the market risks embedded in our assets and liabilities held in
the Company’s general fund are effectively managed and that risk exposures arising from these assets and liabilities are maintained
within risk limits. The embedded market risks include risks related to the level and movement of interest rates and credit and swap
spreads, public equity market performance, ALDA performance and foreign exchange rate movements.
General fund product liabilities are categorized into groups with similar characteristics in order to support them with a specific asset
strategy. We seek to align the asset strategy for each group to the premium and benefit pattern, policyholder options and guarantees,
and crediting rate strategies of the products they support. Similar strategies are established for assets in the Company’s surplus
account. The strategies are set using portfolio analysis techniques intended to optimize returns, subject to considerations related to
regulatory and economic capital requirements, and risk tolerances. They are designed to achieve broad diversification across asset
classes and individual investment risks while being suitably aligned with the liabilities they support. The strategies encompass asset
mix, quality rating, term profile, liquidity, currency and industry concentration targets.
Products which feature guaranteed liability cash flows (i.e. where the projected net flows are not materially dependent upon
economic scenarios) are managed to a target return investment strategy. The products backed by this asset group include:
■ Accumulation annuities (other than annuities with pass-through features), which are primarily short-to-medium-term obligations
and offer interest rate guarantees for specified terms on single premiums. Withdrawals may or may not have market value
adjustments;
■ Payout annuities, which have no surrender options and include predictable and very long-dated obligations; and
■
Insurance products, with recurring premiums extending many years in the future, and which also include a significant component of
very long-dated obligations.
We seek to manage the assets backing these long-dated benefits to achieve a target return sufficient to support the obligations over
their lifetime, subject to established risk tolerances, by investing in a basket of diversified alternative long-duration assets, which may
include public equity investments (“ALDA and public equity”), with the balance invested in fixed income. Utilizing ALDA and public
equity investments provides a suitable match for long-duration liabilities that also enhances long-term investment returns and reduces
aggregate risk through diversification.
Fixed income assets are managed to a benchmark developed to minimize interest rate risk against the liability cash flows not
supported by ALDA and public equity investments, and to achieve target returns/spreads required to preserve long-term interest rate
investment assumptions used in liability pricing.
For insurance and annuity products where significant pass-through features exist, a total return strategy approach is used, generally
combining fixed income with ALDA plus public equity investments. ALDA and public equity may be included to enhance long-term
investment returns and reduce aggregate risk through diversification. Target investment strategies are established using portfolio
analysis techniques that seek to optimize long-term investment returns while considering the risks related to embedded product
guarantees and policyholder withdrawal options, the impact of regulatory and economic capital requirements and management
tolerances with respect to short-term income volatility and long-term tail risk exposure. For these pass-through products such as
participating insurance and universal life insurance, the investment performance of assets supporting the liabilities will be largely
passed through to policyholders as changes in the amounts of dividends declared or rates of interest credited, subject to embedded
minimum guarantees. Shorter duration liabilities such as fixed deferred annuities do not incorporate ALDA plus public equity into their
target asset mixes. Authority to manage our investment portfolios is delegated to investment professionals who manage to
benchmarks derived from the target investment strategies established for each group, including interest rate risk tolerances.
Our asset liability management strategy incorporates a wide variety of risk measurement, risk mitigation and risk management, and
hedging processes. The liabilities and risks to which the Company is exposed, however, cannot be completely matched or hedged due
to both limitations on instruments available in investment markets and uncertainty of impact on liability cash flows from policyholder
experience/behaviour.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
45
Foreign Exchange Risk Management Strategy
Our policy is to generally match the currency of our assets with the currency of the liabilities they support. Where assets and liabilities
are not currency matched, we seek to hedge this exposure where appropriate to stabilize our capital positions and remain within our
enterprise foreign exchange risk limits through the use of financial instruments such as derivatives.
Risk from small balance sheet mismatches is accepted if managed within set risk limits. Risk exposures are measured in terms of
potential changes in capital ratios, due to foreign exchange rate movements, determined to represent a specified likelihood of
occurrence based on internal models.
Liquidity Risk Management Strategy
Global liquidity management policies and procedures are designed to provide adequate liquidity to cover cash and collateral
obligations as they come due, and to sustain and grow operations in both normal and stressed conditions. They reflect legal,
regulatory, tax, operational or economic impediments to inter-entity funding. The asset mix of our balance sheet takes into account
the need to hold adequate unencumbered and appropriate liquid assets to satisfy the requirements arising under stressed scenarios
and to allow our liquidity ratios to remain strong. We manage liquidity centrally and closely monitor the liquidity positions of our
principal subsidiaries.
We seek to mitigate liquidity risk by diversifying our business across different products, markets, geographical regions and
policyholders. We design insurance products to encourage policyholders to maintain their policies in-force, to help generate a
diversified and stable flow of recurring premium income. We design the policyholder termination features of our wealth management
products and related investment strategies with the goal of mitigating the financial exposure and liquidity risk related to unexpected
policyholder terminations. We establish and implement investment strategies intended to match the term profile of the assets to the
liabilities they support, taking into account the potential for unexpected policyholder terminations and resulting liquidity needs. Liquid
assets represent a large portion of our total assets. We aim to reduce liquidity risk in our deposit funded businesses by diversifying our
funding sources and appropriately managing the term structure of our funding. We forecast and monitor daily operating liquidity and
cash movements in various individual entities and operations as well as centrally, aiming to ensure liquidity is available and cash is
employed optimally.
We also maintain centralized cash pools and access to other sources of liquidity and contingent liquidity such as repurchase funding
agreements. Our centralized cash pool consists of cash or near-cash, high quality short-term investments that are continually
monitored for their credit quality and market liquidity.
We have established a variety of contingent liquidity sources. We maintain a $500 million committed unsecured revolving credit
facility with certain Canadian chartered banks available for MFC, and a US$500 million committed unsecured revolving credit facility
with certain U.S. banks available for MFC and certain of its subsidiaries. There were no outstanding borrowings under these credit
facilities as of December 31, 2019. In addition, John Hancock (“JH”) USA is a member of the Federal Home Loan Bank of Indianapolis
(“FHLBI”), which enables the Company to obtain loans from FHLBI as an alternative source of liquidity that is collateralizable by
qualifying mortgage loans, mortgage-backed securities and U.S. Treasury and Agency securities. Based on regulatory limitations, as of
December 31, 2019, JHUSA had an estimated maximum borrowing capacity of US$3.9 billion under the FHLBI facility, with no
amounts outstanding.
The following table outlines the maturity of the Company’s significant financial liabilities.
Maturity of financial liabilities(1)
As at December 31, 2019
($ millions)
Long-term debt
Capital instruments
Derivatives
Deposits from Bank clients(2)
Lease liabilities
Less than
1 year
$
649
–
332
16,872
107
1 to 3
years
$
–
–
145
2,632
142
3 to 5
years
$
–
598
218
1,984
49
Over 5
years
$3,894
6,522
9,589
–
76
Total
$ 4,543
7,120
10,284
21,488
374
(1) The amounts shown above are net of the related unamortized deferred issue costs.
(2) Carrying value and fair value of deposits from Bank clients as at December 31, 2019 was $21,488 million and $21,563 million, respectively (2018 – $19,684 million and
$19,731 million, respectively). Fair value is determined by discounting contractual cash flows, using market interest rates currently offered for deposits with similar terms
and conditions. All deposits from Bank clients were categorized in Level 2 of the fair value hierarchy (2018 – Level 2).
Through the normal course of business, pledging of assets is required to comply with jurisdictional regulatory and other requirements
including collateral pledged to partially mitigate derivative counterparty credit risk, assets pledged to exchanges as initial margin and
assets held as collateral for repurchase funding agreements. Total unencumbered assets were $455.2 billion as at December 31, 2019
(2018 – $427.9 billion).
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Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
l. Market Risk Sensitivities and Market Risk Exposure Measures
Variable Annuity and Segregated Fund Guarantees Sensitivities and Risk Exposure Measures
Guarantees on variable annuity products and segregated funds may include one or more of death, maturity, income and withdrawal
guarantees. Variable annuity and segregated fund guarantees are contingent and only payable upon the occurrence of the relevant
event, if fund values at that time are below guaranteed values. Depending on future equity market levels, liabilities on current in-force
business would be due primarily in the period from 2020 to 2040.
We seek to mitigate a portion of the risks embedded in our retained (i.e. net of reinsurance) variable annuity and segregated fund
guarantee business through the combination of our dynamic and macro hedging strategies (see “Publicly Traded Equity Performance
Risk” below).
The table below shows selected information regarding the Company’s variable annuity and segregated fund investment-related
guarantees gross and net of reinsurance.
Variable annuity and segregated fund guarantees, net of reinsurance
As at December 31,
($ millions)
2019
2018
Guarantee
value
Amount at
Fund value
risk(4),(5)
Guarantee
value
Amount
Fund value
at risk(4),(5)
Guaranteed minimum income benefit
Guaranteed minimum withdrawal benefit
Guaranteed minimum accumulation benefit
$ 4,629 $ 3,696
48,031
18,362
53,355
17,994
$
998
6,030
10
7,038
802
7,840
832
318
1,150
$ 5,264 $ 3,675 $ 1,593
11,388
141
49,214
18,720
60,494
18,611
84,369
10,663
71,609
14,654
13,122
1,567
95,032
86,263
14,689
4,515
2,353
6,868
3,173
2,070
5,243
1,343
493
1,836
75,978
9,555
70,089
17,186
85,533
87,275
3,977
718
4,695
3,199
500
3,699
$ 80,838 $ 83,576
$ 6,690
$ 88,164 $ 81,020 $ 12,853
Gross living benefits(1),(2)
Gross death benefits(3)
Total gross of reinsurance
Living benefits reinsured
Death benefits reinsured
Total reinsured
Total, net of reinsurance
(1) 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.
(2) Contracts with guaranteed long term care benefits are included in this category.
(3) Death benefits include standalone 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 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 amount at risk is defined as the excess of the current annuitization income base over the current account
value. For all guarantees, the amount at risk is floored at zero at the single contract level.
(5) The amount at risk net of reinsurance at December 31, 2019 was $6,690 million (2018 – $12,853 million) of which: US$3,995 million (2018 – US$6,899 million) was on
our U.S. business, $1,178 million (2018 – $2,654 million) was on our Canadian business, US$104 million (2018 – US$332 million) was on our Japan business and
US$145 million (2018 – US$246 million) was related to Asia (other than Japan) and our run-off reinsurance business.
Investment categories for variable contracts with guarantees
Variable contracts with guarantees, including variable annuities and variable life, are invested, at the policyholder’s discretion subject
to contract limitations, in various fund types within the segregated fund accounts and other investments. The account balances by
investment category are set out below.
As at December 31,
($ millions)
Investment category
Equity funds
Balanced funds
Bond funds
Money market funds
Other fixed interest rate investments
Total
2019
2018
$ 47,489
42,448
11,967
1,732
1,975
$ 44,333
41,749
12,279
2,109
2,000
$ 105,611
$ 102,470
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
47
Caution Related to Sensitivities
In the sections that follow, we provide 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 activity and
investment returns assumed in the determination of policy liabilities. 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
LICAT total ratio will be as indicated. Market movements affect LICAT capital sensitivities both through income and other components
of the regulatory capital framework. For example, LICAT is affected by changes to other comprehensive income.
Publicly Traded Equity Performance Risk Sensitivities and Exposure Measures
As outlined above, we have net exposure to equity risk through asset and liability mismatches; 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 macro hedging strategy is designed to mitigate public equity risk arising from variable annuity
guarantees not dynamically hedged and from other unhedged exposures in our insurance liabilities.
Changes in equity prices may impact other items including, but not limited to, asset-based fees earned on assets under management
and administration or policyholder account value, and estimated profits and amortization of deferred policy acquisition and other
costs. These items are not hedged.
The table below shows the potential impact on net income attributed to shareholders resulting from an immediate 10%, 20% and
30% 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. If market values were to remain flat for an entire year, the potential impact would be roughly equivalent
to an immediate decline in market values equal to the expected level of annual growth assumed in the valuation of policy liabilities.
Further, if after market values dropped 10%, 20% or 30% they continued to decline, remained flat, or grew more slowly than
assumed in the valuation the potential impact on net income attributed to shareholders could be considerably more than shown.
Refer to “Sensitivity of Earnings to Changes in Assumptions” for more information on the level of growth assumed and on the net
income sensitivity to changes in these long-term assumptions. The potential impact is shown after taking into account the impact of
the change in markets on the hedge assets. 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 net income attributed to shareholders.
This estimate assumes that the performance of the dynamic hedging program would not completely offset the gain/loss from the
dynamically hedged variable annuity guarantee liabilities. It assumes that the hedge assets are based on the actual position at the
period end, and that equity hedges in the dynamic program are rebalanced at 5% intervals. In addition, we assume that the macro
hedge assets are rebalanced in line with market changes.
It is also important to note that these estimates are illustrative, and that the dynamic and macro hedging programs may underperform
these estimates, particularly during periods of high realized volatility and/or periods where both interest rates and equity market
movements are unfavourable.
The Standards of Practice for the valuation of insurance contract liabilities and guidance published by the CIA constrain the investment
return assumptions for public equities and certain ALDA assets based on historical return benchmarks for public equities. The potential
impact on net income attributed to shareholders does not take into account possible changes to investment return assumptions
resulting from the impact of declines in public equity market values on these historical return benchmarks.
48
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Potential immediate impact on net income attributed to shareholders arising from changes to public equity returns(1),(2),(3)
As at December 31, 2019
($ millions)
Underlying sensitivity to net income attributed to
shareholders(4)
Variable annuity guarantees
General fund equity investments(5)
Total underlying sensitivity before hedging
Impact of macro and dynamic hedge assets(6)
-30%
-20%
-10%
+10%
+20%
+30%
$ (3,270) $ (1,930) $
(1,140)
(4,410)
2,690
(720)
(2,650)
1,580
(860)
(330)
$ 620
340
$ 1,060
680
$ 1,360
1,020
(1,190)
670
960
(580)
1,740
(1,020)
2,380
(1,340)
Net potential impact on net income attributed to shareholders
after impact of hedging
$ (1,720) $ (1,070) $
(520)
$ 380
$
720
$ 1,040
As at December 31, 2018
($ millions)
Underlying sensitivity to net income attributed to
shareholders(4)
Variable annuity guarantees
General fund equity investments(5)
Total underlying sensitivity before hedging
Impact of macro and dynamic hedge assets(6)
-30%
-20%
-10%
+10%
+20%
+30%
$ (3,650) $ (2,240) $
(1,150)
(4,800)
3,110
(780)
(3,020)
1,940
(1,040)
(390)
(1,430)
910
$ 890
290
$ 1,610
580
$ 2,170
860
1,180
(820)
2,190
(1,450)
3,030
(1,930)
Net potential impact on net income attributed to shareholders
after impact of hedging
$ (1,690) $ (1,080) $
(520)
$ 360
$ 740
$ 1,100
(1) See “Caution Related to Sensitivities” above.
(2) The tables show the potential impact on net income attributed to shareholders resulting from an immediate 10%, 20% and 30% 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, excluding impacts from asset-based fees earned on
assets under management and policyholder account value.
(3) Please refer to “Sensitivity of Earnings to Changes in Assumptions” for more information on the level of growth assumed and on the net income sensitivity to changes
in these long-term assumptions.
(4) 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.
(5) This impact for general fund equity investments includes general fund investments supporting our policy liabilities, investment in seed money investments (in new
segregated and mutual funds made by Corporate and Other segment) and the impact on policy liabilities related to the projected future fee income on variable
universal life and other unit linked products. The impact does not include: (i) any potential impact on public equity weightings; (ii) any gains or losses on AFS public
equities held in the Corporate and Other segment; or (iii) any gains or losses on public equity investments held in Manulife Bank. The participating policy funds are
largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in equity markets.
(6) Includes the impact of rebalancing equity hedges in the macro and dynamic hedging program. The impact of dynamic hedge rebalancing represents the impact of
rebalancing equity hedges for dynamically hedged variable annuity guarantee best estimate liabilities at 5% intervals but does not include any impact in respect of
other sources of hedge ineffectiveness (e.g. fund tracking, realized volatility and equity, interest rate correlations different from expected among other factors).
Changes in equity markets impact our available and required components of the LICAT total ratio. The following table shows the
potential impact to MLI’s LICAT total ratio resulting from changes in public equity market values.
Potential immediate impact on MLI’s LICAT total ratio arising from public equity returns different than the expected
return for policy liability valuation(1),(2),(3)
Percentage points
December 31, 2019
December 31, 2018
Impact on MLI’s LICAT total ratio
-30%
-20%
-10%
+10%
+20%
+30%
(5)
(6)
(3)
(4)
(1)
(2)
1
1
4
5
5
7
(1) See “Caution Related to Sensitivities” above. In addition, estimates exclude changes to the net actuarial gains/losses with respect to the Company’s pension obligations as
a result of changes in equity markets, as the impact on the quoted sensitivities is not considered to be material.
(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. The estimated amount that would not be completely offset relates to our practices of not hedging the provisions for adverse deviation and of
rebalancing equity hedges for dynamically hedged variable annuity liabilities at 5% intervals.
(3) OSFI rules for segregated fund guarantees reflect full capital impacts of shocks over 20 quarters within a prescribed range. As such, the deterioration in equity markets
could lead to further increases in capital requirements after the initial shock.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
49
Interest Rate and Spread Risk Sensitivities and Exposure Measures
At December 31, 2019, we estimated the sensitivity of our net income attributed to shareholders to a 50 basis point parallel decline in
interest rates to be a charge of $100 million, and to a 50 basis point increase in interest rates to be a charge of $100 million.
The table below shows the potential impact on net income attributed to shareholders from a 50 basis point parallel move in interest
rates. This includes a change of 50 basis points 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
where government rates are not currently negative, relative to the rates assumed in the valuation of policy liabilities, including
embedded derivatives. For variable annuity guarantee liabilities that are dynamically hedged, it is assumed that interest rate hedges are
rebalanced at 20 basis point intervals.
As the sensitivity to a 50 basis point change in interest rates includes any associated change in the applicable reinvestment scenarios,
the impact of changes to interest rates for less than, or more than 50 basis points is unlikely to be linear. Furthermore, our sensitivities
are not consistent across all regions in which we operate, and the impact of yield curve changes will vary depending upon the
geography where the change occurs. Reinvestment assumptions used in the valuation of policy liabilities tend to amplify the negative
effects of a decrease in interest rates and dampen the positive effects of interest rate increases. This is because the reinvestment
assumptions used in the valuation of our insurance liabilities are based on interest rate scenarios and calibration criteria set by the
Canadian Actuarial Standards Board, while our interest rate hedges are valued using current market interest rates. Therefore, in any
particular quarter, changes to the reinvestment assumptions are not fully aligned to changes in current market interest rates especially
when there is a significant change in the shape of the interest rate curve. As a result, the impact from non-parallel movements may be
materially different from the estimated impact of parallel movements. For example, if long-term interest rates increase more than
short-term interest rates (sometimes referred to as a steepening of the yield curve) in North America, the decrease in the value of our
swaps may be greater than the decrease in the value of our insurance liabilities. This could result in a charge to net income attributed
to shareholders in the short-term even though the rising and steepening of the yield curve, if sustained, may have a positive long-term
economic impact.
The potential impact on net income attributed to shareholders does not take into account any future potential changes to our URR
assumptions or calibration criteria for stochastic risk-free rates. At December 31, 2019, we estimated the sensitivity of our net income
attributed to shareholders to a 10 basis point reduction in the URR in all geographies, and a corresponding change to stochastic risk-
free modeling, to be a charge of $350 million (post-tax); and note that the impact of changes to the URR are not linear. The long-term
URR for risk-free rates in Canada is prescribed at 3.05% and we use the same assumption for the U.S. Our assumption for Japan is
1.6%. The ASB does not anticipate an update to this promulgation prior to the effective date of IFRS 17, expected to be 2022 at the
earliest.
The potential impact on net income attributable to shareholders does not take into account other potential impacts of lower interest
rate levels, for example, increased strain on the sale of new business or lower interest earned on our surplus assets. The impact also
does not reflect any unrealized gains or losses on AFS fixed income assets held in our Corporate and Other segment. Changes in the
market value of these assets may provide a natural economic offset to the interest rate risk arising from our product liabilities. In order
for there to also be an accounting offset, the Company would need to realize a portion of the AFS fixed income asset unrealized gains
or losses. It is not certain we would realize any of the unrealized gains or losses available.
The impact does not reflect any potential effect of changing interest rates to the value of our ALDA assets. Rising interest rates could
negatively impact the value of our ALDA assets (see “Critical Actuarial and Accounting Policies – Fair Value of Invested Assets”,
below). More information on ALDA can be found under the section “Alternative Long-Duration Asset Performance Risk Sensitivities
and Exposure Measures”, below.
Under LICAT, changes in unrealized gains or losses in our AFS bond portfolio resulting from interest rate shocks tend to dominate
capital sensitivities. As a result, the reduction in interest rates improves LICAT total ratios and vice-versa.
The following table shows the potential impact on net income attributed to shareholders including the change in the market value of
AFS fixed income assets held in our Corporate and Other segment, which could be realized through the sale of these assets.
50
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Potential impact on net income attributed to shareholders and MLI’s LICAT total ratio of an immediate parallel change in
interest rates relative to rates assumed in the valuation of policy liabilities(1),(2),(3),(4)
As at December 31,
Net income attributed to shareholders ($ millions)
Excluding change in market value of AFS fixed income assets held in the Corporate and
Other segment
From fair value changes in AFS fixed income assets held in the Corporate and Other
segment, if realized
2019
2018
-50bp
+50bp
-50bp
+50bp
$ (100)
$ (100)
$ (100)
$ 100
1,700
(1,600)
1,600
(1,500)
MLI’s LICAT total ratio (Percentage points)
LICAT total ratio change in percentage points(5)
4
(4)
3
(3)
(1) See “Caution Related to Sensitivities” above. In addition, estimates exclude changes to the net actuarial gains/losses with respect to the Company’s pension obligations
as a result of changes in interest rates, as the impact on the quoted sensitivities is not considered to be material.
(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 Corporate and Other segment will depend on the aggregate amount of
unrealized gain or loss.
(4) Sensitivities are based on projected asset and liability cash flows and the impact of realizing fair value changes in AFS fixed income is based on the holdings at the end
of the period.
(5) LICAT impacts include realized and unrealized fair value changes in AFS fixed income assets. LICAT impacts do not reflect the impact of the scenario switch discussed
below.
The following tables show the potential impact on net income attributed to shareholders resulting from a change in corporate 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 and MLI’s LICAT total ratio arising from changes to corporate
spreads and swap spreads(1),(2),(3)
Corporate spreads(4),(5)
As at December 31,
Net income attributed to shareholders ($ millions)(6)
MLI’s LICAT total ratio (change in percentage points)(7)
Swap spreads
As at December 31,
Net income attributed to shareholders ($ millions)
MLI’s LICAT total ratio (change in percentage points)(7)
2019
2018
-50bp
(800)
$
+50bp
800
$
-50bp
(600)
$
+50bp
600
$
(7)
5
(5)
5
2019
2018
-20bp
+20bp
-20bp
+20bp
$ 100
$
(100)
$
100
$
(100)
nil
nil
nil
nil
(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 Corporate and Other segment
and excludes the impact of changes in segregated fund bond values due to changes in credit spreads. The participating policy funds are largely self-supporting and
generate no material impact on net income attributed to shareholders as a result of changes in corporate and swap spreads.
(3) Sensitivities are based on projected asset and liability cash flows.
(4) Corporate spreads are assumed to grade to the long-term average over five years.
(5) As the sensitivity to a 50 basis point decline in corporate spreads includes the impact of a change in deterministic reinvestment scenarios where applicable, the impact
of changes to corporate spreads for less than, or more than, the amounts indicated are unlikely to be linear.
(6) The impact from a 50 basis point change in corporate spreads increased from December 31, 2018 as the changes in actuarial methods and assumptions, outlined
below (see “Critical Actuarial and Accounting Policies”), resulted in a lengthening of the policy liability cash flows, a portion of which is assumed to be supported by
corporate bonds.
(7) LICAT impacts include realized and unrealized fair value change in AFS fixed income assets. Under LICAT, spread movements are determined from a selection of
investment grade bond indices with BBB and better bonds for each jurisdiction. For LICAT, we use the following indices: FTSE TMX Canada All Corporate Bond Index,
Barclays USD Liquid Investment Grade Corporate Index, and Nomura-BPI (Japan). LICAT impacts presented for corporate spreads do not reflect the impact of the
scenario switch discussed below.
Swap spreads remain at low levels, and if they were to rise, this could generate material charges to net income attributed to
shareholders. Swap spread sensitivity decreased primarily due to additional shortening swaps put in place.
LICAT Scenario Switch
Typically, the reduction in interest rates improves LICAT capital ratios and vice-versa. However, when interest rates decline past a
certain threshold, reflecting the combined movement in risk-free rates and corporate spreads, a different prescribed interest rate stress
scenario needs to be taken into account in the LICAT ratio calculation according to the OSFI guideline.
The OSFI guideline specifies four stress scenarios for interest rates and prescribes the methodology for determining which scenario
needs to be applied by geographic region based on current market inputs and the Company’s balance sheet.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
51
We estimate the potential impact of a switch in the scenarios would be approximately a five percentage point decrease in MLI’s total
LICAT ratio.1 This negative impact of a potential switch in scenarios is not reflected in the stated risk-free rate and corporate spread
sensitivities, as it is a one-time impact. After this one-time event, the sensitivity of the LICAT ratio to further decreases in risk-free
interest rates would again improve the LICAT capital position as stated in the table above.
The level of interest rates and corporate spreads that would trigger a switch in the scenarios is dependent on market conditions and
movements in the Company’s asset and liability position. The scenario switch could reverse in response to subsequent increases in
rates and/or spreads.
Alternative Long-Duration Asset Performance Risk Sensitivities and Exposure Measures
The following table shows the potential impact on net income attributed to shareholders resulting from an immediate 10% change in
market values of ALDA followed by a return to the expected level of growth assumed in the valuation of policy liabilities. If market
values were to remain flat for an entire year, the potential impact would be roughly equivalent to an immediate decline in market
values equal to the expected level of annual growth assumed in the valuation of policy liabilities. Further, if after market values
dropped 10% they continued to decline, remained flat, or grew more slowly than assumed in the valuation of policy liabilities, the
potential impact on net income attributed to shareholders could be considerably more than shown. Refer to “Sensitivity of Earnings to
Changes in Assumptions” below, for more information on the level of growth assumed and on the net income sensitivity to changes
in these long-term assumptions.
ALDA includes commercial real estate, timber and farmland real estate, oil and gas direct holdings, and private equities, some of
which relate to oil and gas.
Potential impact on net income attributed to shareholders arising from changes in ALDA returns(1),(2),(3),(4),(5),(6),(7)
As at December 31,
($ millions)
Real estate, agriculture and timber assets
Private equities and other ALDA
Alternative long-duration assets
2019
2018
-10%
+10%
-10%
+10%
$
(1,300) $ 1,200
1,700
(1,800)
$
(1,300) $ 1,200
1,600
(1,600)
$
(3,100) $ 2,900
$
(2,900) $ 2,800
(1) See “Caution Related to Sensitivities” above.
(2) This impact is calculated as at a point-in-time impact and does not include: (i) any potential impact on ALDA weightings or (ii) any gains or losses on ALDA held in the
Corporate and Other segment.
(3) The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in ALDA
returns. For some classes of ALDA, where there is not an appropriate long-term benchmark available, the return assumptions used in valuation are not permitted by the
Standards of Practice and CIA guidance to result in a lower reserve than an assumption based on a historical return benchmark for public equities in the same
jurisdiction.
(4) Net income impact does not consider any impact of the market correction on assumed future return assumptions.
(5) Please refer to “Sensitivity of Earnings to Changes in Assumptions” below, for more information on the level of growth assumed and on the net income sensitivity to
changes in these long-term assumptions.
(6) The impact of changes to the portfolio asset mix supporting our North American legacy businesses are reflected in the sensitivities when the changes take place.
(7) The impact from a 10% change in ALDA returns increased from December 31, 2018 as the changes in actuarial methods and assumptions, outlined below (see
“Critical Actuarial and Accounting Policies”), resulted in a lengthening of the policy liability cash flows, a portion of which is assumed to be supported by ALDA.
Foreign Exchange Risk Sensitivities and Exposure Measures
We generally match the currency of our assets with the currency of the insurance and investment contract liabilities they support, with
the objective of mitigating risk of loss arising from currency exchange rate changes. As at December 31, 2019, we did not have a
material unmatched currency exposure.
The following table shows the potential impact on core earnings of a 10% change in the Canadian dollar relative to our other key
operating currencies.
Potential impact on core earnings of changes in currency(1),(2)
As at December 31,
($ millions)
2019
2018
+10%
strengthening
-10%
weakening
+10%
strengthening
-10%
weakening
10% change in the Canadian dollar relative to the U.S. dollar and the Hong Kong dollar
10% change in the Canadian dollar relative to the Japanese yen
$
(360)
(50)
$ 360
50
$
(340)
(60)
$ 340
60
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” below.
(2) See “Caution Related to Sensitivities” above.
LICAT regulatory capital ratios are also sensitive to the fluctuations in the Canadian dollar relative to our other key operating
currencies. The direction and materiality of this sensitivity varies across various capital ratios.
1 See “Caution Related to Sensitivities” above.
52
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Liquidity Risk Exposure Measures
We manage liquidity levels of the consolidated group and key subsidiaries against established thresholds. These thresholds are based
on liquidity stress scenarios over different time horizons.
Increased use of derivatives for hedging purposes has necessitated greater emphasis on measurement and management of contingent
liquidity risk related to these instruments, in particular the movement of “over-the-counter” derivatives to central clearing in the U.S.
and Japan places an emphasis on cash as the primary source of liquidity as opposed to security holdings. The market value of our
derivative portfolio is therefore regularly stress tested to assess the potential collateral and cash settlement requirements under various
market conditions.
Manulife Bank (the “Bank”) has a standalone liquidity risk management framework. The framework includes stress testing, cash flow
modeling, a funding plan and a contingency plan. The Bank has an established securitization infrastructure which enables the Bank to
access a range of funding and liquidity sources. The Bank models extreme but plausible stress scenarios that demonstrate that the
Bank has a sufficient pool of highly liquid money market securities and holdings of sovereign bonds, near-sovereign bonds and other
liquid marketable securities, which when combined with the Bank’s capacity to securitize residential mortgage assets provides
sufficient liquidity to meet potential requirements under these stress scenarios.
Similarly, Global Wealth and Asset Management has a standalone liquidity risk management framework.
m. Credit Risk
Credit risk is the risk of loss due to the inability or unwillingness of a borrower or counterparty to fulfill its payment obligations.
Credit Risk Management Strategy
Credit risk is governed by the Credit Committee which oversees the overall credit risk management program. The Company has
established objectives for overall quality and diversification of our general fund investment portfolio and criteria for the selection of
counterparties, including derivative counterparties, reinsurers and insurance providers. Our policies establish exposure limits by
borrower, corporate connection, quality rating, industry, and geographic region, and govern the usage of credit derivatives. Corporate
connection limits vary according to risk rating. Our general fund fixed income investments are primarily public and private investment
grade bonds and commercial mortgages. We have a program for selling Credit Default Swaps (“CDS”) that employs a highly selective,
diversified and conservative approach. CDS decisions follow the same underwriting standards as our cash bond portfolio and the
addition of this asset class allows us to better diversify our overall credit portfolio.
Our credit granting units follow a defined evaluation process that provides an objective assessment of credit proposals. We assign a
risk rating, based on a standardized 22-point scale consistent with those of external rating agencies, following a detailed examination
of the borrower that includes a review of business strategy, market competitiveness, industry trends, financial strength, access to
funds, and other risks facing the counterparty. We assess and update risk ratings regularly. For additional input to the process, we also
assess credit risks using a variety of industry standard market-based tools and metrics. We map our risk ratings to pre-established
probabilities of default and loss given defaults, based on historical industry and Company experience, and to resulting default costs.
We establish delegated credit approval authorities and make credit decisions on a case-by-case basis at a management level
appropriate to the size and risk level of the transaction, based on the delegated authorities that vary according to risk rating. Major
credit decisions are approved by the Credit Committee and the largest decisions are approved by the CEO and, in certain cases, by the
Board of Directors.
We limit the types of authorized derivatives and applications and require pre-approval of all derivative application strategies and
regular monitoring of the effectiveness of derivative strategies. Derivative counterparty exposure limits are established based on a
minimum acceptable counterparty credit rating (generally A- from internationally recognized rating agencies). We measure derivative
counterparty exposure as net potential credit exposure, which takes into consideration mark-to-market values of all transactions with
each counterparty, net of any collateral held, and an allowance to reflect future potential exposure. Reinsurance counterparty
exposure is measured reflecting the level of ceded liabilities net of collateral held. The creditworthiness of all reinsurance
counterparties is reviewed internally on a regular basis.
Regular reviews of the credits within the various portfolios are undertaken with the goal of identifying changes to credit quality and,
where appropriate, taking corrective action. Prompt identification of problem credits is a key objective.
We establish an allowance for losses on a loan when it becomes impaired as a result of deterioration in credit quality, to the extent
there is no longer assurance of timely realization of the carrying value of the loan and related investment income. We reduce the
carrying value of an impaired loan to its estimated net realizable value when we establish the allowance. We establish an allowance
for losses on reinsurance contracts when a reinsurance counterparty becomes unable or unwilling to fulfill its contractual obligations.
We base the allowance for loss on current recoverables and ceded policy liabilities. There is no assurance that the allowance for losses
will be adequate to cover future potential losses or that additional allowances or asset write-downs will not be required.
Policy liabilities include general provisions for credit losses from future asset impairments.
Our credit policies, procedures and investment strategies are established under a strong governance framework and are designed to
ensure that risks are identified, measured and monitored consistent with our risk appetite. We seek to actively manage credit exposure
in our investment portfolio to reduce risk and minimize losses, and derivative counterparty exposure is managed proactively. However,
we could experience volatility on a quarterly basis and losses could potentially rise above long-term expected and historical levels.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
53
Credit Risk Exposure Measures
As at December 31, 2019 and December 31, 2018, for every 50% that credit defaults over the next year exceed the rates provided for
in policy liabilities, net income attributed to shareholders would be reduced by $69 million and $62 million in each year, respectively.
Credit downgrades for fixed income investments would adversely impact our regulatory capital, as required capital levels for such
investments are based on the credit quality of each instrument. In addition, credit downgrades could also be higher than assumed in
policy liabilities, resulting in policy liability increases and a reduction in net income attributed to shareholders.
The table below shows net impaired assets and allowances for loan losses.
Net Impaired Assets and Loan Losses
As at December 31,
($ millions, unless otherwise stated)
Net impaired fixed income assets
Net impaired fixed income assets as a % of total invested assets
Allowance for loan losses
2019
2018
$
234
0.062%
20
$
$
179
0.051%
95
$
n. Product Risk
Product risk is the risk of failure to design, implement and maintain a product or service to achieve expected outcomes and the risk of
loss due to actual experience emerging differently than assumed when a product was designed and priced.
Product Risk Management
Product risk is governed by the Product Oversight Committee for the insurance business and by the Global WAM Risk Committee for
global WAM business.
Insurance Product Risk Management Strategy
The Product Oversight Committee oversees the overall insurance risk management program. The Product Oversight Committee has
established a broad framework for managing insurance risk under a set of policies, standards and guidelines, to ensure that our
product offerings align with our risk taking philosophy and risk limits, and achieve acceptable profit margins. These cover:
■ product design features
■ use of reinsurance
■ pricing models and software
■ internal risk based capital allocations
■ target profit objectives
■ pricing methods and assumption setting
■ stochastic and stress scenario testing
■ required documentation
■ review and approval processes
■ experience monitoring programs
In each business unit that sells insurance, we designate individual pricing officers who are accountable for pricing activities, chief
underwriters who are accountable for underwriting activities and chief claims risk managers who are accountable for claims activities.
Both the pricing officer and the general manager of each business unit approve the design and pricing of each product, including key
claims, policyholder behaviour, investment return and expense assumptions, in accordance with global policies and standards. Risk
management functions provide additional oversight, review and approval of material product and pricing initiatives, as well as material
underwriting initiatives. Actuarial functions provide oversight review and approval of policy liability valuation methods and
assumptions. In addition, both risk and actuarial functions review and approve new reinsurance arrangements. We perform annual
risk and compliance self-assessments of the product development, pricing, underwriting and claims activities of all insurance
businesses. To leverage best practices, we facilitate knowledge transfer between staff working with similar businesses in different
geographies.
We utilize a global underwriting manual intended to ensure insurance underwriting practices for direct written life business are
consistent across the organization while reflecting local conditions. Each business unit establishes underwriting policies and
procedures, including criteria for approval of risks and claims adjudication policies and procedures.
We apply retention limits per insured life that are intended to reduce our exposure to individual large claims which are monitored in
each business unit. These retention limits vary by market and jurisdiction. We reinsure exposure in excess of these limits with other
companies (see “Risk Factors – Product Risk Factors – External market conditions determine the availability, terms and cost of
reinsurance protection”, below). Our current global life retention limit is US$30 million for individual policies (US$35 million for
survivorship life policies) and is shared across businesses. We apply lower limits in some markets and jurisdictions. We aim to further
reduce exposure to claims concentrations by applying geographical aggregate retention limits for certain covers. Enterprise-wide, we
aim to reduce the likelihood of high aggregate claims by operating globally, insuring a wide range of unrelated risk events, and
reinsuring some risks. We seek to actively manage the Company’s aggregate exposure to each of policyholder behaviour risk and
claims risk against enterprise-wide economic capital limits. Policyholder behaviour risk limits cover the combined risk arising from
policy lapses and surrenders, withdrawals and other policyholder driven activity. The claims risk limits cover the combined risk arising
from mortality, longevity and morbidity.
Internal experience studies, as well as trends in our experience and that of the industry, are monitored to update current and
projected claims and policyholder behaviour assumptions, resulting in updates to policy liabilities as appropriate.
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Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Global Wealth and Asset Management (“Global WAM”) Product Risk Management Strategy
Global WAM product risk is governed by the Global WAM Risk Management Committee (the “Committee”), which reviews and
approves notable new products prior to launch. The Committee has established a framework for managing risk under a set of policies,
standards and guidelines to ensure that notable product offerings align with Global WAM risk taking philosophy and risk appetite.
Global WAM Risk Management also provides oversight of notable changes to existing products/solutions on the various Global WAM
platforms.
o. Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, systems failures, human performance failures
or from external events.
Operational Risk Management Strategy
Our corporate governance practices, corporate values, and integrated enterprise-wide approach to managing risk set the foundation
for mitigating operational risks. This base is further strengthened by internal controls and systems, compensation programs, and
seeking to hire and retain trained and competent people throughout the organization. We align compensation programs with
business strategy, long-term shareholder value and good governance practices, and we benchmark these compensation practices
against peer companies.
We have an enterprise operational risk management framework that sets out the processes we use to identify, assess, manage,
mitigate and report on significant operational risk exposures. Execution of our operational risk management strategy supports the
drive towards a focus on the effective management of our key global operational risks. We have an Operational Risk Committee,
which is the main decision-making committee for all operational risk matters and which has oversight responsibility for operational risk
strategy, management and governance. We have enterprise-wide risk management programs for specific operational risks that could
materially impact our ability to do business or impact our reputation.
Legal and Regulatory Risk Management Strategy
Global Compliance oversees our regulatory compliance program and function, supported by designated Chief Compliance Officers in
every segment. The program is designed to promote compliance with regulatory obligations worldwide and to assist in making the
Company’s employees aware of the laws and regulations that affect it, and the risks associated with failing to comply. Segment
Compliance groups monitor emerging legal and regulatory issues and changes and prepare us to address new requirements. Global
Compliance also independently assesses and monitors the effectiveness of a broad range of regulatory compliance processes and
business practices against potential legal, regulatory, fraud and reputation risks, and allows significant issues to be escalated and
proactively mitigated. Among these processes and business practices are: privacy (i.e. handling of personal and other confidential
information), sales and marketing practices, sales compensation practices, asset management practices, fiduciary responsibilities,
employment practices, underwriting and claims processing, product design, the Ethics Hotline, and regulatory filings. In addition, we
have policies, processes and controls in place to help protect the Company, our customers and other related third parties from acts of
fraud and from risks associated with money laundering and terrorist financing. Audit Services, Global Compliance and Segment
Compliance personnel periodically assess the effectiveness of the control environment. For further discussion of government
regulation and legal proceedings, refer to “Government Regulation” in MFC’s Annual Information Form dated February 12, 2020 and
note 18 of the 2019 Annual Consolidated Financial Statements.
Business Continuity Risk Management Strategy
We have an enterprise-wide business continuity and disaster recovery program. This includes policies, plans and procedures that seek to
minimize the impact of natural or human-made disasters, and is designed to ensure that key business functions can continue normal
operations in the event of a major disruption. Each business unit is accountable for preparing and maintaining detailed business
continuity plans and processes. The global program incorporates periodic scenario analysis designed to validate the assessment of both
critical and non-critical units, as well as the establishment and testing of appropriate business continuity plans for all critical functions.
The business continuity team establishes and regularly tests crisis management plans and global crisis communications protocols. We
maintain off-site backup facilities and failover capability designed to minimize downtime and accelerate system recovery.
Technology & Information Security Risk Management Strategy
Our Technology Risk Management function provides strategy, direction, and oversight and facilitates governance for all technology
risk domain activities across the Company. The scope of this function includes: reducing information risk exposures by introducing a
robust enterprise information risk management framework and supporting infrastructure for proactively identifying, managing,
monitoring and reporting on critical information risk exposures; promoting transparency and informed decision-making by building
and maintaining information risk profiles and risk dashboards for Enterprise Technology & Services and segments aligned with
enterprise and operational risk reporting; providing advisory services to Global Technology and the segments around current and
emerging technology risks and their impact to the Company’s information risk profile; and reducing vendor information risk exposures
by incorporating sound information risk management practices into sourcing, outsourcing and offshoring initiatives and programs.
The enterprise-wide information security program, which is overseen by the Chief Information Risk Officer, seeks to mitigate
information security risks. This program establishes the information and cyber security framework for the Company, including
governance, policies and standards, and appropriate controls to protect information and computer systems. We also have annual
security awareness training sessions for all employees.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
55
Many jurisdictions in which we operate are implementing more stringent privacy legislation. Our global privacy program, overseen by
our Chief Privacy Officer, seeks to manage the risk of privacy breaches. It includes policies and standards, ongoing monitoring of
emerging privacy legislation, and a network of privacy officers. Processes have been established to provide guidance on handling
personal information and for reporting privacy incidents and issues to appropriate management for response and resolution.
In addition, the Chief Information Risk Officer, the Chief Privacy Officer, and their teams work closely on information security and
privacy matters.
Human Resource Risk Management Strategy
We have a number of human resource policies, practices and programs in place that seek to manage the risks associated with
attracting and retaining top talent. These include recruiting programs at every level of the organization, training and development
programs for our individual contributors and people leaders, employee engagement surveys, and competitive compensation programs
that are designed to attract, motivate and retain high-performing and high-potential employees.
Model Risk Management Strategy
We have designated model risk management teams working closely with model owners and users that seek to manage model risk.
Our model risk oversight program includes processes intended to ensure that our critical business models are conceptually sound and
used as intended, and to assess the appropriateness of the calculations and outputs.
Third-Party Risk Management Strategy
Our governance framework to address third-party risk includes appropriate policies (such as our Global Outsourcing and Vendor Risk
Management Policy and Global Procurement Policy), standards and procedures, and monitoring of ongoing results and contractual
compliance of third-party arrangements.
Project Risk Management Strategy
To seek to ensure that key projects are successfully implemented and monitored by management, we have a Global Strategy and
Transformation Office, which is responsible for establishing policies and standards for project management. Our policies, standards
and practices are benchmarked against leading practices.
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Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
9. Capital Management Framework
Manulife seeks to manage its capital with the objectives of:
■ Operating with sufficient capital to be able to honour all commitments to its policyholders and creditors with a high degree of
confidence;
■ Retaining the ongoing confidence of regulators, policyholders, rating agencies, investors and other creditors in order to ensure
access to capital markets; and
■ Optimizing return on capital to meet shareholders’ expectations subject to constraints and considerations of adequate levels of
capital established to meet the first two objectives.
Capital is managed and monitored in accordance with the Capital Management Policy. The Policy is reviewed and approved by the
Board of Directors annually and is integrated with the Company’s risk and financial management frameworks. It establishes guidelines
regarding the quantity and quality of capital, internal capital mobility, and proactive management of ongoing and future capital
requirements.
Our capital management framework takes into account the requirements of the Company as a whole as well as the needs of each of
our subsidiaries. Internal capital targets are set above regulatory requirements, and consider a number of factors, including
expectations of regulators and rating agencies, results of sensitivity and stress testing and our own risk assessments. We monitor
against these internal targets and initiate actions appropriate to achieving our business objectives.
We periodically assess the strength of our capital position under various stress scenarios. The annual Dynamic Capital Adequacy
Testing (“DCAT”) typically quantifies the financial impact of economic events arising from shocks in public equity and other markets,
interest rates and credit, amongst others. Our 2019 DCAT results demonstrate that we would have sufficient assets, under the various
adverse scenarios tested, to discharge our policy liabilities. This conclusion was also supported by a variety of other stress tests
conducted by the Company.
We use an Economic Capital (“EC”) framework to inform our internal view of the level of required capital and available capital. The
EC framework is a key component of the Own Risk and Solvency Assessment (“ORSA”) process, which ties together our risk
management, strategic planning and capital management practices to confirm that our capital levels continue to be adequate from an
economic perspective.
Capital management is also integrated into our product planning and performance management practices.
The composition of capital between equity and other capital instruments impacts the financial leverage ratio which is an important
consideration in determining the Company’s financial strength and credit ratings. The Company monitors and rebalances its capital
mix through capital issuances and redemptions.
a. Financing Activities
Securities transactions
During 2019, we redeemed $1.5 billion of debt securities at par.
($ millions)
2.811% MLI Subordinated debentures, redeemed on Feb 21, 2019
7.535% MFCT II Senior debenture notes, redeemed on Dec 31, 2019
Total
Redeemed
500
1,000
$ 1,500
In addition, during the fourth quarter of 2019, we announced the intention to redeem $0.5 billion of 2.64% Fixed/Floating
Subordinated Debentures in January 2020.
During 2019, we had in place the normal course issuer bid program and the Dividend Reinvestment Program (“DRIP”), both noted
below.
Normal Course Issuer Bid
On November 12, 2019, MFC announced that the Toronto Stock Exchange (“TSX”) approved a normal course issuer bid (“NCIB”)
permitting the purchase by MFC for cancellation of up to 58 million MFC common shares. Pursuant to the Notice of Intention filed
with the TSX, purchases under the NCIB commenced on November 14, 2019 and will continue until November 13, 2020, when the
NCIB expires, or such earlier date as MFC completes its purchases. As of December 31, 2019, MFC purchased and subsequently
cancelled 6.3 million of its common shares pursuant to the NCIB at an average price of $25.91 per common share for a total cost of
$163 million.
MFC’s previous NCIB which was announced on November 12, 2018 and amended on February 19, 2019, expired on
November 13, 2019. MFC purchased and subsequently cancelled 74.5 million of its common shares pursuant to the previous NCIB at
an average price of $22.20 per common share for a total cost of $1.76 billion.
During 2019, MFC purchased and subsequently cancelled 57.6 million of its common shares at an average price of $23.22 per
common share for a total cost of $1.3 billion, including 51.3 million common shares for a total cost of $1.2 billion that were
purchased under the previous NCIB.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
57
b. Consolidated capital
As at December 31,
($ millions)
Non-controlling interests
Participating policyholders’ equity
Preferred shares
Common shareholders’ equity(1)
Total equity
Adjusted for accumulated other comprehensive loss on cash flow hedges
Total equity excluding accumulated other comprehensive loss on cash flow hedges
Qualifying capital instruments
Consolidated capital(2)
2019
2018
$ 1,211
(243)
3,822
45,316
50,106
(143)
50,249
7,120
$ 1,093
94
3,822
42,142
47,151
(127)
47,278
8,732
$
2017
929
221
3,577
37,436
42,163
(109)
42,272
8,387
$ 57,369
$ 56,010
$ 50,659
(1) Common shareholders’ equity is equal to total shareholders’ equity less preferred shares.
(2) Consolidated capital does not include $4.5 billion (2018 – $4.8 billion, 2017 – $4.8 billion) of MFC senior debt as this form of financing does not meet OSFI’s definition of
regulatory capital at the MFC level. The Company has down-streamed the proceeds from this financing into operating entities in a form that qualifies as regulatory capital
at the subsidiary level.
Consolidated capital was $57.4 billion as at December 31, 2019 compared with $56.0 billion as at December 31, 2018, an increase of
approximately $1.4 billion. The increase was primarily driven by net income attributed to shareholders net of dividends of $3.5 billion
and net increase in AOCI of $0.2 billion, partially offset by capital redemptions noted above of $1.5 billion and the net impact of share
buybacks and issuance of shares for the dividend reinvestment program of $0.6 billion. The net increase in AOCI was due to the
impact of lower interest rates and higher equity markets on assets classified as AFS, mostly offset by a stronger Canadian dollar
compared to the U.S. dollar.
c. Remittance of Capital
As part of its capital management, Manulife promotes internal capital mobility so that Manulife’s parent company, MFC, has access to
funds to meet its obligations and to optimize the use of excess capital. Cash remittance is defined as the cash remitted or payable to
the Group from operating subsidiaries and excess capital generated by standalone Canadian operations. It is one of the key metrics
used by management to evaluate our financial flexibility. In 2019, MFC subsidiaries delivered $2.8 billion in remittances compared
with $4.0 billion in 2018.
d. Financial Leverage Ratio
MFC’s financial leverage ratio decreased to 25.1% as at December 31, 2019 from 28.6% as at December 31, 2018, driven by net
income attributed to shareholders net of dividends, the redemption of $1.5 billion of securities, and the increase in values of AFS
securities, partially offset by the net impact of share buybacks and issuance of shares for the dividend reinvestment program, and the
impact of a stronger Canadian dollar compared with the U.S. dollar.
e. Common Shareholder Dividends
The declaration and payment of shareholder dividends and the amount thereof are at the discretion of the Board of Directors and
depend upon various factors, including the results of operations, financial condition and future prospects of the Company and taking
into account regulatory restrictions on the payment of shareholder dividends, as well as any other factors deemed relevant by the
Board of Directors.
Common Shareholder Dividends Paid
For the years ended December 31,
$ per share
Dividends paid
2019
2018
2017
$ 1.000
$ 0.910
$ 0.820
The Company offers a Dividend Reinvestment Program (“DRIP”) whereby shareholders may elect to automatically reinvest dividends in
the form of MFC common shares instead of receiving cash. The offering of the program and its terms of execution are subject to the
Board of Directors’ discretion.
During 2019, the required common shares in connection with the DRIP were purchased from treasury with a two per cent (2%)
discount from the market price. In 2019, we issued 30.9 million common shares from treasury for a total consideration of
$723 million under this program.
f. Regulatory Capital Position1
MFC and MLI are regulated by OSFI and are subject to consolidated risk based capital requirements. Manulife monitors and manages
its consolidated capital in compliance with the applicable OSFI LICAT guideline. Under this regime our consolidated available capital is
1 The “Risk Factors” section of the MD&A outlines a number of regulatory capital risks.
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Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
measured against a required amount of risk capital determined in accordance with the guideline. For regulatory purposes, LICAT
available capital is based on the above consolidated capital with adjustments for certain deductions, limits and restrictions, as
mandated by the LICAT guideline.
Manulife’s operating activities are conducted within MLI and its subsidiaries. MLI‘s LICAT total ratio was 140% as at
December 31, 2019, compared with 143% as at December 31, 2018. The three percentage point decline from December 31, 2018
was primarily driven by the narrowing of corporate spreads, and $2.0 billion of capital redemptions1, partially offset by the decrease in
risk-free rates and actions to release capital in our North American legacy businesses.
MFC’s LICAT total ratio was 129% as at December 31, 2019 compared with 132% as at December 31, 2018. The differences
between the MLI and MFC ratios were largely due to the $4.5 billion (2018 – $4.8 billion) of MFC senior debt outstanding that does
not qualify as available capital at the MFC level but, based on the form it was down-streamed to MLI, it qualifies as regulatory capital
at the MLI level.
The LICAT total ratios as at December 31, 2019 resulted in excess capital of $22.4 billion over OSFI’s supervisory target ratio of 100%
for MLI, and $22.4 billion over OSFI’s regulatory minimum target ratio of 90% for MFC (no supervisory target is applicable to MFC).
As at December 31, 2019, all MLI’s subsidiaries maintained capital levels in excess of local requirements.
g. Credit Ratings
Manulife’s operating companies have strong financial strength ratings from credit rating agencies. These ratings are important factors
in establishing the competitive position of insurance companies and maintaining public confidence in products being offered.
Maintaining strong ratings on debt and capital instruments issued by MFC and its subsidiaries allows us to access capital markets at
competitive pricing levels. Should these credit ratings decrease materially, our cost of financing may increase and our access to
funding and capital through capital markets could be reduced.
During 2019, S&P, Moody’s, DBRS, Fitch and A.M. Best Company (“A.M. Best”) maintained their assigned ratings of MFC and its
primary insurance operating companies.
The following table summarizes the financial strength and claims paying ability ratings of MLI and certain of its subsidiaries as at
January 31, 2020.
Financial Strength Ratings
Subsidiary
The Manufacturers Life Insurance Company
Jurisdiction
Canada
S&P
AA-
John Hancock Life Insurance Company (U.S.A.)
United States
AA-
A1
A1
Moody’s
DBRS
AA(Low)
Fitch
AA-
Not Rated
AA-
A.M. Best
A+
(Superior)
A+
(Superior)
Manulife (International) Limited
Manulife Life Insurance Company
Manulife (Singapore) Pte. Ltd.
Hong Kong
Japan
Singapore
AA-
A+
AA-
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
As of January 31, 2020, S&P had a stable outlook on these ratings, except for the rating for Manulife Life Insurance Company which
had a positive outlook. Manulife Life Insurance Company’s rating and the related outlook are constrained by the sovereign rating on
Japan (A+/Positive/A-1), because the company holds a relatively high proportion of Japanese investments in its asset portfolio. In
addition, for Moody’s, Fitch and A.M. Best, the ratings outlook on these ratings were stable, while for DBRS the ratings outlook was
positive.
1 For LICAT, the $2.0 billion of redemptions includes the $0.5 billion redeemed in January 2020 (announced in December 2019) as the LICAT ratio reflects all the actual and
announced capital redemptions.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
59
10. Critical Actuarial and Accounting Policies
The preparation of Consolidated Financial Statements in conformity with IFRS requires management to make judgments, estimates
and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities as at the date of the Consolidated Financial Statements, and the reported amounts of
revenue and expenses during the reporting periods. Actual results may differ from these estimates. The most significant estimation
processes relate to assumptions used in measuring insurance and investment contract liabilities, assessing assets for impairment,
determining of pension and other post-employment benefit obligation and expense assumptions, determining income taxes and
uncertain tax positions and fair valuation of certain invested assets. Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
Although some variability is inherent in these estimates, management believes that the amounts recorded are appropriate. The
significant accounting policies used and the most significant judgments made by management in applying these accounting policies in
the preparation of the 2019 Annual Consolidated Financial Statements are described in note 1 to the Consolidated Financial
Statements.
a. Critical Actuarial Policies – Policy Liabilities (Insurance and Investment Contract Liabilities)
Policy liabilities for IFRS are valued in Canada under standards established by the Actuarial Standards Board. These standards are
designed to ensure we establish an appropriate liability on the Consolidated Statements of Financial Position to cover future
obligations to all our policyholders. The assumptions underlying the valuation of policy liabilities are required to be reviewed and
updated on an ongoing basis to reflect recent and emerging trends in experience and changes in risk profile of the business. In
conjunction with prudent business practices to manage both product and asset related risks, the selection and monitoring of
appropriate valuation assumptions is designed to minimize our exposure to measurement uncertainty related to policy liabilities.
Policy liabilities have two major components: a best estimate amount and a provision for adverse deviation. The best estimate amount
represents the estimated value of future policyholder benefits and settlement obligations to be paid over the term remaining on
in-force policies, including the costs of servicing the policies. The best estimate amount is reduced by the future expected policy
revenues and future expected investment income on assets supporting the policies, before any consideration for reinsurance ceded. To
determine the best estimate amount, assumptions must be made for a number of key factors, including future mortality and morbidity
rates, investment returns, rates of policy termination, and premium persistency, operating expenses, certain taxes (other than income
taxes and includes temporary tax timing and permanent tax rate differences on the cash flows available to satisfy policy obligations)
and foreign currency. Reinsurance is used to transfer part or all of a policy liability to another insurance company at terms negotiated
with that insurance company. A separate asset for reinsurance ceded is calculated based on the terms of the reinsurance treaties that
are in-force, with deductions taken for the credit standing of the reinsurance counterparties where appropriate.
To recognize the uncertainty involved in determining the best estimate actuarial liability assumptions, a provision for adverse deviation
(“PfAD”) is established. The PfAD is determined by including a margin of conservatism for each assumption to allow for possible
mis-estimation of, or deterioration in, future experience in order to provide greater comfort that the policy liabilities will be sufficient
to pay future benefits. The CIA establishes suggested ranges for the level of margins for adverse deviation based on the risk profile of
the business. Our margins are set taking into account the risk profile of our business. The effect of these margins is to increase policy
liabilities over the best estimate assumptions. The margins for adverse deviation decrease the income that is recognized at the time a
new policy is sold and increase the income recognized in later periods as the margins release as the remaining policy risks reduce.
Best Estimate Assumptions
We follow established processes to determine the assumptions used in the valuation of our policy liabilities. The nature of each risk
factor and the process for setting the assumptions used in the valuation are discussed below.
Mortality
Mortality relates to the occurrence of death. Mortality assumptions are based on our internal as well as industry past and emerging
experience and are differentiated by sex, underwriting class, policy type and geographic market. We make assumptions about future
mortality improvements using historical experience derived from population data. Reinsurance is used to offset some of our direct
mortality exposure on in-force life insurance policies with the impact of the reinsurance directly reflected in our policy valuation for the
determination of policy liabilities net of reinsurance. Actual mortality experience is monitored against these assumptions separately for
each business. The results are favourable where mortality rates are lower than assumed for life insurance and where mortality rates
are higher than assumed for payout annuities. Overall 2019 experience was unfavourable (2018 – favourable) when compared with
our assumptions.
Morbidity
Morbidity relates to the occurrence of accidents and sickness for the insured risks. Morbidity assumptions are based on our internal as
well as industry past and emerging experience and are established for each type of morbidity risk and geographic market. For our JH
Long Term Care business we make assumptions about future morbidity changes. Actual morbidity experience is monitored against
these assumptions separately for each business. Our morbidity risk exposure relates to future expected claims costs for long-term care
insurance, as well as for group benefits and certain individual health insurance products we offer. Overall 2019 experience was
unfavourable (2018 – unfavourable) when compared with our assumptions.
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Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Policy Termination and Premium Persistency
Policy termination includes lapses and surrenders, where lapses represent the termination of policies due to non-payment of premiums
and surrenders represent the voluntary termination of policies by policyholders. Premium persistency represents the level of ongoing
deposits on contracts where there is policyholder discretion as to the amount and timing of deposits. Policy termination and premium
persistency assumptions are primarily based on our recent experience adjusted for expected future conditions. Assumptions reflect
differences by type of contract within each geographic market and actual experience is monitored against these assumptions
separately for each business. Overall 2019 experience was unfavourable (2018 – unfavourable) when compared with our assumptions.
Expenses and Taxes
Operating expense assumptions reflect the projected costs of maintaining and servicing in-force policies, including associated
overhead expenses. The expenses are derived from internal cost studies and are projected into the future with an allowance for
inflation. For some developing businesses, there is an expectation that unit costs will decline as these businesses mature. Actual
expenses are monitored against assumptions separately for each business. Overall maintenance expenses for 2019 were unfavourable
(2018 – unfavourable) when compared with our assumptions. Taxes reflect assumptions for future premium taxes and other
non-income related taxes. For income taxes, policy liabilities are adjusted only for temporary tax timing and permanent tax rate
differences on the cash flows available to satisfy policy obligations.
Investment Returns
As noted in the “Risk Management – Market Risk – Asset Liability Management Strategy” section above, our general fund product
liabilities are categorized into groups with similar characteristics in order to support them with a specific asset strategy. We seek to
align the asset strategy for each group to the premium and benefit pattern, policyholder options and guarantees, and crediting rate
strategies of the products they support. The projected cash flows from the assets are combined with projected cash flows from future
asset purchases/sales to determine expected rates of return for future years. The investment strategies for future asset purchases and
sales are based on our target investment policies for each segment and the reinvestment returns are derived from current and
projected market rates for fixed interest investments and our projected outlook for non-fixed interest assets. Credit losses are
projected based on our own and industry experience, as well as specific reviews of the current investment portfolio. Investment return
assumptions for each asset class also incorporate expected investment management expenses that are derived from internal cost
studies. In 2019, actual investment returns were unfavourable (2018 – favourable) when compared with our assumptions. Investment-
related experience and the direct impact of interest rates and equity markets are discussed in the “Financial Performance” section
above.
Segregated Funds
We offer segregated funds to policyholders that offer certain guarantees, including guaranteed returns of principal on maturity or
death, as well as guarantees of minimum withdrawal amounts or income benefits. The on-balance sheet liability for these benefits is
the expected cost of these guarantees including appropriate valuation margins for the various contingencies including mortality and
lapse. The dominant driver of the cost of guarantees is the return on the underlying funds in which the policyholders invest. See “Risk
Management – Market Risk – Hedging Strategies for Variable Annuity and Other Equity Risks” and the “Financial Performance –
Analysis of Net Income” sections above.
Foreign Currency
Foreign currency risk results from a mismatch of the currency of the policy liabilities and the currency of the assets designated to
support these obligations. We generally match the currency of our assets with the currency of the liabilities they support, with the
objective of mitigating the risk of economic loss arising from movements in currency exchange rates. Where a currency mismatch
exists, the assumed rate of return on the assets supporting the liabilities is reduced to reflect the potential for adverse movements in
exchange rates.
Experience Adjusted Products
Where policies have features that allow the impact of changes in experience to be passed on to policyholders through policy
dividends, experience rating refunds, credited rates or other adjustable features, the projected policyholder benefits are adjusted to
reflect the projected experience. Minimum contractual guarantees and other market considerations are taken into account in
determining the policy adjustments.
Provision for Adverse Deviation
The total provision for adverse deviation is the sum of the provisions for adverse deviation for each risk factor. Margins for adverse
deviation are established by product type and geographic market for each assumption or factor used in the determination of the best
estimate actuarial liability. The margins are established based on the risk characteristics of the business being valued.
Margins for interest rate risk are included by testing a number of scenarios of future interest rates. The margin can be established by
testing a limited number of scenarios, some of which are prescribed by Canadian Actuarial Standards of Practice, and determining the
liability based on the worst outcome. Alternatively, the margin can be set by testing many scenarios, which are developed according
to actuarial guidance. Under this approach the liability would be the average of the outcomes above a percentile in the range
prescribed by the Canadian Actuarial Standards of Practice.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
61
In addition to the explicit margin for adverse deviation, the valuation basis for segregated fund liabilities explicitly limits the future
revenue recognition in the valuation basis to the amount necessary to offset acquisition expenses, after allowing for the cost of any
guarantee features. The fees that are in excess of this limitation are reported as an additional margin and are shown in segregated
fund non-capitalized margins.
The provision for adverse deviation and the future revenue deferred in the valuation due to the limitations on recognition of future
revenue in the valuation of segregated fund liabilities are shown in the table below.
As at December 31,
($ millions)
Best estimate actuarial liability
Provision for adverse deviation (“PfAD”)
Insurance risks (mortality/morbidity)
Policyholder behaviour (lapse/surrender/premium persistency)
Expenses
Investment risks (non-credit)
Investment risks (credit)
Segregated funds guarantees
Total PfAD(1)
Segregated funds – additional margins
Total of PfAD and additional segregated fund margins
2019
2018
$ 246,105
$ 226,128
$ 18,147
6,010
1,688
29,650
1,061
1,940
58,496
13,680
$ 19,021
5,776
1,573
25,955
941
2,184
55,450
13,097
$ 72,176
$ 68,547
(1) Reported net actuarial liabilities (excluding the $5,031 million (2018 – $5,514 million) reinsurance asset related to the Company’s in-force participating life insurance
closed block that is retained on a funds withheld basis as part of the New York Life transaction) as at December 31, 2019 of $304,601 million (2018 – $281,578 million)
are comprised of $246,105 million (2018 – $226,128 million) of best estimate actuarial liabilities and $58,496 million (2018 – $55,450 million) of PfAD.
The change in the PfAD from period to period is impacted by changes in liability and asset composition, by currency and interest rate
movements and by material changes in valuation assumptions. The overall decrease in PfADs for insurance risks was primarily due to
the annual review of actuarial valuation methods and assumptions, as well as the appreciation of the Canadian dollar relative to the
U.S. dollar, Hong Kong dollar and Japanese yen, partially offset by the impact of lower interest rates in the U.S. and Canada, as well
as the expected PfAD growth from in-force and new business. The overall increase in PfADs for policyholder behaviour and expense
was driven by the impact of lower interest rates in the U.S. and Canada and the expected PfAD growth from in-force and new
business, partially offset by the appreciation of the Canadian dollar. The overall increase in PfADs for non-credit investment risks was
driven by the expected PfAD growth from in-force and new business, lower interest rates in the U.S. and Canada, and the annual
review of actuarial valuation methods and assumptions, partially offset by the appreciation of the Canadian dollar. The increase in the
additional segregated fund margins was primarily due to increases in equity markets and declines in interest rates in the U.S.
b. Sensitivity of Earnings to Changes in 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 net income attributed to shareholders.
The sensitivity of net income attributed to shareholders to changes in non-economic and certain asset related assumptions underlying
policy liabilities is shown below and assumes that there is a simultaneous change in the assumptions across all business units. The
sensitivity of net income attributed to shareholders to a deterioration or improvement in non-economic assumptions underlying long-
term care policy liabilities as at December 31, 2019 is also shown below.
For changes in 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.
Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions(1)
As at December 31,
($ millions)
Policy related assumptions
2% adverse change in future mortality rates(2),(4)
Products where an increase in rates increases insurance contract liabilities
Products where a decrease in rates increases insurance contract liabilities
5% adverse change in future morbidity rates (incidence and termination)(3),(4),(5)
10% adverse change in future termination rates(4)
5% increase in future expense levels
Decrease in net income
attributed to shareholders
2019
2018
$
(500)
(500)
(5,100)
(2,400)
(600)
$
(500)
(500)
(4,800)
(2,200)
(600)
(1) The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in
non-economic assumptions. Experience gains or losses would generally result in changes to future dividends, with no direct impact to shareholders.
(2) An increase in mortality rates will generally increase policy liabilities for life insurance contracts whereas a decrease in mortality rates will generally increase policy liabilities
for policies with longevity risk such as payout annuities.
62
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
(3) No amounts related to morbidity risk are included for policies where the policy liability provides only for claims costs expected over a short period, generally less than one
year, such as Group Life and Health.
(4) The impacts of the sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premium rates
in such events, subject to state regulatory approval. In practice, we would plan to file for rate increases equal to the amount of deterioration resulting from the sensitivity.
(5) This includes a 5% deterioration in incidence rates and 5% deterioration in claim termination rates.
Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions for Long
Term Care(1)
As at December 31,
($ millions)
Policy related assumptions
2% change in future mortality rates(2),(3)
5% change in future morbidity incidence rates(2),(3)
5% change in future morbidity claims termination rates(2),(3)
10% change in future policy termination rates(2),(3)
5% increase in future expense levels(3)
Decrease in net income
attributed to shareholders
2019
2018
$
(300)
(2,500)
(2,200)
(400)
(100)
$
(200)
(1,700)
(2,800)
(400)
(100)
(1) Translated from US$ at 1.2988 for 2019.
(2) The impacts of the sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise premium rates
in such events, subject to state regulatory approval. In practice, we would plan to file for rate increases equal to the amount of deterioration resulting from the
sensitivities.
(3) The impact of favourable changes to all the sensitivities is relatively symmetrical.
Potential impact on net income attributed to shareholders arising from changes to asset related assumptions supporting
actuarial liabilities(1)
As at December 31,
($ millions)
Increase (decrease) in net income attributed to
shareholders
2019
2018
Increase
Decrease
Increase
Decrease
Asset related assumptions updated periodically in valuation basis changes
100 basis point change in future annual returns for public equities(1)
100 basis point change in future annual returns for ALDA(2)
100 basis point change in equity volatility assumption for stochastic segregated fund modelling(3)
$ 500
3,800
(300)
$ (500)
(4,400)
300
$ 500
3,500
(300)
$
(500)
(3,900)
300
(1) The sensitivity to public equity returns above includes the impact on both segregated fund guarantee reserves and on other policy liabilities. Expected long-term annual
market growth assumptions for public equities are based on long-term historical observed experience and compliance with actuarial standards. As at December 31, 2019,
the growth rates inclusive of dividends in the major markets used in the stochastic valuation models for valuing segregated fund guarantees are 9.2% (9.3% –
December 31, 2018) per annum in Canada, 9.6% (9.6% – December 31, 2018) per annum in the U.S. and 6.2% (6.2% – December 31, 2018) per annum in Japan.
Growth assumptions for European equity funds are market-specific and vary between 8.3% and 9.9%.
(2) ALDA include commercial real estate, timber, farmland, direct oil and gas properties, and private equities, some of which relate to oil and gas. Expected long-term return
assumptions for ALDA and public equity are set in accordance with the Standards of Practice for the valuation of insurance contract liabilities and guidance published by
the CIA. Annual best estimate return assumptions for ALDA and public equity include market growth rates and annual income, such as rent, production proceeds and
dividends, and will vary based on our holding period. Over a 20-year horizon, our best estimate return assumptions range between 5.25% and 11.65%, with an average
of 9.3% (9.5% – December 31, 2018) based on the current asset mix backing our guaranteed insurance and annuity business as of December 31, 2019. Our return
assumptions including the margins for adverse deviations in our valuation, which take into account the uncertainty of achieving the returns, range between 2.5% and
7.5%, with an average of 6.1% (6.3% – December 31, 2018) based on the asset mix backing our guaranteed insurance and annuity business as of December 31, 2019.
The impact from a 100 basis point change increased from December 31, 2018 as the changes in actuarial methods and assumptions, outlined above, resulted in a
lengthening of the policy liability cash flows, a portion of which are assumed to be supported by ALDA investments.
(3) Volatility assumptions for public equities are based on long-term historical observed experience and compliance with actuarial standards. The resulting volatility
assumptions are 16.5% per annum in Canada and 17.15% per annum in the U.S. for large cap public equities, and 19.25% per annum in Japan. For European equity
funds, the volatility varies between 16.5% and 18.4%.
c. Review of Actuarial Methods and Assumptions
A comprehensive review of actuarial methods and assumptions is performed annually. The review is designed to reduce the
Company’s exposure to uncertainty by ensuring assumptions for both asset related and liability related risks remain appropriate. This is
accomplished by monitoring experience and selecting assumptions which represent a current best estimate view of expected future
experience, and margins that are appropriate for the risks assumed. While the assumptions selected represent the Company’s current
best estimates and assessment of risk, the ongoing monitoring of experience and changes in the economic environment are likely to
result in future changes to the actuarial assumptions, which could be material.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
63
2019 Review of Actuarial Methods and Assumptions
The 2019 full year review of actuarial methods and assumptions resulted in an increase in insurance contract liabilities of $74 million,
net of reinsurance, and a decrease in net income attributed to shareholders of $21 million post-tax.
For the year ended December 31, 2019
($ millions)
Long-term care triennial review
Mortality and morbidity updates
Lapses and policyholder behaviour
Investment return assumptions
Other updates
Net impact
Change in insurance contract liabilities, net of reinsurance
Attributed to
participating
policyholders’
account
$
–
47
17
81
(163)
Attributed to
shareholders’
account
$
11
(22)
118
(69)
54
Change in net
income attributed
to shareholders
(post-tax)
$
(8)
14
(75)
70
(22)
$
Total
11
25
135
12
(109)
$
74
$
(18)
$
92
$
(21)
Long-term care triennial review
U.S. Insurance completed a comprehensive long-term care (“LTC”) experience study. The review included all aspects of claim
assumptions, the impact of policyholder benefit reductions as well as the progress on future premium rate increases and a review of
margins on the business. The impact of the LTC review was approximately net neutral to net income attributed to shareholders.
The experience study showed lower termination rates than expected during the elimination or “qualifying” period (which is the period
between when a claim is filed and when benefit payments begin), and favourable incidence as policyholders are filing claims at a
lower rate than expected. In addition, policyholders are electing to reduce their benefits in lieu of paying increased premiums. The
overall claims experience review led to a post-tax charge to net income attributed to shareholders of approximately $1.9 billion
(US$1.4 billion), which includes a gain of approximately $0.2 billion (US$0.16 billion) for the impact of benefit reductions.
The experience study included additional claims data due to the natural aging of the block of business. As a result, we reduced certain
margins for adverse deviations, which resulted in a post-tax gain to net income attributed to shareholders of approximately
$0.7 billion (US$0.5 billion).
While the study continues to support the assumptions of both future morbidity and mortality improvement, we reduced our morbidity
improvement assumption, which resulted in a post-tax charge to net income attributed to shareholders of approximately $0.7 billion
(US$0.5 billion).1
The review of premium increases assumed in the policy liabilities resulted in a post-tax gain to net income attributed to shareholders
of approximately $2.0 billion (US$1.5 billion) related to the expected timing and amount of premium increases that are subject to
state approval and reflects a 30% provision for adverse deviation. The expected premium increases are informed by past approval
rates applied to prior state filings that remain outstanding and estimated new requests based on our 2019 review of morbidity,
mortality and lapse assumptions. Our actual experience in obtaining premium increases could be materially different than what we
have assumed, resulting in further increases or decreases in policy liabilities, which could be material.2
Updates to mortality and morbidity assumptions
Mortality and morbidity updates resulted in a $14 million post-tax gain to net income attributed to shareholders. This included a
review of our Canada Individual Insurance mortality and reinsurance arrangements.
Updates to lapses and policyholder behaviour
Updates to lapses and policyholder behaviour assumptions resulted in a $75 million post-tax charge to net income attributed to
shareholders.
The primary driver of the charge was an update to our lapse assumptions across several term and whole life product lines within our
Canada Individual Insurance business, partially offset by several updates to lapse and premium persistency assumptions in other
geographies.
Updates to investment return assumptions
Updates to investment return assumptions resulted in a $70 million post-tax gain to net income attributed to shareholders.
The primary driver of the gain was an update to our senior secured loan default rates to reflect recent experience, as well as our
investment and crediting rate strategy for certain universal life products. This was partially offset by updates to certain private equity
investment assumptions in Canada.
Other updates
Other updates resulted in a $22 million post-tax charge to net income attributed to shareholders.
1 The padded morbidity assumption is 0.25% for 25 years (down from 0.45%) and unpadded morbidity improvement assumption is 0.50% to age 100 (down from 0.75%).
2 See “Caution regarding forward-looking statements” above.
64
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Impact of changes in actuarial methods and assumptions by segment
The impact of changes in actuarial methods and assumptions in Canada was a post-tax charge to net income attributed to
shareholders of $108 million. This charge was driven by updates to lapse rates for certain products within Canada Individual Insurance
and updates to certain private equity investment assumptions. In the U.S., we recorded a post-tax gain to net income attributed to
shareholders of $71 million, driven primarily by updates to senior secured loan default rates. In addition, several modelling refinements
netted to a positive impact. Updates to assumptions in Asia segment and Corporate and Other segment (which includes our
Reinsurance business) resulted in a post-tax gain of $16 million.
2018 Review of Actuarial Methods and Assumptions
The 2018 full year review of actuarial methods and assumptions resulted in a decrease in insurance contract liabilities of $174 million,
net of reinsurance, and a decrease in net income attributed to shareholders of $51 million post-tax.
Change in insurance contract liabilities, net
of reinsurance
For the year ended December 31, 2018
($ millions)
Mortality and morbidity updates
Lapses and policyholder behaviour
Investment return assumptions
Other updates
Net impact
Attributed to
participating
policyholders’
account
Attributed to
shareholders’
account
Change in net
income attributed
to shareholders
(post-tax)
Total
$ 319
287
(96)
(684)
$ (192)
–
50
(94)
$ 511
287
(146)
(590)
$ (174)
$ (236)
$ 62
$ (360)
(226)
143
392
$
(51)
Updates to mortality and morbidity assumptions
Mortality and morbidity updates resulted in a $360 million post-tax charge to net income attributed to shareholders.
The primary driver of the charge is related to updates to mortality and morbidity assumptions for the Company’s structured settlement
and term renewal business in Canada. A review of mortality assumptions for the Company’s U.S. group pension annuity business and
certain blocks of its U.S. life insurance business resulted in a small charge to earnings, and other updates to mortality and morbidity
assumptions led to a small net charge.
Updates to lapses and policyholder behaviour
Lapse and policyholder behaviour updates resulted in a $226 million post-tax charge to net income attributed to shareholders.
The primary driver of the charge is related to updated lapse and premium persistency rates for certain U.S. life insurance product lines
($252 million post-tax charge). This included updates to universal life no-lapse guarantee and business lapse assumptions to better
reflect emerging experience which showed a variation in lapses based on premium funding levels, partially offset by favourable lapse
experience on several of the U.S. life insurance product lines.
Other updates to lapse and policyholder behaviour assumptions were made across several product lines to reflect recent experience.
Updates to investment return assumptions
Investment return assumption updates resulted in a $143 million post-tax gain to net income attributed to shareholders.
We updated our bond default rates to reflect recent experience, leading to a $401 million post-tax gain and updated our investment
return assumptions for ALDA and public equities, specifically oil and gas, which led to a $210 million post-tax charge. Other
refinements to the projections of investment returns resulted in a $48 million post-tax charge.
Other updates
Refinements to the projection of our tax and liability cashflows across multiple product lines led to a post-tax gain to net income
attributed to shareholders of $392 million. The refinements were primarily driven by the projection of tax cashflows as we reviewed
the deductibility of certain reserves. In addition, we refined the projection of policyholder crediting rates for certain products.
Impact of changes in actuarial methods and assumptions by segment
The impact of changes in actuarial methods and assumptions in Canada was a post-tax charge to net income attributed to
shareholders of $370 million. This charge was driven by updates to oil and gas investment return assumptions and updates to
mortality and morbidity assumptions for our structured settlement and term renewal businesses. In the U.S., we recorded a post-tax
gain of $286 million, driven by updates to our bond default rates and refinements to the projection of our tax and liability cashflows,
partially offset by updates to policyholder behaviour assumptions in JH Life. Updates to assumptions in Asia and Reinsurance resulted
in a post-tax gain of $33 million.
d. Change in net insurance contract liabilities
The change in net insurance contract liabilities can be attributed to several sources: new business, acquisitions, in-force movement and
currency impact. Changes in net insurance contract liabilities are substantially offset in the financial statements by premiums,
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
65
investment income, policy benefits and other policy related cash flows. The changes in net insurance contract liabilities by business
segment are shown below:
2019 Net Insurance Contract Liability Movement Analysis
For the year ended December 31, 2019
($ millions)
Balance, January 1
New business(1),(2)
In-force movement(1),(3)
Changes in methods and assumptions(1)
Currency impact(4)
Balance, December 31
Asia
Canada
U.S.
Corporate
and
Other
Total
$ 76,127
2,996
12,079
60
(3,325)
$ 76,628 $ 133,142
482
12,163
(84)
(6,844)
(227)
6,770
133
(7)
$ (168) $ 285,729
3,251
30,921
74
(10,167)
–
(91)
(35)
9
$ 87,937
$ 83,297 $ 138,859
$ (285) $ 309,808
(1) The $32,458 million increase reported as the change in insurance contract liabilities and change in reinsurance assets on the 2019 Consolidated Statements of Income
primarily consists of changes due to the changes in methods and assumptions, normal in-force movement and new policies. These three items net to an increase of
$34,246 million, of which $33,497 million is included in the income statement increase in insurance contract liabilities and change in reinsurance assets, and a
$751 million increase is included in net claims and benefits. The Consolidated Statements of Income change in insurance contract liabilities also includes the change in
embedded derivatives associated with insurance contracts. Of the $34,172 million net increase in insurance contract liabilities related to new business and in-force
movement, $33,423 million was an increase in actuarial liabilities. The remaining amount was an increase of $751 million in other insurance contract liabilities.
(2) New business policy liability impact is positive/(negative) when estimated future premiums, together with future investment income, are expected to be more/(less) than
sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (excluding income taxes) and expenses on new policies issued.
(3) The net in-force movement over the year was an increase of $30,921 million, primarily reflecting the impact of interest rate declines and expected growth in insurance
contract liabilities in all three insurance segments.
(4) The decrease in policy liabilities from currency impact reflects the appreciation of the Canadian dollar relative to the U.S. dollar, Hong Kong dollar and Japanese yen. To
the extent assets are currency matched to liabilities, the increase in insurance contract liabilities due to currency impact is offset by a corresponding increase from currency
impact in the value of assets supporting those liabilities.
2018 Net Insurance Contract Liability Movement Analysis
For the year ended December 31, 2018
($ millions)
Balance, January 1
New business(1),(2)
In-force movement(1),(3)
Changes in methods and assumptions(1)
Reinsurance transactions(1)
Currency impact(4)
Balance, December 31
Asia
Canada
U.S.
$ 62,243
3,400
5,117
52
–
5,315
$ 76,198 $ 135,851
(31)
(2,330)
(397)
(11,156)
11,205
(100)
344
178
–
8
Corporate
and
Other
Total
$
(46) $ 274,246
3,269
3,029
(174)
(11,156)
16,515
–
(102)
(7)
–
(13)
$ 76,127
$ 76,628 $ 133,142
$ (168) $ 285,729
(1) The $6,826 million decrease reported as the change in insurance contract liabilities and change in reinsurance assets on the 2018 Consolidated Statements of Income
primarily consists of changes due to the reinsurance transactions and changes in methods and assumptions, partially offset by normal in-force movement and new
policies. These four items net to a decrease of $5,032 million, of which $6,017 million is included in the income statement increase in insurance contract liabilities and
change in reinsurance assets, and a $985 million increase is included in net claims and benefits. The Consolidated Statements of Income change in insurance contract
liabilities also includes the change in embedded derivatives associated with insurance contracts. Of the $6,298 million net increase in insurance contract liabilities related
to new business and in-force movement, $5,313 million was an increase in actuarial liabilities. The remaining amount was an increase of $985 million in other insurance
contract liabilities.
(2) New business policy liability impact is positive/(negative) when estimated future premiums, together with future investment income, are expected to be more/(less) than
sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (excluding income taxes) and expenses on new policies issued.
(3) The net in-force movement over the year was an increase of $3,029 million, reflecting expected growth in insurance contract liabilities in all three insurance segments.
Expected growth in insurance contract liabilities in the U.S. was offset by the impact of market and yield curve movements during the year.
(4) The increase in policy liabilities from currency impact reflects the depreciation of the Canadian dollar relative to the U.S. dollar, Hong Kong dollar and Japanese yen. To
the extent assets are currency matched to liabilities, the increase in insurance contract liabilities due to currency impact is offset by a corresponding increase from currency
impact in the value of assets supporting those liabilities.
e. Critical Accounting Policies
Consolidation
The Company is required to consolidate the financial position and results of entities it controls. Control exists when the Company:
■ Has the power to govern the financial and operating policies of the entity;
■
Is exposed to a significant portion of the entity’s variable returns; and
Is able to use its power to influence variable returns from the entity.
■
The Company uses the same principles to assess control over any entity it is involved with. In evaluating control, potential factors
assessed include the effects of:
■ Substantive potential voting rights that are currently exercisable or convertible;
■ Contractual management relationships with the entity;
■ Rights and obligations resulting from policyholders to manage investments on their behalf; and
■ The effect of any legal or contractual restraints on the Company from using its power to affect its variable returns from the entity.
66
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
An assessment of control is based on arrangements in place and the assessed risk exposures at inception. Initial evaluations are
reconsidered at a later date if:
■ The Company acquires additional interests in the entity or its interests in an entity are diluted;
■ The contractual arrangements of the entity are amended such that the Company’s involvement with the entity changes; or
■ The Company’s ability to use its power to affect its variable returns from the entity changes.
Subsidiaries are consolidated from the date on which control is obtained by the Company and cease to be consolidated from the date
that control ceases.
Fair Value of Invested Assets
A large portion of the Company’s invested assets are recorded at fair value. Refer to note 1 of the 2019 Annual Consolidated Financial
Statements for a description of the methods used in determining fair values. When quoted prices in active markets are not available
for a particular investment, significant judgment is required to determine an estimated fair value based on market standard valuation
methodologies including discounted cash flow methodologies, matrix pricing, consensus pricing services, or other similar techniques.
The inputs to these market standard valuation methodologies include: current interest rates or yields for similar instruments, credit
rating of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, tenor (or
expected tenor) of the instrument, management’s assumptions regarding liquidity, volatilities and estimated future cash flows.
Accordingly, the estimated fair values are based on available market information and management’s judgments about the key market
factors impacting these financial instruments. Financial markets are susceptible to severe events evidenced by rapid depreciation in
asset values accompanied by a reduction in asset liquidity. The Company’s ability to sell assets, or the price ultimately realized for
these assets, depends upon the demand and liquidity in the market and increases the use of judgment in determining the estimated
fair value of certain assets.
Evaluation of Invested Asset Impairment
AFS fixed income and equity securities are carried at fair market value, with changes in fair value recorded in other comprehensive
income (“OCI”) with the exception of unrealized gains and losses on foreign currency translation of AFS fixed income securities which
are included in net income attributed to shareholders. Securities are reviewed on a regular basis and any fair value decrement is
transferred out of AOCI and recorded in net income attributed to shareholders when it is deemed probable that the Company will not
be able to collect all amounts due according to the contractual terms of a fixed income security or when fair value of an equity
security has declined significantly below cost or for a prolonged period of time.
Provisions for impairments of mortgage loans and private placement loans are recorded with losses reported in earnings when there is
no longer reasonable assurance as to the timely collection of the full amount of the principal and interest.
Significant judgment is required in assessing whether an impairment has occurred and in assessing fair values and recoverable values.
Key matters considered include economic factors, Company and industry specific developments, and specific issues with respect to
single issuers and borrowers.
Changes in circumstances may cause future assessments of asset impairment to be materially different from current assessments,
which could require additional provisions for impairment. Additional information on the process and methodology for determining the
allowance for credit losses is included in the discussion of credit risk in note 9 to the 2019 Consolidated Financial Statements.
Derivative Financial Instruments
The Company uses derivative financial instruments (“derivatives”) including swaps, forwards and futures agreements, and options to
help manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity
market prices, and to replicate permissible investments. Refer to note 4 to the 2019 Consolidated Financial Statements for a
description of the methods used to determine the fair value of derivatives.
The accounting for derivatives is complex and interpretations of the primary accounting guidance continue to evolve in practice.
Judgment is applied in determining the availability and application of hedge accounting designations and the appropriate accounting
treatment under such accounting guidance. Differences in judgment as to the availability and application of hedge accounting
designations and the appropriate accounting treatment may result in a differing impact on the Consolidated Financial Statements of
the Company from that previously reported. Assessments of hedge effectiveness and measurements of ineffectiveness of hedging
relationships are also subject to interpretations and estimations. If it was determined that hedge accounting designations were not
appropriately applied, reported net income attributed to shareholders could be materially affected.
Employee Future Benefits
The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees and
agents, including registered (tax qualified) pension plans that are typically funded, as well as supplemental non-registered
(non-qualified) pension plans for executives, retiree welfare plans and disability welfare plans that are typically not funded. The largest
defined benefit pension and retiree welfare plans in the U.S. and Canada are the material plans that are discussed herein and in note
16 to the 2019 Annual Consolidated Financial Statements.
Due to the long-term nature of defined benefit pension and retiree welfare plans, the calculation of the defined benefit obligation and
net benefit cost depends on various assumptions such as discount rates, salary increase rates, cash balance interest crediting rates,
health care cost trend rates and rates of mortality. These assumptions are determined by management and are reviewed annually. The
key assumptions, as well as the sensitivity of the defined benefit obligation to changes in these assumptions, are presented in note 16
to the 2019 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
67
Changes in assumptions and differences between actual and expected experience give rise to actuarial gains and losses that affect the
amount of the defined benefit obligation and OCI. For 2019, the amount recorded in OCI was a gain of $113 million (2018 – gain of
$109 million) for the defined benefit pension plans and a loss of $21 million (2018 – loss of $48 million) for the retiree welfare plans.
Contributions to the registered (tax qualified) defined benefit pension plans are made in accordance with the applicable U.S. and
Canadian regulations. During 2019, the Company contributed $13 million (2018 – $23 million) to these plans. As at
December 31, 2019, the difference between the fair value of assets and the defined benefit obligation for these plans was a surplus
of $394 million (2018 – surplus of $257 million). For 2020, the contributions to the plans are expected to be approximately
$11 million.1
The Company’s supplemental pension plans for executives are not funded; benefits under these plans are paid as they become due.
During 2019, the Company paid benefits of $62 million (2018 – $56 million) under these plans. As at December 31, 2019, the
defined benefit obligation for these plans, which is reflected as a liability in the balance sheet, amounted to $758 million
(2018 – $742 million).
The Company’s retiree welfare plans are partially funded, although there are no regulations or laws governing or requiring the
funding of these plans. As at December 31, 2019, the difference between the fair value of plan assets and the defined benefit
obligation for these plans was a deficit of $47 million (2018 – deficit of $30 million).
Income Taxes
The Company is subject to income tax laws in various jurisdictions. Tax laws are complex and potentially subject to different
interpretations by the taxpayer and the relevant tax authority. The provision for income taxes represents management’s interpretation
of the relevant tax laws and its estimate of current and future income tax implications of the transactions and events during the
period. A deferred tax asset or liability results from temporary differences between carrying values of the assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are recorded based on expected future tax rates and management’s assumptions
regarding the expected timing of the reversal of such temporary differences. The realization of deferred tax assets depends upon the
existence of sufficient taxable income within the carryback or carry forward periods under the tax law in the applicable tax jurisdiction.
A deferred tax asset is recognized to the extent that future realization of the tax benefit is probable. Deferred tax assets are reviewed
at each reporting date and are reduced to the extent that it is no longer probable that the tax benefit will be realized. At
December 31, 2019, we had $4,574 million of deferred tax assets (December 31, 2018 – $4,318 million). Factors in management’s
determination include, among other things, the following:
■ Future taxable income exclusive of reversing temporary differences and carry forwards;
■ Future reversals of existing taxable temporary differences;
■ Taxable income in prior carryback years; and
■ Tax planning strategies.
The Company may be required to change its provision for income taxes if the ultimate deductibility of certain items is successfully
challenged by taxing authorities or if estimates used in determining the amount of deferred tax assets to recognize change
significantly, or when receipt of new information indicates the need for adjustment in the recognition of deferred tax assets.
Additionally, future events, such as changes in tax laws, tax regulations, or interpretations of such laws or regulations, could have an
impact on the provision for income tax, deferred tax balances, actuarial liabilities (see Critical Actuarial and Accounting Policies –
Expenses and Taxes above) and the effective tax rate. Any such changes could significantly affect the amounts reported in the
Consolidated Financial Statements in the year these changes occur.
Goodwill and Intangible Assets
At December 31, 2019, under IFRS we had $5,743 million of goodwill and $4,232 million of intangible assets ($1,584 million of which
are intangible assets with indefinite lives). Goodwill and intangible assets with indefinite lives are tested at the cash generating unit
level (“CGU”) or group of CGUs level. A CGU comprises the smallest group of assets that are capable of generating largely
independent cash flows and is either a business segment or a level below. The tests performed in 2019 demonstrated that there was
no impairment of goodwill or intangible assets with indefinite lives. Changes in discount rates and cash flow projections used in the
determination of embedded values or reductions in market-based earnings multiples may result in impairment charges in the future,
which could be material.
Impairment charges could occur in the future as a result of changes in economic conditions. The goodwill testing for 2020 will be
updated based on the conditions that exist in 2020 and may result in impairment charges, which could be material.
f. Future Accounting and Reporting Changes
There are several new accounting and reporting changes issued under IFRS including those still under development by the IASB. We
have summarized below key recently issued accounting standards that are anticipated to have a significant impact on the Company.
Accounting and reporting changes are discussed in note 2 of the 2019 Consolidated Financial Statements.
IFRS 9 “Financial Instruments”
IFRS 9 “Financial Instruments” was issued in November 2009 and amended in October 2010, November 2013 and July 2014, and is
effective for years beginning on or after January 1, 2018, to be applied retrospectively, or on a modified retrospective basis.
Additionally, the IASB issued amendments in October 2017 that are effective for annual periods beginning on or after
January 1, 2019. The standard is intended to replace IAS 39 “Financial Instruments: Recognition and Measurement”.
1 See “Caution regarding forward-looking statements” above.
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The project has been divided into three phases: classification and measurement, impairment of financial assets, and hedge accounting.
IFRS 9’s current classification and measurement methodology provides that financial assets are measured at either amortized cost or
fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of
the financial assets. The classification and measurement for financial liabilities remains generally unchanged; however, for a financial
liability designated as at fair value through profit or loss, revisions have been made in the accounting for changes in fair value
attributable to changes in the credit risk of that liability. Gains or losses caused by changes in an entity’s own credit risk on such
liabilities are no longer recognized in profit or loss but instead are reflected in OCI.
Revisions to hedge accounting were issued in November 2013 as part of the overall IFRS 9 project. The amendment introduces a new
hedge accounting model, together with corresponding disclosures about risk management activity for those applying hedge
accounting. The new model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk
management activities in their financial statements.
Revisions issued in July 2014 replace the existing incurred loss model used for measuring the allowance for credit losses with an
expected loss model. Changes were also made to the existing classification and measurement model designed primarily to address
specific application issues raised by early adopters of the standard. They also address the income statement accounting mismatches
and short-term volatility issues which have been identified as a result of the insurance contracts project.
The Company elected to defer IFRS 9 until January 1, 2021 as allowed under the amendments to IFRS 4 “Insurance Contracts”. The
Company is assessing the impact of this standard.
In June 2019, the exposure draft published for IFRS 17 proposed to extend the deferral date of IFRS 9 by one year to January 1, 2022.
Effective dates for both standards have previously been aligned and any further deferrals for IFRS 17 could influence the effective date
for IFRS 9 as well.
IFRS 17 “Insurance Contracts”
IFRS 17 was issued in May 2017 and is effective for years beginning on January 1, 2021, to be applied retrospectively. If full
retrospective application to a group of contracts is impractical, the modified retrospective or fair value methods may be used. The
standard will replace IFRS 4 “Insurance Contracts” and will materially change the recognition and measurement of insurance contracts
and the corresponding presentation and disclosures in the Company’s Financial Statements.
In June 2019, the IASB issued an exposure draft with a number of proposed targeted amendments for public consultation. The
proposed amendments include a deferral of the effective date of IFRS 17 by one year, to January 1, 2022. The proposed amendments
are subject to IASB’s redeliberation process which is expected to conclude in mid-2020. IASB is additionally taking into consideration a
deferral beyond 2022. The Company will continue to monitor IASB’s future developments related to IFRS 17.
The principles underlying IFRS 17 differ from the CALM as permitted by IFRS 4. While there are many differences, the following
outlines two of the key differences:
■ Under IFRS 17 the discount rate used to estimate the present value of insurance contract liabilities is based on the characteristics of
the liability, whereas under CALM, the Company uses the rates of returns for current and projected assets supporting insurance
contract liabilities to value the liabilities. The difference in the discount rate approach also impacts the timing of investment-related
experience earnings emergence. Under CALM, investment-related experience includes the impact of investing activities. The impact
of investing activities is directly related to the CALM methodology. Under IFRS 17 the impact of investing activities will emerge over
the life of the asset.
■ Under IFRS 17 new business gains are recorded on the Consolidated Statements of Financial Position (in the contractual service
margin component of the insurance contract liability) and amortized into income as services are provided. Under CALM new
business gains (and losses) are recognized in income immediately.
The Company is assessing the implications of this standard including proposed amendments and expects that it will have a significant
impact on the Company’s Consolidated Financial Statements. In addition, in certain jurisdictions, including Canada, it could have a
material effect on tax and regulatory capital positions and other financial metrics that are dependent upon IFRS accounting values. A
summary of some of the key risks are outlined in the “Risk Management – Emerging Risks” section above.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
69
11. Risk Factors
Our insurance, wealth and asset management and other financial services businesses subject Manulife to a broad range of risks.
Management has identified the following risks and uncertainties to which our businesses, operations and financial condition are
subject. The risks and uncertainties described below are not the only ones facing us. Additional risks not presently known to us or that
we currently deem immaterial could also impair our businesses, operations and financial condition. If any of such risks should occur,
the trading price of our securities, including common shares, preferred shares and debt securities, could decline, and you may lose all
or part of your investment.
a. Strategic Risk Factors
We operate in highly competitive markets and compete for customers with both insurance and non-insurance financial services
companies. Customer loyalty and retention, and access to distributors, are important to the Company’s success and are influenced by
many factors, including our distribution practices and regulations, product features, service levels, prices, and our financial strength
ratings and reputation.
We may not be successful in executing our business strategies or these strategies may not achieve our objectives.
■ Refer to “Risk Management – Strategic Risk” above.
■ The economic environment could be volatile and our regulatory environment will continue to evolve, potentially with higher capital
requirements which could materially impact our competitiveness. Further, the attractiveness of our product offerings relative to our
competitors will be influenced by competitor actions as well as our own, and the requirements of the applicable regulatory regimes.
For these and other reasons, there is no certainty that we will be successful in implementing our business strategies or that these
strategies will achieve the objectives we target.
■ Macro-economic factors may result in our inability to achieve business strategies and plans. Of note, economic factors such as flat
or declining equity markets, equity market volatility, or a period of prolonged low interest rates could impact our ability to achieve
business objectives. Other factors, such as management actions taken to bolster capital and manage the Company’s risk profile,
including new or amended reinsurance agreements, and additional actions that the Company may take to help manage near-term
regulatory capital ratios or help mitigate equity market and interest rate exposures, could adversely impact our longer-term earnings
potential.
Our businesses are heavily regulated, and changes in regulation or laws, or in the interpretation or enforcement of
regulation and laws, may reduce our profitability and limit our growth.
■ Our insurance operations are subject to a wide variety of insurance and other laws and regulations. Insurance and securities
■
■
regulators in Canada, the United States, Asia and other jurisdictions regularly re-examine existing laws and regulations applicable to
insurance companies, investment advisors, brokers-dealers and their products. Compliance with applicable laws and regulations is
time consuming and personnel-intensive, and changes in these laws and regulations or in the interpretation or enforcement
thereof, may materially increase our direct and indirect compliance costs and other expenses of doing business, thus having a
material adverse effect on our results of operations and financial condition.
In addition, international regulators as well as domestic financial authorities and regulators in many countries have been reviewing
their capital requirements and are implementing, or are considering implementing, changes aimed at strengthening risk
management and capitalization of financial institutions. Future regulatory capital, actuarial and accounting changes, including
changes with a retroactive impact, could have a material adverse effect on the Company’s consolidated financial condition, results
of operations and regulatory capital both on transition and going forward. In addition, such changes could have a material adverse
effect on the Company’s position relative to that of other Canadian and international financial institutions with which Manulife
competes for business and capital.
In Canada, MFC and its principal operating subsidiary, MLI, are governed by the Insurance Companies Act (Canada) (“ICA”). The
ICA is administered, and the activities of the Company are supervised, by the Office of the Superintendent of Financial Institutions
(“OSFI”). MLI is also subject to regulation and supervision under the insurance laws of each of the provinces and territories of
Canada. Regulatory oversight is vested in various governmental agencies having broad administrative power with respect to, among
other things, dividend payments, capital adequacy and risk based capital requirements, asset and reserve valuation requirements,
permitted investments and the sale and marketing of insurance contracts. These regulations are intended to protect policyholders
and beneficiaries rather than investors and may adversely impact shareholder value.
■ Some recent examples of regulatory and professional standard developments, in addition to the developments outlined in the “Risk
Management – Regulatory Updates” section above, which could impact our net income attributed to shareholders and/or capital
position are provided below.
■ At its annual meeting in November 2019, the International Association of Insurance Supervisors (“IAIS”) adopted its first global
frameworks for supervision of internationally active insurance groups (“IAIGs”) and mitigation of systemic risk in the insurance
sector. The framework was composed of three elements:
O A Common Framework (ComFrame) provides supervisory standards and guidance focusing on the effective group-wide
supervision of IAIGs. ComFrame builds on the revised set of Insurance Core Principles (“ICPs”), that are applicable to the
supervision of all insurers, and which were adopted after extensive review.
O A risk based global Insurance Capital Standard (“ICS”) is being further developed over a five-year monitoring period
beginning in 2020. While broadly supportive of the goals of ICS, OSFI stated that they did not support the ICS design for
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the monitoring period, citing that it was ‘not fit for purpose for the Canadian market’. The adoption of the international
rules in specific markets or on a group-based basis will depend on the decision of each applicable regulator.
O The Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector, which includes reviewing
activities of insurers, will be used beginning in January 2020. At the same time, the Financial Standards Board announced it
would be suspending designations of any IAIGs as Globally Systemically Important Insurers (G-SIIs) until at least November
2022 when it will re-assess whether designations are necessary.
Though the overall frameworks have been adopted, much of the necessary details remain to be developed. Manulife is an IAIG
but is not designated as a G-SII. The impact on capital and other regulatory requirements and Manulife’s competitive position
remains unknown and is being monitored.
■ The National Association of Insurance Commissioners (“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 U.S. In addition, the NAIC is continuing to explore the
development of a group capital calculation tool; the scope of any such tool has not yet been determined.
■ The Actuarial Standards Board (“ASB”) promulgates certain assumptions referenced in the CIA Standards of Practice for the
■
valuation of insurance contract liabilities. These promulgations are updated periodically and, in the event that new promulgations
are published, they will apply to the determination of actuarial liabilities and may lead to an increase in actuarial liabilities and a
reduction in net income attributed to shareholders.
In the United States, state insurance laws regulate most aspects of our business, and our U.S. insurance subsidiaries are regulated by
the insurance departments of the states in which they are domiciled and the states in which they are licensed. State laws grant
insurance regulatory authorities broad administrative powers with respect to, among other things: licensing companies and agents
to transact business; calculating the value of assets to determine compliance with statutory requirements; mandating certain
insurance benefits; regulating certain premium rates; reviewing and approving policy forms; regulating unfair trade and claims
practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment
of inducements; regulating advertising; protecting privacy; establishing statutory capital and reserve requirements and solvency
standards; fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life
insurance policies and annuity contracts; approving changes in control of insurance companies; restricting the payment of dividends
and other transactions between affiliates; and regulating the types, amounts and valuation of investments. Changes in any such
laws and regulations, or in the interpretation or enforcement thereof by regulators, could significantly affect our business, results of
operations and financial condition.
■ Currently, the U.S. federal government does not directly regulate the business of insurance. However, federal legislation and
administrative policies in several areas can significantly and adversely affect state regulated insurance companies. These areas
include financial services regulation, securities regulation, pension regulation, privacy, tort reform legislation and taxation. In
addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the U.S. Board of Governors of
the Federal Reserve has supervisory powers over non-bank financial companies that are determined to be systemically important.
Insurance guaranty associations in Canada and the United States have the right to assess insurance companies doing business in
their jurisdiction for funds to help pay the obligations of insolvent insurance companies to policyholders and claimants. Because the
amount and timing of an assessment is beyond our control, the liabilities that we have currently established for these potential
liabilities may not be adequate.
■
■ While many of the laws and regulations to which we are subject are intended to protect policyholders, beneficiaries, depositors and
investors in our products and services, others also set standards and requirements for the governance of our operations. Failure to
comply with applicable laws or regulations could result in financial penalties or sanctions, and damage our reputation.
■ All aspects of Manulife’s Global Wealth Management businesses are subject to various laws and regulations around the world.
These laws and regulations are primarily intended to protect investment advisory clients, investors in registered and unregistered
funds, and clients of Manulife’s global retirement businesses. For example, in Canada, the Canadian Securities Administrators have
established a set of best interest principles which are intended to ensure investment advisors put their client’s interests first when
providing financial advice. Agencies that regulate investment advisors, investment funds and retirement plan products and services
have broad administrative powers, including the power to limit, restrict or prohibit the regulated entity or person from carrying on
business if it fails to comply with such laws and regulations. Possible sanctions for significant compliance failures include the
suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of
investment advisor and other registrations and censures and fines both for individuals and Manulife.
■ From time to time, regulators raise issues during examinations or audits of Manulife that could have a material adverse impact on
us. We cannot predict whether or when regulatory actions may be taken that could adversely affect our operations. Our failure to
comply with existing and evolving regulatory requirements could also result in regulatory sanctions and could affect our
relationships with regulatory authorities and our ability to execute our business strategies and plans. For further discussion of
government regulation and legal proceedings refer to “Government Regulation” in MFC’s Annual Information Form dated
February 12, 2019 and note 18 of the 2019 Annual Consolidated Financial Statements. Refer to the risk factor “Our non-North
American operations face political, legal, operational and other risks that could negatively affect those operations or our results of
operations and financial condition” for further discussion on the impact to our operations.
International Financial Reporting Standards will have a material impact on our financial results.
■ Accounting standards and our policies are essential to understanding our results of operations and financial condition and new
standards or modifications to existing standards could have a material adverse impact on our financial results and regulatory capital
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
71
position (the regulatory capital framework in Canada uses IFRS as a base). Additionally, any mismatch between the underlying
economics of our business and new accounting standards could have significant unintended negative consequences on our business
model; and potentially affect our customers, shareholders and our access to capital markets.
Changes in tax laws, tax regulations, or interpretations of such laws or regulations could make some of our products less
attractive to consumers, could increase our corporate taxes or cause us to change the value of our deferred tax assets and
liabilities as well as our tax assumptions included in the valuation of our policy liabilities. This could have a material
adverse effect on our business, results of operations and financial condition.
■ Many of the products that the Company sells benefit from one or more forms of preferred tax treatment under current income tax
regimes. For example, the Company sells life insurance policies that benefit from the deferral or elimination of taxation on earnings
accrued under the policy, as well as permanent exclusion of certain death benefits that may be paid to policyholders’ beneficiaries.
We also sell annuity contracts that allow the policyholders to defer the recognition of taxable income earned within the contract.
Other products that the Company sells, such as certain employer-paid health and dental plans, also enjoy similar, as well as other,
types of tax advantages. The Company also benefits from certain tax benefits, including tax-exempt interest, dividends-received
deductions, tax credits (such as foreign tax credits), and favourable tax rates and/or income measurement rules for tax purposes.
■ There is risk that tax legislation could be enacted that would lessen or eliminate some or all of the tax advantages currently
benefiting the Company or its policyholders or its other clients. This could occur in the context of deficit reduction or other tax
reforms. The effects of any such changes could result in materially lower product sales, lapses of policies currently held, and/or our
incurrence of materially higher corporate taxes, any of which could have a material adverse effect on our business, results of
operations and financial condition.
■ Additionally, the Company may be required to change its provision for income taxes or carrying amount of deferred tax assets or
liabilities if the characterization of certain items is successfully challenged by taxing authorities or if future transactions or events,
which could include changes in tax laws, tax regulations or interpretations of such laws or regulations, occur. Any such changes
could significantly affect the amounts reported in the Consolidated Financial Statements in the year these changes occur.
■ The U.S. government enacted the Tax Cuts and Jobs Act effective January 1, 2018 (“U.S. Tax Reform”). The legislation makes broad
and complex changes to the U.S. tax code including reducing individual and corporate tax rates and permitting expensing of many
capital expenditures, increasing and extending the amortization period on policy acquisition costs, and further limiting the
deductibility of policy reserves for U.S. federal income tax purposes. Regulations and further guidance from the Internal Revenue
Service and other bodies continue to be developed and released, implementing and/or clarifying the legislation. Any further changes
or amendments to the law or its interpretation could result in material change to our tax balances.
In the long run, U.S. Tax Reform, all else being equal, could lead to a reduction in corporate borrowings and lower borrowings
could lead to tighter spreads.
■
Access to capital may be negatively impacted by market conditions.
■ Disruptions, uncertainty or volatility in the financial markets may limit our access to the capital markets to raise capital required to
operate our business. Such market conditions may limit our ability to access the capital necessary to satisfy regulatory capital
requirements to grow our business and meet our refinancing requirements. Under extreme conditions, we may be forced, among
other things, to delay raising capital, issue different types of capital than we would otherwise under normal conditions, less
effectively deploy such capital, issue shorter term securities than we prefer, or issue securities that bear an unattractive cost of
capital which could decrease our financial flexibility, profitability, and/or dilute our existing shareholders.
As a holding company, MFC depends on the ability of its subsidiaries to transfer funds to it to meet MFC’s obligations
and pay dividends. Subsidiaries’ remittance of capital depends on subsidiaries’ earnings, regulatory requirements and
restrictions, and macroeconomic conditions.
■ MFC is a holding company and relies on dividends and interest payments from our insurance and other subsidiaries as the principal
source of cash flow to meet MFC’s obligations and pay dividends. As a result, MFC’s cash flows and ability to service its obligations
are dependent upon the earnings of its subsidiaries and the distribution of those earnings and other funds by its subsidiaries to
MFC. Substantially all of MFC’s business is currently conducted through its subsidiaries.
■ The ability of our holding company to fund its cash requirements depends upon it receiving dividends, distributions and other
payments from our operating subsidiaries. The ability of MFC’s insurance subsidiaries to pay dividends to MFC in the future will
depend on their earnings, regulatory requirements and restrictions, and macroeconomic conditions.
■ MFC’s insurance subsidiaries are subject to a variety of insurance and other laws and regulations that vary by jurisdiction and are
intended to protect policyholders and beneficiaries in that jurisdiction first and foremost, rather than investors. These subsidiaries
are generally required to maintain solvency and capital standards as set by their local regulators and may also be subject to other
regulatory restrictions, all of which may limit the ability of subsidiary companies to pay dividends or make distributions to MFC.
■ Potential changes to regulatory capital and actuarial and accounting standards could also limit the ability of the insurance
subsidiaries to pay dividends or make distributions and could have a material adverse effect on internal capital mobility. We may be
required to raise additional capital, which could be dilutive to existing shareholders, or to limit the new business we write, or to
pursue actions that would support capital needs but adversely impact our subsequent earnings potential. In addition, the timing and
outcome of these initiatives could have a significantly adverse impact on our competitive position relative to that of other Canadian
and international financial institutions with which we compete for business and capital.
■ The Company seeks to maintain capital in its insurance subsidiaries in excess of the minimum required in all jurisdictions in which
the Company does business. The minimum requirements in each jurisdiction may increase due to regulatory changes and we may
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decide to maintain additional capital in our operating subsidiaries to fund expected growth of the business or to deal with changes
in the risk profile of such subsidiaries. Any such increases in the level of capital may reduce the ability of the operating companies to
pay dividends.
■ The payment of dividends to MFC by MLI is subject to restrictions set out in the ICA. The ICA prohibits the declaration or payment
of any dividend on shares of an insurance company if there are reasonable grounds for believing: (i) the company does not have
adequate capital and adequate and appropriate forms of liquidity; or (ii) the declaration or the payment of the dividend would
cause the company to be in contravention of any regulation made under the ICA respecting the maintenance of adequate capital
and adequate and appropriate forms of liquidity, or of any direction made to the company by the Superintendent. All of our U.S.
and Asian operating life insurance companies are subsidiaries of MLI. Accordingly, a restriction on dividends from MLI would restrict
MFC’s ability to obtain dividends from its U.S. and Asian businesses.
■ Certain of MFC’s U.S. insurance subsidiaries also are subject to insurance laws in Michigan, New York and Massachusetts, the
jurisdictions in which these subsidiaries are domiciled, which impose general limitations on the payment of dividends and other
upstream distributions by these subsidiaries to MLI.
■ Our Asian insurance subsidiaries are also subject to restrictions in the jurisdictions in which these subsidiaries are domiciled which
could affect their ability to pay dividends to MLI in certain circumstances.
We may experience future downgrades in our financial strength or credit ratings, which may materially adversely impact
our financial condition and results of operations.
■ Credit rating agencies publish financial strength ratings on life insurance companies that are indicators of an insurance company’s
ability to meet contract holder and policyholder obligations. Credit rating agencies also assign credit ratings, which are indicators of
an issuer’s ability to meet the terms of its obligations in a timely manner and are important factors in a company’s overall funding
profile and ability to access external capital. Ratings reflect the views held by each credit agency, which are subject to change based
on various factors that may be within or beyond a company’s control.
■ Ratings are important factors in establishing the competitive position of insurance companies, maintaining public confidence in
products being offered, and determining the cost of capital. A ratings downgrade, or the potential for such a downgrade could
adversely affect our operations and financial condition. A downgrade could, among other things, increase our cost of capital and
limit our access to the capital markets; cause some of our existing liabilities to be subject to acceleration, additional collateral
support, changes in terms, or additional financial obligations; result in the termination of our relationships with broker-dealers,
banks, agents, wholesalers and other distributors of our products and services; increase our cost of hedging; unfavourably impact
our ability to execute on our hedging strategies; materially increase the number of surrenders, for all or a portion of the net cash
values, by the owners of policies and contracts we have issued, impact our ability to obtain reinsurance at reasonable prices or at all,
and materially increase the number of withdrawals by policyholders of cash values from their policies; and reduce new sales.
Competitive factors may adversely affect our market share and profitability.
■ The insurance, wealth and asset management industries are highly competitive. Our competitors include other insurers, securities
firms, investment advisors, mutual funds, banks and other financial institutions. The rapid advancement of new technologies, such
as blockchain, artificial intelligence and advanced analytics, may enable other non-traditional firms to compete directly in the
industry space, or offer services to our traditional competitors to enhance their value propositions. The impact from technological
disruption may result in our competitors improving their customer experience, product offerings and business costs. Our
competitors compete with us for customers, access to distribution channels such as brokers and independent agents, and for
employees. In some cases, competitors may be subject to less onerous regulatory requirements, have lower operating costs or have
the ability to absorb greater risk while maintaining their financial strength ratings, thereby allowing them to price their products
more competitively or offer features that make their products more attractive. These competitive pressures could result in lower
new business volumes and increased pricing pressures on a number of our products and services that may harm our ability to
maintain or increase our profitability. Because of the highly competitive nature of the financial services industry, there can be no
assurance that we will continue to effectively compete with our traditional and non-traditional industry rivals, and competitive
pressure may have a material adverse effect on our business, results of operations and financial condition.
We may experience difficulty in marketing and distributing products through our current and future distribution
channels.
■ We distribute our insurance and wealth management products through a variety of distribution channels, including brokers,
independent agents, broker-dealers, banks, wholesalers, affinity partners, other third-party organizations and our own sales force in
Asia. We generate a significant portion of our business through individual third-party arrangements. We periodically negotiate
provisions and renewals of these relationships, and there can be no assurance that such terms will remain acceptable to us or
relevant third parties. An interruption in our continuing relationship with certain of these third parties could significantly affect our
ability to market our products and could have a material adverse effect on our business, results of operations and financial
condition.
Industry trends could adversely affect the profitability of our businesses.
■ Our business segments continue to be influenced by a variety of trends that affect our business and the financial services industry in
general. The impact of the volatility and instability of the financial markets on our business is difficult to predict and the results of
operations and our financial condition may be significantly impacted by general business and economic trends in the geographies in
which we operate. These conditions include market factors, such as public equity, foreign currency, interest rate and other market
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73
risks, as well as demographic shifts, consumer behaviours (e.g. spending habits and debt levels), governmental policies (e.g. fiscal,
monetary, global trade), and other factors. The Company’s business plans, financial condition and results of operations have been in
the recent past and may in the future be negatively impacted or affected.
We may face unforeseen liabilities or asset impairments arising from possible acquisitions and dispositions of businesses
or difficulties integrating acquired businesses.
■ We have engaged in acquisitions and dispositions of businesses in the past and expect to continue to do so in the future as we may
deem appropriate. There could be unforeseen liabilities or asset impairments, including goodwill impairments that arise in
connection with the businesses that we may sell, have acquired, or may acquire in the future. In addition, there may be liabilities or
asset impairments that we fail, or are unable, to discover in the course of performing due diligence investigations on acquisition
targets. Furthermore, the use of our own funds as consideration in any acquisition would consume capital resources that would no
longer be available for other corporate purposes.
■ Our ability to achieve some or all of the benefits we anticipate from any acquisitions of businesses will depend in large part upon
our ability to successfully integrate the businesses in an efficient and effective manner. We may not be able to integrate the
businesses smoothly or successfully, and the process may take longer than expected. The integration of operations may require the
dedication of significant management resources, which may distract management’s attention from our day-to-day business.
Acquisitions of operations outside of North America, especially any acquisition in a jurisdiction in which we do not currently
operate, may be particularly challenging or costly to integrate. If we are unable to successfully integrate the operations of any
acquired businesses, we may be unable to realize the benefits we expect to achieve as a result of the acquisitions and the results of
operations may be less than expected.
If our businesses do not perform well, or if the outlook for our businesses is significantly lower than historical trends, we
may be required to recognize an impairment of goodwill or intangible assets or to establish a valuation allowance
against our deferred tax assets, which could have a material adverse effect on our results of operations and financial
condition.
■ Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net
identifiable assets at the date of acquisition. Intangible assets represent assets that are separately identifiable at the time of an
acquisition and provide future benefits such as the John Hancock brand.
■ As outlined above, in section “Critical Actuarial and Accounting Policies – Goodwill and Intangible Assets”, goodwill and intangible
assets with indefinite lives are tested at least annually for impairment at the cash generating unit (“CGU”) or group of CGUs level,
representing the smallest group of assets that is capable of generating largely independent cash flows. Going forward, as a result of
the impact of economic conditions and changes in product mix and the granular level of goodwill testing under IFRS, additional
impairment charges could occur in the future. Any impairment in goodwill would not affect LICAT capital.
If market conditions deteriorate in the future and, in particular, if MFC’s common share price is low relative to book value per share,
if the Company’s actions to limit risk associated with its products or investments cause a significant change in any one CGU’s
recoverable amount, or if the outlook for a CGU’s results deteriorate, the Company may need to reassess the value of goodwill and/
or intangible assets which could result in impairments during 2020 or subsequent periods. Such impairments could have a material
adverse effect on our results of operations and financial condition.
■
■ Deferred income tax balances represent the expected future tax effects of the differences between the book and tax basis of assets
and liabilities, loss carry forwards and tax credits. Deferred tax assets are recorded when the Company expects to claim deductions
on tax returns in the future for expenses that have already been recorded in the financial statements.
■ The availability of those deductions is dependent on future taxable income against which the deductions can be made. Deferred tax
assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include
the performance of the business including the ability to generate gains from a variety of sources and tax planning strategies. If
based on information available at the time of the assessment, it is determined that the deferred tax asset will not be realized, then
the deferred tax asset is reduced to the extent that it is no longer probable that the tax benefit will be realized.
We may not be able to protect our intellectual property and may be subject to infringement claims.
■ We rely on a combination of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our
intellectual property. In particular, we have invested considerable resources in promoting the brand names “Manulife” and
“John Hancock” and expect to continue to do so. Although we use a broad range of measures to protect our intellectual property
rights, third parties may infringe or misappropriate our intellectual property. We may have to litigate to enforce and protect our
copyrights, trademarks, patents, trade secrets and know-how or to determine their scope, validity or enforceability, which
represents a diversion of resources that may be significant in amount and may not prove successful. The loss of intellectual property
protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect
on our business and our ability to compete.
■ We also may be subject to costly litigation in the event that another party alleges our operations or activities infringe upon its
intellectual property rights. Third parties may have, or may eventually be issued, patents that could be infringed by our products,
methods, processes or services. Any party that holds such a patent could make a claim of infringement against us. We may also be
subject to claims by third parties for breach of copyright, trademark, trade secret or license usage rights. Any such claims and any
resulting litigation could result in significant liability for damages. If we were found to have infringed a third-party patent or other
intellectual property rights, we could incur substantial liability, and in some circumstances could be enjoined from providing certain
products or services to our customers or utilizing and benefiting from certain methods, processes, copyrights, trademarks, trade
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secrets or licenses, or alternatively could be required to enter into costly licensing arrangements with third parties, all of which could
have a material adverse effect on our business, results of operations and financial condition.
Applicable laws may discourage takeovers and business combinations that common shareholders of MFC might consider
in their best interests.
■ The ICA contains restrictions on the purchase or other acquisition, issue, transfer and voting of the shares of an insurance company.
In addition, under applicable U.S. insurance laws and regulations in states where certain of our insurance company subsidiaries are
domiciled, no person may acquire control of MFC without obtaining prior approval of those states’ insurance regulatory authorities.
These restrictions may delay, defer, prevent, or render more difficult a takeover attempt that common shareholders of MFC might
consider in their best interests. For instance, they may prevent shareholders of MFC from receiving the benefit from any premium to
the market price of MFC’s common shares offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the
existence of these provisions may adversely affect the prevailing market price of MFC’s common shares if they are viewed as
discouraging takeover attempts in the future.
Entities within the MFC Group are interconnected which may make separation difficult.
■ MFC operates in local markets through subsidiaries and branches of subsidiaries. These local operations are financially and
operationally interconnected to lessen expenses, share and reduce risk, and efficiently utilize financial resources. In general, external
capital required for companies in the Manulife group has been raised at the MFC or MLI level and then transferred to other entities
as equity or debt capital as appropriate. Other linkages include policyholder and other creditor guarantees and other forms of
internal support between various entities, loans, capital maintenance agreements, derivatives, shared services and affiliate
reinsurance treaties. Accordingly, the risks undertaken by a subsidiary may be transferred to or shared by affiliates through financial
and operational linkages. Some of the consequences of this are:
O Financial difficulties at a subsidiary may not be isolated and could cause material adverse effects on affiliates and the group
as a whole.
O Linkages may make it difficult to dispose of or separate a subsidiary or business within the group by way of a spin-off or
similar transaction and the disposition or separation of a subsidiary or business may not fully eliminate the liability of the
Company and its remaining subsidiaries for shared risks. Issues raised by such a transaction could include: (i) the Company
cannot terminate, without policyholder consent and in certain jurisdictions regulator consent, parental guarantees on
in-force policies and therefore would continue to have residual risk under any such non-terminated guarantees; (ii) internal
capital mobility and efficiency could be limited; (iii) significant potential tax consequences; (iv) uncertainty about the
accounting and regulatory outcomes of such a transaction; (v) obtaining any other required approvals; (vi) there may be a
requirement for significant capital injections; and (vii) the transaction may result in increased sensitivity of net income
attributed to shareholders and capital of MFC and its remaining subsidiaries to market declines.
b. Market Risk Factors
Market risk is the risk of loss resulting from market price volatility, interest rate change, credit and swap spread changes, and from
adverse foreign currency rate movements. Market price volatility primarily relates to changes in prices of publicly traded equities and
alternative long-duration assets. The profitability of our insurance and annuity products, as well as the fees we earn in our investment
management business, are subject to market risk.
Our most significant source of publicly traded equity risk arises from equity-linked products with guarantees, where the
guarantees are linked to the performance of the underlying funds.
■ Publicly traded equity performance risk arises from a variety of sources, including guarantees associated with equity-linked
investments such as variable annuity and segregated fund products, general fund investments in publicly traded equities and mutual
funds backing general fund product liabilities.
■ Market conditions resulting in reductions in the asset value we manage has an adverse effect on the revenues and profitability of
our investment management business, which depends on fees related primarily to the values of assets under management and
administration.
■ Guaranteed benefits of Variable Annuity and Segregated Funds are contingent and payable upon death, maturity, permitted
withdrawal or annuitization. If equity markets decline or even if they increase by an amount lower than that assumed in our
actuarial valuation, additional liabilities may need to be established to cover the contingent liabilities, resulting in a reduction in net
income attributed to shareholders and regulatory capital ratios. Further, if equity markets do not recover to the amount of the
guarantees, by the dates the liabilities are due, the accrued liabilities will need to be paid out in cash. In addition, sustained flat or
declining public equity markets would likely reduce asset-based fee revenues related to variable annuities and segregated funds
with guarantees and related to other wealth and insurance products.
■ Where publicly traded equity investments are used to support general fund product liabilities, the policy valuation incorporates
projected investment returns on these assets. If actual returns are lower than the expected returns, the investment losses will reduce
net income attributed to shareholders.
■ For products where the investment strategy applied to future cash flows in the policy valuation includes investing a specified portion
of future cash flows in publicly traded equities, a decline in the value of publicly traded equities relative to other assets could require
us to change the investment mix assumed for future cash flows, which may increase policy liabilities and reduce net income
attributed to shareholders. A reduction in the outlook for expected future returns for publicly traded equities, which could result
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75
from a fundamental change in future expected economic growth, would increase policy liabilities and reduce net income attributed
to shareholders. Furthermore, to the extent publicly traded equities are held as Available For Sale, other than temporary
impairments that arise will reduce income.
■ Expected long-term annual market growth assumptions for public equities for key markets are based on long-term historical
observed experience. See Critical Actuarial and Accounting Policies for the rates used in the stochastic valuation of our segregated
fund guarantee business. The calibration of the economic scenario generators that are used to value segregated fund guarantee
business complies with current CIA Standards of Practice for the valuation of these products. Implicit margins, determined through
stochastic valuation processes, lower net yields used to establish policy liabilities. Assumptions used for public equities backing
liabilities are also developed based on historical experience but are constrained by different CIA Standards of Practice and differ
slightly from those used in stochastic valuation. Alternative asset return assumptions vary based on asset class but are largely
consistent, after application of valuation margins and differences in taxation, with returns assumed for public equities.
We experience interest rate and spread risk within the general fund primarily due to the uncertainty of future returns on
investments.
■
Interest rate and spread risk arises from general fund guaranteed benefit products, general fund adjustable benefit products with
minimum rate guarantees, general fund products with guaranteed surrender values, segregated fund products with minimum
benefit guarantees and from surplus fixed income investments. The risk arises within the general fund primarily due to the
uncertainty of future returns on investments to be made as assets mature and as recurring premiums are received and invested or
reinvested to support longer dated liabilities. Interest rate risk also arises due to minimum rate guarantees and guaranteed surrender
values on products where investment returns are generally passed through to policyholders. A rapid rise in interest rates may also
result in losses attributable to early liquidation of fixed income instruments supporting contractual surrender benefits, if customers
surrender to take advantage of higher interest rates on offer elsewhere. In contrast, in a lower interest rate environment, borrowers
may prepay or redeem fixed income securities, mortgages and loans with greater frequency in order to borrow at lower market
rates, potentially reducing the returns on our investment portfolio, if there are no make whole conditions. Substantially all our fixed
income securities, mortgages and loans portfolio include make whole conditions.
■ The valuation of policy liabilities reflects assumptions for the yield on future investments and the projected cash flows associated
with interest rate hedges. A general decline in interest rates, without a change in corporate bond spreads and swap spreads, will
reduce the assumed yield on future investments but favourably impact the value of lengthening interest rate hedges. Conversely, a
general increase in interest rates, without a change in corporate bond spreads and swap spreads, will increase the assumed yield on
future investments, but unfavourably impact the value of lengthening interest rate hedges. The Company’s disclosed estimated
impact from interest rate movements reflects a parallel increase and decrease in interest rates of specific amounts. The reinvestment
assumptions used in the valuation of our insurance liabilities are based on interest rate scenarios and calibration criteria set by the
Actuarial Standards Board, while our interest rate hedges are valued using current market interest rates. Therefore, in any particular
quarter, changes to the reinvestment assumptions are not fully aligned to changes in current market interest rates especially when
there is a significant change in the shape of the interest rate curve. As a result, the impact from non-parallel movements may be
different from the estimated impact of parallel movements. Furthermore, changes in interest rates could change the reinvestment
scenarios used in the calculation of our actuarial liabilities. The reinvestment scenario changes tend to amplify the negative effects
of a decrease in interest rates and dampen the positive effects of interest rate increases. In addition, decreases in corporate bond
spreads or increases in swap spreads should generally result in an increase in policy liabilities and a reduction in net income
attributed to shareholders, while an increase in corporate bond spreads or a decrease in swap spreads should generally have the
opposite impact. The impact of changes in interest rates and in spreads may be partially offset by changes to credited rates on
adjustable products that pass-through investment returns to policyholders.
■ For segregated fund and variable annuity products that contain investment guarantees in the form of benefit guarantees, a
sustained increase in interest rate volatility or a decline in interest rates would increase the costs of hedging the benefit guarantees
provided. The impact of changes in interest rates are managed within the Variable Annuity dynamic hedging program.
We experience ALDA performance risk when actual returns are lower than expected returns.
■ ALDA performance risk arises from general fund investments in commercial real estate, timber properties, farmland properties,
infrastructure, oil and gas properties, and private equities.
■ Where these assets are used to support policy liabilities, the policy valuation incorporates projected investment returns on these
assets. ALDA assumptions vary by asset class and generally have a similar impact on policy liabilities as public equities would. If
actual returns are lower than the expected returns, there will be a negative impact to the net income attributed to shareholders. A
reduction in the outlook for expected future returns for ALDA, which could result from a variety of factors such as a fundamental
change in future expected economic growth or declining risk premiums due to increased competition for such assets, would
increase policy liabilities and reduce net income attributed to shareholders. Further, if returns on certain external asset benchmarks
used to determine permissible assumed returns under the CIA Standards of Practice are lower than expected, expected future
returns will be adjusted accordingly and the Company’s policy liabilities will increase, reducing net income attributed to
shareholders.
■ The value of oil and gas assets could be adversely affected by declines in energy prices as well as by a number of other factors
including production declines, uncertainties associated with estimating oil and natural gas reserves, difficult economic conditions
and geopolitical events. Changes in government regulation of the oil and gas industry, including environmental regulation, carbon
taxes and changes in the royalty rates resulting from provincial royalty reviews, could also adversely affect the value of our oil and
gas investments.
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■ Difficult economic conditions could result in higher vacancy, lower rental rates and lower demand for real estate investments, all of
which would adversely impact the value of our real estate investments. Difficult economic conditions could also prevent companies
in which we have made private equity investments from achieving their business plans and could cause the value of these
investments to fall, or even cause the companies to fail. Declining valuation multiples in the public equity market would also likely
cause values to decline in our private equity portfolio. The timing and amount of investment income from private equity investments
is difficult to predict, and investment income from these investments can vary from quarter to quarter.
■ Our timberland and farmland holdings are exposed to natural risks, such as prolonged drought, wildfires, insects, windstorms,
flooding, and climate change. We are generally not insured for these types of risks but seek to mitigate their impact through
portfolio diversification and prudent operating practices.
■ More broadly, a rising interest rate environment could result in the value of some of our ALDA investments declining, particularly
those with fixed contractual cash flows such as real estate.
■ The negative impact of changes in these factors can take time to be fully reflected in the valuations of private investments, including
ALDA, especially if the change is large and rapid, as market participants adjust their forecasts and better understand the potential
medium to long-term impact of such changes. As a result, valuation changes in any given period may reflect the delayed impact of
events that occurred in prior periods.
■ We rely on a diversified portfolio of ALDA assets to generate relatively stable investment returns. Diversification benefits may be
reduced at times, especially during a period of economic stress, which would adversely affect portfolio returns.
■ The Company determines investment return assumptions for ALDA in accordance with the Standards of Practice for the valuation of
insurance contract liabilities and guidance published by the CIA. The guidance requires that the investment return assumption for
these assets should not be higher than the historical long-term average returns of an appropriate broad-based index. Where such
experience is not available, the investment return assumption for these assets should not result in a lower reserve than an
assumption based on a historical-return benchmark for public equities in the same jurisdiction. As a result, the impact of changes in
the historical returns for public equity benchmarks may result in an update to our investment return assumptions for ALDA.
Our liabilities are valued based on an assumed asset investment strategy over the long term.
■ We develop an investment strategy for the assets that back our liabilities. The strategy involves making assumptions on the kind of
assets in which we will invest and the returns such assets will generate.
■ We may not be able to implement our investment strategy as intended due to a lack of assets available at the returns we assume.
This may result in a change in investment strategy and/or assumed future returns, thus adversely impacting our financial results.
■ From time to time we may decide to adjust our portfolio asset mix which may result in adverse impacts to our financial results for
one or more periods.
We experience foreign exchange risk as a substantial portion of our business is transacted in currencies other than
Canadian dollars.
■ Our financial results are reported in Canadian dollars. A substantial portion of our business is transacted in currencies other than
Canadian dollars, mainly U.S. dollars, Hong Kong dollars and Japanese yen. If the Canadian dollar strengthens relative to these
currencies, net income attributed to shareholders would decline and our reported shareholders’ equity would decline. A weakening
of the Canadian dollar against the foreign currencies in which we do business would have the opposite effect and would increase
net income attributed to shareholders and shareholders’ equity.
The Company’s hedging strategies will not fully reduce the market risks related to the product guarantees and fees being
hedged, hedging costs may increase and the hedging strategies expose the Company to additional risks.
■ Our hedging strategies rely on the execution of derivative transactions in a timely manner. Market conditions can limit availability of
hedging instruments, requiring us to post additional collateral, and can further increase the costs of executing derivative
transactions. Therefore, hedging costs and the effectiveness of the strategy may be negatively impacted if markets for these
instruments become illiquid. The Company is subject to the risk of increased funding and collateral demands which may become
significant as equity markets increase.
■ The Company is also subject to counterparty risks arising from the derivative instruments and to the risk of increased funding and
collateral demands which may become significant as equity markets and interest rates increase. The strategies are highly dependent
on complex systems and mathematical models that are subject to error and rely on forward-looking long-term assumptions that
may prove inaccurate, and which rely on sophisticated infrastructure and personnel which may fail or be unavailable at critical
times. Due to the complexity of the strategies, there may be additional unidentified risks that may negatively impact our business
and future financial results. In addition, rising equity markets and interest rates that would otherwise result in profits on variable
annuities will be offset by losses from our hedging positions. For further information pertaining to counterparty risks, refer to the
risk factor “If a counterparty fails to fulfill its obligations, we may be exposed to risks we had sought to mitigate”.
■ Under certain market conditions, which include a sustained increase in realized equity and interest rate volatilities, a decline in
interest rates, or an increase in the correlation between equity returns and interest rate declines, the costs of hedging the benefit
guarantees provided in variable annuities may increase or become uneconomic. In addition, there can be no assurance that our
dynamic hedging strategy will fully offset the risks arising from the variable annuities being hedged.
■ Policy liabilities and regulatory required capital for variable annuity guarantees are determined using long-term forward-looking
estimates of volatilities. These long-term forward-looking volatilities assumed for policy liabilities and required capital meet the CIA and
OSFI calibration standards. To the extent that realized equity or interest rate volatilities in any quarter exceed the assumed long-term
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
77
volatilities, or correlations between interest rate changes and equity returns are higher, there is a risk that rebalancing will be greater
and more frequent, resulting in higher hedging costs.
■ The level of guarantee claims returns or other benefits ultimately paid will be impacted by policyholder longevity and policyholder
activity including the timing and amount of withdrawals, lapses, fund transfers and contributions. The sensitivity of liability values to
equity market and interest rate movements that we hedge are based on long-term expectations for longevity and policyholder
activity, since the impact of actual longevity and policyholder experience variances cannot be hedged using capital markets
instruments. There is a risk that we may be unable to effectively or economically hedge products which provide for guarantee
claims, returns or other benefits.
Changes in market interest rates may impact our net income attributed to shareholders and capital ratios.
■ A prolonged low or negative interest rate environment may result in charges related to lower fixed income reinvestment
assumptions and an increase in new business strain until products are repositioned for the lower rate environment. Other potential
consequences of low interest rates include:
O Low interest rates could negatively impact sales;
O Lower risk-free rates tend to increase the cost of hedging, and as a result the offering of guarantees could become
uneconomic;
O The reinvestment of cash flows into low yielding bonds could result in lower future earnings due to lower returns on surplus
and general account assets supporting in-force liabilities, and due to guarantees embedded in products including minimum
guaranteed rates in participating and adjustable products;
O A lower interest rate environment could be correlated with other macro-economic factors including unfavourable economic
growth and lower returns on other asset classes;
O Lower interest rates could contribute to potential impairments of goodwill;
O Lower interest rates could lead to lower mean bond parameters used for the stochastic valuation of segregated fund
guarantees, resulting in higher policy liabilities;
O Lower interest rates would also reduce expected earnings on in-force policies;
O A prolonged low or negative interest environment may also result in the Actuarial Standards Board lowering the
promulgated URR and require us to increase our provisions;
O Lower interest rates could also trigger a switch to a more adverse prescribed interest stress scenario, increasing LICAT capital.
See “LICAT Scenario Switch” above.
O The difference between the current investable returns and the returns used in pricing new business are generally capitalized
when new business is written. Lower interest rates result in higher new business strain until products are re-priced or interest
rates increase; and
O Fixed income reinvestment rates other than the URR are based on current market rates. The net income sensitivity to changes
in current rates is outlined in the section “Interest Rate and Spread Risk Sensitivities and Exposure Measures” above.
■ A rapid rise in interest rates may also result in losses attributable to early liquidation of fixed income instruments supporting
contractual surrender benefits if customers surrender to take advantage of higher interest rates on offer elsewhere.
With the continued production of LIBOR not guaranteed beyond 2021, the transition to alternative reference rates may
adversely impact the valuation of our LIBOR-based financial instruments.
■ The Company uses London Interbank Offered Rate (“LIBOR”) based derivatives for the management of our interest rate risk and is
reliant on the continued use of LIBOR as a reference rate in the marketplace. The Chief Executive of the U.K. Financial Conduct
Authority (“FCA”) has announced that, after 2021, the FCA would no longer use its power to persuade or compel panel banks to
submit rate information used to determine LIBOR. To address the increased risk that LIBOR may not exist beyond 2021, public /
private sector working groups have been formed in major currency jurisdictions to identify alternative reference rate benchmarks in
currencies for which LIBOR is quoted.
■ The Federal Reserve Bank of New York has begun publishing a Secured Overnight Financing Rate (“SOFR”), which is intended to
replace U.S. dollar LIBOR, and central banks in several other jurisdictions have also announced plans for alternative reference rates
for other currencies. At this time, we cannot predict how markets will respond to these new rates, and we cannot predict the effect
of any changes to or discontinuation of LIBOR on new or existing financial instruments to which we have exposure.
■ Any changes to or discontinuation of LIBOR or change to an alternative reference rate may adversely affect the valuation of our
existing interest-rate linked and derivatives securities we hold, the effectiveness of those derivatives in mitigating our risks, securities
we have issued, or other asset or liabilities whose value is tied to LIBOR or to a LIBOR alternative. Furthermore, depending on the
nature of the alternative reference rate, we may become exposed to additional risks from other aspects of the business, including
product design, pricing and models. Any change to or discontinuation of similar benchmark rates besides LIBOR could have similar
effects.
c. Liquidity Risk Factors
Liquidity risk, is the risk of not having access to sufficient funds or liquid assets to meet both expected and unexpected cash outflows
and collateral demand. We are exposed to liquidity risk in our operating and holding companies. In the operating companies, cash and
collateral demands arise day-to-day to fund anticipated policyholder benefits, withdrawals of customer deposit balances, reinsurance
settlements, derivative instrument settlements/collateral pledging, expenses, investment and hedging activities. Under stressed
conditions, additional cash and collateral demands could arise primarily from changes to policyholders termination or policy renewal
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rates, withdrawals of customer deposit balances, borrowers renewing or extending their loans when they mature, derivative
settlements or collateral demands, and reinsurance settlements or collateral demands.
Liquidity risk is impacted by various factors, including but not limited to, capital and credit market conditions, re-pricing
risk on letters of credit, collateral pledging obligations, and reliance on confidence sensitive deposits.
■ Adverse market conditions may significantly affect our liquidity risk.
O Reduced asset liquidity may restrict our ability to sell certain types of assets for cash without taking significant losses. If
providers of credit preserve their capital, our access to borrowing from banks and others or access to other types of credit
such as letters of credit, may be reduced. If investors have a negative perception of our creditworthiness, this may reduce
access to wholesale borrowing in the debt capital markets or increase borrowing costs.
O Liquid assets are required to pledge as collateral to support activities such as the use of derivatives for hedging purposes and
to cover cash settlement associated with such derivatives.
O The principal sources of our liquidity are cash and our assets that are readily convertible into cash, including insurance and
annuity premiums, fee income earned on AUM, money market securities, and cash flow from our investment portfolio. The
issuance of long-term debt, common and preferred shares and other capital securities may also increase our available liquid
assets or be required to replace certain maturing or callable liabilities. In the event we seek additional financing, the
availability and terms of such financing will depend on a variety of factors including market conditions, the availability of
credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers, lenders
or investors could develop a negative perception of our long-term or short-term financial prospects if we incur large financial
losses or if the level of our business activity decreases due to a significant market downturn.
■ Dodd-Frank has increased the number of derivative transactions that must be cleared through regulated clearinghouses and has
therefore increased our liquidity risk (as such cleared derivatives are subject to both initial margin and variation margin
requirements, and a more restrictive set of eligible collateral than non-cleared derivatives).
O Over time in-force over the counter derivatives will migrate to clearinghouses, or the Company and its counterparties may
have the right to cancel the contract after specific dates or in certain situations such as a ratings downgrade, which could
accelerate the transition to clearing houses. As such, this may not become a significant risk for Manulife until a large portion
of our derivatives have transitioned to clearinghouses (expected in the 2021 to 2023 timeframe)1 and market conditions
adverse to liquidity (material increases in interest rates and/or equity markets) have been experienced.
In addition, variation margin rules for non-cleared derivatives (including eligible collateral restrictions) have further increased
our liquidity risk. Initial margin rules for non-cleared derivatives taking effect in September 2020 are also expected to affect
our liquidity risk.
O
■ We are exposed to re-pricing risk on letters of credit.
O
In the normal course of business, third-party banks issue letters of credit on our behalf. In lieu of posting collateral, our
businesses utilize letters of credit for which third parties are the beneficiaries, as well as for affiliate reinsurance transactions
between subsidiaries of MFC. Letters of credit and letters of credit facilities must be renewed periodically. At time of
renewal, the Company is exposed to re-pricing risk and under adverse conditions increases in costs may be realized. In the
most extreme scenarios, letters of credit capacity could become constrained due to non-renewals which would restrict our
flexibility to manage capital. This could negatively impact our ability to meet local capital requirements or our sales of
products in jurisdictions in which our operating companies have been affected. As at December 31, 2019, letters of credit for
which third parties are beneficiary, in the amount of $57 million, were outstanding. There were no assets pledged against
these outstanding letters of credit as at December 31, 2019.
■ Our obligations to pledge collateral or make payments related to declines in value of specified assets may adversely affect our
liquidity.
O
In the normal course of business, we are obligated to pledge assets to comply with jurisdictional regulatory and other
requirements including collateral pledged in relation to derivative contracts and assets held as collateral for repurchase
funding agreements. The amount of collateral we may be required to post under these agreements, and the amount of
payments we are required to make to our counterparties, may increase under certain circumstances, including a sustained or
continued decline in the value of our derivative contracts. Such additional collateral requirements and payments could have
an adverse effect on our liquidity. As at December 31, 2019, total pledged assets were $5,844 million, compared with
$5,041 million in 2018.
■ Our banking subsidiary relies on confidence sensitive deposits and this increases our liquidity risk.
O Manulife Bank is a wholly owned subsidiary of our Canadian life insurance operating company, MLI. The Bank is principally
funded by retail deposits. A real or perceived problem with the Bank or its parent companies could result in a loss of
confidence in the Bank’s ability to meet its obligations, which in turn may trigger a significant withdrawal of deposit funds. A
substantial portion of the Bank’s deposits are demand deposits that can be withdrawn at any time, while the majority of the
Bank’s assets are first residential mortgages in the form of home equity lines of credit, which represent long-term funding
obligations. If deposit withdrawal speeds exceed our extreme stress test assumptions the Bank may be forced to sell assets at
a loss to third parties or call the home equity lines of credit.
1 See “Caution regarding forward-looking statements” above.
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The declaration and payment of dividends and the amount thereof is subject to change.
■ The holders of common shares are entitled to receive dividends as and when declared by the Board of Directors of MFC, subject to
the preference of the holders of Class A Shares, Class 1 Shares, Class B Shares (collectively, the “Preferred Shares”) and any other
shares ranking senior to the common shares with respect to priority in payment of dividends. The declaration and payment of
dividends and the amount thereof is subject to the discretion of the Board of Directors of MFC and is dependent upon the results of
operations, financial condition, cash requirements and future prospects of, and regulatory and contractual restrictions on the
payment of dividends by MFC and other factors deemed relevant by the Board of Directors of MFC. Although MFC has historically
declared quarterly cash dividends on the common shares, MFC is not required to do so and the Board of Directors of MFC may
reduce, defer or eliminate MFC’s common share dividend in the future.
■ The foregoing risk disclosure in respect of the declaration and payment of dividends on the common shares applies equally in
respect of the declaration and payment of dividends on the Preferred Shares, notwithstanding that the Preferred Shares have a fixed
rate of dividend.
■ See “Government Regulation” and “Dividends” in MFC’s Annual Information Form dated February 12, 2020 for a summary of
additional statutory and contractual restrictions concerning the declaration of dividends by MFC.
d. Credit Risk Factors
Worsening regional and global economic conditions or the rise in interest rates could result in borrower or counterparty defaults or
downgrades and could lead to increased provisions or impairments related to our general fund invested assets and off-balance sheet
derivative financial instruments, and an increase in provisions for future credit impairments to be included in our policy liabilities. Any
of our reinsurance providers being unable or unwilling to fulfill their contractual obligations related to the liabilities we cede to them
could lead to an increase in policy liabilities.
Our invested assets primarily include investment grade bonds, private placements, commercial mortgages, asset-backed securities, and
consumer loans. These assets are generally carried at fair value, but changes in value that arise from a credit-related impairment are
recorded as a charge against income. The return assumptions incorporated in actuarial liabilities include an expected level of future
asset impairments. There is a risk that actual impairments will exceed the assumed level of impairments in the future and earnings
could be adversely impacted.
Volatility may arise from defaults and downgrade charges on our invested assets and as a result, losses could potentially rise above
long-term expected levels. Net impaired fixed income assets were $234 million, representing 0.06% of total general fund invested
assets as at December 31, 2019, compared with $179 million, representing 0.05% of total general fund invested assets as at
December 31, 2018.
If a counterparty fails to fulfill its obligations, we may be exposed to risks we had sought to mitigate.
■ The Company uses derivative financial instruments to mitigate exposures to public equity, foreign currency, interest rate and other
market risks arising from on-balance sheet financial instruments, guarantees related to variable annuity products, selected
anticipated transactions and certain other guarantees. The Company may be exposed to counterparty risk if a counterparty fails to
pay amounts owed to us or otherwise perform its obligations to us. Counterparty risk increases during economic downturns
because the probability of default increases for most counterparties. If any of these counterparties default, we may not be able to
recover the amounts due from that counterparty. As at December 31, 2019, the largest single counterparty exposure, without
taking into account the impact of master netting agreements or the benefit of collateral held, was $3,047 million
(2018 – $2,269 million). The net exposure to this counterparty, after taking into account master netting agreements and the fair
value of collateral held, was nil (2018 – nil). As at December 31, 2019, the total maximum credit exposure related to derivatives
across all counterparties, without taking into account the impact of master netting agreements and the benefit of collateral held,
was $20,144 million (2018 – $14,320 million) compared with $67 million after taking into account master netting agreements and
the benefit of fair value of collateral held (2018 – $245 million). The exposure to any counterparty would grow if, upon the
counterparty’s default, markets moved such that our derivatives with that counterparty gain in value. Until we are able to replace
that derivative with another counterparty, the gain on the derivatives subsequent to the counterparty’s default would not be
backed by collateral. The Company reinsures a portion of the business we enter into; however, we remain legally liable for contracts
that we had reinsured. In the event that any of our reinsurance providers were unable or unwilling to fulfill their contractual
obligations related to the liabilities we cede to them, we would need to increase actuarial reserves, adversely impacting our net
income attributed to shareholders and capital position. In addition, the Company has over time sold certain blocks of business to
third-party purchasers using reinsurance. To the extent that the reinsured contracts are not subsequently novated to the purchasers,
we remain legally liable to the insureds. Should the purchasers be unable or unwilling to fulfill their contractual obligations under
the reinsurance agreement, we would need to increase policy liabilities resulting in a charge to net income attributed to
shareholders. To reduce credit risk, the Company may require purchasers to provide collateral for their reinsurance liabilities.
■ We participate in a securities lending program whereby blocks of securities are loaned to third parties, primarily major brokerage
firms and commercial banks. Collateral, which exceeds the market value of the loaned securities, is retained by the Company until
the underlying security has been returned. If any of our securities lending counterparties default and the value of the collateral is
insufficient, we would incur losses. As at December 31, 2019, the Company had loaned securities (which are included in invested
assets) valued at approximately $558 million, compared with $1,518 million at December 31, 2018.
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The determination of allowances and impairments on our investments is subjective and changes could materially impact
our results of operations or financial position.
■ The determination of allowances and impairments is based upon a periodic evaluation of known and inherent risks associated with
the respective security. Management considers a wide range of factors about the security and uses its best judgment in evaluating
the cause of the decline, in estimating the appropriate value for the security and in assessing the prospects for near-term recovery.
Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future
earnings potential. Considerations in the impairment evaluation process include: (i) the severity of the impairment; (ii) the length of
time and the extent to which the market value of a security has been below its carrying value; (iii) the financial condition of the
issuer; (iv) the potential for impairments in an entire industry sector or sub-sector; (v) the potential for impairments in certain
economically depressed geographic locations; (vi) the potential for impairments of securities where the issuer, series of issuers or
industry has suffered a catastrophic type of loss or has exhausted natural resources; (vii) our ability and intent to hold the security
for a period of time sufficient to allow for the recovery of its value to an amount equal to or greater than cost or amortized cost;
(viii) unfavourable changes in forecasted cash flows on mortgage-backed and asset-backed securities; and (ix) other subjective
factors, including concentrations and information obtained from regulators and rating agencies.
■ Such evaluations and assessments are revised as conditions change and new information becomes available. We update our
evaluations regularly and reflect changes in allowances and impairments as such evaluations warrant. The evaluations are inherently
subjective and incorporate only those risk factors known to us at the time the evaluation is made. There can be no assurance that
management has accurately assessed the level of impairments that have occurred. Additional impairments will likely need to be
taken or allowances provided for in the future as conditions evolve. Historical trends may not be indicative of future impairments or
allowances.
e. Product Risk Factors
We make a variety of assumptions related to the future level of claims, policyholder behaviour, expenses, reinsurance costs and sales
levels when we design and price products, and when we establish policy liabilities. Assumptions for future claims are generally based
on both Company and industry experience, and assumptions for future policyholder behaviour and expenses are generally based on
Company experience. Assumptions for future policyholder behaviour include assumptions related to the retention rates for insurance
and wealth products. Assumptions for expenses include assumptions related to future maintenance expense levels and volume of the
business.
Losses may result should actual experience be materially different than that assumed in the valuation of policy liabilities.
■ Such losses could have a significant adverse effect on our results of operations and financial condition. In addition, we periodically
review the assumptions we make in determining our policy liabilities and the review may result in an increase in policy liabilities and
a decrease in net income attributed to shareholders. Such assumptions require significant professional judgment, and actual
experience may be materially different than the assumptions we make. (See “Critical Actuarial and Accounting Policies” above.)
We may be unable to implement necessary price increases on our in-force businesses or may face delays in
implementation.
■ We continue to seek state regulatory approvals for price increases on existing long-term care business in the United States. We
cannot be certain whether or when each approval will be granted. For some in-force business regulatory approval for price increases
may not be required. However, regulators or policyholders may nonetheless seek to challenge our authority to implement such
increases. Our policy liabilities reflect our estimates of the impact of these price increases, but should we be less successful than
anticipated in obtaining them, then policy liabilities could increase accordingly and reduce net income attributed to shareholders.
Evolving legislation related to genetic testing could adversely impact our underwriting abilities.
■ Current or future legislation in jurisdictions where Manulife operates may restrict its right to underwrite based on access to genetic
test results. Without the obligation of disclosure, the asymmetry of information shared between applicant and insurer could
increase anti-selection in both new business and in-force policyholder behaviour. The impact of restricting insurers’ access to this
information and the associated problems of anti-selection becomes more acute where genetic technology leads to advancements in
diagnosis of life-threatening conditions that are not matched by improvements in treatment. We cannot predict the potential
financial impact that this would have on the Company or the industry as a whole. In addition, there may be further unforeseen
implications as genetic testing continues to evolve and becomes more established in mainstream medical practice.
Life and health insurance claims may be impacted unexpectedly by changes in the prevalence of diseases or illnesses,
medical and technology advances, widespread lifestyle changes, natural disasters, large-scale human-made disasters and
acts of terrorism.
■ Claims resulting from catastrophic events could cause substantial volatility in our financial results in any period and could materially
reduce our profitability or harm our financial condition. Large-scale catastrophic events may also reduce the overall level of
economic activity, which could hurt our business and our ability to write new business. It is possible that geographic concentration
of insured individuals, could increase the severity of claims we receive from future catastrophic events. The effectiveness of external
parties, including governmental and nongovernmental organizations, in combating the severity of such an event is outside of our
control and could have a material impact on the losses we experience.
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■ The cost of health insurance benefits may be impacted by unforeseen trends in the incidence, termination and severity rates of
claims. The ultimate level of lifetime benefits paid to policyholders may be increased by an unexpected increase in life expectancy.
For example, advances in technology could lead to longer lives through better medical treatment or better disease prevention.
Policyholder behaviour including premium payment patterns, policy renewals, lapse rates and withdrawal and surrender activity are
influenced by many factors including market and general economic conditions, and the availability and relative attractiveness of
other products in the marketplace. For example, a weak or declining economic environment could increase the value of guarantees
associated with variable annuities or other embedded guarantees and contribute to adverse policyholder behaviour experience, or a
rapid rise in interest rates could increase the attractiveness of alternatives for customers holding products that offer contractual
surrender benefits that are not market value adjusted, which could also contribute to adverse policyholder behaviour experience. As
well, adverse claims experience could result from systematic anti-selection, which could arise from the development of investor
owned and secondary markets for life insurance policies, anti-selective lapse behaviour, underwriting process failures, anti-selective
policyholder behaviour due to greater consumer accessibility to home-based medical screening, or other factors.
External market conditions determine the availability, terms and cost of reinsurance protection which could impact our
financial position and our ability to write new policies.
■ As part of our overall risk and capital management strategy, we purchase reinsurance protection on certain risks underwritten or
assumed by our various insurance businesses. As the global reinsurance industry continues to review and optimize their business
models, certain of our reinsurers have attempted to increase rates on our existing reinsurance contracts. The ability of our reinsurers
to increase rates depends upon the terms of each reinsurance contract. Typically, the reinsurer’s ability to raise rates is restricted by
a number of terms in our reinsurance contracts, which we seek to enforce. We believe our reinsurance provisions are appropriate at
December 31, 2019; however, there can be no assurance regarding the impact of future rate increase actions taken by our
reinsurers. Accordingly, future rate increase actions by our reinsurers could result in accounting charges, an increase in the cost of
reinsurance, and the assumption of more risk on business already reinsured.
In addition, an increase in the cost of reinsurance could also adversely affect our ability to write future business or result in the
assumption of more risk with respect to policies we issue. Premium rates charged on new policies we write are based, in part, on
the assumption that reinsurance will be available at a certain cost. Certain reinsurers may attempt to increase the rates they charge
us for new policies we write, and for competitive reasons, we may not be able to raise the premium rates we charge for newly
written policies to offset the increase in reinsurance rates. If the cost of reinsurance were to increase, if reinsurance were to become
unavailable, and if alternatives to reinsurance were not available, our ability to write new policies at competitive premium rates
could be adversely affected.
■
f. Operational Risk Factors
Operational risk is naturally present in all of our business activities and encompasses a broad range of risks, including regulatory
compliance failures, legal disputes, technology failures, business interruption, information security and privacy breaches, human
resource management failures, processing errors, modelling errors, business integration, theft and fraud, and damage to physical
assets. Exposures can take the form of financial losses, regulatory sanctions, loss of competitive positioning, or damage to our
reputation. Operational risk is also embedded in all the practices we use to manage other risks; therefore, if not managed effectively,
operational risk can impact our ability to manage other key risks such as credit risk, market risk, liquidity risk and insurance risk.
Adverse publicity, litigation or regulatory action resulting from our business practices or actions by our employees,
representatives and/or business partners, could erode our corporate image and damage our franchise value and/or create
losses.
■ Manulife’s reputation is one of its most valuable assets. Harm to a company’s reputation is often a consequence of risk control
failure, whether associated with complex financial transactions or relatively routine operational activities. Manulife’s reputation
could also be harmed by the actions of third parties with whom we do business. Our representatives include affiliated broker-
dealers, agents, wholesalers and independent distributors, such as broker-dealers and banks, whose services and representations
our customers rely on. Business partners include, among others, third parties to whom we outsource certain functions and that we
rely on to fulfill various obligations.
If any of these representatives or business partners fail to adequately perform their responsibilities, or monitor its own risk, these
failures could affect our business reputation and operations. While we seek to maintain adequate internal risk management policies
and procedures and protect against performance failures, events may occur that could cause us to lose customers or suffer legal or
regulatory sanctions, which could have a material adverse effect on our reputation, our business, and our results of operations. For
further discussion of government regulation and legal proceedings refer to “Government Regulation” in MFC’s Annual Information
Form dated February 12, 2020 and note 18 of the Consolidated Financial Statements.
■
If we are not able to attract, motivate and retain agency leaders and individual agents, our competitive position, growth
and profitability will suffer.
■ We must attract and retain sales representatives to sell our products. Strong competition exists among financial services companies
for efficient and effective sales representatives. We compete with other financial services companies for sales representatives
primarily on the basis of our financial position, brand, support services and compensation and product features. Any of these factors
could change either because we change the Company or our products, or because our competitors change theirs and we are
unable or unwilling to adapt. If we are unable to attract and retain sufficient sales representatives to sell our products, our ability to
compete and revenues from new sales would suffer, which could have a material adverse effect on our business, results of
operations and financial condition.
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If we are unable to complete key projects on time, on budget, and capture planned benefits, our business strategies and
plans, and operations may be impaired.
■ We must successfully deliver a number of key projects in order to implement our business strategies and plans. If we are unable to
complete these projects in accordance with planned schedules, and to capture projected benefits, there could be a material adverse
effect on our business and financial condition.
Key business processes may fail, causing material loss events and impacting our customers and reputation
■ A large number of complex transactions are performed by the organization, and there is risk that errors may have significant impact
on our customers or result in a loss to the organization. Controls are in place that seek to ensure processing accuracy for our most
significant business processes, and escalation and reporting processes have been established for when errors do occur.
The interconnectedness of our operations and risk management strategies could expose us to risk if all factors are not
appropriately considered and communicated.
■ Our business operations, including strategies and operations related to risk management, asset liability management and liquidity
management, are interconnected and complex. Changes in one area may have a secondary impact in another area of our
operations. For example, risk management actions, such as the increased use of interest rate swaps, could have implications for the
Company’s Global Wealth and Asset Management segment or its Treasury function, as this strategy could result in the need to post
additional amounts of collateral. Failure to appropriately consider these inter-relationships, or effectively communicate changes in
strategies or activities across our operations, could have a negative impact on the strategic objectives or operations of another
group. Further, failure to consider these inter-relationships in our modeling and financial and strategic decision-making processes
could have a negative impact on our operations.
Our risk management policies, procedures and strategies may leave us exposed to unidentified or unanticipated risks,
which could negatively affect our business, results of operations and financial condition.
■ We have devoted significant resources to develop our risk management policies, procedures and strategies and expect to continue
to do so in the future. Nonetheless, there is a risk that our policies, procedures and strategies may not be comprehensive. Many of
our methods for measuring and managing risk and exposures are based upon the use of observed historical market behaviour or
statistics based on historical models. Future behaviour may be very different from past behaviour, especially if there are some
fundamental changes that affect future behaviour. As an example, the increased occurrence of negative interest rates can make it
difficult to model future interest rates as interest rate models have been generally developed for an environment of positive interest
rates. As a result, these methods may not fully predict future exposures, which can be significantly greater than our historical
measures indicate. Other risk management methods depend upon the evaluation and/or reporting of information regarding
markets, clients, client transactions, catastrophe occurrence or other matters publicly available or otherwise accessible to us. This
information may not always be accurate, complete, up-to-date or properly evaluated or reported.
We are subject to tax audits, tax litigation or similar proceedings, and as a result we may owe additional taxes, interest
and penalties in amounts that may be material.
■ We are subject to income and other taxes in the jurisdictions in which we do business. In determining our provisions for income
taxes and our accounting for tax related matters in general, we are required to exercise judgment. We regularly make estimates
where the ultimate tax determination is uncertain. There can be no assurance that the final determination of any tax audit, appeal
of the decision of a taxing authority, tax litigation or similar proceedings will not be materially different from that reflected in our
historical financial statements. The assessment of additional taxes, interest and penalties could be materially adverse to our current
and future results of operations and financial condition.
Our non-North American operations face political, legal, operational and other risks that could negatively affect those
operations or our results of operations and financial condition.
■ A substantial portion of our revenue and net income attributed to shareholders is derived from our operations outside of North
America, primarily in key Asian markets. Some of these key geographical markets are developing and are rapidly growing countries
and markets that present unique risks that we do not face, or are negligible, in our operations in Canada or the U.S. Our operations
outside of North America face the risk of discriminatory regulation, political and economic instability, market volatility and
significant inflation, limited protection for, or increased costs to protect intellectual property rights, inability to protect and/or
enforce contractual or legal rights, nationalization or expropriation of assets, price controls and exchange controls or other
restrictions that prevent us from transferring funds from these operations out of the countries in which they operate or converting
local currencies we hold into Canadian or U.S. dollars. Failure to manage these risks could have a significant negative impact on our
operations and profitability.
■ Any plans to expand our global operations in markets where we operate and potentially in new markets may require considerable
management time, as well as start-up expenses for market development before any significant revenues and earnings are
generated. Operations in new foreign markets may achieve low margins or may be unprofitable, and expansion in existing markets
may be affected by local economic and market conditions.
We are regularly involved in litigation.
■ We are regularly involved in litigation, either as a plaintiff or defendant. These cases could result in an unfavourable resolution and
could have a material adverse effect on our results of operations and financial condition. For further discussion of legal proceedings
refer to note 18 of the 2019 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
83
We are exposed to investors trying to profit from short positions in our stock.
■ Short sellers seek to profit from a decline in the price of our common shares. Through their actions and public statements, they may
encourage the decline in price from which they profit and may encourage others to take short positions in our shares. The existence
of such short positions and the related publicity may lead to continued volatility in our common share price.
System failures or events that impact our facilities may disrupt business operations.
■ Technology is used in virtually all aspects of our business and operations; in addition, part of our strategy involves the expansion of
technology to directly serve our customers. An interruption in the service of our technology resulting from system failure, cyber-
attack, human error, natural disaster, human-made disaster, pandemic, or other unpredictable events beyond reasonable control
could prevent us from effectively operating our business.
■ While our facilities and operations are distributed across the globe, we can experience extreme weather, natural disasters, civil
unrest, human-made disasters, power outages, pandemic, and other events which can prevent access to, and operations within, the
facilities for our employees, partners, and other parties that support our business operations.
■ We take measures to plan, structure and protect against routine events that may impact our operations, and maintain plans to
recover from unpredictable events. An interruption to our operations may subject us to regulatory sanctions and legal claims, lead
to a loss of customers, assets and revenues, result in unauthorized disclosures of personal or confidential information, or otherwise
adversely affect us from a financial, operational and reputational perspective.
An information security or privacy breach of our operations or of a related third party could adversely impact our
business, results of operations, financial condition, and reputation.
■
It is possible that the Company may not be able to anticipate or to implement effective preventive measures against all disruptions
or privacy and security breaches, especially because the techniques used change frequently, generally increase in sophistication,
often are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including
organized crime, hackers, terrorists, activists, and other external parties, including parties sponsored by hostile foreign governments.
Those parties may also attempt to fraudulently induce employees, customers, and other users of the Company’s systems or third-
party service providers to disclose sensitive information in order to gain access to the Company’s data or that of its customers or
clients. We, our customers, regulators and other third parties have been subject to, and are likely to continue to be the target of,
cyber-attacks, including computer viruses, malicious or destructive code, phishing attacks, denial of service and other security
incidents, that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of personal, confidential,
proprietary and other information of the Company, our employees, our customers or of third parties, or otherwise materially disrupt
our or our customers’ or other third parties’ network access or business operations. These attacks could adversely impact us from a
financial, operational and reputational perspective.
■ The Company has an Information Risk Management Program, which includes information and cyber security defenses, to protect
our networks and systems from attacks; however, there can be no assurance that these counter measures will be successful in every
instance in protecting our networks against advanced attacks. In addition to protection, detection and response mechanisms, the
Company maintains cyber risk insurance, but this insurance may not cover all costs associated with the financial, operational and
reputational consequences of personal, confidential or proprietary information being compromised.
Competition for the best people is intense and an inability to recruit qualified individuals may negatively impact our
ability to execute on business strategies or to conduct our operations.
■ We compete with other insurance companies and financial institutions for qualified executives, employees and agents. We must
attract and retain top talent to maintain our competitive advantage. Failure to attract and retain the best people could adversely
impact our business.
Model risk may arise from the inappropriate use or interpretation of models or their output, or the use of deficient
models, data or assumptions.
■ We are relying on some highly complex models for pricing, valuation and risk measurement, and for input to decision making.
Consequently, the risk of inappropriate use or interpretation of our models or their output, or the use of deficient models, could
have a material adverse effect on our business.
■ We are continuing to enhance our valuation models and processes across the organization. We do not expect this initiative to result
in significant reserve adjustments. However, as we systematically review our models, there could be updates to our assumptions and
methodologies that result in reserve changes.
Fraud risks may arise from incidents related to identity theft and account takeovers.
Policies and procedures are in place to prevent and detect fraud incidents; however, our existing control environment may not be able
to mitigate all possible incidents, which could adversely impact our business, results of operations, financial condition, and reputation.
Policies and procedures are being reviewed to enhance our capabilities to better protect against more sophisticated fraud threats, but
we may nevertheless not be able to mitigate all possible incidents.
Contracted third parties may fail to deliver against contracted activities.
We rely on third parties to perform a variety of activities on our behalf, and failure of our most significant third parties to meet their
contracted obligations may impact our ability to meet our strategic objectives or may directly impact our customers. Vendor
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governance processes are in place that seek to ensure that appropriate due diligence is conducted at time of vendor contracting, and
ongoing vendor monitoring activities are in place that seek to ensure that the contracted services are being fulfilled to satisfaction, but
we may nevertheless not be able to mitigate all possible failures.
Environmental risk may arise related to our commercial mortgage loan portfolio and owned property or from our
business operations.
Environmental risk may originate from investment properties that are subject to natural or human-made environmental risk. Real
estate assets may be owned, leased and/or managed, as well as mortgaged by Manulife and we might enter into the chain of liability
due to foreclosure ownership when in default.
Liability under environmental protection laws resulting from our commercial mortgage loan portfolio and owned property (including
commercial real estate, oil and gas, timberland and farmland properties) may adversely impact our reputation, results of operations
and financial condition. Under applicable laws, contamination of a property with hazardous materials or substances may give rise to a
lien on the property to secure recovery of the costs of cleanup. In some instances, this lien has priority over the lien of an existing
mortgage encumbering the property. The environmental risk may result from on-site or off-site (adjacent) due to migration of
regulated pollutants or contaminates with financial or reputational environmental risk and liability consequences by virtue of strict
liability. Environmental risk could also arise from natural disasters (e.g., climate change, weather, fire, earthquake, floods, pests) or
human activities (use of chemicals, pesticides) conducted within the site or when impacted from adjacent sites.
Additionally, as lender, we may incur environmental liability (including without limitation liability for clean-up, remediation and
damages incurred by third parties) similar to that of an owner or operator of the property, if we or our agents exercise sufficient
control over the operations at the property. We may also have liability as the owner and/or operator of real estate for environmental
conditions or contamination that exist or occur on the property or affecting other property.
In addition, failure to adequately prepare for the potential impacts of climate change may have a negative impact on our financial
position or our ability to operate. Potential impacts may be direct or indirect and may include: business losses or disruption resulting
from extreme weather conditions; the impact of changes in legal or regulatory framework made to address climate change; impact to
fixed income asset values for portfolio investments in fossil-fuel related industries; or increased mortality or morbidity resulting from
environmental damage or climate change.
g. Additional Risk Factors That May Affect Future Results
Other factors that may affect future results include changes in government trade policy, monetary policy or fiscal policy; political
conditions and developments in or affecting the countries in which we operate; technological changes; public infrastructure
disruptions; changes in consumer spending and saving habits; the possible impact on local, national or global economies from public
health emergencies, such as an influenza pandemic, and international conflicts and other developments including those relating to
terrorist activities. Although we take steps to anticipate and minimize risks in general, unforeseen future events may have a negative
impact on our business, financial condition and results of operations.
We caution that the preceding discussion of risks that may affect future results is not exhaustive. When relying on our forward-
looking statements to make decisions with respect to our Company, investors and others should carefully consider the foregoing risks,
as well as other uncertainties and potential events, and other external and Company specific risks that may adversely affect the future
business, financial condition or results of operations of our Company.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
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12. Controls and Procedures
a. Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us
is recorded, processed, summarized, and reported accurately and completely and within the time periods specified under Canadian
and U.S. securities laws. Our process includes controls and procedures that are designed to ensure that information is accumulated
and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure.
As of December 31, 2019, management evaluated the effectiveness of its disclosure controls and procedures as defined under the
rules adopted by the U.S. Securities and Exchange Commission and the Canadian securities regulatory authorities. This evaluation was
performed under the supervision of the Audit Committee, the CEO and CFO. Based on that evaluation, the CEO and CFO concluded
that our disclosure controls and procedures were effective as at December 31, 2019.
MFC’s Audit Committee has reviewed this MD&A and the 2019 Consolidated Financial Statements and MFC’s Board of Directors
approved these reports prior to their release.
b. Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control system was designed to provide reasonable assurance to management and the Board of Directors regarding the
preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. All
internal control systems, no matter how well designed, have inherent limitations due to manual controls. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation.
Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with
management’s authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to ensure that
information and communication flows are effective and to monitor performance, including performance of internal control
procedures.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 based on
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework in Internal Control
– Integrated Framework. Based on this assessment, management believes that, as of December 31, 2019, the Company’s internal
control over financial reporting is effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by
Ernst & Young LLP, the Company’s independent registered public accounting firm that also audited the Consolidated Financial
Statements of the Company for the year ended December 31, 2019. Their report expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.
c. Changes in Internal Control over Financial Reporting
No changes were made in our internal control over financial reporting during the year ended December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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13. 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. A financial
measure is considered a non-GAAP measure for Canadian securities law purposes if it is presented other than in accordance with
generally accepted accounting principles used for the Company’s audited financial statements. Non-GAAP measures include: core
earnings (loss); core ROE; diluted core earnings per common share; core earnings before income taxes, depreciation and amortization
(“core EBITDA”); core EBITDA margin; core investment gains, constant exchange rate basis (measures that are reported on a constant
exchange rate basis include percentage growth/decline in core earnings, sales, APE sales, gross flows, core EBITDA, new business value
(“NBV”), new business value margin (“NBV margin”), assets under management, and assets under management and administration
(“AUMA”)); assets under administration; expense efficiency ratio; assets under management and administration; assets under
management; consolidated capital; embedded value; new business value; new business value margin; sales; APE sales; gross flows;
and net flows. Non-GAAP financial measures are not defined terms under GAAP and, therefore, 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.
Effective January 1, 2018, the Company’s reporting segments have been reorganized as outlined under the “Manulife Financial
Corporation” section at the beginning of the MD&A. In addition, we made the following adjustments to our reporting:
■ The definition of the Global Wealth and Asset Management business now includes the Guaranteed Interest Account portion of the
Canadian Pension defined contribution business;
■ The NBV calculation has been refined for our Canadian segregated fund guarantee business; and
■ The calculation of net flows and AUMA now includes the sale of non-proprietary products in Canada.
Core earnings (loss) is a non-GAAP measure which we believe aids investors in better understanding the long-term earnings capacity
and valuation of the business. Core earnings allows investors to focus on the Company’s operating performance by excluding the
direct impact of changes in equity markets and interest rates, changes in actuarial methods and assumptions as well as a number of
other items, outlined below, that we believe are material, but do not reflect the underlying earnings capacity of the business. For
example, due to the long-term nature of our business, the mark-to-market movements of equity markets, interest rates, foreign
currency exchange rates and commodity prices from period-to-period can, and frequently do, have a substantial impact on the
reported amounts of our assets, liabilities and net income attributed to shareholders. These reported amounts are not actually realized
at the time and may never be realized if the markets move in the opposite direction in a subsequent period. This makes it very difficult
for investors to evaluate how our businesses are performing from period-to-period and to compare our performance with other
issuers.
We believe that core earnings better reflect the underlying earnings capacity and valuation of our business. We use core earnings as
the basis for management planning and reporting and, along with net income attributed to shareholders, as a key metric used in our
short and mid-term incentive plans at the total Company and operating segment level.
While core earnings 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. See “Quarterly Financial Information” below for reconciliation of core
earnings to net income attributed to shareholders.
Any future changes to the core earnings definition referred to below, will be disclosed.
Items included in core earnings:
1.
Expected earnings on in-force policies, 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.
4.
5.
6.
New business strain and gains.
Policyholder experience gains or losses.
Acquisition and operating expenses compared with expense assumptions used in the measurement of policy liabilities.
Up to $400 million of net favourable investment-related experience reported in a single year, which are referred to as “core
investment gains”. This means up to $100 million in the first quarter, up to $200 million on a year-to-date basis in the second
quarter, up to $300 million on a year-to-date basis in the third quarter and up to $400 million on a full year basis in the fourth
quarter. Any investment-related experience losses reported in a quarter will be offset against the net year-to-date investment-
related experience gains with the difference being included in core earnings subject to a maximum of the year-to-date core
investment gains and a minimum of zero, which reflects our expectation that investment-related experience will be positive
through-the-business cycle. To the extent any investment-related experience losses cannot be fully offset in a quarter they will
be carried forward to be offset against investment-related experience gains in subsequent quarters in the same year, for
purposes of determining core investment gains. Investment-related experience relates to fixed income investing, ALDA returns,
credit experience and asset mix changes other than those related to a strategic change. An example of a strategic asset mix
change is outlined below.
O This favourable and unfavourable investment-related experience is a combination of reported investment experience as well
as the impact of investing activities on the measurement of our policy liabilities. We do not attribute specific components of
investment-related experience to amounts included or excluded from core earnings.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
87
O The $400 million threshold represents the estimated average annualized amount of net favourable investment-related
experience that the Company reasonably expects to achieve through-the-business cycle based on historical experience. It is
not a forecast of expected net favourable investment-related experience for any given fiscal year.
O Our average net annualized investment-related experience calculated from the introduction of core earnings in 2012 to the
end of 2019 was $527 million (2012 to the end of 2018 was $493 million).
O The decision announced on December 22, 2017 to reduce the allocation to ALDA in the portfolio asset mix supporting our
legacy businesses was the first strategic asset mix change since we introduced the core earnings metric in 2012. We refined
our description of investment-related experience in 2017 to note that asset mix changes other than those related to a
strategic change are taken into consideration in the investment-related experience component of core investment gains.
O While historical investment return time horizons may vary in length based on underlying asset classes generally exceeding
20 years, for purposes of establishing the threshold, we look at a business cycle that is five or more years and includes a
recession. We monitor the appropriateness of the threshold as part of our annual five-year planning process and would
adjust it, either to a higher or lower amount, in the future if we believed that our threshold was no longer appropriate.
O Specific criteria used for evaluating a potential adjustment to the threshold may include, but are not limited to, the extent to
which actual investment-related experience differs materially from actuarial assumptions used in measuring insurance
contract liabilities, material market events, material dispositions or acquisitions of assets, and regulatory or accounting
changes.
7.
Earnings on surplus other than mark-to-market items. Gains on available-for-sale (“AFS”) equities and seed money investments
in new segregated and mutual funds are included in core earnings.
Routine or non-material legal settlements.
All other items not specifically excluded.
8.
9.
10. Tax on the above items.
11. All tax related items except the impact of enacted or substantively enacted income tax rate changes.
Items excluded from core earnings:
1.
The direct impact of equity markets and interest rates and variable annuity guarantee liabilities includes the items listed below.
O 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 insurance and investment contract 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.
O Gains (charges) on variable annuity guarantee liabilities not dynamically hedged.
O Gains (charges) on general fund equity investments supporting policy liabilities and on fee income.
O Gains (charges) 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 insurance and investment contract liabilities.
O Gains (charges) on higher (lower) fixed income reinvestment rates assumed in the valuation of insurance and investment
contract liabilities.
O Gains (charges) on sale of AFS bonds and open derivatives not in hedging relationships in the Corporate and Other segment.
2.
Net favourable investment-related experience in excess of $400 million per annum or net unfavourable investment-related
experience on a year-to-date basis.
3. Mark-to-market gains or losses on assets held in the Corporate and Other segment other than gains on AFS equities and seed
4.
money investments in new segregated or mutual funds.
Changes in actuarial methods and assumptions. As noted in the “Critical Actuarial and Accounting Policies” section above,
policy liabilities for IFRS are valued in Canada under standards established by the Actuarial Standards Board. The standards
require a comprehensive review of actuarial methods and assumptions to be performed annually. The review is designed to
reduce the Company’s exposure to uncertainty by ensuring assumptions for both asset related and liability related risks remain
appropriate and is accomplished by monitoring experience and selecting assumptions which represent a current best estimate
view of expected future experience, and margins for adverse deviations that are appropriate for the risks assumed. Changes
related to URR are included in the direct impact of equity markets and interest rates and variable annuity guarantee liabilities. By
excluding the results of the annual reviews, core earnings assist investors in evaluating our operational performance and
comparing our operational performance from period to period with other global insurance companies because the associated
gain or loss is not reflective of current year performance and not reported in net income in most actuarial standards outside of
Canada.
The impact on the measurement of policy liabilities of changes in product features or new reinsurance transactions, if material.
5.
6. Goodwill impairment charges.
7. Gains or losses on disposition of a business.
8. Material one-time only adjustments, including highly unusual/extraordinary and material legal settlements or other items that are
material and exceptional in nature.
Tax on the above items.
Impact of enacted or substantially enacted income tax rate changes.
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
9.
10.
88
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
ROE using average common shareholders’ equity.
Diluted core earnings per common share is core earnings available to common shareholders expressed per diluted weighted
average common share outstanding.
The Company also uses financial performance measures that are prepared on a constant exchange rate basis, which are non-GAAP
measures that exclude the impact of currency fluctuations (from local currency to Canadian dollars at a total Company level and from
local currency to U.S. dollars in Asia). Amounts stated on a constant exchange rate basis in this report are calculated, as appropriate,
using the income statement and balance sheet exchange rates effective for the fourth quarter of 2019. Measures that are reported on
a constant exchange rate basis include growth in core earnings, sales, APE sales, gross flows, core EBITDA, new business value, new
business value margin, assets under management, and assets under management and administration.
Assets under management and administration (“AUMA”) is a non-GAAP measure of the size of the Company. It is comprised of
the non-GAAP measures assets under management (“AUM”), which includes both assets of general account and external client assets
for which we provide investment management services, and assets under administration, which includes assets for which we provide
administrative services only. Assets under management and administration is a common industry metric for WAM businesses.
Assets under management and administration
As at December 31,
($ millions)
Total invested assets
Segregated funds net assets
Assets under management per financial statements
Mutual funds
Institutional advisory accounts (excluding segregated funds)
Other funds
Total assets under management
Other assets under administration
Currency impact
AUMA at constant exchange rates
$
2019
378,527
343,108
721,635
217,015
95,410
9,401
1,043,461
145,397
–
2018
$ 353,664
313,209
666,873
188,729
95,813
7,658
959,073
124,449
(36,054)
$ 1,188,858
$ 1,047,468
Consolidated capital
The definition we use for consolidated 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. Consolidated capital is calculated as the sum of: (i) total equity excluding accumulated other
comprehensive income (“AOCI”) on cash flow hedges; and (ii) liabilities for capital instruments.
Consolidated capital
As at December 31,
($ millions)
Total equity
Add AOCI loss on cash flow hedges
Add qualifying capital instruments
Consolidated capital
2019
2018
$ 50,106
143
7,120
$ 47,151
127
8,732
$ 57,369
$ 56,010
Core EBITDA is a non-GAAP measure which Manulife uses to better understand the long-term earnings capacity and valuation of our
Global WAM business on a basis more comparable to how the profitability of global asset managers is generally measured. Core
EBITDA presents core earnings before the impact of interest, taxes, depreciation, and amortization. Core EBITDA excludes certain
acquisition expenses related to insurance contracts in our retirement businesses which are deferred and amortized over the expected
life time of the customer relationship under the CALM. Core EBITDA was selected as a key performance indicator for our Global WAM
business, as EBITDA is widely used among asset management peers, and core earnings is a primary profitability metric for the
Company overall.
Core EBITDA margin is a non-GAAP measure which Manulife uses to better understand the long-term profitability of our Global
WAM business on a more comparable basis to how profitability of global asset managers are measured. Core EBITDA margin presents
core earnings before the impact of interest, taxes, depreciation, and amortization divided by total revenue from these businesses. Core
EBITDA margin was selected as a key performance indicator for our Global WAM business, as EBITDA margin is widely used among
asset management peers, and core earnings is a primary profitability metric for the Company overall.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
89
Global Wealth and Asset Management
For the years ended December 31,
($ millions)
Core EBITDA
Amortization of deferred acquisition costs and other depreciation
Amortization of deferred sales commissions
Core earnings before income taxes
Core income tax (expense) recovery
Core earnings
2019
2018
$ 1,536
(311)
(81)
$ 1,497
(301)
(98)
1,144
(123)
1,098
(113)
$ 1,021
$ 985
Expense efficiency ratio is a non-GAAP measure which Manulife uses to measure progress towards our target to be more efficient.
Efficiency ratio is defined as pre-tax general expenses included in core earnings divided by the sum of pre-tax core earnings and
pre-tax general expenses included in core earnings.
Embedded value (“EV”) is a measure of the present value of shareholders’ interests in the expected future distributable earnings on
in-force business reflected in the Consolidated Statements of Financial Position of Manulife, excluding any value associated with future
new business. EV is calculated as the sum of the adjusted net worth and the value of in-force business. The adjusted net worth is the
IFRS shareholders’ equity adjusted for goodwill and intangibles, fair value of surplus assets, the carrying value of debt and preferred
shares, and local statutory balance sheet, regulatory reserve, and capital for Manulife’s Asian business. The value of in-force business
in Canada and the U.S. is the present value of expected future IFRS earnings on in-force business less the present value of the cost of
holding capital to support the in-force business under the MCCSR framework. The MCCSR framework was replaced by the LICAT
framework on January 1, 2018 and LICAT was used to calculate EV as at December 31, 2018. It has been used to calculate quarterly
NBV starting January 1, 2018. The value of in-force business in Asia reflects local statutory earnings and capital requirements. The
value of in-force excludes our Global WAM, Manulife Bank and Property and Casualty Reinsurance businesses.
New business value (“NBV”) is the change in embedded value as a result of sales in the reporting period. NBV is calculated as the
present value of shareholders’ interests in expected future distributable earnings, after the cost of capital, on actual new business sold
in the period using assumptions that are consistent with the assumptions used in the calculation of embedded value. NBV excludes
businesses with immaterial insurance risks, such as the Company’s Global WAM, Manulife Bank and the short-term Property and
Casualty Reinsurance businesses. NBV is a useful metric to evaluate the value created by the Company’s new business franchise.
New business value margin (“NBV margin”) is calculated as NBV divided by APE excluding non-controlling interests. APE is
calculated as 100% of annualized first year premiums for recurring premium products, and as 10% of single premiums for single
premium products. Both NBV and APE used in the NBV margin calculation are after non-controlling interests and exclude our Global
WAM, Manulife Bank and Property and Casualty Reinsurance businesses. The NBV margin is a useful metric to help understand the
profitability of our new business.
Sales are measured according to product type:
For individual insurance, sales include 100% of new annualized premiums and 10% 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. Single premium is the lump sum premium from the sale of a single premium product, e.g.
travel insurance. Sales are reported gross before the impact of reinsurance.
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.
APE sales is comprised of 100% of regular premiums/deposits and 10% of single premiums/deposits for both insurance and
insurance-based wealth accumulation products.
Insurance-based wealth accumulation product sales include all new deposits into variable and fixed annuity contracts. As we
discontinued sales of new Variable Annuity contracts in the U.S. in 1Q13, subsequent deposits into existing U.S. Variable Annuity
contracts are not reported as sales. Asia variable annuity deposits are included in APE sales.
Bank new lending volumes include bank loans and mortgages authorized in the period.
Gross flows is a new business measure presented for our Global WAM business and includes all deposits into mutual funds, college
savings 529 plans, group pension/retirement savings products, private wealth and institutional asset management products. Gross
flows is a common industry metric for WAM businesses as it provides a measure of how successful the businesses are at attracting
assets.
Net flows is presented for our Global WAM business and includes gross flows less redemptions for mutual funds, college savings 529
plans, group pension/retirement savings products, private wealth and institutional asset management products. Net flows is a
common industry metric for WAM businesses as it provides a measure of how successful the businesses are at attracting and retaining
assets. When gross flows exceed redemptions, net flows will be positive and will be referred to as net inflows. Conversely, when
redemptions exceed gross flows, net flows will be negative and will be referred to as net outflows.
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Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
14. Additional Disclosures
a. Contractual Obligations
In the normal course of business, the Company enters into contracts that give rise to obligations fixed by agreement as to the timing
and dollar amount of payment.
As at December 31, 2019, the Company’s contractual obligations and commitments are as follows:
Payments due by period
($ millions)
Long-term debt(1)
Liabilities for capital instruments(1)
Investment commitments
Lease Liabilities
Insurance contract liabilities(2)
Investment contract liabilities(1)
Deposits from Bank clients
Other
Total contractual obligations
$
Total
6,196
8,778
8,681
374
797,040
5,095
21,488
611
Less than
1 year
$
663
234
2,914
107
9,682
289
16,872
204
$
1 to 3
years
277
470
3,025
142
12,084
484
2,632
254
$
3 to 5
years
277
912
1,960
49
16,587
476
1,984
147
$
After 5
years
4,979
7,162
782
76
758,687
3,846
–
6
$ 848,263
$ 30,965
$ 19,368
$ 22,392
$ 775,538
(1) The contractual payments include principal, interest and distributions. The contractual payments reflect the amounts payable from January 1, 2020 up to and including
the final contractual maturity date. In the case of floating rate obligations, the floating rate index is based on the interest rates as at December 31, 2019 and is assumed
to remain constant to the final contractual maturity date. The Company may have the contractual right to redeem or repay obligations prior to maturity and if such right
is exercised, total contractual obligations paid and the timing of payment could vary significantly from the amounts and timing included in the table.
(2) Insurance contract liabilities cash flows include estimates related to the timing and payment of death and disability claims, policy surrenders, policy maturities, annuity
payments, minimum guarantees on segregated fund products, policyholder dividends, commissions and premium taxes offset by contractual future premiums on in-force
contracts. These estimated cash flows are based on the best estimate assumptions used in the determination of insurance contract liabilities. These amounts are
undiscounted and reflect recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows may differ from these estimates (see “Policy
Liabilities”). Cash flows include embedded derivatives measured separately at fair value.
b. Legal and Regulatory Proceedings
We are regularly involved in legal actions, both as a defendant and as a plaintiff. Information on legal and regulatory proceedings can
be found in note 18 of the 2019 Annual Consolidated Financial Statements.
c. Fourth Quarter Financial Highlights
Profitability
As at and for the quarters ended December 31,
($ millions, unless otherwise stated)
Profitability:
Net income attributed to shareholders
Core earnings(1),(2)
Diluted earnings per common share ($)
Diluted core earnings per common share ($)(1)
Return on common shareholders’ equity (“ROE”)
Core ROE(1)
2019
2018
2017
$ 1,228
$ 1,477
0.61
$
0.73
$
10.3%
12.5%
$
593
$ 1,337
$ 0.28
$ 0.65
5.3%
12.5%
$
(1,606)
$ 1,205
(0.83)
$
0.59
$
(17.1)%
12.1%
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.
(2) Impact of currency movement on the fourth quarter of 2019 (“4Q19”) core earnings compared with 4Q18 was a $4 million favourable variance.
Manulife’s 4Q19 net income attributed to shareholders was $1,228 million compared with $593 million in 4Q18. Net
income attributed to shareholders is comprised of core earnings (consisting of items we believe reflect the underlying earnings
capacity of the business), which amounted to $1,477 million in 4Q19 compared with $1,337 million in 4Q18, and items excluded
from core earnings, which netted to charges of $249 million in 4Q19 compared with charges of $744 million in 4Q18 for a period-
over-period decrease in charges of $495 million. Net income attributed to shareholders in 4Q19 was higher than in 4Q18 due to
$0.3 billion higher investment-related experience and a lower charge of $0.3 billion related to the direct impact of markets.
The $140 million increase in core earnings compared with 4Q18 was primarily driven by in-force and new business growth in the U.S.,
Hong Kong and Asia Other, growth in Global Wealth and Asset Management and the non-recurrence of market losses on seed
money investments in our surplus portfolio, partially offset by unfavourable policyholder experience in Canada and the U.S., lower
new business volumes in Japan and the impact on earnings of actions taken over the last 12 months to improve the capital efficiency
of our legacy businesses. Core earnings in 4Q19 included net policyholder experience losses of $22 million post-tax ($38 million
pre-tax) compared with gains of $11 million post-tax ($13 million pre-tax) in 4Q18.1 Reinsurance and ALDA portfolio mix actions to
improve the capital efficiency of our legacy businesses resulted in $17 million lower core earnings in 4Q19 compared with 4Q18.
1 Policyholder experience includes gains of $20 million from customers who have opted to change their existing medical coverage to the VHIS products in Hong Kong.
These gains did not have a material impact on core earnings as they were offset by new business strain.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
91
Core earnings by segment is presented in the table below for the periods presented.
For the quarters ended December 31,
($ millions)
Core earnings(1),(2)
Asia
Canada
U.S.
Global Wealth and Asset Management
Corporate and Other (excluding core investment gains)
Core investment gains(1)
Core earnings
2019
2018
$ 494
288
489
265
(159)
100
$ 463
305
454
231
(216)
100
$ 1,477
$ 1,337
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.
(2) 2018 comparatives for core earnings in each segment have been updated to reflect the 2019 methodology for allocating capital and interest on surplus to our insurance
segments from the Corporate and Other segment.
In Asia, core earnings were $494 million in 4Q19 compared with $463 million in 4Q18, an increase of 5%, after adjusting for the
impact of changes in foreign currency exchange rates. The increase in core earnings was driven by higher new business volumes and
in-force business growth in Hong Kong and Asia Other, partially offset by lower new business volumes in Japan. Sales of the recently-
launched VHIS products in Hong Kong did not have a material current period impact on core earnings as experience gains from
customers who have opted to change their existing medical coverage to the new VHIS product were offset by new business strain.
In Canada, core earnings were $288 million in 4Q19 compared with $305 million in 4Q18. The $17 million decrease was primarily
driven by unfavourable policyholder experience in our retail insurance businesses.
In the U.S., core earnings were $489 million in 4Q19 compared with $454 million in 4Q18. The 8% increase was driven by higher
sales volumes, tax benefits from the closure of prior tax years, and gains from a variable annuity transfer program were partially offset
by actions taken over the last 12 months to improve the capital efficiency of our legacy businesses and unfavourable 4Q19
policyholder experience in life and long-term care insurance compared with gains in 4Q18.
Global Wealth and Asset Management core earnings were $265 million in 4Q19 compared with $231 million in 4Q18. The increase of
15% was primarily driven by higher average asset levels.
Corporate and Other core loss excluding core investment gains was $159 million in 4Q19 compared with $216 million in 4Q18. The
$57 million decrease in core loss was primarily driven by the favourable impact of markets on seed money investments in new
segregated and mutual funds compared to losses in 4Q18, partly offset by lower gains on AFS equities, higher withholding taxes on
future U.S. remittances and the non-recurrence of a net release of P&C provisions in 4Q18.
The table below reconciles net income attributed to shareholders to core earnings for the periods presented and provides further
details for each of the items excluded from core earnings.
For the quarters ended December 31,
($ millions)
Core earnings(1)
Items excluded from core earnings
Investment-related experience outside of core earnings
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities (see table below)
Direct impact of equity markets and variable annuity guarantee liabilities(2)
Fixed income reinvestment rates assumed in the valuation of policy liabilities(3)
Sale of AFS bonds and derivative positions in the Corporate and Other segment
Reinsurance transactions
Restructuring charge(4)
Tax-related items and other(5)
Total items excluded from core earnings
Net income (loss) attributed to shareholders
2019
2018
$ 1,477
$ 1,337
182
(389)
125
(583)
69
(34)
–
(8)
(249)
(130)
(675)
(723)
112
(64)
142
(63)
(18)
(744)
$ 1,228
$ 593
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.
(2) In 4Q19, gains of $125 million were driven by the equity markets performing better than that assumed in the valuation of our policy liabilities. In 4Q18, losses of
$2,362 million from gross equity exposure were partially offset by gains of $1,614 million from dynamic hedging experience and $25 million from macro hedge
experience, which resulted in a loss of $723 million.
(3) The $583 million charge in 4Q19 primarily relates to lower corporate spreads and a decrease in the fair value of interest rate derivatives which more than offset the
decrease in liabilities arising from a steepening of the yield curve in the U.S. and Canada. The $112 million gain in 4Q18 for fixed income reinvestment assumptions was
driven by the increases in corporate spreads which resulted in an increase in the reinvestment yields on future fixed income purchases assumed in the measurement of
policy liabilities partially offset by a decrease in risk-free rates and increases in swap spreads that resulted in a decrease in the fair value of our swaps.
(4) The 4Q18 charge of $63 million is an update to the estimated $200 million charge that was reported in the second quarter of 2018.
(5) Tax-related items and other charges in 4Q19 related to legacy transaction fees. The charge in 4Q18 related to integration costs associated with a prior acquisition.
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Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
Growth
As at and for the quarters ended December 31,
($ millions, unless otherwise stated)
Asia APE sales
Canada APE sales
U.S. APE sales
Total APE sales(1)
Asia new business value
Canada new business value
U.S. new business value
Total new business value(1)
Wealth and asset management gross flows ($ billions)(1)
Wealth and asset management net flows ($ billions)(1)
Wealth and asset management assets under management and administration ($ billions)(1)
(1) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.
2019
2018
2017
$ 975
271
249
1,495
390
59
77
526
32.9
4.9
681.2
$ 1,040
277
152
1,469
402
51
48
501
26.3
(9.0)
608.8
$ 884
222
153
1,259
319
48
16
383
32.2
3.6
609.0
Sales
APE sales were $1.5 billion in 4Q19, an increase of 1% compared with 4Q18. In Asia, APE sales decreased 8% as growth in
Hong Kong and Asia Other was more than offset by the impact of tax changes to COLI product sales in Japan. In Canada, APE sales
decreased 2% as higher Manulife Par and small-case group insurance sales were more than offset by variability in the large-case
group insurance market. In the U.S., APE sales increased 64% driven by growth in domestic and international universal life sales.
Higher domestic universal life sales included the benefit of sales in advance of anticipated regulatory changes.
New Business Value was $526 million in 4Q19, an increase of 4% compared with 4Q18. In Asia, NBV decreased 4% to
$390 million, reflecting a decline in Japan sales, partially offset by higher sales in Hong Kong and volume growth and a more
favourable business mix in Asia Other. In Canada, NBV increased 16% to $59 million, driven by higher individual insurance sales and a
more favourable business mix in group insurance. In the U.S., NBV increased 61% to $77 million, primarily as a result of higher sales.
Wealth and Asset Management net inflows were $4.9 billion in 4Q19 compared with net outflows of $9.0 billion in 4Q18. Net
inflows in Asia were $0.2 billion in 4Q19 compared with $1.1 billion in 4Q18. The decrease was driven by higher redemptions and
lower gross flows in institutional asset management, partially offset by higher net inflows in retail. Net inflows in Canada were
$1.0 billion in 4Q19 compared with net outflows of $0.7 billion in 4Q18. The increase was driven by continued sales momentum
across the product line-up and lower redemptions in retail, as well as the funding of several large fixed income mandates in
institutional asset management. Net inflows in the U.S. were $3.7 billion in 4Q19 compared with net outflows of $9.4 billion in 4Q18
and represented the fourth consecutive quarter of growth. The growth compared with 4Q18 was driven by lower redemptions in
retail amid improved equity market returns and higher gross flows from all business lines.
Wealth and Asset Management gross flows were $32.9 billion in 4Q19 compared with $26.3 billion in 4Q18. Gross flows in Asia
were $5.9 billion in 4Q19 compared with $5.3 billion in 4Q18. The increase was driven by retail partially offset by lower gross flows in
institutional asset management. Gross flows in Canada were $6.5 billion in 4Q19 compared with $4.9 billion in 4Q18. The increase
was driven by continued sales momentum across the product line-up in retail and the funding of several large fixed income mandates
in institutional asset management. Gross flows in the U.S. were $20.5 billion in 4Q19 compared with $16.1 billion in 4Q18. The
increase was from all business lines.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
93
d. Quarterly Financial Information
The following table provides summary information related to our eight most recently completed quarters:
As at and for the three months ended
($ millions, except per share amounts or otherwise
stated)
Dec 31,
2019
Sept 30,
2019
Jun 30,
2019
Mar 31,
2019
Dec 31,
2018
Sept 30,
2018
Jun 30,
2018
Mar 31,
2018
Revenue
Premium income
Life and health insurance
Annuities and pensions
Net premium income
Investment income
Realized and unrealized gains and losses on assets
supporting insurance and investment contract
liabilities(1)
Other revenue
Total revenue
Income (loss) before income taxes
Income tax (expense) recovery
$ 8,373 $ 8,309 $ 7,696 $ 8,077 $ 7,724 $ 7,700 $ 7,628 $ 7,300
1,025
237
(5,892)
(2,599)
1,126
1,026
995
865
9,238
4,004
9,335
3,932
8,691
3,710
8,314
3,747
1,832
3,278
5,101
3,481
8,754
3,566
8,325
3,235
(4,503)
2,433
6,592
2,770
7,185
2,634
8,926
2,562
1,113
2,291
(3,210)
2,671
(1,615)
2,964
(5,316)
2,502
$ 11,172 $ 22,629 $ 22,220 $ 23,549 $ 8,514 $ 8,043 $ 13,669 $ 8,746
$ 1,225 $
(89)
715 $ 1,756 $ 2,524 $ 359 $ 1,911 $ 1,535 $ 1,714
(337)
(100)
(246)
(289)
(240)
(43)
(6)
Net income (loss)
$ 1,136 $
615 $ 1,516 $ 2,235 $ 316 $ 1,905 $ 1,289 $ 1,377
Net income (loss) attributed to shareholders
$ 1,228 $
723 $ 1,475 $ 2,176 $ 593 $ 1,573 $ 1,262 $ 1,372
Reconciliation of core earnings to net income
attributed to shareholders
Total core earnings(2)
Other items to reconcile net income attributed to
shareholders to core earnings:
Investment-related experience outside of core
earnings
Direct impact of equity markets, interest rates and
variable annuity guarantee liabilities
Change in actuarial methods and assumptions
Reinsurance transactions
Restructuring charge
Tax-related items and other
$ 1,477 $ 1,527 $ 1,452 $ 1,548 $ 1,337 $ 1,539 $ 1,431 $ 1,303
182
(289)
146
327
(130)
312
18
(389)
–
(34)
–
(8)
(494)
(21)
–
–
–
(144)
–
63
–
(42)
249
–
52
–
–
(675)
–
142
(63)
(18)
(277)
(51)
(65)
–
115
45
–
12
(200)
(44)
–
50
–
86
–
(67)
Net income (loss) attributed to shareholders
$ 1,228 $
723 $ 1,475 $ 2,176 $ 593 $ 1,573 $ 1,262 $ 1,372
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
$
$
0.61 $
0.35 $
0.73 $
1.09 $ 0.28 $ 0.77 $
0.61 $ 0.67
0.61 $
0.35 $
0.73 $
1.08 $ 0.28 $ 0.77 $
0.61 $ 0.67
Segregated funds deposits
Total assets (in billions)
$ 9,417 $ 9,160 $ 9,398 $ 10,586 $ 9,212 $ 9,424 $ 9,872 $ 9,728
$
809 $
812 $
790 $
780 $ 750 $ 748 $
752 $ 740
Weighted average common shares (in millions)
1,948
1,961
1,965
1,965
1,980
1,984
1,984
1,983
Diluted weighted average common shares (in
millions)
1,953
1,965
1,969
1,969
1,983
1,989
1,989
1,989
Dividends per common share
$ 0.250 $ 0.250 $ 0.250 $ 0.250 $ 0.250 $ 0.220 $ 0.220 $ 0.220
CDN$ to US$1 – Statement of Financial Position
1.2988
1.3243
1.3087
1.3363
1.3642
1.2945
1.3168
1.2894
CDN$ to US$1 – Statement of Income
1.3200
1.3204
1.3377
1.3295
1.3204
1.3069
1.2912
1.2647
(1) For fixed income assets supporting insurance and investment contract liabilities and for equities supporting pass-through products and derivatives related to variable
hedging programs, the impact of realized and unrealized gains (losses) on the assets is largely offset in the change in insurance and investment contract liabilities.
(2) This item is a non-GAAP measure. See “Performance and Non-GAAP Measures” above.
94
Manulife Financial Corporation | 2019 Annual Report | Management’s Discussion and Analysis
e. Selected Annual Financial Information
As at and for the years ended December 31,
($ millions, except per share amounts)
Revenue
Asia
Canada
U.S.
Global Wealth and Asset Management
Corporate and Other
Total revenue
Total assets
Long-term financial liabilities
Long-term debt
Capital instruments
Total financial liabilities
Dividend per common share
Cash dividend per Class A Share, Series 2
Cash dividend per Class A Share, Series 3
Cash dividend per Class 1 Share, Series 3
Cash dividend per Class 1 Share, Series 4
Cash dividend per Class 1 Share, Series 5
Cash dividend per Class 1 Share, Series 7
Cash dividend per Class 1 Share, Series 9
Cash dividend per Class 1 Share, Series 11
Cash dividend per Class 1 Share, Series 13
Cash dividend per Class 1 Share, Series 15
Cash dividend per Class 1 Share, Series 17
Cash dividend per Class 1 Share, Series 19
Cash dividend per Class 1 Share, Series 21
Cash dividend per Class 1 Share, Series 23
Cash dividend per Class 1 Share, Series 25(1)
2019
2018
2017
$ 28,673
19,609
24,594
5,595
1,099
$ 19,710
13,598
586
5,463
(385)
$ 20,690
11,187
21,318
5,200
(72)
$ 79,570
$ 38,972
$ 58,323
$ 809,130
$ 750,271
$ 729,533
$
4,543
7,120
$
4,769
8,732
$
4,785
8,387
$ 11,663
$ 13,501
$ 13,172
$
1.00
1.1625
1.125
0.5445
0.7713
0.9728
1.078
1.0878
1.1828
1.1035
0.9608
0.975
0.95
1.40
1.2125
1.1750
$
0.91
1.1625
1.125
0.5445
0.6536
0.9728
1.078
1.0878
1.1371
0.9884
0.975
0.975
0.95
1.40
1.2125
0.9706
$
0.82
1.1625
1.125
0.5445
0.4918
0.9728
1.096
1.0969
1.00
0.95
0.975
0.975
0.95
1.40
1.298
–
(1) On February 20, 2018, MFC issued 10 million of Non-cumulative Rate Reset Class 1 Shares Series 25.
f. Differences between IFRS and Hong Kong Financial Reporting Standards
Manulife’s Consolidated Financial Statements are presented in accordance with IFRS. IFRS differs in certain respects from Hong Kong
Financial Reporting Standards (“HKFRS”). Until IFRS 17 “Insurance Contracts” is issued and becomes effective, IFRS 4 “Insurance
Contracts” permits the use of the insurance standard in effect at the time an issuer adopts IFRS. IFRS insurance contract liabilities are
valued in Canada under standards established by the Canadian Actuarial Standards Board. In certain interest rate environments,
insurance contract liabilities determined in accordance with HKFRS may be higher than those computed in accordance with current
IFRS.
g. IFRS and Hong Kong Regulatory Requirements
Insurers in Hong Kong are required by the Insurance Authority to meet minimum solvency requirements. As at December 31, 2019,
the Company’s business that falls within the scope of these requirements has sufficient assets to meet the minimum solvency
requirements under both Hong Kong regulatory requirements and IFRS.
h. Outstanding Common Shares
As at January 31, 2020, MFC had 1,944,896,776 common shares outstanding.
i. Additional Information Available
Additional information relating to Manulife, including MFC’s Annual Information Form, is available on the Company’s website at
www.manulife.com and on SEDAR at www.sedar.com.
Management’s Discussion and Analysis | Manulife Financial Corporation | 2019 Annual Report
95
Responsibility for Financial Reporting
The accompanying consolidated financial statements of Manulife Financial Corporation are the responsibility of management and
have been approved by the Board of Directors. It is also the responsibility of management to ensure that all information in the annual
report to shareholders is consistent with these consolidated financial statements.
The consolidated financial statements have been prepared by management in accordance with International Financial Reporting
Standards and the accounting requirements of the Office of the Superintendent of Financial Institutions, Canada. When alternative
accounting methods exist, or when estimates and judgment are required, management has selected those amounts that present the
Company’s financial position and results of operations in a manner most appropriate to the circumstances.
Appropriate systems of internal control, policies and procedures have been maintained to ensure that financial information is both
relevant and reliable. The systems of internal control are assessed on an ongoing basis by management and the Company’s internal
audit department.
The actuary appointed by the Board of Directors (the “Appointed Actuary”) is responsible for ensuring that assumptions and methods
used in the determination of policy liabilities are appropriate to the circumstances and that reserves will be adequate to meet the
Company’s future obligations under insurance and annuity contracts.
The Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately
responsible for reviewing and approving the consolidated financial statements. These responsibilities are carried out primarily through
an Audit Committee of unrelated and independent directors appointed by the Board of Directors.
The Audit Committee meets periodically with management, the internal auditors, the external auditors and the Appointed Actuary to
discuss internal control over the financial reporting process, auditing matters and financial reporting issues. The Audit Committee
reviews the consolidated financial statements prepared by management and then recommends them to the Board of Directors for
approval. The Audit Committee also recommends to the Board of Directors and shareholders the appointment of external auditors
and approval of their fees.
The consolidated financial statements have been audited by the Company’s external auditors, Ernst & Young LLP, in accordance with
Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board
(United States). Ernst & Young LLP has full and free access to management and the Audit Committee.
Roy Gori
President and Chief Executive Officer
Philip Witherington
Chief Financial Officer
Toronto, Canada
February 12, 2020
Appointed Actuary’s Report to the Shareholders
I have valued the policy liabilities and reinsurance recoverables of Manulife Financial Corporation for its Consolidated Statements of
Financial Position as at December 31, 2019 and 2018 and their change in the Consolidated Statements of Income for the years then
ended in accordance with actuarial practice generally accepted in Canada, including selection of appropriate assumptions and
methods.
In my opinion, the amount of policy liabilities net of reinsurance recoverables makes appropriate provision for all policyholder
obligations and the consolidated financial statements fairly present the results of the valuation.
Steven Finch
Appointed Actuary
Toronto, Canada
February 12, 2020
96
Manulife Financial Corporation | 2019 Annual Report | Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Manulife Financial Corporation
Opinion on the Consolidated Financial Statements
We have audited the consolidated financial statements of Manulife Financial Corporation (the “Company”), which comprise the
Consolidated Statements of Financial Position as at December 31, 2019 and 2018, and the Consolidated Statements of Income,
Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in Equity and Consolidated Statements of
Cash Flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant
accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Company as at December 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash
flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our
report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the
consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated
financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each
matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed
to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit
procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the
accompanying consolidated financial statements.
Key Audit
Matter
How Our
Audit
Addressed the
Key Audit
Matter
Valuation of Insurance Contract Liabilities
The Company recorded insurance contract liabilities of $351.2 billion at December 31, 2019 on its consolidated statement of
financial position. Insurance contract liabilities are reported gross of reinsurance ceded and represent management’s estimate of
the amount which, together with estimated future premiums and net investment income, will be sufficient to pay estimated
future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on insurance policies in-force.
Insurance contract liabilities are determined using the Canadian Asset Liability Method (CALM), as required by the Canadian
Institute of Actuaries. The valuation of insurance contract liabilities is based on an explicit projection of cash flows using current
assumptions for each material cash flow item. Cash flows related to insurance contract liabilities have two major components: a
best estimate assumption and a provision for adverse deviation. Best estimate assumptions are made with respect to mortality,
morbidity, investment returns, policy termination rates, premium persistency, expenses, and taxes. A provision for adverse
deviation is recorded to reflect the inherent uncertainty related to the timing and amount of the best estimate assumptions.
Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting Policies’ and Note 6 ‘Insurance
Contract Liabilities and Reinsurance Assets’ of the consolidated financial statements.
Auditing the valuation of insurance contract liabilities was complex and required the application of significant auditor judgement
due to the complexity of the cash flow models, the selection and use of best estimate assumptions, and the interrelationship of
these variables in measuring insurance contract liabilities. The audit effort involved professionals with specialized skill and
knowledge to assist in evaluating the audit evidence obtained.
We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the
valuation of insurance contract liabilities. The controls we tested related to, among other areas, actuarial methodology, integrity
of data used, controls over relevant information technology, and the assumption setting and implementation processes used by
management.
To test the valuation of insurance contract liabilities, our audit procedures included, among other procedures, involving our
actuarial specialists to assess the methodology and assumptions with respect to compliance with the Company’s policies,
Canadian Institute of Actuaries guidance and industry practice. We performed audit procedures over a sample of assumptions,
including the implementation of those assumptions into the models. These procedures included testing underlying support and
documentation, including testing a sample of experience studies supporting specific assumptions, challenging the nature and
timing of changes recorded, and assessing whether individual changes were errors or refinements of estimates. We also
performed independent recalculation procedures on a sample of insurance policies to evaluate management’s recorded reserves.
In addition, we assessed the adequacy of the disclosures provided in the notes to the consolidated financial statements.
Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
97
Valuation of Invested Assets with Significant Non-Market Observable Inputs
Key Audit
Matter
The Company recorded invested assets of $17.0 billion at December 31, 2019 on its consolidated statement of financial position
which are both (a) measured at fair value and (b) subject to a valuation estimate that includes significant non-market observable
inputs. These assets are valued based on internal models or third-party pricing sources that incorporate assumptions with a high-
level of subjectivity. Examples of such assumptions include interest rates, yield curves, credit ratings and related spreads, expected
future cash flows and transaction prices of comparable assets. These invested assets are classified as level 3 within the Company’s
hierarchy of fair value measurements. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant
Accounting Policies’ and Note 3 ‘Invested Assets and Investment Income’ of the consolidated financial statements.
Auditing the valuation of these invested assets was complex and required the application of significant auditor judgment in
assessing the valuation methodology and non-observable inputs used. The valuation of these assets is sensitive to the significant
non-market observable inputs described above, which are inherently forward-looking and could be affected by future economic
and market conditions. The audit effort involved professionals with specialized skill and knowledge to assist in evaluating the
audit evidence obtained.
How Our
Audit
Addressed the
Key Audit
Matter
We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the
investment valuation process. The controls we tested related to, among other areas, management’s determination and approval
of assumptions and methodologies used in model-based valuations and management’s review of valuations provided by third-
party pricing sources.
To test the valuation of these invested assets, our audit procedures included, among other procedures, involving our valuation
specialists to assess the methodologies and significant assumptions used by the Company. These procedures included assessing
the valuation methodologies used with respect to the Company’s policies, valuation guidelines, and industry practice and
comparing a sample of valuation assumptions used against benchmarks, including comparable transactions and independent
pricing sources where available. We also performed independent investment valuations on a sample of investments to evaluate
management’s recorded values. In addition, we assessed the adequacy of the disclosures provided in the notes to the
consolidated financial statements.
Other Information
Management is responsible for the other information. The other information comprises:
■ Management’s Discussion and Analysis; and
■ The information, other than the consolidated financial statements and our auditor’s report thereon, in the 2019 Annual Report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing
so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have
performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this
auditor’s report. We have nothing to report in this regard.
The 2019 Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will
perform on this other information, we conclude there is a material misstatement of other information, we are required to report that
fact to those charged with governance.
98
Manulife Financial Corporation | 2019 Annual Report | Consolidated Financial Statements
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial
Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing
standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on
the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
■
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control.
■ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
■ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
■ Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our
auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify
our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Company to cease to continue as a going concern.
■ Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
■ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the
Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in
the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these
matters in our report of independent registered public accounting firm unless law or regulation precludes public disclosure about the
matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the
adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this report of independent registered public accounting firm is Sean Musselman.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 12, 2020
Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
99
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Manulife Financial Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying Consolidated Statements of Financial Position of Manulife Financial Corporation (the “Company”)
as of December 31, 2019 and 2018, the related Consolidated Statements of Income, Consolidated Statements of Comprehensive
Income, Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for the years then ended, and the
related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board.
Report on Internal Control over Financial Reporting
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 12, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Description of
the Matter
Valuation of Insurance Contract Liabilities
The Company recorded insurance contract liabilities of $351.2 billion at December 31, 2019 on its consolidated statement of
financial position. Insurance contract liabilities are reported gross of reinsurance ceded and represent management’s estimate
of the amount which, together with estimated future premiums and net investment income, will be sufficient to pay
estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on insurance
policies in-force. Insurance contract liabilities are determined using the Canadian Asset Liability Method (CALM), as required
by the Canadian Institute of Actuaries. The valuation of insurance contract liabilities is based on an explicit projection of cash
flows using current assumptions for each material cash flow item. Cash flows related to insurance contract liabilities have two
major components: a best estimate assumption and a provision for adverse deviation. Best estimate assumptions are made
with respect to mortality, morbidity, investment returns, policy termination rates, premium persistency, expenses, and taxes. A
provision for adverse deviation is recorded to reflect the inherent uncertainty related to the timing and amount of the best
estimate assumptions. Disclosures on this matter are found in Note 1 ‘Nature of Operations and Significant Accounting
Policies’ and Note 6 ‘Insurance Contract Liabilities and Reinsurance Assets’ of the consolidated financial statements.
Auditing the valuation of insurance contract liabilities was complex and required the application of significant auditor
judgement due to the complexity of the cash flow models, the selection and use of best estimate assumptions, and the
interrelationship of these variables in measuring insurance contract liabilities. The audit effort involved professionals with
specialized skill and knowledge to assist in evaluating the audit evidence obtained.
100
Manulife Financial Corporation | 2019 Annual Report | Consolidated Financial Statements
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over
the valuation of insurance contract liabilities. The controls we tested related to, among other areas, actuarial methodology,
integrity of data used, controls over relevant information technology, and the assumption setting and implementation
processes used by management.
Description of
the Matter
To test the valuation of insurance contract liabilities, our audit procedures included, among other procedures, involving our
actuarial specialists to assess the methodology and assumptions with respect to compliance with the Company’s policies,
Canadian Institute of Actuaries guidance and industry practice. We performed audit procedures over a sample of
assumptions, including the implementation of those assumptions into the models. These procedures included testing
underlying support and documentation, including testing a sample of experience studies supporting specific assumptions,
challenging the nature and timing of changes recorded, and assessing whether individual changes were errors or refinements
of estimates. We also performed independent recalculation procedures on a sample of insurance policies to evaluate
management’s recorded reserves. In addition, we assessed the adequacy of the disclosures provided in the notes to the
consolidated financial statements.
Valuation of Invested Assets with Significant Non-Market Observable Inputs
The Company recorded invested assets of $17.0 billion at December 31, 2019 on its consolidated statement of financial
position which are both (a) measured at fair value and (b) subject to a valuation estimate that includes significant non-market
observable inputs. These assets are valued based on internal models or third-party pricing sources that incorporate
assumptions with a high-level of subjectivity. Examples of such assumptions include interest rates, yield curves, credit ratings
and related spreads, expected future cash flows and transaction prices of comparable assets. These invested assets are
classified as level 3 within the Company’s hierarchy of fair value measurements. Disclosures on this matter are found in Note
1 ‘Nature of Operations and Significant Accounting Policies’ and Note 3 ‘Invested Assets and Investment Income’ of the
consolidated financial statements.
Auditing the valuation of these invested assets was complex and required the application of significant auditor judgment in
assessing the valuation methodology and non-observable inputs used. The valuation of these assets is sensitive to the
significant non-market observable inputs described above, which are inherently forward-looking and could be affected by
future economic and market conditions. The audit effort involved professionals with specialized skill and knowledge to assist
in evaluating the audit evidence obtained.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over
the investment valuation process. The controls we tested related to, among other areas, management’s determination and
approval of assumptions and methodologies used in model-based valuations and management’s review of valuations
provided by third-party pricing sources.
To test the valuation of these invested assets, our audit procedures included, among other procedures, involving our valuation
specialists to assess the methodologies and significant assumptions used by the Company. These procedures included
assessing the valuation methodologies used with respect to the Company’s policies, valuation guidelines, and industry
practice and comparing a sample of valuation assumptions used against benchmarks, including comparable transactions and
independent pricing sources where available. We also performed independent investment valuations on a sample of
investments to evaluate management’s recorded values. In addition, we assessed the adequacy of the disclosures provided in
the notes to the consolidated financial statements.
Chartered Professional Accountants
Licensed Public Accountants
We have served as Manulife Financial Corporation’s auditors since 1905.
Toronto, Canada
February 12, 2020
Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
101
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Manulife Financial Corporation
Opinion on Internal Control over Financial Reporting
We have audited Manulife Financial Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the “COSO criteria”). In our opinion, Manulife Financial Corporation (the “Company”) maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Consolidated Statements of Financial Position of the Company as of December 31, 2019 and 2018, and the related
Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated Statements of Changes in
Equity and Consolidated Statements of Cash Flows for the years then ended, and the related notes and our report dated
February 12, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial
Reporting contained in the Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by
the International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 12, 2020
102
Manulife Financial Corporation | 2019 Annual Report | Consolidated Financial Statements
Consolidated Statements of Financial Position
As at December 31,
(Canadian $ in millions)
Assets
Cash and short-term securities
Debt securities
Public equities
Mortgages
Private placements
Policy loans
Loans to bank clients
Real estate
Other invested assets
Total invested assets (note 3)
Other assets
Accrued investment income
Outstanding premiums
Derivatives (note 4)
Reinsurance assets (notes 6 and 7)
Deferred tax assets (note 16)
Goodwill and intangible assets (note 5)
Miscellaneous
Total other assets
Segregated funds net assets (note 22)
Total assets
Liabilities and Equity
Liabilities
Insurance contract liabilities (note 6)
Investment contract liabilities (note 7)
Deposits from bank clients
Derivatives (note 4)
Deferred tax liabilities (note 16)
Other liabilities
Long-term debt (note 9)
Capital instruments (note 10)
Segregated funds net liabilities (note 22)
Total liabilities
Equity
Preferred shares (note 11)
Common shares (note 11)
Contributed surplus
Shareholders’ retained earnings
Shareholders’ accumulated other comprehensive income (loss):
Pension and other post-employment plans
Available-for-sale securities
Cash flow hedges
Real estate revaluation surplus
Translation of foreign operations
Total shareholders’ equity
Participating policyholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
2019
2018
$ 20,300
198,122
22,851
49,376
37,979
6,471
1,740
12,928
28,760
$ 16,215
185,594
19,179
48,363
35,754
6,446
1,793
12,777
27,543
378,527
353,664
2,416
1,385
19,449
41,446
4,574
9,975
8,250
87,495
2,427
1,369
13,703
43,053
4,318
10,097
8,431
83,398
343,108
313,209
$ 809,130
$ 750,271
$ 351,161
3,104
21,488
10,284
1,972
16,244
404,253
4,543
7,120
343,108
759,024
$ 328,654
3,265
19,684
7,803
1,814
15,190
376,410
4,769
8,732
313,209
703,120
3,822
23,127
254
15,488
(350)
1,511
(143)
31
5,398
49,138
(243)
1,211
50,106
3,822
22,961
265
12,704
(426)
(265)
(127)
20
7,010
45,964
94
1,093
47,151
$ 809,130
$ 750,271
Roy Gori
President and Chief Executive Officer
John Cassaday
Chairman of the Board of Directors
Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
103
Consolidated Statements of Income
For the years ended December 31,
(Canadian $ in millions except per share amounts)
Revenue
Premium income
Gross premiums
Premiums ceded to reinsurers
Net premiums
Investment income (note 3)
Investment income
Realized and unrealized gains (losses) on assets supporting insurance and investment contract liabilities and
on the macro hedge program
Net investment income
Other revenue (note 13)
Total revenue
Contract benefits and expenses
To contract holders and beneficiaries
Gross claims and benefits (note 6)
Increase (decrease) in insurance contract liabilities (note 6)
Increase (decrease) in investment contract liabilities (note 7)
Benefits and expenses ceded to reinsurers
(Increase) decrease in reinsurance assets (note 6)
Net benefits and claims
General expenses
Investment expenses (note 3)
Commissions
Interest expense
Net premium taxes
Total contract benefits and expenses
Income before income taxes
Income tax expense (note 16)
Net income
Net income (loss) attributed to:
Non-controlling interests
Participating policyholders
Shareholders
Net income attributed to shareholders
Preferred share dividends
Common shareholders’ net income
Earnings per share
Basic earnings per common share (note 11)
Diluted earnings per common share (note 11)
Dividends per common share
The accompanying notes are an integral part of these Consolidated Financial Statements.
2019
2018
$ 41,059
(5,481)
$ 39,150
(15,138)
35,578
24,012
15,393
18,200
33,593
10,399
79,570
28,660
33,727
170
(5,373)
(1,269)
55,915
7,686
1,748
6,293
1,319
389
73,350
6,220
(718)
13,560
(9,028)
4,532
10,428
38,972
27,878
2,907
35
(5,153)
(9,733)
15,934
7,957
1,708
6,173
1,275
406
33,453
5,519
(632)
$
5,502
$ 4,887
$
233
(333)
5,602
$
214
(127)
4,800
$
5,502
$ 4,887
5,602
(172)
4,800
(168)
$
5,430
$ 4,632
$
2.77
2.77
1.00
$
2.34
2.33
0.91
104
Manulife Financial Corporation | 2019 Annual Report | Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
For the years ended December 31,
(Canadian $ in millions)
Net income
Other comprehensive income (loss) (“OCI”), net of tax:
Items that may be subsequently reclassified to net income:
Foreign exchange gains (losses) on:
Translation of foreign operations
Net investment hedges
Available-for-sale financial securities:
Unrealized gains (losses) arising during the year
Reclassification of net realized (gains) losses and impairments to net income
Cash flow hedges:
Unrealized gains (losses) arising during the year
Reclassification of realized losses to net income
Share of other comprehensive income (losses) of associates
Total items that may be subsequently reclassified to net income
Items that will not be reclassified to net income:
Change in pension and other post-employment plans
Real estate revaluation reserve
Total items that will not be reclassified to net income
Other comprehensive income (loss), net of tax
Total comprehensive income (loss), net of tax
Total comprehensive income (loss) attributed to:
Non-controlling interests
Participating policyholders
Shareholders
Income Taxes included in Other Comprehensive Income
For the years ended December 31,
(Canadian $ in millions)
Income tax expense (recovery) on:
Unrealized foreign exchange gains/losses on translation of foreign operations
Unrealized foreign exchange gains/losses on net investment hedges
Unrealized gains/losses on available-for-sale financial securities
Reclassification of realized gains/losses and recoveries/impairments to net income on available-for-sale financial
securities
Unrealized gains/losses on cash flow hedges
Reclassification of realized gains/losses to net income on cash flow hedges
Change in pension and other post-employment plans
Real estate revaluation reserve
Total income tax expense (recovery)
The accompanying notes are an integral part of these Consolidated Financial Statements.
2019
2018
$ 5,502
$ 4,887
(1,933)
320
2,212
(433)
(28)
12
1
151
76
11
87
238
3,078
(428)
(458)
13
(34)
16
(1)
2,186
(62)
(1)
(63)
2,123
$ 5,740
$ 7,010
$
237
(334)
5,837
$
212
(127)
6,925
2019
2018
$
(1)
39
558
(140)
(20)
4
18
–
$
1
(62)
(151)
26
31
4
4
1
$
458
$
(146)
Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
105
Consolidated Statements of Changes in Equity
For the years ended December 31,
(Canadian $ in millions)
Preferred shares
Balance, beginning of year
Issued (note 11)
Issuance costs, net of tax
Balance, end of year
Common shares
Balance, beginning of year
Repurchased (note 11)
Issued on exercise of stock options and deferred share units
Issued under dividend reinvestment and share purchase plans
Balance, end of year
Contributed surplus
Balance, beginning of year
Exercise of stock options and deferred share units
Stock option expense
Impact of deferred tax asset rate change
Acquisition of non-controlling interest
Balance, end of year
Shareholders’ retained earnings
Balance, beginning of year
Opening adjustment at adoption of IFRS 16 (note 2)
Net income attributed to shareholders
Common shares repurchased (note 11)
Preferred share dividends
Common share dividends
Balance, end of year
Shareholders’ accumulated other comprehensive income (loss) (“AOCI”)
Balance, beginning of year
Change in unrealized foreign exchange gains (losses) of net foreign operations
Change in actuarial gains (losses) on pension and other post-employment plans
Change in unrealized gains (losses) on available-for-sale financial securities
Change in unrealized gains (losses) on derivative instruments designated as cash flow hedges
Change in real estate revaluation reserve
Share of other comprehensive income (losses) of associates
Balance, end of year
Total shareholders’ equity, end of year
Participating policyholders’ equity
Balance, beginning of year
Opening adjustment at adoption of IFRS 16 (note 2)
Net income (loss) attributed to participating policyholders
Other comprehensive income attributed to policyholders
Balance, end of year
Non-controlling interests
Balance, beginning of year
Net income attributed to non-controlling interests
Other comprehensive income (loss) attributed to non-controlling interests
Contributions (distributions/disposal), net
Balance, end of year
Total equity, end of year
The accompanying notes are an integral part of these Consolidated Financial Statements.
2019
2018
$ 3,822
–
–
3,822
22,961
(677)
104
739
23,127
$ 3,577
250
(5)
3,822
22,989
(269)
59
182
22,961
265
(20)
11
(2)
–
254
12,704
(19)
5,602
(662)
(172)
(1,965)
15,488
6,212
(1,612)
76
1,775
(16)
11
1
6,447
49,138
94
(3)
(333)
(1)
(243)
1,093
233
4
(119)
1,211
277
(10)
10
–
(12)
265
10,083
–
4,800
(209)
(168)
(1,802)
12,704
4,087
2,650
(62)
(443)
(18)
(1)
(1)
6,212
45,964
221
–
(127)
–
94
929
214
(2)
(48)
1,093
$ 50,106
$ 47,151
106
Manulife Financial Corporation | 2019 Annual Report | Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the years ended December 31,
(Canadian $ in millions)
Operating activities
Net income
Adjustments:
Increase in insurance contract liabilities
Increase in investment contract liabilities
(Increase) decrease in reinsurance assets excluding coinsurance transactions (note 6)
Amortization of (premium) discount on invested assets
Other amortization
Net realized and unrealized (gains) losses and impairment on assets
Deferred income tax expense (recovery)
Stock option expense
Cash provided by operating activities before undernoted items
Changes in policy related and operating receivables and payables
Cash provided by (used in) operating activities
Investing activities
Purchases and mortgage advances
Disposals and repayments
Change in investment broker net receivables and payables
Net cash flows from acquisition and disposal of subsidiaries and businesses
Cash provided by (used in) investing activities
Financing activities
Change in repurchase agreements and securities sold but not yet purchased
Redemption of long-term debt (note 9)
Issue of capital instruments, net (note 10)
Redemption of capital instruments (note 10)
Secured borrowing from securitization transactions
Changes in deposits from Bank clients, net
Lease payments (note 2)
Shareholders’ dividends paid in cash
Contributions from (distributions to) non-controlling interests, net
Common shares repurchased (note 11)
Common shares issued, net (note 11)
Preferred shares issued, net (note 11)
Cash provided by (used in) financing activities
Cash and short-term securities
Increase (decrease) during the year
Effect of foreign exchange rate changes on cash and short-term securities
Balance, beginning of year
Balance, December 31
Cash and short-term securities
Beginning of year
Gross cash and short-term securities
Net payments in transit, included in other liabilities
Net cash and short-term securities, January 1
End of year
Gross cash and short-term securities
Net payments in transit, included in other liabilities
Net cash and short-term securities, December 31
Supplemental disclosures on cash flow information
Interest received
Interest paid
Income taxes paid (refund)
The accompanying notes are an integral part of these Consolidated Financial Statements.
2019
2018
$ 5,502
$ 4,887
33,727
170
(557)
117
626
(20,265)
(454)
11
18,877
1,665
20,542
(80,610)
65,333
1,159
288
(13,830)
266
–
–
(1,500)
107
1,819
(117)
(1,398)
(22)
(1,339)
104
–
(2,080)
4,632
(466)
15,382
19,548
16,215
(833)
15,382
20,300
(752)
2,907
35
893
212
747
8,727
930
10
19,348
(160)
19,188
(101,172)
82,111
(128)
187
(19,002)
(189)
(400)
597
(450)
250
1,490
–
(1,788)
(60)
(478)
59
245
(724)
(538)
822
15,098
15,382
15,965
(867)
15,098
16,215
(833)
$ 19,548
$ 15,382
$ 11,549
1,299
104
$ 10,952
1,212
461
Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
107
Notes to Consolidated Financial Statements
Page Number
Note
109
116
119
127
133
135
144
145
151
152
153
154
155
156
158
162
164
166
168
170
170
172
174
178
Invested Assets and Investment Income
Insurance Contract Liabilities and Reinsurance Assets
Investment Contract Liabilities
Note 1 Nature of Operations and Significant Accounting Policies
Note 2 Accounting and Reporting Changes
Note 3
Note 4 Derivative and Hedging Instruments
Note 5 Goodwill and Intangible Assets
Note 6
Note 7
Note 8 Risk Management
Note 9 Long-Term Debt
Note 10 Capital Instruments
Note 11 Share Capital and Earnings Per Share
Note 12 Capital Management
Note 13 Revenue from Service Contracts
Note 14 Stock-Based Compensation
Note 15 Employee Future Benefits
Note 16 Income Taxes
Note 17 Interests in Structured Entities
Note 18 Commitments and Contingencies
Note 19 Segmented Information
Note 20 Related Parties
Note 21 Subsidiaries
Note 22 Segregated Funds
Note 23 Information Provided in Connection with Investments in Deferred Annuity Contracts and
SignatureNotes Issued or Assumed by John Hancock Life Insurance Company (U.S.A.)
Note 24 Comparatives
108
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
(Canadian $ in millions except per share amounts or unless otherwise stated)
Note 1 Nature of Operations and Significant Accounting Policies
(a) Reporting entity
Manulife Financial Corporation (“MFC”) is a publicly traded company and the holding company of The Manufacturers Life Insurance
Company (“MLI”), a Canadian life insurance company. MFC and its subsidiaries (collectively, “Manulife” or the “Company”) is a
leading financial services group with principal operations in Asia, Canada and the United States. Manulife’s international network of
employees, agents and distribution partners offers financial protection and wealth management products and services to personal and
business clients as well as asset management services to institutional customers. The Company operates as Manulife in Canada and
Asia and as John Hancock in the United States.
MFC is domiciled in Canada and incorporated under the Insurance Companies Act (Canada) (“ICA”). These Consolidated Financial
Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”).
These Consolidated Financial Statements should be read in conjunction with “Risk Management” in the 2019 Management’s
Discussion and Analysis (“MD&A”) dealing with IFRS 7 “Financial Instruments: Disclosures” as the discussion on market risk and
liquidity risk includes certain disclosures that are considered an integral part of these Consolidated Financial Statements.
These Consolidated Financial Statements as at and for the year ended December 31, 2019 were authorized for issue by MFC’s Board
of Directors on February 12, 2020.
(b) Basis of preparation
The preparation of Consolidated Financial Statements in conformity with IFRS requires management to make judgments, estimates
and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities as at the date of the Consolidated Financial Statements, and the reported amounts of
revenue and expenses during the reporting periods. Actual results may differ from these estimates. The most significant estimation
processes relate to assumptions used in measuring insurance and investment contract liabilities, assessing assets for impairment,
determining of pension and other post-employment benefit obligation and expense assumptions, determining income taxes and
uncertain tax positions and fair valuation of certain invested assets. Estimates and underlying assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
Although some variability is inherent in these estimates, management believes that the amounts recorded are appropriate. The
significant accounting policies used and the most significant judgments made by management in applying these accounting policies in
the preparation of these Consolidated Financial Statements are summarized below.
(c) Fair value measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (not a
forced liquidation or distress sale) between market participants at the measurement date, that is, an exit value.
When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is typically
based upon alternative valuation techniques such as discounted cash flows, matrix pricing, consensus pricing services and other
techniques. Broker quotes are generally used when external public vendor prices are not available.
The Company has a process in place that includes a review of price movements relative to the market, a comparison of prices between
vendors, and a comparison to internal matrix pricing which uses predominately external observable data. Judgment is applied in
adjusting external observable data for items including liquidity and credit factors.
The Company categorizes its fair value measurements according to a three-level hierarchy. The hierarchy prioritizes the inputs used by
the Company’s valuation techniques. A level is assigned to each fair value measurement based on the lowest level input significant to
the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined as follows:
Level 1 – Fair value measurements that reflect unadjusted, quoted prices in active markets for identical assets and liabilities that the
Company can access at the measurement date reflecting market transactions.
Level 2 – Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. These include quoted prices for similar assets and liabilities in active markets, quoted prices for
identical or similar assets and liabilities in inactive markets, inputs that are observable that are not prices (such as interest rates, credit
risks, etc.) and inputs that are derived from or corroborated by observable market data. Most debt securities are classified within
Level 2. Also, included in the Level 2 category are derivative instruments that are priced using models with observable market inputs,
including interest rate swaps, equity swaps, and foreign currency forward contracts.
Level 3 – Fair value measurements using significant non-market observable inputs. These include valuations for assets and liabilities
that are derived using data, some or all of which is not market observable, including assumptions about risk. Level 3 securities include
less liquid securities such as real estate investment property, other invested assets, timber investments held within segregated funds,
certain long-duration bonds and other securities that have little or no price transparency. Certain derivative financial instruments are
also included in Level 3.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
109
(d) Basis of consolidation
MFC consolidates the financial statements of all entities, including certain structured entities that it controls. Subsidiaries are entities
controlled by the Company. The Company has control over an entity when the Company has the power to govern the financial and
operating policies of the entity, is exposed to variable returns from its activities which are significant in relation to the total variable
returns of the entity and the Company is able to use its power over the entity to affect its share of variable returns. In assessing
control, significant judgment is applied while considering all relevant facts and circumstances. When assessing decision-making power,
the Company considers the extent of its rights relative to the management of an entity, the level of voting rights held in an entity
which are potentially or presently exercisable, the existence of any contractual management agreements which may provide the
Company with power over an entity’s financial and operating policies and to the extent of other parties’ ownership in an entity, if any,
the possibility for de facto control being present. When assessing returns, the Company considers the significance of direct and
indirect financial and non-financial variable returns to the Company from an entity’s activities in addition to the proportionate
significance of such returns. The Company also considers the degree to which its interests are aligned with those of other parties
investing in an entity and the degree to which it may act in its own interest.
The financial statements of subsidiaries are included in MFC’s consolidated results from the date control is established and are
excluded from consolidation from the date control ceases. The initial control assessment is performed at inception of the Company’s
involvement with the entity and is reconsidered at a later date if the Company acquires or loses power over key operating and
financial policies of the entity; acquires additional interests or disposes of interests in the entity; the contractual arrangements of the
entity are amended such that the Company’s proportionate exposure to variable returns changes; or if the Company’s ability to use its
power to affect its variable returns from the entity changes.
The Company’s Consolidated Financial Statements have been prepared using uniform accounting policies for like transactions and
events in similar circumstances. Intercompany balances, and income and expenses arising from intercompany transactions, have been
eliminated in preparing the Consolidated Financial Statements.
Non-controlling interests are interests of other parties in the equity of MFC’s subsidiaries and are presented within total equity,
separate from the equity of MFC’s shareholders. Non-controlling interests in the net income and other comprehensive income (“OCI”)
of MFC’s subsidiaries are included in total net income and total OCI, respectively. An exception to this occurs where the subsidiary’s
shares are required to be redeemed for cash on a fixed or determinable date, in which case other parties’ interests in the subsidiary’s
capital are presented as liabilities of the Company and other parties in the subsidiary’s income and OCI are recorded as expenses of
the Company.
The equity method of accounting is used to account for entities over which the Company has significant influence or joint control
(“associates” or “joint ventures”), whereby the Company records its share of the associate’s or joint venture’s net assets and financial
results using uniform accounting policies for similar transactions and events. Significant judgment is used to determine whether voting
rights, contractual management and other relationships with the entity, if any, provide the Company with significant influence or joint
control over the entity. Gains and losses on the sale of associates or joint ventures are included in income when realized, while
impairment losses are recognized immediately when there is objective evidence of impairment. Gains and losses on commercial
transactions with associates or joint ventures are eliminated to the extent of the Company’s interest in the associate or joint venture.
Investments in associates or joint ventures are included in other invested assets on the Company’s Consolidated Statements of
Financial Position.
(e) Invested assets
Invested assets that are considered financial instruments are classified as fair value through profit or loss (“FVTPL”), loans and
receivables, or as available-for-sale (“AFS”) financial assets. The Company determines the classification of its financial assets at initial
recognition. Invested assets are recognized initially at fair value plus, in the case of investments not at FVTPL, directly attributable
transaction costs. Invested assets are classified as financial instruments at FVTPL if they are held for trading, if they are designated by
management under the fair value option, or if they are designated by management when they include one or more embedded
derivatives. Invested assets classified as AFS are non-derivative financial assets that do not fall into any of the other categories
described above.
Valuation methods for the Company’s invested assets are described above. All fair value valuations are performed in accordance with
IFRS 13 “Fair Value Measurement”. Disclosure of financial instruments carried at fair value with the three levels of the fair value
hierarchy and the disclosure of the fair value for financial instruments not carried at fair value on the Consolidated Statements of
Financial Position are presented in note 3. Fair value valuations are performed by the Company and by third-party service providers.
When third-party service providers are engaged, the Company performs a variety of procedures to corroborate pricing information.
These procedures may include, but are not limited to, inquiry and review of valuation techniques, inputs to the valuation and vendor
controls reports.
Cash and short-term securities comprise of cash, current operating accounts, overnight bank and term deposits, and fixed income
securities held for meeting short-term cash commitments. Short-term securities are carried at fair value. Short-term securities are
comprised of investments due to mature within one year of the date of purchase. Commercial paper and discount notes are classified
as Level 2 because these securities are typically not actively traded. Net payments in transit and overdraft bank balances are included
in other liabilities.
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Debt securities are carried at fair value. Debt securities are generally valued by independent pricing vendors using proprietary pricing
models incorporating current market inputs for similar instruments with comparable terms and credit quality (matrix pricing). The
significant inputs include, but are not limited to, yield curves, credit risks and spreads, prepayment rates and volatility of these inputs.
These debt securities are classified as Level 2 but can be Level 3 if significant inputs are market unobservable. Realized gains and losses
on sale of debt securities and unrealized gains and losses on debt securities designated as FVTPL are recognized in investment income
immediately. Unrealized gains and losses on AFS debt securities are recorded in OCI, except for unrealized gains and losses on foreign
currency translation which are included in income. Impairment losses on AFS debt securities are recognized in income on an individual
security basis when there is objective evidence of impairment. Impairment is considered to have occurred, based on management’s
judgment, when it is deemed probable that the Company will not be able to collect all amounts due according to the debt security’s
contractual terms.
Equities are comprised of common and preferred equities and are carried at fair value. Equities are generally classified as Level 1, as
fair values are normally based on quoted market prices. Realized gains and losses on sale of equities and unrealized gains and losses
on equities designated as FVTPL are recognized in investment income immediately. Unrealized gains and losses on AFS equities are
recorded in OCI. Impairment losses on AFS equities are recognized in income on an individual security basis when there is objective
evidence of impairment. Impairment is considered to have occurred when fair value has declined below cost by a significant amount
or for a prolonged period of time. Judgment is applied in determining whether the decline is significant or prolonged.
Mortgages are carried at amortized cost and are classified as Level 3 for fair value purposes due to the lack of market observability of
certain significant valuation inputs. Realized gains and losses are recorded in investment income immediately. Impairment losses are
recorded on mortgages when there is no longer reasonable assurance as to the timely collection of the full amount of principal and
interest and are measured based on the discounted value of expected future cash flows at the original effective interest rates inherent
in the mortgage. Expected future cash flows of impaired mortgages are typically determined with reference to the fair value of
collateral security underlying the mortgage, net of expected costs of realization and including any applicable insurance recoveries.
Significant judgment is applied in the determination of impairment including the timing and amount of future collections.
The Company accounts for insured and uninsured mortgage securitizations as secured financing transactions since the criteria for sale
accounting are not met. For these transactions, the Company continues to recognize the mortgages and records a liability in other
liabilities for the amounts owed at maturity. Interest income from these mortgages and interest expense on the borrowings are
recorded using the effective interest rate method.
Private placements, which include corporate loans for which there is no active market, are carried at amortized cost and are generally
classified as Level 2 for fair value disclosure purposes or as Level 3 if significant inputs are market unobservable. Realized gains and
losses are recorded in income immediately. Impairment losses are recorded on private placements when there is no longer assurance
as to the timely collection of the full amount of principal and interest. Impairment is measured based on the discounted value of
expected future cash flows at the original effective interest rate inherent in the loan. Significant judgment is applied in the
determination of impairment including the timing and amount of future collections.
Policy loans are carried at an amount equal to their unpaid balances and are classified as Level 2 for fair value disclosure purposes.
Policy loans are fully collateralized by the cash surrender value of the underlying policies.
Loans to Manulife Bank of Canada (“Manulife Bank” or “Bank”) clients are carried at amortized cost and are classified as Level 2 for
fair value disclosure purposes. A loan to a Bank client is considered impaired when there is objective evidence of impairment because
of one or more loss events that have occurred after initial recognition, with a negative impact on the estimated future cash flows of
the loan.
Once established, allowances for impairment of mortgages, private placements and loans to Bank clients are reversed only if the
conditions that caused the impairment no longer exist. Reversals of impairment charges on AFS debt securities are only recognized in
income to the extent that increases in fair value can be attributed to events after the impairment loss being recorded. Impairment
losses for AFS equity instruments are not reversed through income. On disposition of an impaired asset, any allowance for impairment
is released.
In addition to impairments and provisions for loan losses (recoveries) reported in investment income, the measurement of insurance
contract liabilities, via investment return assumptions, includes expected future credit losses on fixed income investments. Refer to
note 6(d).
Interest income is recognized on debt securities, mortgages, private placements, policy loans and loans to Bank clients as it accrues
and is calculated using the effective interest rate method. Premiums, discounts and transaction costs are amortized over the life of the
underlying investment using the effective yield method for all debt securities as well as mortgages and private placements.
The Company records purchases and sales of invested assets on a trade date basis, except for loans originated by the Company, which
are recognized on a settlement date basis.
Real estate consists of both own use and investment property. Own use property is carried at cost less accumulated depreciation and
any accumulated impairment losses. Depreciation is calculated based on the cost of an asset less its residual value and is recognized in
income on a straight-line basis over the estimated useful life ranging from 30 to 60 years. Impairment losses are recorded in income to
the extent the recoverable amount is less than the carrying amount. Where own use property is included in assets backing insurance
contract liabilities, the fair value of the property is used in the valuation of insurance contract liabilities. Own use property is classified
as Level 3 for fair value disclosure purposes.
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An investment property is a property held to earn rental income, for capital appreciation, or both. Investment properties are measured
at fair value, with changes in fair value recognized in income. Fair value is determined using external appraisals that are based on the
highest and best use of the property. The valuation techniques include discounted cash flows, the direct capitalization method as well
as comparable sales analysis and include both observable and unobservable inputs. Inputs include existing and assumed tenancies,
market data from recent comparable transactions, future economic outlook and market risk assumptions, capitalization rates and
internal rates of return. Investment properties are classified as Level 3 for fair value disclosure purposes.
When a property changes from own use to investment property, any gain or loss arising on the remeasurement of the property to fair
value at the date of transfer is recognized in OCI, to the extent that it is not reversing a previous impairment loss. Reversals of
impairment losses are recognized in income.
Other invested assets include private equity and property investments held in infrastructure and timber, as well as in agriculture and oil
and gas sectors. Private equity investments are accounted for as associates or joint ventures using the equity method (as described in
note 1(d) above) or are classified as FVTPL or AFS and carried at fair value. Investments in oil and gas exploration and evaluation
activities are measured on the cost basis using the “successful efforts” method. Timber and agriculture properties are measured at fair
value with changes in fair value recognized in income, except for buildings, equipment and bearer plants which are measured at
amortized cost. The fair value of other invested assets is determined using a variety of valuation techniques as described in note 3.
Other invested assets that are measured or disclosed at fair value are classified as Level 3.
Other invested assets also include investments in leveraged leases, which are accounted for using the equity method. The carrying
value under the equity method reflects the amortized cost of the lease receivable and related non-recourse debt using the effective
yield method.
(f) Goodwill and intangible assets
Goodwill represents the difference between the fair value of purchase consideration of an acquired business and the Company’s
proportionate share of the net identifiable assets acquired. It is initially recorded at cost and subsequently measured at cost less any
accumulated impairment.
Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying
amounts may not be recoverable at the cash generating unit (“CGU”) or group of CGUs level. The Company allocates goodwill to
CGUs or groups of CGUs for impairment testing based on the lowest level within the entity in which the goodwill is monitored for
internal management purposes. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the
business combination in which the goodwill arose. Any potential impairment of goodwill is identified by comparing the recoverable
amount with the carrying value of a CGU or group of CGUs. Goodwill is reduced by the amount of deficiency, if any. If the deficiency
exceeds the carrying amount of goodwill, the carrying values of the remaining assets in the CGU or group of CGUs are subject to
being reduced by the excess on a pro-rata basis.
The recoverable amount of a CGU is the higher of the estimated fair value less costs to sell or the value-in-use of the CGU. In
assessing value-in-use, estimated future cash flows are discounted using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. In some cases, the most recent detailed calculation made in
a prior period of the recoverable amount of a CGU is used in the testing of impairment of goodwill in the current period. This is the
case only if there are no significant changes to the CGU, the likelihood of impairment is remote based on the analysis of current
events and circumstances, and the most recently calculated recoverable amount substantially exceeds the current carrying amount of
the CGU.
Intangible assets with indefinite useful lives include the John Hancock brand name, certain investment management contracts and
agricultural water rights. The indefinite useful life assessment for brand is based on the brand name being protected in markets where
branded products are sold by trademarks, which are renewable indefinitely, and for certain investment management contracts due to
the ability to renew these contracts indefinitely. In addition, there are no legal, regulatory or contractual provisions that limit the useful
lives of these intangible assets. An intangible asset with an indefinite useful life is not amortized but is subject to an annual
impairment test which is performed more frequently if an indication that it is not recoverable arises.
Intangible assets with finite useful lives include acquired distribution networks, customer relationships, capitalized software, certain
investment management contracts and other contractual rights. Distribution networks, customer relationships, and other finite life
intangible assets are amortized over their estimated useful lives, six to 68 years, either based on straight-line or in relation to other
asset consumption metrics. Software intangible assets are amortized on a straight-line basis over their estimated useful lives of three
to five years. Finite life intangible assets are assessed for indicators of impairment at each reporting period. If any indication of
impairment exists, these assets are subject to an impairment test.
(g) Miscellaneous assets
Miscellaneous assets include assets held in a rabbi trust with respect to unfunded defined benefit obligations, defined benefit assets, if
any (refer to note 1(o)), deferred acquisition costs and capital assets. Deferred acquisition costs are carried at cost less accumulated
amortization. These costs are recognized over the period where redemption fees may be charged or over the period revenue is
earned. Capital assets are carried at cost less accumulated amortization computed on a straight-line basis over their estimated useful
lives, which vary from two to 10 years.
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(h) Segregated funds
The Company manages segregated funds on behalf of policyholders. The investment returns on these funds are passed directly to
policyholders. In some cases, the Company has provided guarantees associated with these funds.
Segregated funds net assets are measured at fair value and include investments in mutual funds, debt securities, equities, cash, short-
term investments and other investments. With respect to the consolidation requirement of IFRS, in assessing the Company’s degree of
control over the underlying investments, the Company considers the scope of its decision-making rights, the rights held by other
parties, its remuneration as an investment manager and its exposure to variability of returns. The Company has determined that it
does not have control over the underlying investments as it acts as an agent on behalf of segregated fund policyholders.
The methodology applied to determine the fair value of investments held in segregated funds is consistent with that applied to
invested assets held by the general fund, as described above in note 1(e). Segregated funds liabilities are measured based on the value
of the segregated funds net assets. Investment returns on segregated funds assets belong to policyholders and the Company does not
bear the risk associated with these assets outside of guarantees offered on certain variable life and annuity products, for which the
underlying investments are held within segregated funds. Accordingly, investment income earned by segregated funds and expenses
incurred by segregated funds are offset and are not separately presented in the Consolidated Statements of Income. Fee income
earned by the Company for managing the segregated funds is included in other revenue.
Liabilities related to guarantees associated with certain segregated funds, as a result of certain variable life and annuity contracts, are
recorded within the Company’s insurance contract liabilities. The Company holds assets supporting these guarantees in the general
fund, which are included in invested assets according to their investment type.
(i) Insurance and investment contract liabilities
Most contracts issued by the Company are considered insurance, investment or service contracts. Contracts under which the
Company accepts significant insurance risk from a policyholder are classified as insurance contracts in the Consolidated Financial
Statements. A contract is considered to have significant insurance risk if, and only if, an insured event could cause an insurer to make
significant additional payments in any scenario, excluding scenarios that lack commercial substance at the inception of the contract.
Contracts under which the Company does not accept significant insurance risk are either classified as investment contracts or
considered service contracts and are accounted for in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”
or IFRS 15 “Revenue from Contracts with Customers”, respectively.
Once a contract has been classified as an insurance contract it remains an insurance contract even if the insurance risk reduces
significantly. Investment contracts can be reclassified as insurance contracts if insurance risk subsequently becomes significant.
Insurance contract liabilities, net of reinsurance assets, represent the amount which, together with estimated future premiums and net
investment income, will be sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income
taxes) and expenses on policies in-force. Insurance contract liabilities are presented gross of reinsurance assets on the Consolidated
Statements of Financial Position. The Company’s Appointed Actuary is responsible for determining the amount of insurance contract
liabilities in accordance with standards established by the Canadian Institute of Actuaries. Insurance contract liabilities, net of
reinsurance assets, have been determined using the Canadian Asset Liability Method (“CALM”) as permitted by IFRS 4 “Insurance
Contracts”. Refer to note 6.
Investment contract liabilities include contracts issued to retail and institutional investors that do not contain significant insurance risk.
Investment contract liabilities and deposits are measured at amortized cost or at fair value by election. The election reduces accounting
mismatches between assets supporting these contracts and the related policy liabilities. Investment contract liabilities are derecognized
when the contract expires, is discharged or is cancelled.
Derivatives embedded within insurance contracts are separately accounted for as derivatives if they are not considered to be closely
related to the host insurance contract and do not meet the definition of an insurance contract. These embedded derivatives are
presented separately in other assets or other liabilities and are measured at fair value with changes in fair value recognized in income.
(j) Reinsurance assets
The Company uses reinsurance in the normal course of business to manage its risk exposure. Insurance ceded to a reinsurer does not
relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to
the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under a reinsurance agreement.
Reinsurance assets represent the benefit derived from reinsurance agreements in-force at the reporting date, considering the financial
condition of the reinsurer. Amounts recoverable from reinsurers are estimated in accordance with the terms of the relevant
reinsurance contract.
Gains or losses on reinsurance transactions are recognized in income immediately on the transaction date and are not amortized.
Premiums ceded and claims reimbursed are presented on a gross basis on the Consolidated Statements of Income. Reinsurance assets
are not offset against the related insurance contract liabilities and are presented separately on the Consolidated Statements of
Financial Position. Refer to note 6(a).
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(k) Other financial instruments accounted for as liabilities
The Company issues a variety of other financial instruments classified as liabilities, including notes payable, term notes, senior notes,
senior debentures, subordinated notes, surplus notes and preferred shares. These financial liabilities are measured at amortized cost,
with issuance costs deferred and amortized using the effective interest rate method.
(l) Income taxes
The provision for income taxes is calculated based on income tax laws and income tax rates substantively enacted as at the date of the
Consolidated Statements of Financial Position. The income tax provision is comprised of current income taxes and deferred income
taxes. Current and deferred income taxes relating to items recognized in OCI and directly in equity are similarly recognized in OCI and
directly in equity, respectively.
Current income taxes are amounts expected to be payable or recoverable for the current year and any adjustments to taxes payable in
respect of previous years.
Deferred income taxes are provided for using the liability method and result from temporary differences between the carrying values
of assets and liabilities and their respective tax bases. Deferred income taxes are measured at the substantively enacted tax rates that
are expected to be applied to temporary differences when they reverse.
A deferred tax asset is recognized to the extent that future realization of the tax benefit is probable. Deferred tax assets are reviewed
at each reporting date and are reduced to the extent that it is no longer probable that the tax benefit will be realized. Deferred tax
assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities and they relate to income
taxes levied by the same tax authority on the same taxable entity.
Deferred tax liabilities are recognized for all taxable temporary differences, except in respect of taxable temporary differences
associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
The Company records liabilities for uncertain tax positions if it is probable that the Company will make a payment on tax positions due
to examinations by tax authorities. These provisions are measured at the Company’s best estimate of the amount expected to be paid.
Provisions are reversed to income in the period in which management assesses they are no longer required or determined by statute.
The Company is subject to income tax laws in various jurisdictions. Tax laws are complex and potentially subject to different
interpretations by the taxpayer and the relevant tax authority. The provision for current income taxes and deferred income taxes
represents management’s interpretation of the relevant tax laws and its estimate of current and future income tax implications of the
transactions and events during the year. The Company may be required to change its provision for income taxes or deferred income
tax balances when the ultimate deductibility of certain items is successfully challenged by taxing authorities, or if estimates used in
determining the amount of deferred tax balances to recognize change significantly, or when receipt of new information indicates the
need for adjustment in the amount of deferred income taxes to be recognized. Additionally, future events, such as changes in tax
laws, tax regulations, or interpretations of such laws or regulations, could have an impact on the provision for income taxes, deferred
tax balances and the effective tax rate. Any such changes could materially affect the amounts reported in the Consolidated Financial
Statements in the period these changes occur.
(m) Foreign currency translation
Items included in the financial statements of each of the Company’s subsidiaries, joint ventures and associates are measured by each
entity using the currency of the primary economic environment in which the entity operates (the “functional currency”). If their
functional currency is other than Canadian dollar, these entities are foreign operations of the Company.
Transactions in a foreign currency are translated to the functional currency at the exchange rate prevailing at the date of the
transaction. Assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate in
effect at the reporting date. Revenue and expenses denominated in foreign currencies are translated at the average exchange rate
prevailing during the quarter reported. Exchange gains and losses are recognized in income except for translation of net investments
in foreign operations and the results of hedging these positions, and for non-monetary items designated as AFS. These foreign
exchange gains and losses are recognized in OCI until such time that the foreign operation or non-monetary item is disposed of or
control or significant influence over it is lost.
The Consolidated Financial Statements are presented in Canadian dollars. The financial statements of the Company’s foreign
operations are translated from their functional currencies to Canadian dollars; assets and liabilities are translated at the exchange rate
at the reporting date, and revenue and expenses are translated using the average exchange rates for the period. These foreign
exchange gains and losses are included in OCI.
(n) Stock-based compensation
The Company provides stock-based compensation to certain employees and directors as described in note 14. Compensation expense
of equity instruments is accrued based on the best estimate of the number of instruments expected to vest, with revisions made to
that estimate if subsequent information indicates that actual forfeitures are likely to differ from initial estimates, unless forfeitures are
due to market-based conditions.
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Stock options are expensed with a corresponding increase in contributed surplus. Restricted share units and deferred share units are
expensed with a corresponding liability accrued based on the market value of MFC’s common shares at the end of each quarter.
Performance share units are expensed with a corresponding liability accrued based on specific performance conditions and the market
value of MFC’s common shares at the end of each quarter. The change in the value of the awards resulting from changes in the
market value of MFC’s common shares or changes in the specific performance conditions and credited dividends is recognized in
income, offset by the impact of total return swaps used to manage the variability of the related liability.
Stock-based compensation cost is recognized over the applicable vesting period, unless the employee is eligible to retire at the time of
grant or will be eligible to retire during the vesting period. Compensation cost, attributable to stock options, restricted share units,
and performance share units granted to employees who are eligible to retire on the grant date or who will become eligible to retire
during the vesting period, is recognized at the grant date or over the period from the grant date to the date of retirement eligibility,
respectively.
The Company’s contributions to the Global Share Ownership Plan (“GSOP”) (refer to note 14(d)), are expensed as incurred. Under the
GSOP, subject to certain conditions, the Company will match a percentage of an employee’s eligible contributions to certain
maximums. All contributions are used by the plan’s trustee to purchase MFC common shares in the open market.
(o) Employee future benefits
The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees and
agents including registered (tax qualified) pension plans that are typically funded as well as supplemental non-registered
(non-qualified) pension plans for executives, retiree and disability welfare plans that are typically not funded.
The Company’s obligation in respect of defined benefit pension and other post-employment benefits is calculated for each plan as the
estimated present value of future benefits that eligible employees have earned in return for their service up to the reporting date using
the projected benefit method. The discount rate used is based on the yield, as at the reporting date, of high-quality corporate debt
securities that have approximately the same term as the obligations and that are denominated in the same currency in which the
benefits are expected to be paid.
To determine the Company’s net defined benefit asset or liability, the fair value of plan assets is deducted from the defined benefit
obligations. When this calculation results in a surplus, the asset that can be recognized is limited to the present value of future
economic benefit available in the form of future refunds from the plan or reductions in future contributions to the plan (the asset
limit). Defined benefit assets are included in other assets and defined benefit liabilities are included in other liabilities.
Changes in the net defined benefit asset or liability due to re-measurement of pension and retiree welfare plans are recorded in OCI in
the period in which they occur and are not reclassified to income in subsequent periods. They consist of actuarial gains and losses, the
impact of the asset limit, if any, and the return on plan assets, excluding amounts included in net interest income or expense. Changes
in the net defined benefit asset or liability due to re-measurement of disability welfare plans are recorded in income in the period in
which they occur.
The cost of defined benefit pension plans is recognized over the employee’s years of service to retirement while the cost of retiree
welfare plans is recognized over the employee’s years of service to their date of full eligibility. The net benefit cost for the year is
recorded in income and is calculated as the sum of the service cost in respect of the fiscal year, the net interest income or expense and
any applicable administration expenses, plus past service costs or credits resulting from plan amendments or curtailments. The net
interest income or expense is determined by applying the discount rate to the net defined benefit asset or liability. The current year
cost of disability welfare plans is the year-over-year change in the defined benefit obligation, including any actuarial gains or losses.
The cost of defined contribution plans is the contribution provided by the Company and is recorded in income in the periods during
which services are rendered by employees.
(p) Derivative and hedging instruments
The Company uses derivative financial instruments (“derivatives”) including swaps, forward and futures agreements, and options to
manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and equity market
prices, and to replicate permissible investments. Derivatives embedded in other financial instruments are separately recorded as
derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the
embedded derivative are the same as those of a standalone derivative and the host instrument itself is not recorded at FVTPL.
Derivatives are recorded at fair value. Derivatives with unrealized gains are reported as derivative assets and derivatives with unrealized
losses are reported as derivative liabilities.
A determination is made for each derivative as to whether to apply hedge accounting. Where hedge accounting is not applied,
changes in the fair value of derivatives are recorded in investment income. Refer to note 3(c).
Where the Company has elected to apply hedge accounting, a hedging relationship is designated and documented at inception.
Hedge effectiveness is evaluated at inception and throughout the term of the hedge. Hedge accounting is only applied when the
Company expects that the hedging relationship will be highly effective in achieving offsetting changes in fair value or changes in cash
flows attributable to the risk being hedged. The assessment of hedge effectiveness is performed at the end of each reporting period
both prospectively and retrospectively. When it is determined that a hedging relationship is no longer effective, or the hedging
instrument or the hedged item has been sold or terminated, the Company discontinues hedge accounting prospectively. In such cases,
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if the derivatives are not sold or terminated, any subsequent changes in fair value of the derivatives are recognized in investment
income.
For derivatives that are designated as hedging instruments, changes in fair value are recorded according to the nature of the risks
being hedged, as discussed below.
In a fair value hedging relationship, changes in fair value of the hedging instruments are recorded in investment income, offsetting
changes in fair value of the hedged items, which would otherwise not be carried at fair value. Hedge ineffectiveness is recognized in
investment income and arises from differences between changes in the fair values of hedging instruments and hedged items. When
hedge accounting is discontinued, the carrying value of the hedged item is no longer adjusted and the cumulative fair value
adjustments are amortized to investment income over the remaining term of the hedged item unless the hedged item is sold, at which
time the balance is recognized immediately in investment income.
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging instrument is recorded in OCI
while the ineffective portion is recognized in investment income. Gains and losses in accumulated other comprehensive income
(“AOCI”) are recognized in income during the same periods as the variability in the hedged cash flows or the hedged forecasted
transactions are recognized in income. The reclassifications from AOCI are made to investment income, except for total return swaps
that hedge restricted share units, which are reclassified to general expenses.
Gains and losses on cash flow hedges in AOCI are reclassified immediately to investment income when the hedged item is sold or the
forecasted transaction is no longer expected to occur. When a hedge is discontinued, but the hedged forecasted transaction is
expected to occur, the amounts in AOCI are reclassified to investment income in the periods during which variability in the cash flows
hedged or the hedged forecasted transaction is recognized in income.
In a net investment in foreign operations hedging relationship, gains and losses relating to the effective portion of the hedge are
recorded in OCI. Gains and losses in AOCI are recognized in income during the periods when gains or losses on the underlying
hedged net investment in foreign operations are recognized in income.
(q) Premium income and related expenses
Gross premiums for all types of insurance contracts, and contracts with limited mortality or morbidity risk, are generally recognized as
revenue when due. Premiums are reported gross of reinsurance ceded (refer to note 6).
(r) Revenue from service contracts
The Company recognizes revenue from service contracts in accordance with IFRS 15. The Company’s service contracts generally
impose single performance obligations, each consisting of a series of similar related services for each customer. Revenue is recorded as
performance obligations are satisfied over time because the customers simultaneously receive and consume the benefits of the
services rendered, measured using an output method. Revenue for variable consideration is recognized to the extent that it is highly
probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is
subsequently resolved. Refer to note 13.
Note 2 Accounting and Reporting Changes
(a) Changes in accounting and reporting policy
(i) IFRS 16 “Leases”
Effective January 1, 2019, the Company adopted IFRS 16 “Leases” which was issued in January 2016 and replaces IAS 17 “Leases”
and IFRIC 4 “Determining whether an arrangement contains a lease”. IFRS 16 sets out principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract. The standard brings most leases on-balance sheet under a single
model and eliminates the previous classifications of operating and finance leases. Exemptions to this treatment are for lease contracts
with low value assets or leases with duration of less than one year. Lessor accounting largely remains unchanged with previous
classifications of operating and finance leases continuing.
The Company adopted IFRS 16 using the modified retrospective method with no restatement of comparative information.
Right-of-use assets of $381 and lease liabilities of $410 were recognized within miscellaneous assets and other liabilities in the
Consolidated Statements of Financial Position, respectively. The net post-tax impact of these adjustments was $22, of which $19 was
recognized in shareholders’ retained earnings and $3 was recognized in participating policyholders’ equity. The assets and liabilities
arise primarily from real estate lease contracts.
The Company applied the practical expedient of not reviewing lease classification under IFRS 16 for contracts not previously classified
as leases. In addition, the Company has elected to expense lease payments on a straight-line basis for all leases with lease term of 12
months or less or the underlying asset has a low value.
(ii) IFRS Interpretation Committee (“IFRIC”) Interpretation 23 “Uncertainty over Income Tax Treatments”
Effective January 1, 2019, the Company adopted IFRIC 23 “Uncertainty over Income Tax Treatments” which was issued in June 2017.
IFRIC 23 was applied retrospectively. IFRIC 23 provides guidance on applying the recognition and measurement requirements in IAS 12
when there is uncertainty over income tax treatments including whether uncertain tax treatments should be considered together or
separately based on which approach better predicts resolution of the uncertainty. Adoption of IFRIC 23 did not have a significant
impact on the Company’s Consolidated Financial Statements.
116
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(iii) Amendments to IAS 28 “Investments in Associates and Joint Ventures”
Effective January 1, 2019, the Company adopted the amendments to IAS 28 “Investments in Associates and Joint Ventures” which
were issued in October 2017. The amendments were applied retrospectively. The amendments clarify that an entity applies IFRS 9
“Financial Instruments” to financial interests in an associate or joint venture, aside from investments in equity, to which the equity
method is not applied. IAS 39 will be applied to these interests until IFRS 9 is adopted. Adoption of these amendments did not have a
significant impact on the Company’s Consolidated Financial Statements.
(iv) Annual Improvements 2015–2017 Cycle
Effective January 1, 2019, the Company adopted amendments issued within the Annual Improvements 2015 – 2017 Cycle which was
issued in December 2017. The IASB issued four minor amendments to different standards as part of the Annual Improvements
process, with the amendments to be applied prospectively. Adoption of these amendments did not have a significant impact on the
Company’s Consolidated Financial Statements.
(v) Amendments to IAS 19 “Employee Benefits”
Effective January 1, 2019, the Company adopted amendments to IAS 19 “Employee Benefits” which were issued in February 2018.
The amendments were applied prospectively. The amendments address the accounting for a plan amendment, curtailment or
settlement that occurs within a reporting period. Updated actuarial assumptions must be used to determine current service cost and
net interest for the remainder of the reporting period after such an event. The amendments also address how the accounting for asset
ceilings are affected by such an event. Adoption of these amendments did not have a significant impact on the Company’s
Consolidated Financial Statements.
(b) Future accounting and reporting changes
(i) IFRS 9 “Financial Instruments”
IFRS 9 “Financial Instruments” was issued in November 2009 and amended in October 2010, November 2013 and July 2014, and is
effective for years beginning on or after January 1, 2018, to be applied retrospectively, or on a modified retrospective basis.
Additionally, the IASB issued amendments in October 2017 that are effective for annual periods beginning on or after January 1, 2019.
In June 2019, the exposure draft published for IFRS 17 proposed to extend the deferral date of IFRS 9 by one year to January 1, 2022.
The standard is intended to replace IAS 39 “Financial Instruments: Recognition and Measurement”.
The project has been divided into three phases: classification and measurement, impairment of financial assets, and hedge accounting.
IFRS 9’s current classification and measurement methodology provides that financial assets are measured at either amortized cost or
fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of
the financial assets. The classification and measurement for financial liabilities remains generally unchanged; however, for a financial
liability designated as at fair value through profit or loss, revisions have been made in the accounting for changes in fair value
attributable to changes in the credit risk of that liability. Gains or losses caused by changes in an entity’s own credit risk on such
liabilities are no longer recognized in profit or loss but instead are reflected in OCI.
Revisions to hedge accounting were issued in November 2013 as part of the overall IFRS 9 project. The amendment introduces a new
hedge accounting model, together with corresponding disclosures about risk management activity for those applying hedge
accounting. The new model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk
management activities in their financial statements.
Revisions issued in July 2014 replace the existing incurred loss model used for measuring the allowance for credit losses with an
expected loss model. Changes were also made to the existing classification and measurement model designed primarily to address
specific application issues raised by early adopters of the standard. They also address the income statement accounting mismatches
and short-term volatility issues which have been identified as a result of the insurance contracts project.
The Company elected to defer IFRS 9 until January 1, 2021 as allowed under IFRS 4 “Insurance Contracts”. The Company is assessing
the impact of this standard.
(ii) IFRS 17 “Insurance Contracts”
IFRS 17 was issued in May 2017 and is effective for years beginning on January 1, 2021, to be applied retrospectively. If full
retrospective application to a group of contracts is impractical, the modified retrospective or fair value methods may be used. The
standard will replace IFRS 4 “Insurance Contracts” and will materially change the recognition and measurement of insurance contracts
and the corresponding presentation and disclosures in the Company’s Financial Statements.
Exposure Draft Amendments to IFRS 17 was published in June 2019, which proposed a number of targeted amendments for public
consultation. The proposed amendments include a deferral of the effective date of IFRS 17 by one year, to January 1, 2022. The
proposed amendments are subject to IASB’s re-deliberation process which is expected to conclude in mid-2020. The Company will
continue to monitor IASB’s future developments related to IFRS 17.
IFRS 17 requires entities to measure insurance contract liabilities on the balance sheet as the total of (a) the fulfillment cash flows – the
current estimates of amounts that the Company expects to collect from premiums and pay out for claims, benefits and expenses,
including an adjustment for the timing and risk for those amounts; and (b) the contractual service margin – the future profit for
providing insurance coverage.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
117
The principles underlying IFRS 17 differ from the CALM as permitted by IFRS 4. While there are many differences, the following
outlines two of the key differences:
■ Under IFRS 17, the discount rate used to estimate the present value of insurance liabilities is based on the characteristics of the
liability, whereas under CALM, the Company uses the rates of returns for current and projected assets supporting policy liabilities to
value the liabilities. The difference in the discount rate approach also impacts the timing of investment-related experience earnings
emergence. Under CALM, investment-related experience includes investment experience and the impact of investing activities. The
impact of investing activities is directly related to the CALM methodology. Under IFRS 17, the impact of investing activities will
emerge over the life of the new asset.
■ Under IFRS 17, new business gains are recorded on the Consolidated Statements of Financial Position and amortized into income as
services are provided. Under CALM, new business gains (and losses) are recognized in income immediately.
The Company is assessing the implications of this standard including proposed amendments and expects that it will have a significant
impact on the Company’s Consolidated Financial Statements. In addition, in certain jurisdictions, including Canada, it could have a
material effect on tax and regulatory capital positions and other financial metrics that are dependent upon IFRS accounting values.
(iii) Amendments to IFRS 3 “Business Combinations”
Amendments to IFRS 3 “Business Combinations” were issued in October 2018 and are effective for business combinations occurring
on or after January 1, 2020, with earlier application permitted. The amendments revise the definition of a business and permit a
simplified assessment of whether an acquired set of activities and assets qualifies as a business. Application of the amendments are
expected to result in fewer acquisitions qualifying as business combinations. Adoption of these amendments is not expected to have a
significant impact on the Company’s Consolidated Financial Statements.
(iv) Amendments to IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting
Estimates and Errors”
Amendments to IAS 1 “Presentation of Financial Statements” and IAS 8 “Accounting Policies, Changes in Accounting Estimates and
Errors” were issued in October 2018. The amendments are effective for annual periods beginning on or after January 1, 2020 and are
to be applied prospectively. The amendments update the definition of material. Adoption of these amendments is not expected to
have a significant impact on the Company’s Consolidated Financial Statements.
(v) Interest Rate Benchmark Reform Amendments to IFRS 9, IAS 39 and IFRS 7
Amendments to IFRS 9, IAS 39 and IFRS 7 were issued in September 2019 related to interest rate benchmark reform and are effective
retrospectively for annual periods beginning on or after January 1, 2020. The amendments provide temporary relief for hedge
accounting to continue during the period of uncertainty before replacement of an existing interest rate benchmark with an alternative
risk-free rate. The amendments apply to all hedge accounting relationships that are affected by the interest rate benchmark reform.
The IASB is expected to issue further guidance addressing various accounting issues that will arise when the existing interest rate
benchmark has been replaced. The Company is assessing the implications of these amendments.
118
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Note 3
Invested Assets and Investment Income
(a) Carrying values and fair values of invested assets
As at December 31, 2019
Cash and short-term securities(6)
Debt securities(7)
Canadian government and agency
U.S. government and agency
Other government and agency
Corporate
Mortgage/asset-backed securities
Public equities
Mortgages
Private placements
Policy loans
Loans to Bank clients
Real estate
Own use property(8)
Investment property
Other invested assets
Alternative long-duration assets(9),(10)
Various other (11)
Total invested assets
As at December 31, 2018
Cash and short-term securities(6)
Debt securities(7)
Canadian government and agency
U.S. government and agency
Other government and agency
Corporate
Mortgage/asset-backed securities
Public equities
Mortgages
Private placements
Policy loans
Loans to Bank clients
Real estate
Own use property(8)
Investment property
Other invested assets
Alternative long-duration assets(9),(10)
Various other (11)
Total invested assets
FVTPL(1)
AFS(2)
Other(3)
Total carrying
value(4)
Total fair
value(5)
$
1,859
$ 13,084 $
5,357
$
20,300 $ 20,300
18,582
11,031
17,383
116,044
3,267
20,060
–
–
–
–
–
–
15,252
149
4,779
17,221
4,360
5,285
170
2,791
–
–
–
–
–
–
99
–
–
–
–
–
–
–
49,376
37,979
6,471
1,740
1,926
11,002
9,492
3,768
23,361
28,252
21,743
121,329
3,437
22,851
49,376
37,979
6,471
1,740
1,926
11,002
24,843
3,917
23,361
28,252
21,743
121,329
3,437
22,851
51,450
41,743
6,471
1,742
3,275
11,002
25,622
3,918
$ 203,627
$ 47,789 $ 127,111
$
378,527 $ 386,496
FVTPL(1)
AFS(2)
Other(3)
Total carrying
value(4)
Total fair
value(5)
$
1,080
$ 10,163 $
4,972
$
16,215 $ 16,215
16,445
11,934
16,159
107,425
2,774
16,721
–
–
–
–
–
–
14,720
151
7,342
13,990
4,101
5,245
179
2,458
–
–
–
–
–
–
101
–
–
–
–
–
–
–
48,363
35,754
6,446
1,793
2,016
10,761
8,617
3,954
23,787
25,924
20,260
112,670
2,953
19,179
48,363
35,754
6,446
1,793
2,016
10,761
23,438
4,105
23,787
25,924
20,260
112,670
2,953
19,179
48,628
36,103
6,446
1,797
3,179
10,761
24,211
4,104
$ 187,409
$ 43,579 $ 122,676
$
353,664 $ 356,217
(1) FVTPL classification was elected for securities backing insurance contract liabilities to substantially reduce any accounting mismatch arising from changes in the fair value
of these assets and changes in the value of the related insurance contract liabilities. If this election had not been made and instead the AFS classification was selected,
there would be an accounting mismatch because changes in insurance contract liabilities are recognized in net income rather than in OCI.
(2) Securities that are designated as AFS are not actively traded by the Company but sales do occur as circumstances warrant. Such sales result in a reclassification of any
accumulated unrealized gain (loss) in AOCI to net income as a realized gain (loss).
(3) Primarily includes assets classified as loans and carried at amortized cost, own use properties, investment properties, equity method accounted investments, oil and gas
investments, and leveraged leases. Refer to note 1(e) for further details regarding accounting policy.
(4) Fixed income invested assets above include debt securities, mortgages, private placements and approximately $179 (2018 – $116) other invested assets, which primarily
have contractual cash flows that qualify as SPPI. Fixed income invested assets which do not have SPPI qualifying cash flows as at December 31, 2019 include debt
securities, private placements and other invested assets with fair values of $98, $257 and $373, respectively (2018 – $105, $230 and $465). The change in the fair value
of these invested assets during the year was $71 (2018 – $21).
(5) The methodologies used in determining fair values of invested assets are described in note 1(c) and note 3(g).
(6)
Includes short-term securities with maturities of less than one year at acquisition amounting to $3,806 (2018 – $2,530), cash equivalents with maturities of less than 90
days at acquisition amounting to $11,136 (2018 – $8,713) and cash of $5,358 (2018 – $4,972).
(7) Debt securities include securities which were acquired with maturities of less than one year and less than 90 days of $537 and $69, respectively (2018 – $870 and $40,
respectively).
Includes accumulated depreciation of $414 (2018 – $391).
(8)
(9) Alternative long-duration assets (“ALDA”) include investments in private equity of $6,396, infrastructure of $8,854, oil and gas of $3,245, timber and agriculture of
(10)
$4,669 and various other invested assets of $1,679 (2018 – $6,769, $7,970, $3,416, $4,493 and $790, respectively). During the year, a group of investments in hydro-
electric power of $418 was sold. This group of investments was previously classified as held for sale.
In 2019, the Company sold $1,112 of North American Private Equity investments to Manulife Private Equity Partners, L.P, a closed-end pooled fund of funds. The
Company provides management services to the fund. In 2018, the Company sold the following invested assets to related parties: $1,422 of infrastructure ALDA was
sold to the John Hancock Infrastructure Master Fund L.P. in the USA, an associate of the Company which is a structured entity based on partnership voting rights, the
Company provides management services to the fund and owns less than 1% of the ownership interest; $510 of U.S. commercial real estate was sold to the Manulife US
Real Estate Investment Trust in Singapore, an associate of the Company which is a structured entity based on unitholder voting rights, the Company provides
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
119
management services to the trust and owns approximately 8.5% of its units; and $1,314 of U.S. commercial real estate was sold to three joint ventures which are
structured entities based on voting rights.
Includes $3,371 (2018 – $3,575) of leveraged leases. Refer to note 1(e) regarding accounting policy.
(11)
(b) Equity method accounted invested assets
Other invested assets include investments in associates and joint ventures which are accounted for using the equity method of
accounting as presented in the following table.
As at December 31,
Leveraged leases
Timber and agriculture
Real estate
Other
Total
Carrying
value
$ 3,371
668
1,031
2,716
$ 7,786
2019
2018
Carrying
% of total
value % of total
43
9
13
35
100
$ 3,575
599
725
1,959
$ 6,858
51
9
11
29
100
The Company’s share of profit and dividends from these investments for the year ended December 31, 2019 were $369 and $5,
respectively (2018 – $369 and $13).
120
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(c) Investment income
For the year ended December 31, 2019
Cash and short-term securities
Interest income
Gains (losses)(2)
Debt securities
Interest income
Gains (losses)(2)
Recovery (impairment loss), net
Public equities
Dividend income
Gains (losses)(2)
Impairment loss, net
Mortgages
Interest income
Gains (losses)(2)
Recovery (provision), net
Private placements
Interest income
Gains (losses)(2)
Impairment loss, net
Policy loans
Loans to Bank clients
Interest income
Provision, net
Real estate
Rental income, net of depreciation(3)
Gains (losses)(2)
Derivatives
Interest income, net
Gains (losses)(2)
Other invested assets
Interest income
Oil and gas, timber, agriculture and other income
Gains (losses)(2)
Recovery (impairment loss), net
Total investment income
Investment income
Interest income
Dividend, rental and other income
Impairments, provisions and recoveries, net
Other
Realized and unrealized gains (losses) on assets supporting insurance and investment
contract liabilities and on macro equity hedges
Debt securities
Public equities
Mortgages
Private placements
Real estate
Other invested assets
Derivatives, including macro equity hedging program
FVTPL
AFS
Other(1)
Total
$
32
11
$
281
(29)
$
5,557
11,525
(9)
551
3,079
–
–
–
–
–
–
–
–
–
–
–
–
579
2,653
–
–
742
–
783
472
1
69
109
(24)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
–
–
–
–
–
–
–
1,951
26
31
1,782
(62)
(35)
391
87
(1)
505
508
(24)
(6)
69
1,862
35
93
$
313
(18)
6,340
11,997
(8)
620
3,188
(24)
1,951
26
31
1,782
(62)
(35)
391
87
(1)
505
508
555
2,647
69
1,862
776
93
$ 24,720
$ 1,661
$ 7,212
$ 33,593
$ 6,168
552
(9)
265
$ 1,064
69
(23)
539
$ 4,256
2,367
88
57
$ 11,488
2,988
56
861
6,976
1,649
6,768
15,393
11,521
2,865
–
–
–
776
2,582
17,744
7
5
–
–
–
–
–
12
–
–
26
(62)
514
(28)
(6)
444
11,528
2,870
26
(62)
514
748
2,576
18,200
Total investment income
$ 24,720
$ 1,661
$ 7,212
$ 33,593
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
121
For the year ended December 31, 2018
Cash and short-term securities
Interest income
Gains (losses)(2)
Debt securities
Interest income
Gains (losses)(2)
Recovery (impairment loss), net
Public equities
Dividend income
Gains (losses)(2)
Impairment loss, net
Mortgages
Interest income
Gains (losses)(2)
Provision, net
Private placements
Interest income
Gains (losses)(2)
Impairment loss, net
Policy loans
Loans to Bank clients
Interest income
Provision, net
Real estate
Rental income, net of depreciation(3)
Gains (losses)(2)
Derivatives
Interest income, net
Gains (losses)(2)
Other invested assets
Interest income
Oil and gas, timber, agriculture and other income
Gains (losses)(2)
Impairment loss, net
Total investment income
Investment income
Interest income
Dividend, rental and other income
Impairments, provisions and recoveries, net
Other
Realized and unrealized gains (losses) on assets supporting insurance and investment
contract liabilities and on macro equity hedges
Debt securities
Public equities
Mortgages
Private placements
Real estate
Other invested assets
Derivatives, including macro equity hedging program
FVTPL
AFS
Other(1)
Total
$
18
(74)
$ 250
62
$
5,432
(5,993)
18
484
(1,596)
–
646
(310)
–
72
330
(43)
–
–
–
–
–
–
–
–
–
–
–
689
(2,251)
–
–
283
(2)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4)
–
–
–
–
–
–
–
–
1,824
56
(8)
1,729
(83)
(10)
371
81
(1)
515
445
(33)
27
74
1,758
(110)
(114)
$
268
(12)
6,078
(6,303)
18
556
(1,266)
(43)
1,824
56
(8)
1,729
(83)
(10)
371
81
(1)
515
445
656
(2,224)
74
1,758
173
(120)
$ (2,992)
$ 1,003
$ 6,521
$ 4,532
$ 6,139
484
16
(271)
$ 896
72
(47)
58
$ 4,046
2,273
(133)
27
$ 11,081
2,829
(164)
(186)
6,368
979
6,213
13,560
(6,012)
(1,454)
–
–
–
357
(2,251)
(9,360)
18
10
–
–
–
(4)
–
24
–
–
55
(83)
449
(140)
27
308
(5,994)
(1,444)
55
(83)
449
213
(2,224)
(9,028)
Total investment income
$ (2,992)
$ 1,003
$ 6,521
$ 4,532
(1) Primarily includes investment income on loans carried at amortized cost, own use properties, investment properties, derivative and hedging instruments in cash flow
hedging relationships, equity method accounted investments, oil and gas investments, and leveraged leases.
(2) Includes net realized and unrealized gains (losses) for financial instruments at FVTPL, real estate investment properties, and other invested assets measured at fair value.
Also includes net realized gains (losses) for financial instruments at AFS and other invested assets carried at amortized cost.
(3) Rental income from investment properties is net of direct operating expenses.
122
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(d) Investment expenses
The following table presents total investment expenses.
For the years ended December 31,
Related to invested assets
Related to segregated, mutual and other funds
Total investment expenses
(e) Investment properties
The following table presents the rental income and direct operating expenses of investment properties.
For the years ended December 31,
Rental income from investment properties
Direct operating expenses of rental investment properties
Total
2019
2018
$
627
1,121
$ 638
1,070
$ 1,748
$ 1,708
2019
2018
$ 864
(464)
$ 1,013
(582)
$ 400
$ 431
(f) Mortgage securitization
The Company securitizes certain insured and uninsured fixed and variable rate residential mortgages and Home Equity Lines of Credit
(“HELOC”) through creation of mortgage-backed securities under the Canadian Mortgage Bond Program (“CMB”), and the HELOC
securitization program.
Benefits received from the securitization include interest spread between the asset and associated liability. There are no expected
credit losses on securitized mortgages under the Canada Mortgage and Housing Corporation (“CMHC”) sponsored CMB and the
Platinum Canadian Mortgage Trust (“PCMT”) HELOC securitization programs as they are insured by CMHC and other third-party
insurance programs against borrowers’ default. Mortgages securitized in the Platinum Canadian Mortgage Trust II (“PCMT II”)
program are uninsured.
Cash flows received from the underlying securitized assets/mortgages are used to settle the related secured borrowing liability. For
CMB transactions, receipts of principal are deposited into a trust account for settlement of the liability at time of maturity. These
transferred assets and related cash flows cannot be transferred or used for other purposes. For the HELOC transactions, investors are
entitled to periodic interest payments, and the remaining cash receipts of principal are allocated to the Company (the “Seller”) during
the revolving period of the deal and are accumulated for settlement during an accumulation period or repaid to the investor monthly
during a reduction period, based on the terms of the note.
Securitized assets and secured borrowing liabilities
As at December 31, 2019
Securitization program
HELOC securitization(1)
CMB securitization
Total
As at December 31, 2018
Securitization program
HELOC securitization(1)
CMB securitization
Total
Securitized assets
Securitized
mortgages
Restricted cash and
short-term securities
$2,285
1,620
$3,905
$ 8
–
$ 8
Securitized assets
Securitized
mortgages
Restricted cash and
short-term securities
$2,285
1,525
$3,810
$ 8
–
$ 8
Total
$2,293
1,620
$3,913
Total
$2,293
1,525
$3,818
Secured borrowing
liabilities(2)
$ 2,250
1,632
$ 3,882
Secured borrowing
liabilities(2)
$ 2,250
1,524
$ 3,774
(1) Manulife Bank, a subsidiary, securitizes a portion of its HELOC receivables through Platinum Canadian Mortgage Trust (“PCMT”), and Platinum Canadian Mortgage Trust
II (“PCMT II”). PCMT funds the purchase of the co-ownership interests from Manulife Bank by issuing term notes collateralized by an underlying pool of CMHC insured
HELOCs to institutional investors. PCMT II funds the purchase of the co-ownership interests from Manulife Bank by issuing term notes collateralized by an underlying pool
of uninsured HELOCs to institutional investors. The restricted cash balance for the HELOC securitization reflects a cash reserve fund established in relation to the
transactions. The reserve will be drawn upon only in the event of insufficient cash flows from the underlying HELOCs to satisfy the secured borrowing liability.
(2) Secured borrowing liabilities primarily comprise of Series 2011-1 notes with a floating rate which are expected to mature on December 15, 2021, and the Series 2016-1
notes with a floating rate which are expected to mature on May 15, 2022. Manulife Bank also securitizes insured amortizing mortgages under the National Housing Act
Mortgage-Backed Securities (“NHA MBS”) program sponsored by CMHC. Manulife Bank participates in CMB programs by selling NHA MBS securities to Canada Housing
Trust (“CHT”), as a source of fixed rate funding.
As at December 31, 2019, the fair value of securitized assets and associated liabilities were $3,950 and $3,879, respectively
(2018 – $3,843 and $3,756).
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
123
(g) Fair value measurement
The following table presents the fair values of invested assets and segregated funds net assets measured at fair value categorized by
the fair value hierarchy.
As at December 31, 2019
Cash and short-term securities
FVTPL
AFS
Other
Debt securities
FVTPL
Canadian government and agency
U.S. government and agency
Other government and agency
Corporate
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other asset-backed securities
AFS
Canadian government and agency
U.S. government and agency
Other government and agency
Corporate
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other asset-backed securities
Public equities
FVTPL
AFS
Real estate – investment property(1)
Other invested assets(2)
Segregated funds net assets(3)
Total
As at December 31, 2018
Cash and short-term securities
FVTPL
AFS
Other
Debt securities
FVTPL
Canadian government and agency
U.S. government and agency
Other government and agency
Corporate
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other asset-backed securities
AFS
Canadian government and agency
U.S. government and agency
Other government and agency
Corporate
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other asset-backed securities
Public equities
FVTPL
AFS
Real estate – investment property(1)
Other invested assets(2)
Segregated funds net assets(3)
Total
Total fair
value
Level 1
Level 2
Level 3
$
1,859
13,084
5,357
$
–
–
5,357
$
1,859
13,084
–
$
18,582
11,031
17,383
116,044
13
1,271
1,983
4,779
17,221
4,360
5,285
1
102
67
20,060
2,791
11,002
18,194
343,108
–
–
–
–
–
–
–
–
–
–
–
–
–
–
20,060
2,788
–
91
293,903
18,582
11,031
17,383
115,411
13
1,271
1,983
4,779
17,221
4,360
5,270
1
102
67
–
3
–
–
44,693
–
–
–
–
–
–
633
–
–
–
–
–
–
15
–
–
–
–
–
11,002
18,103
4,512
$ 613,577
$ 322,199
$ 257,113
$ 34,265
Total fair
value
Level 1
Level 2
Level 3
$
1,080
10,163
4,972
$
–
–
4,972
$
1,080
10,163
–
$
16,445
11,934
16,159
107,425
13
1,344
1,417
7,342
13,990
4,101
5,245
2
128
49
16,721
2,458
10,761
17,562
313,209
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,718
2,456
–
–
273,840
16,445
11,934
15,979
106,641
6
1,344
1,417
7,342
13,990
4,064
5,125
–
128
49
–
2
–
–
34,922
–
–
–
–
–
180
784
7
–
–
–
–
37
120
2
–
–
3
–
10,761
17,562
4,447
$ 562,520
$ 297,986
$ 230,631
$ 33,903
(1) For investment properties, the significant unobservable inputs are capitalization rates (ranging from 2.75% to 8.75% during the year and ranging from 2.75% to 8.75%
during 2018) and terminal capitalization rates (ranging from 3.80% to 9.25% during the year and ranging from 3.80% to 9.25% during 2018). Holding other factors
constant, a lower capitalization or terminal capitalization rate will tend to increase the fair value of an investment property. Changes in fair value based on variations in
unobservable inputs generally cannot be extrapolated because the relationship between the directional changes of each input is not usually linear.
124
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(2) Other invested assets measured at fair value are held primarily in infrastructure and timber sectors. The significant inputs used in the valuation of the Company’s
infrastructure investments are primarily future distributable cash flows, terminal values and discount rates. Holding other factors constant, an increase to future
distributable cash flows or terminal values would tend to increase the fair value of an infrastructure investment, while an increase in the discount rate would have the
opposite effect. Discount rates during the year ranged from 7.00% to 16.5% (2018 – ranged from 8.95% to 16.5%). Disclosure of distributable cash flow and terminal
value ranges are not meaningful given the disparity in estimates by project. The significant inputs used in the valuation of the Company’s investments in timberland are
timber prices and discount rates. Holding other factors constant, an increase to timber prices would tend to increase the fair value of a timberland investment, while an
increase in the discount rates would have the opposite effect. Discount rates during the year ranged from 5.0% to 7.0% (2018 – ranged from 5.0% to 7.0%). A range of
prices for timber is not meaningful as the market price depends on factors such as property location and proximity to markets and export yards.
(3) Segregated funds net assets are measured at fair value. The Company’s Level 3 segregated funds assets are predominantly in investment properties and timberland
properties valued as described above.
The following table presents fair value of invested assets not measured at fair value by the fair value hierarchy.
As at December 31, 2019
Mortgages(1)
Private placements(2)
Policy loans(3)
Loans to Bank clients(4)
Real estate – own use property(5)
Other invested assets(6)
Carrying
value
$ 49,376
37,979
6,471
1,740
1,926
10,566
Fair value
Level 1
$ 51,450
41,743
6,471
1,742
3,275
11,346
$
–
–
–
–
–
165
$
Level 2
–
36,234
6,471
1,742
–
–
Level 3
$ 51,450
5,509
–
–
3,275
11,181
Total invested assets disclosed at fair value
$ 108,058
$ 116,027
$ 165
$ 44,447
$ 71,415
As at December 31, 2018
Mortgages(1)
Private placements(2)
Policy loans(3)
Loans to Bank clients(4)
Real estate – own use property(5)
Other invested assets(6)
Carrying
value
$ 48,363
35,754
6,446
1,793
2,016
9,981
Fair value
Level 1
$ 48,628
36,103
6,446
1,797
3,179
10,753
$
–
–
–
–
–
121
$
Level 2
–
30,325
6,446
1,797
–
–
Level 3
$ 48,628
5,778
–
–
3,179
10,632
Total invested assets disclosed at fair value
$ 104,353
$ 106,906
$ 121
$ 38,568
$ 68,217
(1) Fair value of commercial mortgages is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs
include credit assumptions and liquidity spread adjustments. Fair value of fixed-rate residential mortgages is determined using the discounted cash flow method. Inputs
used for valuation are primarily comprised of prevailing interest rates and prepayment rates, if applicable. Fair value of variable-rate residential mortgages is assumed to be
their carrying value.
(2) Fair value of private placements is determined through an internal valuation methodology using both observable and unobservable inputs. Unobservable inputs include
credit assumptions and liquidity spread adjustments. Private placements are classified within Level 2 unless the liquidity adjustment constitutes a significant price impact,
in which case the securities are classified as Level 3.
(3) Fair value of policy loans is equal to their unpaid principal balances.
(4) Fair value of fixed-rate loans to Bank clients is determined using the discounted cash flow method. Inputs used for valuation are primarily comprised of current interest
rates. Fair value of variable-rate loans is assumed to be their carrying value.
(5) Fair value of own use real estate and the fair value hierarchy are determined in accordance with the methodologies described for real estate – investment property in
note 1.
(6) Primarily include leveraged leases, oil and gas properties and equity method accounted other invested assets. Fair value of leveraged leases is disclosed at their carrying
values as fair value is not routinely calculated on these investments. Fair value for oil and gas properties is determined using external appraisals based on discounted cash
flow methodology. Inputs used in valuation are primarily comprised of forecasted price curves, planned production, as well as capital expenditures, and operating costs.
Fair value of equity method accounted other invested assets is determined using a variety of valuation techniques including discounted cash flows and market comparable
approaches. Inputs vary based on the specific investment.
Transfers between Level 1 and Level 2
The Company records transfers of assets and liabilities between Level 1 and Level 2 at their fair values as at the end of each reporting
period. Assets are transferred out of Level 1 when they are no longer transacted with sufficient frequency and volume in an active
market. Conversely, assets are transferred from Level 2 to Level 1 when transaction volume and frequency are indicative of an active
market. The Company had $nil of assets transferred between Level 1 and Level 2 during the years ended December 31, 2019 and
2018.
For segregated funds net assets, the Company had $nil transfers from Level 1 to Level 2 for the year ended December 31, 2019
(2018 – $nil). The Company had $nil transfers from Level 2 to Level 1 for the year ended December 31, 2019 (2018 – $2).
Invested assets and segregated funds net assets measured at fair value using significant unobservable inputs (Level 3)
The Company classifies fair values of invested assets and segregated funds net assets as Level 3 if there are no observable markets for
these assets or, in the absence of active markets, most of the inputs used to determine fair value are based on the Company’s own
assumptions about market participant assumptions. The Company prioritizes the use of market-based inputs over entity-based
assumptions in determining Level 3 fair values. The gains and losses in the tables below include the changes in fair value due to both
observable and unobservable factors.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
125
The following table presents a roll forward for invested assets, derivatives and segregated funds net assets measured at fair value
using significant unobservable inputs (Level 3) for the years ended December 31, 2019 and 2018.
Net
realized/
unrealized
gains
(losses)
included
in net
income(1)
Net
realized/
unrealized
gains
(losses)
included
in AOCI(2) Purchases
Balance,
January 1,
2019
Sales Settlements
Transfer
into
Level 3(3),(4)
Transfer
out of
Level 3(3,(4)
Currency
movement
Balance,
December 31,
2019
Change in
unrealized
gains
(losses) on
assets still
held
$ – $
–
16 $
43
(18) $
(88)
–
(18)
$
– $ (178) $
514
(604)
(1)
(33)
(1)
–
–
(6)
–
(107)
(18)
514
(788)
(34)
$
180 $
784
7
971
37
120
2
–
159
1
35
–
36
1
1
–
–
2
3
3
1,739
1,739
10,761
17,562
506
(1,028)
28,323
(522)
106
1,884
4,447
148
–
59
5
13
–
37
55
(12)
(21)
–
–
–
(4)
–
–
(33)
(4)
–
–
(1,679)
(1,679)
–
–
(457)
(144)
–
(1,031)
(601)
(1,031)
440
3,401
3,841
42
–
–
–
–
–
–
–
–
–
–
2
2
44
–
$
– $
633
–
633
–
14
1
–
15
–
–
–
47
–
47
–
–
–
–
–
1,510
1,510
11,002
18,103
29,105
468
(923)
(455)
1,456
1,423
–
–
–
–
–
–
–
15
2
17
(31)
(93)
(1)
(37)
(162)
–
–
–
–
–
–
(2)
–
–
(2)
(63)
(63)
(263)
(661)
(924)
(36)
$ 34,009 $ 3,287
$ 46 $ 4,190 $ (2,560) $ (1,768)
$ 666 $ (984) $ (1,165)
$ 35,721 $ 2,636
193
(140)
(30)
–
–
(106)
4,512
111
–
(685)
135
(34)
For the year ended
December 31, 2019
Debt securities
FVTPL
Other government &
agency
Corporate
Residential mortgage-
backed securities
AFS
Other government &
agency
Corporate
Residential mortgage-
backed securities
Commercial mortgage-
backed securities
Public equities
FVTPL
Real estate –
investment property
Other invested assets
Derivatives
Segregated funds net
assets
Total
126
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
For the year ended December 31, 2018
Debt securities
FVTPL
Other government & agency
Corporate
Residential mortgage-backed securities
Other asset-backed securities
AFS
Other government & agency
Corporate
Residential mortgage-backed securities
Other asset-backed securities
Public equities
FVTPL
Net
realized/
unrealized
gains
(losses)
included in
net
income(1)
Net
realized/
unrealized
gains
(losses)
included
in AOCI(2)
Balance,
January 1,
2018
Purchases
Sales Settlements
Transfer
into
Level 3(3),(4)
Transfer
out of
Level 3(3,(4)
Currency
movement
Balance,
December 31,
2018
Change in
unrealized
gains
(losses) on
assets still
held
$
239 $
710
1
25
975
47
88
–
1
136
3
3
7
–
–
–
–
–
–
–
(2) $
3
6
–
– $
–
–
–
27 $
190
–
31
248
(85) $
(61)
–
–
(146)
(14)
(18)
–
–
(32)
$ – $
–
–
–
– $
(93)
–
(56)
15 $
53
–
–
180 $
784
7
–
–
–
–
1
–
1
–
–
–
1
1
6
49
–
–
55
–
–
(15)
(12)
–
–
(27)
–
–
615
3,926
(2,578)
(1,636)
4,541
(4,214)
(48)
–
12
155
–
(367)
(4)
(4)
–
–
(8)
–
–
–
(841)
(841)
18
1
–
–
–
–
–
–
–
–
–
–
–
9
3
(149)
68
971
–
(7)
–
(1)
(8)
–
–
3
6
1
–
10
–
–
37
120
2
–
159
3
3
(706)
(35)
610
1,112
10,761
17,562
244
(434)
(741)
1,722
28,323
(190)
(13)
(17)
25
191
106
4,447
(460)
161
(3)
(10)
6
–
(7)
–
–
–
–
–
–
–
Real estate – investment property
Other invested assets
Derivatives
Segregated funds net assets
12,529
16,203
28,732
769
4,255
291
(1,168)
(877)
(666)
226
Total
$ 34,870 $ (1,310) $ (46) $ 5,011 $ (4,754) $ (862)
$ 12 $ (928) $ 2,016 $ 34,009 $ (496)
(1) These amounts are included in net investment income on the Consolidated Statements of Income except for the amount related to segregated funds net assets, where
the amount is recorded in changes in segregated funds net assets, refer to note 22.
(2) These amounts are included in AOCI on the Consolidated Statements of Financial Position.
(3) The Company uses fair values of the assets at the beginning of the year for assets transferred into and out of Level 3 except for derivatives, refer to footnote 4 below.
(4) For derivatives transfer into or out of Level 3, the Company uses fair value at the end of the year and at the beginning of the year, respectively.
Transfers into Level 3 primarily result from securities that were impaired during the year or securities where a lack of observable
market data (versus the previous period) resulted in reclassifying assets into Level 3. Transfers from Level 3 primarily result from
observable market data now being available for the entire term structure of the debt security.
Note 4 Derivative and Hedging Instruments
Derivatives are financial contracts, the value of which is derived from underlying interest rates, foreign exchange rates, other financial
instruments, commodity prices or indices. The Company uses derivatives including swaps, forward and futures agreements, and
options to manage current and anticipated exposures to changes in interest rates, foreign exchange rates, commodity prices and
equity market prices, and to replicate permissible investments.
Swaps are over-the-counter (“OTC”) contractual agreements between the Company and a third party to exchange a series of cash
flows based upon rates applied to a notional amount. For interest rate swaps, counterparties generally exchange fixed or floating
interest rate payments based on a notional value in a single currency. Cross currency swaps involve the exchange of principal amounts
between parties as well as the exchange of interest payments in one currency for the receipt of interest payments in another currency.
Total return swaps are contracts that involve the exchange of payments based on changes in the values of a reference asset, including
any returns such as interest earned on these assets, in return for amounts based on reference rates specified in the contract.
Forward and futures agreements are contractual obligations to buy or sell a financial instrument, foreign currency or other underlying
commodity on a predetermined future date at a specified price. Forward contracts are OTC contracts negotiated between
counterparties, whereas futures agreements are contracts with standard amounts and settlement dates that are traded on regulated
exchanges.
Options are contractual agreements whereby the holder has the right, but not the obligation, to buy (call option) or sell (put option) a
security, exchange rate, interest rate, or other financial instrument at a predetermined price/rate within a specified time.
See variable annuity dynamic hedging strategy in the “Risk Management” section of the Company’s 2019 MD&A for an explanation
of the Company’s dynamic hedging strategy for its variable annuity product guarantees.
(a) Fair value of derivatives
The pricing models used to value OTC derivatives are based on market standard valuation methodologies and the inputs to these
models are consistent with what a market participant would use when pricing the instruments. Derivative valuations can be affected
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
127
by changes in interest rates, currency exchange rates, financial indices, credit spreads, default risk (including the counterparties to the
contract), and market volatility. The significant inputs to the pricing models for most OTC derivatives are inputs that are observable or
can be corroborated by observable market data and are classified as Level 2. Inputs that are observable generally include interest rates,
foreign currency exchange rates and interest rate curves. However, certain OTC derivatives may rely on inputs that are significant to
the fair value that are not observable in the market or cannot be derived principally from, or corroborated by, observable market data
and these derivatives are classified as Level 3. Inputs that are unobservable generally include broker quoted prices, volatilities and
inputs that are outside of the observable portion of the interest rate curve or other relevant market measures. These unobservable
inputs may involve significant management judgment or estimation. Even though unobservable, these inputs are based on
assumptions deemed appropriate given the circumstances and consistent with what market participants would use when pricing such
instruments. The Company’s use of unobservable inputs is limited and the impact on derivative fair values does not represent a
material amount as evidenced by the limited amount of Level 3 derivatives. The credit risk of both the counterparty and the Company
are considered in determining the fair value for all OTC derivatives after considering the effects of netting agreements and collateral
arrangements.
The following table presents gross notional amount and fair value of derivative instruments by the underlying risk exposure.
As at December 31,
Type of hedge
Instrument type
Qualifying hedge accounting relationships
Fair value hedges
Cash flow hedges
Net investment hedges
Interest rate swaps
Foreign currency swaps
Foreign currency swaps
Forward contracts
Equity contracts
Forward contracts
Total derivatives in qualifying hedge accounting relationships
Derivatives not designated in qualifying hedge
accounting relationships
Interest rate swaps
Interest rate futures
Interest rate options
Foreign currency swaps
Currency rate futures
Forward contracts
Equity contracts
Credit default swaps
Equity futures
$
Notional
amount
350
86
1,790
–
132
2,822
5,180
283,172
13,069
12,248
26,329
3,387
33,432
14,582
502
10,576
2019
Fair value
Assets
Liabilities
$
$
–
3
39
–
16
7
65
15,159
–
423
606
–
2,337
853
6
–
5
1
407
–
–
22
435
8,140
–
–
1,399
–
273
37
–
–
$
Notional
amount
519
91
1,834
80
101
1,864
4,489
300,704
14,297
11,736
23,156
4,052
29,248
15,492
652
10,908
2018
Fair value
Assets
Liabilities
$
$
–
5
80
–
–
21
106
11,204
–
314
747
–
670
653
9
–
13
–
367
9
12
65
466
5,675
–
–
1,341
–
158
163
–
–
Total derivatives not designated in qualifying hedge accounting
relationships
Total derivatives
397,297
19,384
9,849
410,245
13,597
7,337
$ 402,477
$ 19,449
$ 10,284
$ 414,734
$ 13,703
$ 7,803
The following table presents fair values of derivative instruments by the remaining term to maturity. The fair values disclosed below do
not incorporate the impact of master netting agreements. Refer to note 8.
As at December 31, 2019
Derivative assets
Derivative liabilities
As at December 31, 2018
Derivative assets
Derivative liabilities
Less than
1 year
$ 1,248
332
Less than
1 year
$
649
359
Remaining term to maturity
1 to 3
years
3 to 5
years
Over 5
years
Total
$ 1,659
145
$ 1,309
218
$ 15,233
9,589
$ 19,449
10,284
Remaining term to maturity
1 to 3
years
3 to 5
years
Over 5
years
Total
$ 671
229
$ 795
227
$ 11,588
6,988
$ 13,703
7,803
128
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The following table presents gross notional amount by the remaining term to maturity, total fair value (including accrued interest),
credit risk equivalent and risk-weighted amount by contract type.
Remaining term to maturity (notional amounts)
Fair value
Under 1
year
1 to 5
years
Over
5 years
Total
Positive
Negative
Net
As at December 31, 2019
Interest rate contracts
OTC swap contracts
Cleared swap contracts
Forward contracts
Futures
Options purchased
$ 5,105
3,932
11,709
13,069
1,266
$ 22,288 $ 112,863 $ 140,256
143,266
127,835
28,081
1,283
13,069
–
12,248
6,528
11,499
15,089
–
4,454
$ 15,627 $
238
2,312
–
423
(8,910) $ 6,717
(2)
2,059
–
423
(240)
(253)
–
–
Credit risk
equivalent(1)
$ 6,891
–
398
–
560
Risk-
weighted
amount(2)
$ 957
–
53
–
77
Subtotal
Foreign exchange
Swap contracts
Forward contracts
Futures
Credit derivatives
Equity contracts
Swap contracts
Futures
Options purchased
Subtotal including accrued
interest
Less accrued interest
35,081
53,330
248,509
336,920
18,600
(9,403)
9,197
7,849
1,087
998
8,173
3,387
275
1,233
10,576
6,604
7,519
–
–
227
164
–
6,633
19,688
–
–
–
–
–
80
28,205
8,173
3,387
502
1,397
10,576
13,317
642
32
–
6
43
–
821
(1,864)
(42)
–
–
(1,222)
(10)
–
6
(16)
–
(20)
27
–
801
2,515
138
–
–
236
–
3,418
279
16
–
–
29
–
448
66,327
–
67,873
–
268,277
–
402,477
–
20,144
695
(11,345)
(1,061)
8,799
(366)
14,156
–
1,859
–
Total
$ 66,327
$ 67,873 $ 268,277 $ 402,477
$ 19,449 $ (10,284) $ 9,165
$ 14,156
$ 1,859
As at December 31, 2018
Interest rate contracts
OTC swap contracts
Cleared swap contracts
Forward contracts
Futures
Options purchased
Subtotal
Foreign exchange
Swap contracts
Forward contracts
Futures
Credit derivatives
Equity contracts
Swap contracts
Futures
Options purchased
Subtotal including accrued
interest
Less accrued interest
Remaining term to maturity (notional amounts)
Fair value
Under 1
year
1 to 5
years
Over
5 years
Total
Positive
Negative
Net
$ 3,495 $ 22,568 $ 121,817 $ 147,880
153,343
25,206
14,297
11,736
131,480
648
–
5,589
5,723
10,258
14,297
1,166
16,140
14,300
–
4,981
$ 11,750 $
95
637
–
317
(6,477)
(96)
(126)
–
–
$ 5,273
(1)
511
–
317
34,939
57,989
259,534
352,462
12,799
(6,699)
6,100
1,024
5,926
4,052
143
2,728
10,908
6,142
6,281
60
–
509
142
–
6,581
17,776
–
–
–
–
–
–
25,081
5,986
4,052
652
2,870
10,908
12,723
807
54
–
10
29
–
621
(1,736)
(106)
–
–
(57)
–
(118)
(929)
(52)
–
10
(28)
–
503
Credit risk
equivalent(1)
$ 5,301
–
259
–
376
Risk-
weighted
amount(2)
$ 787
–
37
–
58
5,936
2,309
108
–
–
303
–
2,277
882
256
13
–
–
38
–
316
65,862
–
71,562
–
277,310
–
414,734
–
14,320
617
(8,716)
(913)
5,604
(296)
10,933
–
1,505
–
Total
$ 65,862 $ 71,562 $ 277,310 $ 414,734
$ 13,703 $
(7,803)
$ 5,900
$ 10,933
$ 1,505
(1) Credit risk equivalent is the sum of replacement cost and the potential future credit exposure. Replacement cost represents the current cost of replacing all contracts with
a positive fair value. The amounts take into consideration legal contracts that permit offsetting of positions. The potential future credit exposure is calculated based on a
formula prescribed by OSFI.
(2) Risk-weighted amount represents the credit risk equivalent, weighted according to the creditworthiness of the counterparty, as prescribed by OSFI.
The total notional amount of $402 billion (2018 – $415 billion) includes $128 billion (2018 – $136 billion) related to derivatives
utilized in the Company’s variable annuity guarantee dynamic hedging and macro equity risk hedging programs. Due to the
Company’s variable annuity hedging practices, a large number of trades are in offsetting positions, resulting in materially lower net
fair value exposure to the Company than what the gross notional amount would suggest.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
129
Fair value and the fair value hierarchy of derivative instruments
As at December 31, 2019
Derivative assets
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit default swaps
Total derivative assets
Derivative liabilities
Interest rate contracts
Foreign exchange contracts
Equity contracts
Total derivative liabilities
As at December 31, 2018
Derivative assets
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit default swaps
Total derivative assets
Derivative liabilities
Interest rate contracts
Foreign exchange contracts
Equity contracts
Total derivative liabilities
Fair value
Level 1
Level 2
Level 3
$
$ 17,894
680
869
6
$ 19,449
$
$
$ 8,397
1,850
37
$ 10,284
$
–
–
–
–
–
–
–
–
–
$ 15,801
680
821
6
$ 2,093
–
48
–
$ 17,308
$ 2,141
$ 7,730
1,849
20
$ 667
1
17
$ 9,599
$ 685
Fair value
Level 1
Level 2
Level 3
$
$ 12,155
886
653
9
$ 13,703
$
$
$ 5,815
1,814
174
$ 7,803
$
–
–
–
–
–
–
–
–
–
$ 11,537
876
621
9
$ 618
10
32
–
$ 13,043
$ 660
$ 5,318
1,813
118
$ 497
1
56
$ 7,249
$ 554
Level 3 roll forward information for net derivative contracts measured using significant unobservable inputs is disclosed in note 3(g).
(b) Hedging relationships
The Company uses derivatives for economic hedging purposes. In certain circumstances, these hedges also meet the requirements of
hedge accounting. Risk management strategies eligible for hedge accounting are designated as fair value hedges, cash flow hedges or
net investment hedges, as described below.
Fair value hedges
The Company uses interest rate swaps to manage its exposure to changes in the fair value of fixed rate financial instruments due to
changes in interest rates. The Company also uses cross currency swaps to manage its exposure to foreign exchange rate fluctuations,
interest rate fluctuations, or both.
The Company recognizes gains and losses on derivatives and the related hedged items in fair value hedges in investment income.
These investment gains (losses) are shown in the following table.
For the year ended December 31, 2019
Interest rate swaps
Foreign currency swaps
Total
For the year ended December 31, 2018
Interest rate swaps
Foreign currency swaps
Total
Hedged items in qualifying
fair value hedging
relationships
Fixed rate liabilities
Fixed rate assets
Hedged items in qualifying
fair value hedging
relationships
Fixed rate assets
Fixed rate liabilities
Fixed rate assets
Gains (losses)
recognized on
derivatives
Gains (losses)
recognized for
hedged items
$ 8
(1)
$ 7
$ (6)
2
$ ( 4)
Gains (losses)
recognized on
derivatives
Gains (losses)
recognized for
hedged items
$ 1
3
7
$ 11
$ (1)
(3)
(5)
$ (9)
Ineffectiveness
recognized in
investment
income
$ 2
1
$ 3
Ineffectiveness
recognized in
investment
income
$ –
–
2
$ 2
130
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Cash flow hedges
The Company uses interest rate swaps to hedge the variability in cash flows from variable rate financial instruments and forecasted
transactions. The Company also uses cross currency swaps and foreign currency forward contracts to hedge the variability from
foreign currency financial instruments and foreign currency expenses. Total return swaps are used to hedge the variability in cash
flows associated with certain stock-based compensation awards. Inflation swaps are used to reduce inflation risk generated from
inflation-indexed liabilities.
The effects of derivatives in cash flow hedging relationships on the Consolidated Statements of Income and the Consolidated
Statements of Comprehensive Income are shown in the following table.
For the year ended December 31, 2019
Foreign currency swaps
Forward contracts
Equity contracts
Total
For the year ended December 31, 2018
Interest rate swaps
Foreign currency swaps
Forward contracts
Equity contracts
Total
Hedged items in qualifying
cash flow hedging
relationships
Fixed rate assets
Floating rate liabilities
Fixed rate liabilities
Forecasted expenses
Stock-based compensation
Hedged items in qualifying
cash flow hedging
relationships
Forecasted liabilities
Fixed rate assets
Floating rate liabilities
Fixed rate liabilities
Forecasted expenses
Stock-based compensation
Gains (losses)
deferred in
AOCI on
derivatives
Gains (losses)
reclassified
from AOCI into
investment
income
Ineffectiveness
recognized in
investment
income
$
(2)
(40)
(41)
–
35
$
1
37
(35)
(9)
(9)
$
$
(48)
$
(15)
$
–
–
–
–
–
–
Gains (losses)
deferred in
AOCI on
derivatives
Gains (losses)
reclassified
from AOCI into
investment
income
Ineffectiveness
recognized in
investment
income
$
$
–
–
(36)
60
(8)
(21)
$
(20)
(1)
(62)
62
(2)
27
$
(5)
$
4
$
–
–
–
–
–
–
–
The Company anticipates that net losses of approximately $8 will be reclassified from AOCI to net income within the next 12 months.
The maximum time frame for which variable cash flows are hedged is 17 years.
Hedges of net investments in foreign operations
The Company primarily uses forward currency contracts, cross currency swaps and non-functional currency denominated debt to
manage its foreign currency exposures to net investments in foreign operations.
The effects of net investment hedging relationships on the Consolidated Statements of Income and the Consolidated Statements of
Other Comprehensive Income are shown in the following table.
For the year ended December 31, 2019
Non-functional currency denominated debt
Forward contracts
Total
For the year ended December 31, 2018
Non-functional currency denominated debt
Forward contracts
Total
Gains (losses)
deferred in AOCI
$ 279
80
$ 359
Gains (losses)
reclassified from
AOCI into
investment income
Ineffectiveness
recognized in
investment
income
$
$
–
–
–
$
$
–
–
–
Gains (losses)
deferred in AOCI
$ (469)
9
$ (460)
Gains (losses)
reclassified from
AOCI into
investment income
Ineffectiveness
recognized in
investment
income
$
$
–
–
–
$
$
–
–
–
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
131
(c) Derivatives not designated in qualifying hedge accounting relationships
Derivatives used in portfolios supporting insurance contract liabilities are generally not designated in qualifying hedge accounting
relationships because the change in the value of the insurance contract liabilities economically hedged by these derivatives is also
recorded through net income. Since changes in fair value of these derivatives and related hedged risks are recognized in investment
income as they occur, they generally offset the change in hedged risk to the extent the hedges are economically effective. Interest rate
and cross currency swaps are used in the portfolios supporting insurance contract liabilities to manage duration and currency risks.
Investment income on derivatives not designated in qualifying hedge accounting relationships
For the years ended December 31,
Interest rate swaps
Interest rate futures
Interest rate options
Foreign currency swaps
Currency rate futures
Forward contracts
Equity futures
Equity contracts
Credit default swaps
Total
2019
2018
$ 1,483
571
96
(242)
88
2,815
(2,436)
277
(3)
$ (1,894)
(298)
(52)
(122)
3
(355)
742
(276)
(6)
$ 2,649
$ (2,258)
(d) Embedded derivatives
Certain insurance contracts contain features that are classified as embedded derivatives and are measured separately at FVTPL
including reinsurance contracts related to guaranteed minimum income benefits and contracts containing certain credit and interest
rate features.
Certain reinsurance contracts related to guaranteed minimum income benefits contain embedded derivatives requiring separate
measurement at FVTPL as the financial component contained in the reinsurance contracts does not contain significant insurance risk.
As at December 31, 2019, reinsurance ceded guaranteed minimum income benefits had a fair value of $981 (2018 – $1,148) and
reinsurance assumed guaranteed minimum income benefits had a fair value of $109 (2018 – $114). Claims recovered under
reinsurance ceded contracts offset claims expenses and claims paid on the reinsurance assumed are reported as contract benefits.
The Company’s credit and interest rate embedded derivatives promise to pay the returns on a portfolio of assets to the contract
holder. These embedded derivatives contain a credit and interest rate risk that is a financial risk embedded in the underlying insurance
contract. As at December 31, 2019, these embedded derivatives had a fair value of $(137) (2018 – $53).
Other financial instruments classified as embedded derivatives but exempt from separate measurement at fair value include variable
universal life and variable life products, minimum guaranteed credited rates, no lapse guarantees, guaranteed annuitization options,
CPI indexing of benefits, and segregated fund minimum guarantees other than reinsurance ceded/assumed guaranteed minimum
income benefits. These embedded derivatives are measured and reported within insurance contract liabilities and are exempt from
separate fair value measurement as they contain insurance risk and/or are closely related to the insurance host contract.
132
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Note 5 Goodwill and Intangible Assets
(a) Change in the carrying value of goodwill and intangible assets
The following table presents the change in the carrying value of goodwill and intangible assets.
As at December 31, 2019
Goodwill
Indefinite life intangible assets
Brand
Fund management contracts and other(1)
Finite life intangible assets(2)
Distribution networks
Customer relationships
Software
Other
Total intangible assets
Balance,
January 1
Additions/
disposals
Amortization
expense
Effect of changes
in foreign
exchange rates
Balance,
December 31
$ 5,864
$
(6)
$ n/a
$ (115)
$ 5,743
819
798
1,617
868
860
821
67
2,616
4,233
–
32
32
6
(2)
357
–
361
393
n/a
n/a
n/a
44
54
168
5
271
271
(40)
(25)
(65)
(29)
(9)
(19)
(1)
(58)
(123)
779
805
1,584
801
795
991
61
2,648
4,232
Total goodwill and intangible assets
$ 10,097
$ 387
$ 271
$ (238)
$ 9,975
As at December 31, 2018
Goodwill
Indefinite life intangible assets
Brand
Fund management contracts and other(1)
Finite life intangible assets(2)
Distribution networks
Customer relationships
Software
Other
Total intangible assets
Balance,
January 1
Additions/
disposals(3)
Amortization
expense
Effect of changes
in foreign
exchange rates
Balance,
December 31
$ 5,713
$
(65)
$ n/a
$ 216
$ 5,864
753
755
1,508
989
899
661
70
2,619
4,127
–
3
3
(133)
–
275
–
142
145
n/a
n/a
n/a
48
55
147
5
255
255
66
40
106
60
16
32
2
110
216
819
798
1,617
868
860
821
67
2,616
4,233
Total goodwill and intangible assets
$ 9,840
$
80
$ 255
$ 432
$ 10,097
(1) Fund management contracts were mostly allocated to Canada WAM and U.S. WAM CGUs with the carrying values of $273 (2018 – $273) and $380 (2018 – $400),
respectively.
(2) Gross carrying amount of finite life intangible assets was $1,292 for distribution networks, $1,133 for customer relationships, $2,239 for software and $130 for other
(2018 – $1,331, $1,145, $2,110 and $133), respectively.
(3) In 2018, disposals include $65 of goodwill and $96 of distribution networks from the sale of the U.S. broker-dealer business, and impairments of distribution networks
for discontinued products of $27 in the U.S. segment and $13 in Asia segment.
(b) Goodwill impairment testing
The Company completed its annual goodwill impairment testing in the fourth quarter of 2019 by determining the recoverable
amounts of its businesses using valuation techniques discussed below (refer to notes 1(f) and 5(c)). The review indicated that there
was no impairment of goodwill in 2019 and 2018.
Effective January 1, 2018, the Company made organizational changes to drive better alignment with strategic priorities and increase
focus and leverage scale in its wealth management business. As a result of this reorganization, which included recognition of the
Company’s wealth and asset management businesses (Global WAM) as a primary reporting segment (note 19), the Company has
modified the level at which goodwill is tested for impairment purposes. The modification includes (a) the allocation of existing
goodwill to the relevant CGUs or group of CGUs within the Global WAM segment that had previously been combined within
respective regional insurance businesses and (b) the amalgamation of the remaining Canadian-based goodwill (including Individual
Life, Affinity Markets, Individual Annuities, Group Benefits and International Group Program) under the Canadian Insurance reporting
segment. These reorganization-based changes have resulted in goodwill being allocated to CGUs or groups of CGUs based on the
lowest level within the Company in which goodwill is monitored for internal management purposes.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
133
The following tables present the carrying value of goodwill by CGU or group of CGUs.
As at December 31, 2019
CGU or group of CGUs
Asia
Asia Insurance (excluding Japan)
Japan Insurance
Canada Insurance
U.S. Insurance
Global Wealth and Asset Management
Asia WAM
Canada WAM
U.S. WAM
Total
As at December 31, 2018
CGU or group of CGUs
Asia
Asia Insurance (excluding Japan)
Japan Insurance
Canada Insurance
U.S. Insurance
Global Wealth and Asset Management
Asia WAM
Canada WAM
U.S. WAM
Total
Balance,
January 1,
Additions/
disposals
$
$ 165
435
1,962
367
196
1,436
1,303
$ 5,864
$
–
–
–
–
–
–
(6)
(6)
Balance,
January 1,
Additions/
disposals
$ 154
391
1,954
400
180
1,436
1,198
$
–
–
–
(65)
–
–
–
Effect of
changes in
foreign
exchange
rates
$
(6)
(15)
(5)
(18)
(9)
–
(62)
Balance,
December 31,
$ 159
420
1,957
349
187
1,436
1,235
$ (115)
$ 5,743
Effect of
changes in
foreign
exchange
rates
$ 11
44
8
32
16
–
105
Balance,
December 31,
$ 165
435
1,962
367
196
1,436
1,303
$ 5,713
$ (65)
$ 216
$ 5,864
The valuation techniques, significant assumptions and sensitivities, where applicable, applied in the goodwill impairment testing are
described below.
(c) Valuation techniques
The recoverable amounts were based on fair value less costs to sell (“FVLCS”) for Asia Insurance (excluding Japan) and Asia WAM. For
other CGUs, value-in-use (“VIU”) was used. When determining if a CGU is impaired, the Company compares its recoverable amount
to the allocated capital for that unit, which is aligned with the Company’s internal reporting practices.
Under the FVLCS approach, the Company determines the fair value of the CGU or group of CGUs using an earnings-based approach
which incorporates forecasted earnings, excluding interest and equity market impacts and normalized new business expenses
multiplied by an earnings-multiple derived from the observable price-to-earnings multiples of comparable financial institutions. The
price-to-earnings multiple used by the Company for testing was 10.3 (2018 – 9.0 to 11.7). These FVLCS valuations are categorized as
Level 3 of the fair value hierarchy (2018 – Level 3).
Under the VIU approach, used for CGUs with insurance business, an embedded appraisal value is determined from a projection of
future distributable earnings derived from both the in-force business and new business expected to be sold in the future, and
therefore, reflects the economic value for each CGU’s or group of CGUs’ profit potential under a set of assumptions. This approach
requires assumptions including sales and revenue growth rates, capital requirements, interest rates, equity returns, mortality,
morbidity, policyholder behaviour, tax rates and discount rates. For non-insurance CGUs, the VIU is based on discounted cash flow
analysis which incorporates relevant aspects of the embedded appraisal value approach.
(d) Significant assumptions
To calculate embedded value, the Company discounted projected earnings from in-force contracts and valued 10 years of new
business growing at expected plan levels, consistent with the periods used for forecasting long-term businesses such as insurance. In
arriving at its projections, the Company considered past-experience, economic trends such as interest rates, equity returns and product
mix as well as industry and market trends. Where growth rate assumptions for new business cash flows were used in the embedded
value calculations, they ranged from zero per cent to 20 per cent (2018 – negative five per cent to 17 per cent).
Interest rate assumptions are based on prevailing market rates at the valuation date.
134
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Tax rates applied to the projections include the impact of internal reinsurance treaties and amounted to 28.0 per cent, 26.5 per cent
and 21 per cent (2018 – 30.8 per cent, 26.8 per cent and 21 per cent) for the Japan, Canadian and U.S. jurisdictions, respectively. Tax
assumptions are sensitive to changes in tax laws as well as assumptions about the jurisdictions in which profits are earned. It is
possible that actual tax rates could differ from those assumed.
Discount rates assumed in determining the value-in-use for applicable CGUs or groups of CGUs ranged from 7.5 per cent to 10.0 per
cent on an after-tax basis or 9.4 per cent to 12.5 per cent on a pre-tax basis (2018 – 7.5 per cent to 14.2 per cent on an after-tax
basis or 10.2 per cent to 20.4 per cent on a pre-tax basis).
The key assumptions described above may change as economic and market conditions change, which may lead to impairment charges
in the future. Changes in discount rates and cash flow projections used in the determination of embedded values or reductions in
market-based earnings multiples may result in impairment charges in the future which could be material.
Note 6
Insurance Contract Liabilities and Reinsurance Assets
(a) Insurance contract liabilities and reinsurance assets
Insurance contract liabilities are reported gross of reinsurance ceded and the ceded liabilities are reported separately as a reinsurance
asset. Insurance contract liabilities include actuarial liabilities, benefits payable, provision for unreported claims and policyholder
amounts on deposit. The components of gross and net insurance contract liabilities are shown below.
As at December 31,
Insurance contract liabilities
Benefits payable and provision for unreported claims
Policyholder amounts on deposit
Gross insurance contract liabilities
Reinsurance assets(1)
Net insurance contract liabilities
2019
2018
$ 336,156
4,229
10,776
$ 313,737
4,398
10,519
351,161
(41,353)
328,654
(42,925)
$ 309,808
$ 285,729
(1) The Company also holds reinsurance assets of $93 (2018 – $128) for investment contract liabilities, refer to note 7(b).
Net insurance contract liabilities represent the amount which, together with estimated future premiums and net investment income,
will be sufficient to pay estimated future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses
on policies in-force net of reinsurance premiums and recoveries.
Net insurance contract liabilities are determined using CALM, as required by the Canadian Institute of Actuaries.
The determination of net insurance contract liabilities is based on an explicit projection of cash flows using current assumptions for
each material cash flow item. Investment returns are projected using the current asset portfolios and projected reinvestment
strategies.
Each assumption is based on the best estimate adjusted by a margin for adverse deviation. For fixed income returns, this margin is
established by scenario testing a range of prescribed and company-developed scenarios consistent with Canadian Actuarial Standards
of Practice. For all other assumptions, this margin is established by directly adjusting the best estimate assumption.
Cash flows used in the net insurance contract liabilities valuation adjust the gross policy cash flows to reflect projected cash flows
from ceded reinsurance. The cash flow impact of ceded reinsurance varies depending upon the amount of reinsurance, the structure
of reinsurance treaties, the expected economic benefit from treaty cash flows and the impact of margins for adverse deviation. Gross
insurance contract liabilities are determined by discounting gross policy cash flows using the same discount rate as the net CALM
model discount rate.
The reinsurance asset is determined by taking the difference between the gross insurance contract liabilities and the net insurance
contract liabilities. The reinsurance asset represents the benefit derived from reinsurance arrangements in force at the date of the
Consolidated Statements of Financial Position.
The period used for the projection of cash flows is the policy lifetime for most individual insurance contracts. For other types of
contracts, a shorter projection period may be used, with the contract generally ending at the earlier of the first renewal date on or
after the Consolidated Statements of Financial Position date where the Company can exercise discretion in renewing its contractual
obligations or terms of those obligations and the renewal or adjustment date that maximizes the insurance contract liabilities. For
segregated fund products with guarantees, the projection period is generally set as the period that leads to the largest insurance
contract liability. Where the projection period is less than the policy lifetime, insurance contract liabilities may be reduced by an
allowance for acquisition expenses expected to be recovered from policy cash flows beyond the projection period used for the
liabilities. Such allowances are tested for recoverability using assumptions that are consistent with other components of the actuarial
valuation.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
135
(b) Composition
The composition of insurance contract liabilities and reinsurance assets by the line of business and reporting segment is as follows.
Gross insurance contract liabilities
As at December 31, 2019
Asia
Canada
U.S.
Corporate and Other
Total, net of reinsurance ceded
Total reinsurance ceded
Individual insurance
Participating
Non-
participating
$ 46,071 $ 32,887
39,655
66,163
(609)
12,012
8,734
–
66,817
138,096
9,869
13,588
Annuities
and
pensions
$ 5,915
17,871
14,763
36
38,585
16,850
Other
insurance
contract
liabilities(1)
Total, net of
reinsurance
ceded
Total
reinsurance
ceded
Total,
gross of
reinsurance
ceded
$ 3,064 $ 87,937
83,297
138,859
(285)
13,759
49,199
288
$ 1,432 $ 89,369
83,583
178,270
(61)
286
39,411
224
66,310
309,808
$ 41,353 $ 351,161
1,046
41,353
Total, gross of reinsurance ceded
$ 76,686 $ 151,684
$ 55,435
$ 67,356 $ 351,161
As at December 31, 2018
Asia
Canada
U.S.
Corporate and Other
Total, net of reinsurance ceded
Total reinsurance ceded
Individual insurance
Participating
Non-
participating
$ 38,470 $ 29,547
34,677
63,412
(601)
10,743
8,673
–
57,886
127,035
11,596
12,303
Annuities
and
pensions
$ 5,062
18,339
16,125
46
39,572
17,927
Other
insurance
contract
liabilities(1)
Total, net of
reinsurance
ceded
Total
reinsurance
ceded
Total,
gross of
reinsurance
ceded
$ 3,048 $ 76,127
76,628
133,142
(168)
12,869
44,932
387
$ 1,332 $ 77,459
76,426
174,837
(68)
(202)
41,695
100
61,236
285,729
$ 42,925 $ 328,654
1,099
42,925
Total, gross of reinsurance ceded
$ 69,482 $ 139,338
$ 57,499
$ 62,335 $ 328,654
(1) Other insurance contract liabilities include group insurance and individual and group health including long-term care insurance.
Separate sub-accounts were established for participating policies in-force at the demutualization of MLI and John Hancock Mutual Life
Insurance Company. These sub-accounts permit this participating business to be operated as separate “closed blocks” of participating
policies. As at December 31, 2019, $29,402 (2018 – $28,790) of both assets and insurance contract liabilities were related to these
closed blocks of participating policies.
(c) Assets backing insurance contract liabilities, other liabilities and capital
Assets are segmented and matched to liabilities with similar underlying characteristics by product line and major currency. The
Company has established target investment strategies and asset mixes for each asset segment supporting insurance contract liabilities
which consider the risk attributes of the liabilities supported by the assets and expectations of market performance. Liabilities with rate
and term guarantees are predominantly backed by fixed-rate instruments on a cash flow matching basis for a targeted duration
horizon. Longer duration cash flows on these liabilities as well as on adjustable products such as participating life insurance are backed
by a broader range of asset classes, including equity and alternative long-duration investments. The Company’s capital is invested in a
range of debt and equity investments, both public and private.
Changes in the fair value of assets backing net insurance contract liabilities, that the Company considers to be other than temporary,
would have a limited impact on the Company’s net income wherever there is an effective matching of assets and liabilities, as these
changes would be substantially offset by corresponding changes in the value of net insurance contract liabilities. The fair value of
assets backing net insurance contract liabilities as at December 31, 2019, excluding reinsurance assets, was estimated at $315,952
(2018 – $287,326).
As at December 31, 2019, the fair value of assets backing capital and other liabilities was estimated at $501,147 (2018 – $465,497).
136
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The following table presents the carrying value of assets backing net insurance contract liabilities, other liabilities and capital.
As at December 31, 2019
Assets
Debt securities
Public equities
Mortgages
Private placements
Real estate
Other
Total
As at December 31, 2018
Assets
Debt securities
Public equities
Mortgages
Private placements
Real estate
Other
Total
Individual insurance
Participating
Non-
participating
Annuities
and pensions
Other insurance
contract
liabilities(1)
Other
liabilities(2)
Capital(3)
Total
$ 34,169 $ 74,113
6,453
12,140
16,020
6,446
22,924
10,907
2,921
4,658
3,336
10,826
$ 19,865
204
5,203
6,957
1,082
5,274
$ 31,620 $
253
7,916
9,122
1,731
15,668
8,828 $ 29,527 $ 198,122
22,851
4,653
49,376
31
37,979
132
12,928
220
487,874
22,806
381
21,165
1,090
113
410,376
$ 66,817 $ 138,096
$ 38,585
$ 66,310 $ 441,953
$ 57,369 $ 809,130
Individual insurance
Participating
Non-
participating
Annuities
and pensions
Other insurance
contract
liabilities(1)
Other
liabilities(2)
Capital(3)
Total
$ 30,934 $ 67,387
5,562
11,111
14,131
6,028
22,816
8,416
2,218
4,151
3,106
9,061
$ 20,469
172
4,972
6,960
1,214
5,785
$ 28,435 $ 10,061 $ 28,308 $ 185,594
19,179
48,363
35,754
12,777
448,604
589
21,295
1,772
397
374,418
4,178
35
159
233
23,097
262
8,732
8,581
1,799
13,427
$ 57,886 $ 127,035
$ 39,572
$ 61,236 $ 408,532 $ 56,010 $ 750,271
(1) Other insurance contract liabilities include group insurance and individual and group health including long-term care insurance.
(2) Other liabilities are non-insurance contract liabilities which include segregated funds, bank deposits, long-term debt, deferred tax liabilities, derivatives, investment
contracts, embedded derivatives and other miscellaneous liabilities.
(3) Capital is defined in note 12.
(d) Significant insurance contract liability valuation assumptions
The determination of insurance contract liabilities involves the use of estimates and assumptions. Insurance contract liabilities have
two major components: a best estimate amount and a provision for adverse deviation.
Best estimate assumptions
Best estimate assumptions are made with respect to mortality and morbidity, investment returns, rates of policy termination, operating
expenses and certain taxes. Actual experience is monitored to ensure that assumptions remain appropriate and assumptions are
changed as warranted. Assumptions are discussed in more detail in the following table.
Nature of factor and assumption methodology
Risk management
Mortality
and
morbidity
Mortality relates to the occurrence of death. Mortality is a key
assumption for life insurance and certain forms of annuities.
Mortality assumptions are based on the Company’s internal
experience as well as past and emerging industry experience.
Assumptions are differentiated by sex, underwriting class,
policy type and geographic market. Assumptions are made for
future mortality improvements.
Morbidity relates to the occurrence of accidents and sickness
for insured risks. Morbidity is a key assumption for long-term
care insurance, disability insurance, critical illness and other
forms of individual and group health benefits. Morbidity
assumptions are based on the Company’s internal experience
as well as past and emerging industry experience and are
established for each type of morbidity risk and geographic
market. Assumptions are made for future morbidity
improvements.
The Company maintains underwriting standards to determine
the insurability of applicants. Claim trends are monitored on
an ongoing basis. Exposure to large claims is managed by
establishing policy retention limits, which vary by market and
geographic location. Policies in excess of the limits are
reinsured with other companies.
Mortality is monitored monthly and the overall 2019
experience was unfavourable (2018 – favourable) when
compared to the Company’s assumptions. Morbidity is also
monitored monthly and the overall 2019 experience was
unfavourable (2018 – unfavourable) when compared to the
Company’s assumptions.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
137
Nature of factor and assumption methodology
Risk management
Investment
returns
The Company segments assets to support liabilities by
business segment and geographic market and establishes
investment strategies for each liability segment. Projected cash
flows from these assets are combined with projected cash
flows from future asset purchases/sales to determine expected
rates of return on these assets for future years. Investment
strategies are based on the target investment policies for each
segment and the reinvestment returns are derived from
current and projected market rates for fixed income
investments and a projected outlook for other alternative
long-duration assets.
Investment return assumptions include expected future asset
credit losses on fixed income investments. Credit losses are
projected based on past experience of the Company and
industry as well as specific reviews of the current investment
portfolio.
Investment return assumptions for each asset class and
geographic market also incorporate expected investment
management expenses that are derived from internal cost
studies. The costs are attributed to each asset class to develop
unitized assumptions per dollar of asset for each asset class
and geographic market.
The Company’s policy of closely matching asset cash flows
with those of the corresponding liabilities is designed to
mitigate the Company’s exposure to future changes in
interest rates. The interest rate risk positions in business
segments are monitored on an ongoing basis. Under CALM,
the reinvestment rate is developed using interest rate scenario
testing and reflects the interest rate risk positions.
In 2019, the movement in interest rates negatively
(2018 – positively) impacted the Company’s net income. This
negative impact was driven by decreases in risk free interest
rates and corporate spreads, as well the impact of swap
spreads on policy liabilities.
The exposure to credit losses is managed against policies that
limit concentrations by issuer, corporate connections, ratings,
sectors and geographic regions. On participating policies and
some non-participating policies, credit loss experience is
passed back to policyholders through the investment return
crediting formula. For other policies, premiums and benefits
reflect the Company’s assumed level of future credit losses at
contract inception or most recent contract adjustment date.
The Company holds explicit provisions in actuarial liabilities for
credit risk including provisions for adverse deviation.
In 2019, credit loss experience on debt securities and
mortgages was favourable (2018 – favourable) when
compared to the Company’s assumptions.
Equities, real estate and other alternative long-duration assets
are used to support liabilities where investment return
experience is passed back to policyholders through dividends
or credited investment return adjustments. Equities, real
estate, oil and gas and other alternative long-duration assets
are also used to support long-dated obligations in the
Company’s annuity and pension businesses and for long-
dated insurance obligations on contracts where the
investment return risk is borne by the Company.
In 2019, investment experience on alternative long-duration
assets backing policyholder liabilities was favourable (2018 –
unfavourable) primarily due to gains in real estate properties
and private equities, partially offset by losses in timber and
agriculture properties as well as in oil and gas properties. In
2019, alternative long-duration asset origination exceeded
(2018 – exceeded) valuation requirements.
In 2019, for the business that is dynamically hedged,
segregated fund guarantee experience on residual,
non-dynamically hedged market risks were favourable
(2018 – unfavourable). For the business that is not
dynamically hedged, experience on segregated fund
guarantees due to changes in the market value of assets
under management was also favourable (2018 –
unfavourable). This excludes the experience on the macro
equity hedges.
In 2019, investment expense experience was unfavourable
(2018 – unfavourable) when compared to the Company’s
assumptions.
138
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Nature of factor and assumption methodology
Risk management
Policy
termination
and
premium
persistency
Expenses
and taxes
Policyholder
dividends,
experience
rating
refunds, and
other
adjustable
policy
elements
Foreign
currency
Policies are terminated through lapses and surrenders, where
lapses represent the termination of policies due to
non-payment of premiums and surrenders represent the
voluntary termination of policies by policyholders. Premium
persistency represents the level of ongoing deposits on
contracts where there is policyholder discretion as to the
amount and timing of deposits. Policy termination and
premium persistency assumptions are primarily based on the
Company’s recent experience adjusted for expected future
conditions. Assumptions reflect differences by type of contract
within each geographic market.
Operating expense assumptions reflect the projected costs of
maintaining and servicing in-force policies, including
associated overhead expenses. The expenses are derived from
internal cost studies projected into the future with an
allowance for inflation. For some developing businesses, there
is an expectation that unit costs will decline as these
businesses grow.
Taxes reflect assumptions for future premium taxes and other
non-income related taxes. For income taxes, policy liabilities
are adjusted only for temporary tax timing and permanent tax
rate differences on the cash flows available to satisfy policy
obligations.
The best estimate projections for policyholder dividends and
experience rating refunds, and other adjustable elements of
policy benefits are determined to be consistent with
management’s expectation of how these elements will be
managed should experience emerge consistently with the best
estimate assumptions used for mortality and morbidity,
investment returns, rates of policy termination, operating
expenses and taxes.
Foreign currency risk results from a mismatch of the currency
of liabilities and the currency of the assets designated to
support these obligations. Where a currency mismatch exists,
the assumed rate of return on the assets supporting the
liabilities is reduced to reflect the potential for adverse
movements in foreign exchange rates.
The Company seeks to design products that minimize
financial exposure to lapse, surrender and premium
persistency risk. The Company monitors lapse, surrender and
persistency experience.
In aggregate, 2019 policyholder termination and premium
persistency experience was unfavourable (2018 – unfavourable)
when compared to the Company’s assumptions used in the
computation of actuarial liabilities.
The Company prices its products to cover the expected costs
of servicing and maintaining them. In addition, the Company
monitors expenses monthly, including comparisons of actual
expenses to expense levels allowed for in pricing and
valuation.
Maintenance expenses for 2019 were unfavourable
(2018 – unfavourable) when compared to the Company’s
assumptions used in the computation of actuarial liabilities.
The Company prices its products to cover the expected cost of
taxes.
The Company monitors policy experience and adjusts policy
benefits and other adjustable elements to reflect this
experience.
Policyholder dividends are reviewed annually for all businesses
under a framework of Board-approved policyholder dividend
policies.
The Company generally matches the currency of its assets
with the currency of the liabilities they support, with the
objective of mitigating the risk of loss arising from movements
in currency exchange rates.
The Company reviews actuarial methods and assumptions on an annual basis. If changes are made to assumptions (refer to note 6(h)),
the full impact is recognized in income immediately.
(e) Sensitivity of insurance contract liabilities to changes in non-economic assumptions
The sensitivity of net income attributed to shareholders to changes in non-economic assumptions underlying insurance contract
liabilities is shown below, assuming a simultaneous change in the assumption across all business units. The sensitivity of net income
attributed to shareholders to a deterioration or improvement in non-economic assumptions for Long-Term Care (“LTC”) as at
December 31, 2019 is also shown below.
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; changes in business mix, effective tax rates and other market factors; and the general limitations of internal
models.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
139
Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions(1)
As at December 31,
Policy related assumptions
2% adverse change in future mortality rates(2),(4)
Products where an increase in rates increases insurance contract liabilities
Products where a decrease in rates increases insurance contract liabilities
5% adverse change in future morbidity rates (incidence and termination)(3),(4),(5)
10% adverse change in future policy termination rates(4)
5% increase in future expense levels
Decrease in net income
attributed to shareholders
2019
2018
$
(500) $
(500)
(5,100)
(2,400)
(600)
(500)
(500)
(4,800)
(2,200)
(600)
(1) The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in
non-economic assumptions. Experience gains or losses would generally result in changes to future dividends, with no direct impact to shareholders.
(2) An increase in mortality rates will generally increase policy liabilities for life insurance contracts whereas a decrease in mortality rates will generally increase policy liabilities
for policies with longevity risk such as payout annuities.
(3) No amounts related to morbidity risk are included for policies where the policy liability provides only for claims costs expected over a short period, generally less than one
year, such as Group Life and Health.
(4) The impacts of the adverse sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise
premium rates in such events, subject to state regulatory approval. In practice, the Company would plan to file for rate increases equal to the amount of deterioration
resulting from the sensitivity.
(5) This includes a 5% deterioration in incidence rates and 5% deterioration in claim termination rates.
Potential impact on net income attributed to shareholders arising from changes to non-economic assumptions for Long-
Term Care included in the above table(1),(2)
As at December 31,
Policy related assumptions
2% adverse change in future mortality rates
5% adverse change in future morbidity incidence rates
5% adverse change in future morbidity claims termination rates
10% adverse change in future policy termination rates
5% increase in future expense levels
Decrease in net income
attributed to shareholders
2019
2018
$
(300) $
(2,500)
(2,200)
(400)
(100)
(200)
(1,700)
(2,800)
(400)
(100)
(1) The impacts of the adverse sensitivities on LTC for morbidity, mortality and lapse do not assume any partial offsets from the Company’s ability to contractually raise
premium rates in such events, subject to state regulatory approval. In practice, the Company would plan to file for rate increases equal to the amount of deterioration
resulting from the sensitivities.
(2) The impact of favourable changes to all the sensitivities is relatively symmetrical.
(f) Provision for adverse deviation assumptions
The assumptions made in establishing insurance contract liabilities reflect expected best estimates of future experience. To recognize
the uncertainty in these best estimate assumptions, to allow for possible misestimation of and deterioration in experience and to
provide a greater degree of assurance that the insurance contract liabilities are adequate to pay future benefits, the Appointed
Actuary is required to include a margin in each assumption.
Margins are released into future earnings as the policy is released from risk. Margins for interest rate risk are included by testing a
number of scenarios of future interest rates. The margin can be established by testing a limited number of scenarios, some of which
are prescribed by the Canadian Actuarial Standards of Practice, and determining the liability based on the worst outcome.
Alternatively, the margin can be set by testing many scenarios, which are developed according to actuarial guidance. Under this
approach the liability would be the average of the outcomes above a percentile in the range prescribed by the Canadian Actuarial
Standards of Practice.
Specific guidance is also provided for other risks such as market, credit, mortality and morbidity risks. For other risks which are not
specifically addressed by the Canadian Institute of Actuaries, a range is provided of five per cent to 20 per cent of the expected
experience assumption. The Company uses assumptions within the permissible ranges, with the determination of the level set
considering the risk profile of the business. On occasion, in specific circumstances for additional prudence, a margin may exceed the
high end of the range, which is permissible under the Canadian Actuarial Standards of Practice. This additional margin would be
released if the specific circumstances which led to it being established were to change.
Each margin is reviewed annually for continued appropriateness.
140
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(g) Change in insurance contract liabilities
The change in insurance contract liabilities was a result of the following business activities and changes in actuarial estimates.
For the year ended December 31, 2019
Balance, January 1
New policies(2)
Normal in-force movement(2)
Changes in methods and assumptions(2)
Impact of changes in foreign exchange rates
Balance, December 31
For the year ended December 31, 2018
Balance, January 1
New policies(3)
Normal in-force movement(3)
Changes in methods and assumptions(3)
Impact of annuity coinsurance transactions
Impact of changes in foreign exchange rates
Balance, December 31
Other
insurance
contract
liabilities(1)
Net
insurance
contract
liabilities
Reinsurance
assets
Gross
insurance
contract
liabilities
Net actuarial
liabilities
$ 272,761 $ 12,968 $ 285,729
3,251
30,921
74
(10,167)
3,251
30,171
74
(9,668)
–
750
–
(499)
$ 42,925 $ 328,654
3,772
29,949
1,001
(12,215)
521
(972)
927
(2,048)
$ 296,589 $ 13,219 $ 309,808
$ 41,353 $ 351,161
Other
insurance
contract
liabilities(1)
Net
insurance
contract
liabilities
Reinsurance
assets
Gross
insurance
contract
liabilities
Net actuarial
liabilities
$ 263,091 $ 11,155 $ 274,246
3,269
3,029
(174)
(11,156)
16,515
3,269
2,044
(173)
(11,156)
15,686
–
985
(1)
–
829
$ 30,359 $ 304,605
3,657
1,879
(782)
–
19,295
388
(1,150)
(608)
11,156
2,780
$ 272,761 $ 12,968 $ 285,729
$ 42,925 $ 328,654
(1) Other insurance contract liabilities are comprised of benefits payable and provision for unreported claims and policyholder amounts on deposit.
(2) In 2019, the $33,727 increase reported as the change in insurance contract liabilities on the Consolidated Statements of Income primarily consists of changes due to
normal in-force movement, new policies and changes in methods and assumptions. These three items in the gross insurance contract liabilities were netted off by an
increase of $34,721, of which $34,056 is included in the Consolidated Statements of Income increase in insurance contract liabilities and $665 is included in gross claims
and benefits. The Consolidated Statements of Income change in insurance contract liabilities also includes the change in embedded derivatives associated with insurance
contracts.
(3) In 2018, the $2,907 increase reported as the change in insurance contract liabilities on the Consolidated Statements of Income primarily consists of changes due to
normal in-force movement, new policies and changes in methods and assumptions. These three items in the gross insurance contract liabilities were netted off by an
increase of $4,754, of which $3,632 is included in the Consolidated Statements of Income increase in insurance contract liabilities and $1,122 is included in gross claims
and benefits. The Consolidated Statements of Income change in insurance contract liabilities also includes the change in embedded derivatives associated with insurance
contracts. The Company finalized its estimate of U.S. Tax reform which resulted in a $196 pre-tax ($154 post-tax) increase in insurance contract liabilities, refer to
note 16.
(h) Actuarial methods and assumptions
A comprehensive review of valuation assumptions and methods is performed annually. The review reduces the Company’s exposure
to uncertainty by ensuring assumptions for both asset and liability risks remain appropriate. This is accomplished by monitoring
experience and updating assumptions which represent a best estimate of expected future experience, and margins that are
appropriate for the risks assumed. While the assumptions selected represent the Company’s current best estimates and assessment of
risk, the ongoing monitoring of experience and the changes in economic environment are likely to result in future changes to the
actuarial assumptions, which could materially impact the insurance contract liabilities.
Annual review 2019
The completion of the 2019 annual review of actuarial methods and assumptions resulted in an increase in insurance contract
liabilities of $74, net of reinsurance, and a decrease in net income attributed to shareholders of $21 post-tax.
Change in insurance contract liabilities,
net of reinsurance
For the year ended December 31, 2019
Long-term care triennial review
Mortality and morbidity updates
Lapses and policyholder behaviour
Investment return assumptions
Other updates
Net impact
Attributed to
participating
policyholders’
account
Attributed to
shareholders’
account
Change in net
income attributed
to shareholders
(post-tax)
$
Total
11
25
135
12
(109)
$
–
47
17
81
(163)
$ 11
(22)
118
(69)
54
$
74
$ (18)
$ 92
$ (8 )
14
(75)
70
(22)
$ (21)
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
141
Long-term care triennial review
U.S. Insurance completed a comprehensive long-term care (“LTC”) experience study. The review included all aspects of claim
assumptions, the impact of policyholder benefit reductions as well as the progress on future premium rate increases and a review of
margins on the business. The impact of the LTC review was approximately net neutral to net income attributed to shareholders.
The experience study showed lower termination rates than expected during the elimination or “qualifying” period (which is the period
between when a claim is filed and when benefit payments begin), and favourable incidence as policyholders are filing claims at a
lower rate than expected. In addition, policyholders are electing to reduce their benefits in lieu of paying increased premiums. The
overall claims experience review led to a post-tax charge to net income attributed to shareholders of approximately $1.9 billion, which
includes a gain of approximately $0.2 billion for the impact of benefit reductions.
The experience study included additional claims data due to the natural aging of the block of business. As a result, the Company
reduced certain margins for adverse deviations, which resulted in a post-tax gain to net income attributed to shareholders of
approximately $0.7 billion.
While the study continues to support the assumptions of both future morbidity and mortality improvement, the Company reduced its
morbidity improvement assumption, which resulted in a post-tax charge to net income attributed to shareholders of approximately
$0.7 billion.
The review of premium increases assumed in the policy liabilities resulted in a post-tax gain to net income attributed to shareholders
of approximately $2.0 billion related to the expected timing and amount of premium increases that are subject to state approval and
reflects a 30% margin. The expected premium increases are informed by past approval rates applied to prior state filings that remain
outstanding and estimated new requests based on the Company’s 2019 review of morbidity, mortality and lapse assumptions. The
Company’s actual experience in obtaining premium increases could be materially different than what it has assumed, resulting in
further increases or decreases in policy liabilities, which could be material.
Updates to mortality and morbidity
Mortality and morbidity updates resulted in a $14 post-tax gain to net income attributed to shareholders. This included a review of the
Company’s Canada Individual Insurance mortality and reinsurance arrangements.
Updates to lapses and policyholder behaviour
Updates to lapses and policyholder behaviour assumptions resulted in a $75 post-tax charge to net income attributed to shareholders.
The primary driver of the charge was an update to the Company’s lapse assumptions across several term and whole life product lines
within the Company’s Canada Individual Insurance business, partially offset by several updates to lapse and premium persistency
assumptions in other geographies.
Updates to investment return assumptions
Updates to investment return assumptions resulted in a $70 post-tax gain to net income attributed to shareholders.
The primary driver of the gain was an update to the Company’s senior secured loan default rates to reflect recent experience, as well
as its investment and crediting rate strategy for certain universal life products. This was partially offset by updates to certain private
equity investment assumptions in Canada.
Other updates
Other updates resulted in a $22 post-tax charge to net income attributed to shareholders.
Annual Review 2018
The 2018 annual review of actuarial methods and assumptions resulted in a decrease in insurance contract liabilities of $174, net of
reinsurance, and a decrease in net income attributed to shareholders of $51 post-tax.
Change in insurance contract liabilities,
net of reinsurance
For the year ended December 31, 2018
Mortality and morbidity updates
Lapses and policyholder behaviour
Investment return assumptions
Other
Net impact
Attributed to
participating
policyholders’
account
Attributed to
shareholders’
account
Change in net
income attributed to
shareholders
(post-tax)
Total
$ 319
287
(96)
(684)
$ (192)
–
50
(94)
$ 511
287
(146)
(590)
$ (174)
$ (236)
$
62
$ (360)
(226)
143
392
$
(51)
142
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Updates to mortality and morbidity assumptions
Mortality and morbidity updates resulted in a $360 post-tax charge to net income attributed to shareholders.
The primary driver of the charge is related to updates to mortality and morbidity assumptions for the Company’s structured settlement
and term renewal business in Canada. A review of mortality assumptions for the Company’s U.S. group pension annuity business and
certain blocks of life insurance business resulted in a small charge to earnings, and other updates to mortality and morbidity
assumptions led to a small net charge.
Updates to lapses and policyholder behaviour
Lapse and policyholder behaviour updates resulted in a $226 post-tax charge to net income attributed to shareholders.
The primary driver of the charge is related to updated lapse and premium persistency rates for certain U.S. insurance product lines
($252 post-tax charge). This included updates to universal life no-lapse guarantee business lapse assumptions to better reflect
emerging experience, which showed a variation in lapses based on premium funding levels, partially offset by favourable lapse
experience on several of the U.S. life insurance product lines.
Other updates to lapse and policyholder behaviour assumptions were made across several product lines to reflect recent experience.
Updates to investment return assumptions
Investment return assumption updates resulted in a $143 post-tax gain to net income attributed to shareholders.
The Company updated its bond default rates to reflect recent experience, leading to a $401 post-tax gain and updated the investment
return assumptions for ALDA and public equities, specifically oil and gas, which led to a $210 post-tax charge. Other refinements to
the projections of investment returns resulted in a $48 post-tax charge.
Other updates
Refinements to the projection of the tax and liability cashflows across multiple product lines led to a post-tax gain to net income
attributed to shareholders of $392. The refinements were primarily driven by the projection of tax cashflows as the Company
reviewed the deductibility of certain reserves. In addition, the Company refined the projection of policyholder crediting rates for
certain products.
(i) Insurance contracts contractual obligations
Insurance contracts give rise to obligations fixed by agreement. As at December 31, 2019, the Company’s contractual obligations and
commitments relating to insurance contracts are as follows.
Payments due by period
Insurance contract liabilities(1)
Less than
1 year
1 to 3
years
3 to 5
years
Over 5
years
Total
$ 9,682 $ 12,084 $ 16,587 $ 758,687 $ 797,040
(1) Insurance contract liability cash flows include estimates related to the timing and payment of death and disability claims, policy surrenders, policy maturities, annuity
payments, minimum guarantees on segregated fund products, policyholder dividends, commissions and premium taxes offset by contractual future premiums on in-force
contracts. These estimated cash flows are based on the best estimate assumptions used in the determination of insurance contract liabilities. These amounts are
undiscounted and reflect recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows may differ from these estimates. Cash flows include
embedded derivatives measured separately at fair value.
(j) Gross claims and benefits
The following table presents a breakdown of gross claims and benefits.
For the years ended December 31,
Death, disability and other claims
Maturity and surrender benefits
Annuity payments
Policyholder dividends and experience rating refunds
Net transfers from segregated funds
Total
2019
2018
$15,752
8,433
4,030
1,445
(1,000)
$15,174
7,722
4,262
1,809
(1,089)
$28,660
$27,878
(k) Annuity coinsurance transactions
On September 26, 2018, the Company entered into coinsurance agreements with Reinsurance Group of America (“RGA”) to reinsure
a block of legacy U.S. individual pay-out annuities business from John Hancock Life Insurance Company (U.S.A.) (“JHUSA”) with a
100% quota share and John Hancock Life Insurance Company of New York (“JHNY”) with a 90% quota share. Under the terms of
the agreements, the Company will maintain responsibility for servicing the policies. The transaction was structured such that the
Company ceded policyholder contract liabilities and transferred invested assets backing these liabilities. The JHUSA transaction closed
in 2018.
The JHNY transaction closed with an effective date of January 1, 2019. The Company recorded an after-tax gain of $18, which
includes an increase of reinsurance assets of $132 and ceded premiums of $131 on the Consolidated Statements of Income.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
143
On October 31, 2018, the Company entered into coinsurance agreements with Jackson National Life Insurance Company (“Jackson”),
a wholly-owned subsidiary of Prudential plc, to reinsure a block of legacy U.S. group pay-out annuities business from JHUSA with a
100% quota share and JHNY with a 90% quota share. Under the terms of the agreements, the Company will maintain responsibility
for servicing the policies. The transaction was structured such that the Company ceded policyholder contract liabilities and transferred
related invested assets backing these liabilities. The JHUSA transaction closed in 2018.
The JHNY transaction closed with an effective date of January 1, 2019. The Company recorded an after-tax gain of $31, which
includes an increase of reinsurance assets of $621, a ceding commission paid of $35 and ceded premiums of $581 on the
Consolidated Statements of Income.
Note 7
Investment Contract Liabilities
Investment contract liabilities are contractual obligations that do not contain significant insurance risk. Those contracts are measured
either at fair value or at amortized cost.
(a) Investment contract liabilities measured at fair value
Investment contract liabilities measured at fair value include certain investment savings and pension products sold primarily in Hong
Kong and mainland China. The following table presents the movement in investment contract liabilities measured at fair value.
For the years ended December 31,
Balance, January 1
New policies
Changes in market conditions
Redemptions, surrenders and maturities
Impact of changes in foreign exchange rates
Balance, December 31
2019
$ 782
66
62
(86)
(35)
$ 789
2018
$ 639
96
76
(86)
57
$ 782
(b) Investment contract liabilities measured at amortized cost
Investment contract liabilities measured at amortized cost include several fixed annuity products sold in Canada and U.S. fixed annuity
products that provide guaranteed income payments for a contractually determined period and are not contingent on survivorship.
The following table presents carrying and fair values of investment contract liabilities measured at amortized cost.
As at December 31,
U.S. fixed annuity products
Canadian fixed annuity products
Investment contract liabilities
2019
2018
Amortized
cost, gross of
reinsurance
ceded(1)
$ 1,248
1,067
$ 2,315
Amortized
cost, gross of
reinsurance
ceded(1)
$ 1,357
1,126
$ 2,483
Fair value
$ 1,482
1,158
$ 2,640
Fair value
$ 1,449
1,269
$ 2,718
(1) As at December 31, 2019, investment contract liabilities with the carrying value and fair value of $93 and $103, respectively (2018 – $128 and $130, respectively), were
reinsured by the Company. The net carrying value and fair value of investment contract liabilities were $2,222 and $2,537 (2018 – $2,355 and $2,588), respectively.
The changes in investment contract liabilities measured at amortized cost was a result of the following business activities.
For the years ended December 31,
Balance, January 1
Policy deposits
Interest
Withdrawals
Fees
Other
Impact of changes in foreign exchange rates
Balance, December 31
2019
2018
$ 2,483
2
62
(182)
(3)
17
(64)
$ 2,487
6
82
(201)
(1)
–
110
$ 2,315
$ 2,483
Carrying value of fixed annuity products is amortized at a rate that exactly discounts the projected actual cash flows to the net
carrying amount of the liability at the date of issue.
Fair value of fixed annuity products is determined by projecting cash flows according to the contract terms and discounting the cash
flows at current market rates adjusted for the Company’s own credit standing. As at December 31, 2019 and 2018, all investment
contracts were categorized in Level 2 of the fair value hierarchy.
144
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(c) Investment contracts contractual obligations
As at December 31, 2019, the Company’s contractual obligations and commitments relating to the investment contracts are as
follows.
Payments due by period
Investment contract liabilities(1)
Less than
1 year
1 to 3
years
3 to 5
years
Over 5
years
Total
$ 289
$ 484
$ 476
$ 3,846
$ 5,095
(1) Due to the nature of the products, the timing of net cash flows may be before contract maturity. Cash flows are undiscounted.
Note 8 Risk Management
The Company policies and procedures for managing risks of financial instruments are disclosed in the shaded area of the “Risk
Management and Risk Factors” section of the MD&A for the year ended December 31, 2019. These disclosures are in accordance
with IFRS 7 “Financial Instruments: Disclosures” and an integral part of these Consolidated Financial Statements.
(a) Credit risk
Credit risk is the risk of loss due to inability or unwillingness of a borrower, or counterparty, to fulfill its payment obligations.
Worsening regional and global economic conditions, segment or industry sector challenges, or company specific factors could result in
defaults or downgrades and could lead to increased provisions or impairments related to the Company’s general fund invested assets,
derivative financial instruments and reinsurance assets and an increase in provisions for future credit impairments that are included in
actuarial liabilities.
The Company’s exposure to credit risk is managed through risk management policies and procedures which include a defined credit
evaluation and adjudication process, delegated credit approval authorities and established exposure limits by borrower, corporate
connection, credit rating, industry and geographic region. The Company measures derivative counterparty exposure as net potential
credit exposure, which takes into consideration mark-to-market values of all transactions with each counterparty, net of any collateral
held, and an allowance to reflect future potential exposure. Reinsurance counterparty exposure is measured reflecting the level of
ceded liabilities.
The Company also ensures where warranted, that mortgages, private placements and loans to Bank clients are secured by collateral,
the nature of which depends on the credit risk of the counterparty.
An allowance for losses on loans is established when a loan becomes impaired. Allowances for loan losses are calculated to reduce the
carrying value of the loans to estimated net realizable value. The establishment of such allowances takes into consideration normal
historical credit loss levels and future expectations, with an allowance for adverse deviations. In addition, policy liabilities include
general provisions for credit losses from future asset impairments. Impairments are identified through regular monitoring of all credit
related exposures, considering such information as general market conditions, industry and borrower specific credit events and any
other relevant trends or conditions. Allowances for losses on reinsurance contracts are established when a reinsurance counterparty
becomes unable or unwilling to fulfill its contractual obligations. The allowance for loss is based on current recoverable amounts and
ceded policy liabilities.
Credit risk associated with derivative counterparties is discussed in note 8(d) and credit risk associated with reinsurance counterparties
is discussed in note 8(i).
(i) Credit exposure
The following table presents the gross carrying amount of financial instruments subject to credit exposure, without considering any
collateral held or other credit enhancements.
As at December 31,
Debt securities
FVTPL
AFS
Mortgages
Private placements
Policy loans
Loans to Bank clients
Derivative assets
Accrued investment income
Reinsurance assets
Other financial assets
Total
2019
2018
$ 166,307
31,815
49,376
37,979
6,471
1,740
19,449
2,416
41,446
5,628
$ 154,737
30,857
48,363
35,754
6,446
1,793
13,703
2,427
43,053
4,800
$ 362,627
$ 341,933
As at December 31, 2019, 99% (2018 – 99%) of debt securities were investment grade-rated with ratings ranging between AAA to
BBB.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
145
(ii) Credit quality
Credit quality of commercial mortgages and private placements
Credit quality of commercial mortgages and private placements is assessed at least annually by using an internal rating based on
regular monitoring of credit-related exposures, considering both qualitative and quantitative factors.
A provision is recorded when the internal risk ratings indicate that a loss represents the most likely outcome. These assets are
designated as non-accrual and an allowance is established based on an analysis of the security and repayment sources.
The following table presents credit quality of commercial mortgages and private placements.
As at December 31, 2019
Commercial mortgages
Retail
Office
Multi-family residential
Industrial
Other
Total commercial mortgages
Agricultural mortgages
Private placements
Total
As at December 31, 2018
Commercial mortgages
Retail
Office
Multi-family residential
Industrial
Other
Total commercial mortgages
Agricultural mortgages
Private placements
Total
AAA
AA
A
BBB
BB
B and lower
Total
$ 132 $ 1,374 $ 5,285 $ 2,039 $ 10
26
35
10
–
1,402
714
237
1,290
5,808
2,397
1,820
976
1,540
1,585
364
739
77
640
38
260
$
– $ 8,840
8,871
5,371
2,469
3,273
18
–
–
8
1,147
–
1,098
5,602
27
5,513
16,286
137
14,311
5,682
312
14,139
81
–
823
26
–
2,095
28,824
476
37,979
$ 2,245 $ 11,142 $ 30,734 $ 20,133 $ 904
$ 2,121 $ 67,279
AAA
AA
A
BBB
BB
B and lower
Total
$
82 $ 1,524 $ 4,459 $ 2,227 $ 11
45
5,454
56
2,407
613
37
120
1,953
36
–
1,167
289
1,650
839
339
1,191
1,495
1,427
366
334
1,076
–
1,143
5,146
163
4,968
15,440
–
13,304
6,246
389
14,055
213
–
733
$
74 $ 8,377
8,706
5,323
2,814
2,995
6
–
–
14
94
28,215
–
1,551
552
35,754
$ 2,219 $ 10,277 $ 28,744 $ 20,690 $ 946
$ 1,645 $ 64,521
Credit quality of residential mortgages and loans to Bank clients
Credit quality of residential mortgages and loans to Bank clients is assessed at least annually with the loan being performing or
non-performing as the key credit quality indicator.
Full or partial write-offs of loans are recorded when management believes that there is no realistic prospect of full recovery. Write-
offs, net of recoveries, are deducted from the allowance for credit losses. All impairments are captured in the allowance for credit
losses.
The following table presents credit quality of residential mortgages and loans to Bank clients.
As at December 31,
Residential mortgages
Performing
Non-performing
Loans to Bank clients
Performing
Non-performing
Total
2019(1)
2018
Insured
Uninsured
Total
Insured
Uninsured
Total
$ 6,613
25
$ 13,411
27
$ 20,024
52
$ 6,854
19
$ 12,696
27
$ 19,550
46
n/a
n/a
1,740
–
1,740
–
n/a
n/a
1,787
6
1,787
6
$ 6,638
$ 15,178
$ 21,816
$ 6,873
$ 14,516
$ 21,389
(1) Non-performing refers to assets that are 90 days or more past due.
The carrying value of government-insured mortgages was 14% of the total mortgage portfolio as at December 31, 2019 (2018 –15%).
Most of these insured mortgages are residential loans as classified in the table above.
(iii) Past due or credit impaired financial assets
The Company provides for credit risk by establishing allowances against the carrying value of impaired loans and recognizing
impairment losses on AFS debt securities. In addition, the Company reports as impairment certain declines in the fair value of debt
securities designated as FVTPL which it deems represent an impairment.
146
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The following table presents past due but not impaired and impaired financial assets.
As at December 31, 2019
Debt securities
FVTPL
AFS
Private placements
Mortgages and loans to Bank clients
Other financial assets
Total
As at December 31, 2018
Debt securities
FVTPL
AFS
Private placements
Mortgages and loans to Bank clients
Other financial assets
Total
Past due but not impaired
Less than
90 days
90 days
and greater
Total
impaired
Total
$ 11
4
215
61
60
$ 351
$ – $ 11
5
215
61
102
1
–
–
42
$ 167
–
7
59
1
$ 43 $ 394
$ 234
Past due but not impaired
Less than
90 days
90 days
and greater
Total
impaired
Total
$ 14
–
15
70
77
$ 176
$
– $ 14
2
–
–
26
2
15
70
103
$ 39
1
18
120
1
$ 28 $ 204
$ 179
The following table presents gross carrying amount and allowances for loan losses for impaired loans.
As at December 31, 2019
Private placements
Mortgages and loans to Bank clients
Total
As at December 31, 2018
Private placements
Mortgages and loans to Bank clients
Total
Gross
carrying
value
$ 11
75
$ 86
Gross
carrying
value
$ 61
172
$ 233
Allowances for
loan losses
Net carrying
value
$ 4
16
$ 20
$
7
59
$ 66
Allowances for
loan losses
Net carrying
value
$ 43
52
$ 95
$ 18
120
$138
The following table presents movement of allowance for loan losses during the year.
For the years ended December 31,
Balance, January 1
Provisions
Recoveries
Write-offs(1)
Balance, December 31
2019
Mortgages
and loans to
Bank clients
$ 52
15
(46)
(5)
$ 16
Private
placements
$ 43
35
–
(74)
$ 4
Total
$ 95
50
(46)
(79)
$ 20
Private
placements
$ 39
37
(27)
(6)
$ 43
2018
Mortgages
and loans to
Bank clients
$ 46
18
(9)
(3)
$ 52
Total
$ 85
55
(36)
(9)
$ 95
(1) Includes disposals and impact of changes in foreign exchange rates.
(b) Securities lending, repurchase and reverse repurchase transactions
The Company engages in securities lending to generate fee income. Collateral exceeding the market value of the loaned securities is
retained by the Company until the underlying security has been returned to the Company. The market value of the loaned securities is
monitored daily and additional collateral is obtained or refunded as the market value of the underlying loaned securities fluctuates. As
at December 31, 2019, the Company had loaned securities (which are included in invested assets) with a market value of
$558 (2018 – $1,518). The Company holds collateral with a current market value that exceeds the value of securities lent in all cases.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
147
The Company engages in reverse repurchase transactions to generate fee income to take possession of securities to cover short
positions in similar instruments and to meet short-term funding requirements. As at December 31, 2019, the Company had engaged
in reverse repurchase transactions of $990 (2018 – $63) which are recorded as short-term receivables. In addition, the Company had
engaged in repurchase transactions of $333 as at December 31, 2019 (2018 – $64) which are recorded as payables.
(c) Credit default swaps
The Company replicates exposure to specific issuers by selling credit protection via credit default swaps (“CDS”) to complement its
cash debt securities investing. The Company does not write CDS protection more than its government bond holdings. A CDS is a
derivative instrument representing an agreement between two parties to exchange the credit risk of a single specified entity or an
index based on the credit risk of a group of entities (all commonly referred to as the “reference entity” or a portfolio of “reference
entities”), in return for a periodic premium. CDS contracts typically have a five-year term.
The following table presents details of the credit default swap protection sold by type of contract and external agency rating for the
underlying reference security.
As at December 31, 2019
Single name CDS – Corporate debt
(3)
AA
A
BBB
Total single name CDS
Total CDS protection sold
As at December 31, 2018
Single name CDS – Corporate debt
(3)
AA
A
BBB
Total single name CDS
Total CDS protection sold
Notional
amount(1)
Fair value
$ 24
371
107
$ 502
$ 502
$ –
5
1
$ 6
$ 6
Notional
amount(1)
Fair value
$ 25
447
180
$ 652
$ 652
$ –
7
2
$ 9
$ 9
Weighted
average
maturity
(in years)(2)
1
1
2
1
1
Weighted
average
maturity
(in years)(2)
2
2
2
2
2
(1) Notional amounts represent the maximum future payments the Company would have to pay its counterparties assuming a default of the underlying credit and zero
recovery on the underlying issuer obligation.
(2) The weighted average maturity of the CDS is weighted based on notional amounts.
(3) Rating agency designations are based on S&P where available followed by Moody’s, DBRS, and Fitch. If no rating is available from a rating agency, an internally developed
rating is used.
The Company held no purchased credit protection as at December 31, 2019 and 2018.
(d) Derivatives
The Company’s point-in-time exposure to losses related to credit risk of a derivative counterparty is limited to the amount of any net
gains that may have accrued with a counterparty. Gross derivative counterparty exposure is measured as the total fair value (including
accrued interest) of all outstanding contracts in a gain position excluding any offsetting contracts in a loss position and the impact of
collateral on hand. The Company limits the risk of credit losses from derivative counterparties by: using investment grade
counterparties; entering into master netting arrangements which permit the offsetting of contracts in a loss position in the case of a
counterparty default; and entering into Credit Support Annex agreements, whereby collateral must be provided when the exposure
exceeds a certain threshold. All contracts are held with counterparties rated BBB+ or higher. As at December 31, 2019, the
percentage of the Company’s derivative exposure with counterparties rated AA- or higher was 23 per cent (2018 – 19 per cent).
The Company’s exposure to credit risk was mitigated by $12,038 fair value of collateral held as security as at December 31, 2019
(2018 – $7,848).
As at December 31, 2019, the largest single counterparty exposure, without considering the impact of master netting agreements or
the benefit of collateral held, was $3,047 (2018 – $2,269). The net exposure to this counterparty, after considering master netting
agreements and the fair value of collateral held, was $nil (2018 – $nil). As at December 31, 2019, the total maximum credit exposure
related to derivatives across all counterparties, without considering the impact of master netting agreements and the benefit of
collateral held, was $20,144 (2018 – $14,320).
(e) Offsetting financial assets and financial liabilities
Certain derivatives, securities lent and repurchase agreements have conditional offset rights. The Company does not offset these
financial instruments in the Consolidated Statements of Financial Position, as the rights of offset are conditional.
148
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
In the case of derivatives, collateral is collected from and pledged to counterparties and clearing houses to manage credit risk
exposure in accordance with Credit Support Annexes to swap agreements and clearing agreements. Under master netting
agreements, the Company has a right of offset in the event of default, insolvency, bankruptcy or other early termination.
In the case of reverse repurchase and repurchase transactions, additional collateral may be collected from or pledged to counterparties
to manage credit exposure according to bilateral reverse repurchase or repurchase agreements. In the event of default by a
counterparty, the Company is entitled to liquidate the collateral held to offset against the same counterparty’s obligation.
The following table presents the effect of conditional master netting and similar arrangements. Similar arrangements may include
global master repurchase agreements, global master securities lending agreements, and any related rights to financial collateral.
As at December 31, 2019
Financial assets
Derivative assets
Securities lending
Reverse repurchase agreements
Total financial assets
Financial liabilities
Derivative liabilities
Repurchase agreements
Total financial liabilities
As at December 31, 2018
Financial assets
Derivative assets
Securities lending
Reverse repurchase agreements
Total financial assets
Financial liabilities
Derivative liabilities
Repurchase agreements
Total financial liabilities
Related amounts not set off in the
Consolidated Statements of
Financial Position
Amounts subject to
an enforceable
master netting
arrangement or
similar agreements
Financial and
cash collateral
pledged
(received)(2)
Net amount
including
financing
trusts(3)
Net amounts
excluding
financing
trusts
Gross amounts of
financial instruments(1)
$
20,144
558
990
$ (9,188)
–
–
$ (10,889)
(558)
(989)
$
21,692
$ (9,188)
$ (12,436)
$
(11,345)
(333)
$ 9,188
–
$
1,903
330
$ (11,678)
$ 9,188
$
2,233
$
$
67
–
1
68
$ (254)
(3)
$ (257)
$ 67
–
1
$ 68
$ (53)
(3)
$ (56)
Related amounts not set off in the
Consolidated Statements of
Financial Position
Amounts subject to
an enforceable
master netting
arrangement or
similar agreements
Financial and
cash collateral
pledged
(received)(2)
Net amount
including
financing
trusts(3)
Net amounts
excluding
financing
trusts
Gross amounts of
financial instruments(1)
$ 14,320
1,518
63
$ 15,901
$ (8,716)
(64)
$ (8,780)
$ (6,644)
–
(63)
$ (7,431)
(1,518)
–
$ (6,707)
$ (8,949)
$ 6,644
63
$ 1,868
1
$ 6,707
$ 1,869
$ 245
–
–
$ 245
$ (204)
–
$ (204)
$ 245
–
–
$ 245
$ (33)
–
$ (33)
(1) Financial assets and liabilities include accrued interest of $696 and $1,061, respectively (2018 – $621 and $913, respectively).
(2) Financial and cash collateral exclude over-collateralization. As at December 31, 2019, the Company was over-collateralized on OTC derivative assets, OTC derivative
liabilities, securities lending and reverse purchase agreements and repurchase agreements in the amounts of $1,149, $526, $44 and $nil, respectively (2018 – $417,
$405, $80 and $nil, respectively). As at December 31, 2019, collateral pledged (received) does not include collateral-in-transit on OTC instruments or initial margin on
exchange traded contracts or cleared contracts.
(3) Includes derivative contracts entered between the Company and its financing trusts which it does not consolidate. The Company does not exchange collateral on
derivative contracts entered with these trusts. Refer to note 17.
The Company has certain credit linked note assets and variable surplus note liabilities which have unconditional offset rights. Under
the netting agreements, the Company has rights of offset including in the event of the Company’s default, insolvency, or bankruptcy.
These financial instruments are offset in the Consolidated Statements of Financial Position.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
149
A credit linked note is a security that allows the issuer to transfer a specific credit risk to the buyer. A surplus note is a subordinated
debt obligation that often qualifies as a surplus (the U.S. statutory equivalent of equity) by some U.S. state insurance regulators.
Interest payments on surplus notes are made after all other contractual payments are made. The following table presents the effect of
unconditional netting.
As at December 31, 2019
Credit linked note(1)
Variable surplus note
As at December 31, 2018
Credit linked note(1)
Variable surplus note
Gross amounts of
financial instruments
Amounts subject to
an enforceable
netting arrangement
Net amounts of
financial instruments
$ 782
(782)
$ (782)
782
$ –
–
Gross amounts of
financial instruments
Amounts subject to
an enforceable
netting arrangement
Net amounts of
financial instruments
$ 679
(679)
$ (679)
679
$ –
–
(1) As at December 31, 2019, the Company had no fixed surplus notes outstanding (December 31, 2018 – $nil).
(f) Risk concentrations
The Company defines enterprise-wide investment portfolio level targets and limits to ensure that portfolios are diversified across asset
classes and individual investment risks. The Company monitors actual investment positions and risk exposures for concentration risk
and reports its findings to the Executive Risk Committee and the Risk Committee of the Board of Directors.
As at December 31,
Debt securities and private placements rated as investment grade BBB or higher(1)
Government debt securities as a per cent of total debt securities
Government private placements as a per cent of total private placements
Highest exposure to a single non-government debt security and private placement issuer
Largest single issuer as a per cent of the total equity portfolio
Income producing commercial office properties (2019 – 56% of real estate, 2018 – 55%)
Largest concentration of mortgages and real estate(2) – Ontario, Canada (2019 – 27%, 2018 – 26%)
2019
2018
98%
37%
12%
$ 1,083
2%
$ 7,279
$ 17,038
98%
38%
11%
$ 1,013
2%
$ 7,065
$ 16,092
(1) Investment grade debt securities and private placements include 41% rated A, 17% rated AA and 16% rated AAA (2018 – 41%, 17% and 17%) investments based on
external ratings where available.
(2) Mortgages and real estate investments are diversified geographically and by property type.
The following table presents debt securities and private placements portfolio by sector and industry.
As at December 31,
Government and agency
Utilities
Financial
Consumer
Energy
Industrial
Other
Total
2019
2018
Carrying value
% of total
Carrying value
% of total
$ 77,883
44,426
31,929
25,931
20,196
19,024
16,712
$ 236,101
33
19
13
11
9
8
7
$ 73,858
41,929
31,340
24,190
17,685
17,508
14,838
33
19
14
11
8
8
7
100
$ 221,348
100
(g) Insurance risk
Insurance risk is the risk of loss due to actual experience for mortality and morbidity claims, policyholder behaviour and expenses
emerging differently than assumed when a product was designed and priced. A variety of assumptions are made related to these
experience factors, for reinsurance costs, and for sales levels when products are designed and priced, as well as in the determination
of policy liabilities. Assumptions for future claims are generally based on both Company and industry experience, and assumptions for
future policyholder behaviour and expenses are generally based on Company experience. Such assumptions require significant
professional judgment, and actual experience may be materially different than the assumptions made by the Company. Claims may be
impacted unexpectedly by changes in the prevalence of diseases or illnesses, medical and technology advances, widespread lifestyle
changes, natural disasters, large-scale man-made disasters and acts of terrorism. Policyholder behaviour including premium payment
patterns, policy renewals, lapse rates and withdrawal and surrender activity are influenced by many factors including market and
general economic conditions, and the availability and relative attractiveness of other products in the marketplace. Some reinsurance
rates are not guaranteed and may be changed unexpectedly. Adjustments the Company seeks to make to Non-Guaranteed elements
to reflect changing experience factors may be challenged by regulatory or legal action and the Company may be unable to implement
them or may face delays in implementation.
150
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The Company manages insurance risk through global policies, standards and best practices with respect to product design, pricing,
underwriting and claim adjudication, and a global underwriting manual. Each business unit establishes underwriting policies and
procedures, including criteria for approval of risks and claims adjudication policies and procedures. The current global life retention
limit is US$30 for individual policies (US$35 for survivorship life policies) and is shared across businesses. Lower limits are applied in
some markets and jurisdictions. The Company aims to further reduce exposure to claims concentrations by applying geographical
aggregate retention limits for certain covers. Enterprise-wide, the Company aims to reduce the likelihood of high aggregate claims by
operating globally, insuring a wide range of unrelated risk events, and reinsuring some risk.
(h) Concentration risk
The geographic concentration of the Company’s insurance and investment contract liabilities, including embedded derivatives, is
shown below. The disclosure is based on the countries in which the business is written.
As at December 31, 2019
U.S. and Canada
Asia and Other
Total
As at December 31, 2018
U.S. and Canada
Asia and Other
Total
Gross liabilities
Reinsurance
assets
Net liabilities
$ 255,999
98,237
$ (40,944)
(502)
$ 215,055
97,735
$ 354,236
$ (41,446)
$ 312,790
Gross liabilities
Reinsurance
assets
Net liabilities
$ 246,255
85,830
$ (42,634)
(419)
$ 203,621
85,411
$ 332,085
$ (43,053)
$ 289,032
(i) Reinsurance risk
In the normal course of business, the Company limits the amount of loss on any one policy by reinsuring certain levels of risk with
other insurers. In addition, the Company accepts reinsurance from other reinsurers. Reinsurance ceded does not discharge the
Company’s liability as the primary insurer. Failure of reinsurers to honour their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. To minimize losses from reinsurer insolvency, the
Company monitors the concentration of credit risk both geographically and with any one reinsurer. In addition, the Company selects
reinsurers with high credit ratings.
As at December 31, 2019, the Company had $41,446 (2018 – $43,053) of reinsurance assets. Of this, 94 per cent (2018 – 94 per
cent) were ceded to reinsurers with Standard and Poor’s ratings of A- or above. The Company’s exposure to credit risk was mitigated
by $26,638 fair value of collateral held as security as at December 31, 2019 (2018 – $24,435). Net exposure after considering
offsetting agreements and the benefit of the fair value of collateral held was $14,808 as at December 31, 2019 (2018 – $18,618).
Note 9 Long-Term Debt
(a) Carrying value of long-term debt instruments
As at December 31,
4.70% Senior notes(1),(3)
5.375% Senior notes(2),(3)
3.527% Senior notes(2),(3)
4.150% Senior notes(2),(3)
4.90% Senior notes(2),(3)
Total
Issue date
Maturity date
Par value
2019
2018
June 23, 2016
March 4, 2016
December 2, 2016
March 4, 2016
September 17, 2010
US$ 1,000
June 23, 2046
US$ 750
March 4, 2046
US$ 270
December 2, 2026
March 4, 2026
US$ 1,000
September 17, 2020 US$ 500
$ 1,290
962
350
1,292
649
$ 4,543
$ 1,355
1,010
367
1,356
681
$ 4,769
(1) MFC may redeem the notes in whole, but not in part, on June 23, 2021 and thereafter on every June 23, at a redemption price equal to par, together with accrued and
unpaid interest.
(2) MFC may redeem the senior notes in whole or in part, at any time, at a redemption price equal to the greater of par and a price based on the yield of a corresponding
U.S. Treasury bond plus a specified number of basis points. The specified number of basis points is as follows: 5.375% - 40 bps, 3.527% - 20 bps, 4.150% - 35 bps, and
4.90% - 35 bps.
(3) These US dollar senior notes have been designated as hedges of the Company’s net investment in its U.S. operations which reduces the earnings volatility that would
otherwise arise from the re-measurement of these senior notes into Canadian dollars.
The cash amount of interest paid on long-term debt during the year ended December 31, 2019 was $216 (2018 – $222). Issue costs
are amortized over the term of the debt.
(b) Fair value measurement
Fair value of long-term debt instruments is determined using the following hierarchy:
Level 1 – Fair value is determined using quoted market prices where available.
Level 2 – When quoted market prices are not available, fair value is determined with reference to quoted prices of similar debt
instruments or estimated using discounted cash flows based on observable market rates.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
151
The Company measures long-term debt at amortized cost in the Consolidated Statements of Financial Position. As at
December 31, 2019, the fair value of long-term debt was $5,078 (2018 – $4,886). Fair value of long-term debt was determined using
Level 2 valuation techniques (2018 – Level 2).
(c) Aggregate maturities of long-term debt
As at December 31,
2019
2018
Note 10 Capital Instruments
(a) Carrying value of capital instruments
Less than
1 year
$649
–
1 to 3
years
$ –
681
3 to 5
years
Over 5
years
Total
$ –
$3,894
$4,543
–
4,088
4,769
As at December 31,
Issuance date
Earliest par redemption
date
Maturity date
Par value
2019
2018
7.535% MFCT II Senior debenture notes(1)
JHFC Subordinated notes(2)
4.061% MFC Subordinated notes(3)
3.00% MFC Subordinated notes(4)
3.049% MFC Subordinated debentures(5)
3.317% MFC Subordinated debentures(5)
3.181% MLI Subordinated debentures(6)
3.85% MFC Subordinated notes(4)
2.389% MLI Subordinated debentures(6)
2.10% MLI Subordinated debentures(6)
2.64% MLI Subordinated debentures(6),(7)
2.811% MLI Subordinated debentures(8)
7.375% JHUSA Surplus notes(9)
Total
February 24, 2027
August 20, 2024
May 9, 2023
$ 1,000
December 31, 2019 December 31, 2108
July 10, 2009
650
December 15, 2036
$
December 14, 2006 n/a
750
February 24, 2032 US$
February 24, 2017
500
November 21, 2017 November 21, 2024 November 21, 2029 S$
750
$
August 18, 2017
$
May 9, 2018
600
$ 1,000
November 20, 2015 November 22, 2022 November 22, 2027
500
May 25, 2016
350
June 1, 2015
750
March 10, 2015
500
December 1, 2014
500
February 21, 2014
450
February 25, 1994
S$
May 25, 2026
$
January 5, 2026
$
June 1, 2025
$
January 15, 2025
February 21, 2024
$
February 15, 2024 US$
May 25, 2021
January 5, 2021
June 1, 2020
January 15, 2020
February 21, 2019
n/a
August 20, 2029
May 9, 2028
$
–
647
969
481
747
598
998
482
350
750
500
–
598
$ 1,000
647
1,017
498
747
597
997
499
349
749
500
500
632
$ 7,120
$ 8,732
(1) MLI redeemed in full the 7.535% Manulife Financial Capital Trust II (“MFCT II”) Senior debenture notes at par, on December 30, 2019, together with accrued interest.
Refer to note 17.
(2) Issued by Manulife Holdings (Delaware) LLC (“MHDLL”), now John Hancock Financial Corporation (“JHFC”), a wholly owned subsidiary of MFC, to Manulife Finance
(Delaware) LLC (“MFLLC”), a subsidiary of Manulife Finance (Delaware) L.P. (“MFLP”). MFLP and its subsidiaries are wholly owned unconsolidated related parties to the
Company. The note bears interest at a floating rate equal to the 90-day Bankers’ Acceptance rate plus 0.72%. With regulatory approval, JHFC may redeem the note, in
whole or in part, at any time, at par, together with accrued and unpaid interest. Refer to note 17.
(3) On the earliest par redemption date, the interest rate will reset to equal the 5-Year US Dollar Mid-Swap Rate plus 1.647%. With regulatory approval, MFC may redeem
the debentures, in whole, but not in part, on the earliest par redemption date, at a redemption price equal to par, together with accrued and unpaid interest.
(4) On the earliest par redemption date, the interest rate will reset to equal the 5-Year Singapore Dollar Swap Rate plus a specified number of basis points. The specified
number of basis points is as follows: 3.00% – 83.2 bps, 3.85% – 197 bps. With regulatory approval, MFC may redeem the debentures, in whole, but not in part, on the
earliest par redemption date and thereafter on each interest payment date, at a redemption price equal to par, together with accrued and unpaid interest.
(5) Interest is fixed for the period up to the earliest par redemption date, thereafter, the interest rate will reset to a floating rate equal to the 90-day Bankers’ Acceptance rate
plus a specified number of basis points. The specified number of basis points is as follows: 3.049% – 105 bps, 3.317% – 78 bps. With regulatory approval, MFC may
redeem the debentures, in whole or in part, on or after the earliest par redemption date, at a redemption price equal to par, together with accrued and unpaid interest.
(6) Interest is fixed for the period up to the earliest par redemption date, thereafter the interest rate will reset to a floating rate equal to the 90-day Bankers’ Acceptance rate
plus a specified number of basis points. The specified number of basis points is as follows: 3.181% – 157 bps, 2.389% – 83 bps, 2.10% – 72 bps, 2.64% – 73 bps. With
regulatory approval, MLI may redeem the debentures, in whole or in part, on or after the earliest par redemption date, at a redemption price equal to par, together with
accrued and unpaid interest.
(7) MLI redeemed in full the 2.64% subordinated debentures at par, on January 15, 2020, the earliest par redemption date.
(8) MLI redeemed in full the 2.811% subordinated debentures at par, on February 21, 2019, the earliest par redemption date.
(9) Issued by John Hancock Mutual Life Insurance Company, now John Hancock Life Insurance Company (U.S.A.). Any payment of interest or principal on the surplus notes
requires prior approval from the Department of Insurance and Financial Services of the State of Michigan. The carrying value of the surplus notes reflects an unamortized
fair value increment of US$17 (2018 – US$20), which arose as a result of the acquisition of John Hancock Financial Services, Inc. The amortization of the fair value
adjustment is recorded in interest expense.
(b) Fair value measurement
Fair value of capital instruments is determined using the following hierarchy:
Level 1 – Fair value is determined using quoted market prices where available.
Level 2 – When quoted market prices are not available, fair value is determined with reference to quoted prices of similar debt
instruments or estimated using discounted cash flows based on observable market rates.
The Company measures capital instruments at amortized cost in the Consolidated Statements of Financial Position. As at
December 31, 2019, the fair value of capital instruments was $7,333 (2018 – $8,712). Fair value of capital instruments was
determined using Level 2 valuation techniques (2018 – Level 2).
152
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Note 11 Share Capital and Earnings Per Share
The authorized capital of MFC consists of:
■ an unlimited number of common shares without nominal or par value; and
■ an unlimited number of Class A, Class B and Class 1 preferred shares without nominal or par value, issuable in series.
(a) Preferred shares
The following tables presents information about the outstanding preferred shares as at December 31, 2019 and 2018.
As at December 31, 2019
Issue date
Annual
dividend
rate(1)
Earliest redemption
date(2)
Number of
shares
(in millions)
Face
amount
Net amount(3)
2019
2018
Class A preferred shares
Series 2
Series 3
Class 1 preferred shares
Series 3(4),(5)
Series 4(6)
Series 5(4),(5)
Series 7(4),(5)
Series 9(4),(5)
Series 11(4),(5)
Series 13(4),(5)
Series 15(4),(5),(7)
Series 17(4),(5)
Series 19(4),(5)
Series 21(4),(5)
Series 23(4),(5)
Series 25(4),(5),(8)
Total
February 18, 2005
January 3, 2006
4.65%
4.50%
n/a
n/a
14 $ 350
300
12
$
March 11, 2011
June 20, 2016
December 6, 2011
February 22, 2012
May 24, 2012
December 4, 2012
June 21, 2013
February 25, 2014
August 15, 2014
December 3, 2014
February 25, 2016
November 22, 2016
February 20, 2018
2.178%
floating
3.891%
4.312%
4.351%
4.731%
4.414%
3.786%
3.90%
3.80%
5.60%
4.85%
4.70%
June 19, 2021
June 19, 2021
December 19, 2021
March 19, 2022
September 19, 2022
March 19, 2023
September 19, 2023
June 19, 2024
December 19, 2019
March 19, 2020
June 19, 2021
March 19, 2022
June 19, 2023
6
2
8
10
10
8
8
8
14
10
17
19
10
158
42
200
250
250
200
200
200
350
250
425
475
250
344
294
155
41
195
244
244
196
196
195
343
246
417
467
245
$ 344
294
155
41
195
244
244
196
196
195
343
246
417
467
245
156 $ 3,900
$ 3,822
$ 3,822
(1) Holders of Class A and Class 1 preferred shares are entitled to receive non-cumulative preferential cash dividends on a quarterly basis, as and when declared by the Board
of Directors.
(2) Redemption of all preferred shares is subject to regulatory approval. MFC may redeem each series, in whole or in part, at par, on the earliest redemption date or every five
years thereafter, except for Class A Series 2, Class A Series 3 and Class 1 Series 4 preferred shares. Class A Series 2 and Series 3 preferred shares are past their respective
earliest redemption date and MFC may redeem these shares, in whole or in part, at par at any time, subject to regulatory approval, as noted. MFC may redeem the
Class 1 Series 4, in whole or in part, at any time, at $25.00 per share if redeemed on June 19, 2021 and on June 19 every five years thereafter, or at $25.50 per share if
redeemed on any other date after June 19, 2016, subject to regulatory approval, as noted.
(3) Net of after-tax issuance costs.
(4) On the earliest redemption date and every five years thereafter, the annual dividend rate will be reset to the five-year Government of Canada bond yield plus a yield specified
for each series. The specified yield for Class 1 shares is: Series 3 – 1.41%, Series 5 – 2.90%, Series 7 – 3.13%, Series 9 – 2.86%, Series 11 – 2.61%, Series 13 – 2.22%,
Series 15 – 2.16%, Series 17 – 2.36%, Series 19 – 2.30%, Series 21 – 4.97%, Series 23 – 3.83% and Series 25 – 2.55%.
(5) On the earliest redemption date and every five years thereafter, Class 1 preferred shares are convertible at the option of the holder into a new series that is one number
higher than their existing series, and the holders are entitled to non-cumulative preferential cash dividends, payable quarterly if and when declared by the Board of
Directors, at a rate equal to the three-month Government of Canada Treasury bill yield plus the rate specified in footnote 4 above.
(6) The floating dividend rate for the Class 1 Shares Series 4 equals the three-month Government of Canada Treasury bill yield plus 1.41%.
(7) MFC did not exercise its right to redeem all or any of the outstanding Class 1 Shares Series 15 on June 19, 2019 (the earliest redemption date). Dividend rate for Class 1
Shares Series 15 was reset as specified in footnote 4 above to an annual fixed rate of 3.786% for a five-year period commencing on June 20, 2019.
(8) On February 20, 2018, MFC issued 10 million of Non-Cumulative Rate Reset Class 1 Shares Series 25 at a price of $25 per share for gross proceeds of $250.
(b) Common shares
The following table presents changes in common shares issued and outstanding.
For the years ended December 31,
Balance, January 1
Repurchased for cancellation
Issued under dividend reinvestment plan
Issued on exercise of stock options and deferred share units
Total
2019
2018
Number of
shares
(in millions)
Amount
Number of
shares
(in millions)
Amount
1,971
(58)
31
5
$ 22,961
(677)
739
104
1,982
(23)
9
35
$ 22,989
(269)
182
9
1,949
$ 23,127
1,971
$ 22,961
Normal Course Issuer Bid
On November 12, 2019, MFC announced that the Toronto Stock Exchange (“TSX”) approved a normal course issuer bid (“NCIB”)
permitting the purchase by MFC for cancellation of up to 58 million MFC common shares. Pursuant to the Notice of Intention filed
with the TSX, purchases under the NCIB commenced on November 14, 2019 and will continue until November 13, 2020, when the
NCIB expires, or such earlier date as MFC completes its purchases. As of December 31, 2019, MFC purchased and subsequently
cancelled 6.3 million of its common shares pursuant to the NCIB at an average price of $25.91 per common share for a total cost of
$163 million.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
153
MFC’s previous NCIB which was announced on November 12, 2018 and amended on February 19, 2019, expired on
November 13, 2019. MFC purchased and subsequently cancelled 74.5 million of its common shares pursuant to the previous NCIB at
an average price of $22.20 per common share for a total cost of $1.7 billion.
During 2019, MFC purchased and subsequently cancelled 57.6 million of its common shares at an average price of $23.22 per
common share for a total cost of $1.3 billion, including 51.3 million common shares for a total cost of $1.2 billion that were
purchased under the previous NCIB.
Dividend Reinvestment Plan
The Company offers a Dividend Reinvestment Program (“DRIP”) whereby shareholders may elect to automatically reinvest dividends in
the form of MFC common shares instead of receiving cash. The offering of the program and its terms of execution are subject to the
Board of Directors’ discretion. For the first three quarters of 2019, common shares in connection with DRIP were purchased on the
open market with no applicable discount. For the dividend paid on December 19, 2019, the required common shares were purchased
from treasury with a two per cent discount from the market price.
(c) Earnings per share
The following table presents basic and diluted earnings per common share of the Company.
For the years ended December 31,
Basic earnings per common share
Diluted earnings per common share
$
2019
2.77
2.77
$
2018
2.34
2.33
The following is a reconciliation of the number of shares in the calculation of basic and diluted earnings per share.
For the years ended December 31,
Weighted average number of common shares (in millions)
Dilutive stock-based awards(1) (in millions)
Weighted average number of diluted common shares (in millions)
2019
1,958
4
1,962
2018
1,983
5
1,988
(1) The dilutive effect of stock-based awards was calculated using the treasury stock method. This method calculates the number of incremental shares by assuming the
outstanding stock-based awards are (i) exercised and (ii) then reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the average
market price of MFC common shares for the year. Excluded from the calculation was a weighted average of 9 million (2018 – 7 million) anti-dilutive stock-based awards.
(d) Quarterly dividend declaration subsequent to year end
On February 12, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.28 per share on the common shares of
MFC, payable on or after March 19, 2020 to shareholders of record at the close of business on February 25, 2020.
The Board also declared dividends on the following non-cumulative preferred shares, payable on or after March 19, 2020 to
shareholders of record at the close of business on February 25, 2020.
Class A Shares Series 2 – $ 0.29063 per share
Class A Shares Series 3 – $ 0.28125 per share
Class 1 Shares Series 3 – $ 0.136125 per share
Class 1 Shares Series 4 – $ 0.191413 per share
Class 1 Shares Series 5 – $ 0.243188 per share
Class 1 Shares Series 7 – $ 0.2695 per share
Class 1 Shares Series 9 – $ 0.271938 per share
Class 1 Shares Series 11 – $ 0.295688 per share
Note 12 Capital Management
Class 1 Shares Series 13 – $ 0.275875 per share
Class 1 Shares Series 15 – $ 0.236625 per share
Class 1 Shares Series 17 – $ 0.2375 per share
Class 1 Shares Series 19 – $ 0.2375 per share
Class 1 Shares Series 21 – $ 0.35 per share
Class 1 Shares Series 23 – $ 0.303125 per share
Class 1 Shares Series 25 – $ 0.29375 per share
(a) Capital management
The Company monitors and manages its consolidated capital in compliance with the Life Insurance Capital Adequacy Test (“LICAT”)
guideline, the capital framework issued by the Office of the Superintendent of Financial Institutions (“OSFI”) that became effective on
January 1, 2018. Under this capital framework, the Company’s consolidated capital resources, including available capital, surplus
allowance, and eligible deposits, are measured against the base solvency buffer, which is the risk-based capital requirement
determined in accordance with the guideline.
The Company’s operating activities are mostly conducted within MLI and its subsidiaries. MLI is also regulated by OSFI and is therefore
subject to consolidated risk-based capital requirements using the OSFI LICAT framework.
The Company seeks to manage its capital with the objectives of:
■ Operating with sufficient capital to be able to honour all commitments to its policyholders and creditors with a high degree of
confidence;
■ Retaining the ongoing confidence of regulators, policyholders, rating agencies, investors and other creditors in order to ensure
access to capital markets; and
154
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
■ Optimizing return on capital to meet shareholders’ expectations subject to constraints and considerations of adequate levels of
capital established to meet the first two objectives.
Capital is managed and monitored in accordance with the Capital Management Policy. The policy is reviewed and approved by the
Board of Directors annually and is integrated with the Company’s risk and financial management frameworks. It establishes guidelines
regarding the quantity and quality of capital, internal capital mobility, and proactive management of ongoing and future capital
requirements.
The capital management framework takes into account the requirements of the Company as a whole as well as the needs of each of
the Company’s subsidiaries. Internal capital targets are set above the regulatory requirements, and consider a number of factors,
including expectations of regulators and rating agencies, results of sensitivity and stress testing and the Company’s own risk
assessments. The Company monitors against these internal targets and initiates actions appropriate to achieving its business
objectives.
Consolidated capital, based on accounting standards, is presented in the table below for MFC. For regulatory reporting purposes,
LICAT available capital is based on consolidated capital with adjustments for certain deductions, limits and restrictions, as mandated
by the LICAT guideline.
Consolidated capital
As at December 31,
Total equity
Adjusted for AOCI loss on cash flow hedges
Total equity excluding AOCI on cash flow hedges
Qualifying capital instruments
Consolidated capital
2019
2018
$ 50,106
(143)
$ 47,151
(127)
50,249
7,120
47,278
8,732
$ 57,369
$ 56,010
(b) Restrictions on dividends and capital distributions
Dividends and capital distributions are restricted under the Insurance Companies Act (“ICA”). These restrictions apply to both the
Company and its primary operating subsidiary MLI. The ICA prohibits the declaration or payment of any dividend on shares of an
insurance company if there are reasonable grounds for believing a company does not have adequate capital and adequate and
appropriate forms of liquidity or the declaration or the payment of the dividend would cause the company to be in contravention of
any regulation made under the ICA respecting the maintenance of adequate capital and adequate and appropriate forms of liquidity,
or of any direction made to the company by OSFI. The ICA also requires an insurance company to notify OSFI of the declaration of a
dividend at least 15 days prior to the date fixed for its payment. Similarly, the ICA prohibits the purchase for cancellation of any shares
issued by an insurance company or the redemption of any redeemable shares or other similar capital transactions, if there are
reasonable grounds for believing that the company does not have adequate capital and adequate and appropriate forms of liquidity or
the payment would cause the company to be in contravention of any regulation made under the ICA respecting the maintenance of
adequate capital and adequate and appropriate forms of liquidity, or any direction made to the company by OSFI. These latter
transactions would require the prior approval of OSFI.
The ICA requires Canadian insurance companies to maintain adequate levels of capital at all times.
Since the Company is a holding company that conducts all of its operations through regulated insurance subsidiaries (or companies
owned directly or indirectly by these subsidiaries), its ability to pay future dividends will depend on the receipt of sufficient funds from
its regulated insurance subsidiaries. These subsidiaries are also subject to certain regulatory restrictions under laws in Canada, the
United States and certain other countries that may limit their ability to pay dividends or make other upstream distributions.
Note 13 Revenue from Service Contracts
The Company provides investment management services, administrative services, distribution and related services to proprietary and
third-party investment funds, retirement plans, group benefit plans and other arrangements. The Company also provides real estate
management services to tenants of the Company’s investment properties.
The Company’s service contracts generally impose single performance obligations, each consisting of a series of similar related services
for each customer.
The Company’s performance obligations within service arrangements are generally satisfied over time as the customer simultaneously
receives and consumes the benefits of the services rendered, measured using an output method. Fees typically include variable
consideration and the related revenue is recognized to the extent that it is highly probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty is subsequently resolved.
Asset based fees vary with asset values of accounts under management, subject to market conditions and investor behaviors beyond
the Company’s control. Transaction processing and administrative fees vary with activity volume, also beyond the Company’s control.
Some fees, including distribution fees, are based on account balances and transaction volumes. Fees related to account balances and
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
155
transaction volumes are measured daily. Real estate management service fees include fixed portions plus recovery of variable costs of
services rendered to tenants. Fees related to services provided are generally recognized as services are rendered, which is when it
becomes highly probable that no significant reversal of cumulative revenue recognized will occur. The Company has determined that
its service contracts have no significant financing components as fees are collected monthly. The Company has no significant contract
assets or contract liabilities.
The following tables present revenue from service contracts by service lines and reporting segments as disclosed in note 19.
For the year ended
December 31, 2019
Investment management and other related fees
Transaction processing, administration, and service fees
Distribution fees and other
Total included in other revenue
Real estate management services included in net investment income
Total
For the year ended
December 31, 2018
Investment management and other related fees
Transaction processing, administration, and service fees
Distribution fees and other
Total included in other revenue
Real estate management services included in net investment income
Total
Note 14 Stock-Based Compensation
Asia
Canada
U.S.
Global
WAM
Corporate
and Other
$ 177
268
184
629
36
$ 161
827
52
1,040
160
$ 542
17
72
631
137
$ 2,773
2,048
741
5,562
–
$ (198)
–
(44)
(242)
9
Total
$ 3,455
3,160
1,005
7,620
342
$ 665
$ 1,200
$ 768
$ 5,562
$ (233)
$ 7,962
Asia
Canada
U.S.
Global
WAM
Corporate
and Other
$ 148
242
246
636
31
$ 149
854
49
1,052
160
$ 521
17
617
1,155
147
$ 2,809
1,939
724
5,472
–
$ (236)
–
(30)
(266)
10
Total
$ 3,391
3,052
1,606
8,049
348
$ 667
$ 1,212
$ 1,302
$ 5,472
$ (256)
$ 8,397
(a) Stock options
The Company grants stock options under its Executive Stock Option Plan (“ESOP”) to selected individuals. The options provide the
holder the right to purchase MFC common shares at an exercise price equal to the higher of the prior day, prior five-day or prior
ten-day average closing market price of the shares on the Toronto Stock Exchange on the date the options are granted. The options
vest over a period not exceeding four years and expire not more than 10 years from the grant date. Effective with the 2015 grant,
options may only be exercised after the fifth-year anniversary. A total of 73,600,000 common shares have been reserved for issuance
under the ESOP.
Options outstanding
For the years ended December 31,
Outstanding, January 1
Granted
Exercised
Expired
Forfeited
Outstanding, December 31
Exercisable, December 31
For the year ended December 31, 2019
$12.64 - $20.99
$21.00 - $24.83
Total
2019
2018
Number of
options
(in millions)
23
3
(4)
–
(1)
21
5
Weighted
average
exercise
price
$ 20.29
22.62
18.79
18.88
23.41
$ 20.91
$ 17.56
Number of
options
(in millions)
25
3
(3)
(1)
(1)
23
9
Options outstanding
Options exercisable
Number of
options
(in millions)
8
13
21
Weighted
average
exercise
price
$ 16.91
$ 23.19
$ 20.91
Weighted
average
remaining
contractual
life
(in years)
4.16
6.94
5.93
Number of
options
(in millions)
4
1
5
Weighted
average
exercise
price
$ 16.07
$ 21.27
$ 17.56
Weighted
average
exercise
price
$20.45
24.52
17.77
37.35
21.24
$20.29
$18.08
Weighted
average
remaining
contractual
life
(in years)
1.85
3.37
2.29
156
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The weighted average fair value of each option granted in 2019 has been estimated at $4.57 (2018 – $4.97) using the Black-Scholes
option-pricing model. The pricing model uses the following assumptions for these options: risk-free interest rate of 2.50%
(2018 – 2.00%), dividend yield of 3.50% (2018 – 3.25%), expected volatility of 28.0% (2018 – 28.0%) and expected life of 6.3
(2018 – 6.3) years. Expected volatility is estimated by evaluating a number of factors including historical volatility of the share price
over multi-year periods.
Compensation expense related to stock options was $11 for the year ended December 31, 2019 (2018 – $10).
(b) Deferred share units
In 2000, the Company granted deferred share units (“DSUs”) to certain employees under the ESOP. These DSUs vest over a three-year
period and each DSU entitles the holder to receive one common share on retirement or termination of employment. When dividends
are paid on common shares, holders of DSUs are deemed to receive dividends at the same rate, payable in the form of additional
DSUs. In 2019, nil DSUs were granted to employees under the ESOP (2018 – nil). The number of DSUs outstanding was 298,000 as at
December 31, 2019 (2018 – 337,000).
In addition, for certain employees and pursuant to the Company’s deferred compensation program, the Company grants DSUs under
the Restricted Share Units (“RSUs”) Plan which entitle the holder to receive payment in cash equal to the value of the same number of
common shares plus credited dividends on retirement or termination of employment. In 2019, the Company granted 46,000 DSUs to
certain employees which vest after 36 months (2018 – 55,000). In 2019, 49,000 DSUs (2018 – 8,000) were granted to certain
employees who elected to defer receipt of all or part of their annual bonus. These DSUs vested immediately. Also, in 2019, 24,000
DSUs (2018 – nil) were granted to certain employees to defer payment of all or part of their RSUs and/or Performance Share Units
(“PSUs”). These DSUs also vested immediately.
Under the Stock Plan for Non-Employee Directors, each eligible director may elect to receive his or her annual director’s retainer and
fees in DSUs or common shares in lieu of cash. Upon termination of the Board service, an eligible director who has elected to receive
DSUs will be entitled to receive cash equal to the value of the DSUs accumulated in his or her account, or at his or her direction, an
equivalent number of common shares. The Company is allowed to issue up to one million common shares under this plan after which
awards may be settled using shares purchased in the open market.
The fair value of 229,000 DSUs issued during the year was $26.36 per unit as at December 31, 2019 (2018 – 141,000 at $19.37 per
unit).
For the years ended December 31,
Number of DSUs (in thousands)
Outstanding, January 1
Issued
Reinvested
Redeemed
Forfeitures and cancellations
Outstanding, December 31
2019
2,538
229
102
(416)
(58)
2,395
2018
2,645
141
98
(346)
–
2,538
Of the DSUs outstanding as at December 31, 2019, 298,000 (2018 – 337,000) entitle the holder to receive common shares,
1,055,000 (2018 – 1,151,000) entitle the holder to receive payment in cash and 1,042,000 (2018 – 1,050,000) entitle the holder to
receive payment in cash or common shares, at the option of the holder.
Compensation expense related to DSUs was $10 for the year ended December 31, 2019 (2018 – $6).
The carrying and fair value of the DSUs liability as at December 31, 2019 was $55 (2018 – $43) and was included in other liabilities.
(c) Restricted share units and performance share units
For the year ended December 31, 2019, 6.5 million RSUs (2018 – 5.5 million) and 1.1 million PSUs (2018 – 0.8 million) were granted
to certain eligible employees under MFC’s Restricted Share Unit Plan. The fair value of the RSUs and PSUs granted during the year was
$26.36 per unit as at December 31, 2019 (2018 – $19.37 per unit). Each RSU and PSU entitles the holder to receive payment equal to
the market value of one common share, plus credited dividends, at the time of vesting, subject to any performance conditions.
RSUs and PSUs granted in February 2019 will vest after 36 months from their grant date and the related compensation expense is
recognized over these periods, except where the employee is eligible to retire prior to a vesting date, in which case the cost is
recognized over the period between the grant date and the date on which the employee is eligible to retire. Compensation expense
related to RSUs and PSUs was $128 and $17, respectively, for the year ended December 31, 2019 (2018 – $111 and $14,
respectively).
The carrying and fair value of the RSUs and PSUs liability as at December 31, 2019 was $205 (2018 – $128) and was included in other
liabilities.
(d) Global share ownership plan
The Company’s Global Share Ownership Plan allows qualifying employees to apply up to five per cent of their annual base earnings
toward the purchase of common shares. The Company matches a percentage of the employee’s eligible contributions up to a
maximum amount. The Company’s contributions vest immediately. All contributions are used to purchase common shares in the open
market.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
157
Note 15 Employee Future Benefits
The Company maintains defined contribution and defined benefit pension plans and other post-employment plans for employees and
agents including registered (tax qualified) pension plans that are typically funded, as well as supplemental non-registered
(non-qualified) pension plans for executives, retiree welfare plans and disability welfare plans that are typically not funded.
(a) Plan characteristics
The Company’s final average pay defined benefit pension plans and retiree welfare plans are closed to new members. All employees
may participate in capital accumulation plans including defined benefit cash balance plans, 401(k) plans and/or defined contribution
plans, depending on the country of employment.
During 2018, the Company implemented a voluntary exit program, as part of its Canadian operations transformation, and a North
American voluntary early retirement program. Combined, these two programs resulted in the voluntary separation of 1,225
employees in Canada and 204 employees in the U.S. by the end of 2019. A curtailment loss of $22 resulting from these programs was
recorded in earnings during 2018. This loss represents the increase in net defined benefit liability due to the affected employees
separating sooner than had previously been assumed.
All pension arrangements are governed by local pension committees or management, but significant plan changes require approval
from the Company’s Board of Directors.
The Company’s funding policy for defined benefit pension plans is to make the minimum annual contributions required by regulations
in the countries in which the plans are offered. Assumptions and methods prescribed for regulatory funding purposes typically differ
from those used for accounting purposes.
The Company’s remaining defined benefit pension and/or retiree welfare plans are in the U.S., Canada, Japan, and Taiwan (China).
There are also disability welfare plans in the U.S. and Canada.
The largest defined benefit pension and retiree welfare plans are the primary plans for employees in the U.S. and Canada. These are
the material plans that are discussed in the balance of this note. The Company measures its defined benefit obligations and fair value
of plan assets for accounting purposes as at December 31 each year.
U.S. defined benefit pension and retiree welfare plans
The Company operates a qualified cash balance plan that is open to new members, a closed non-qualified cash balance plan, and a
closed retiree welfare plan.
Actuarial valuations to determine the Company’s minimum funding contributions for the qualified cash balance plan are required
annually. Deficits revealed in the funding valuations must generally be funded over a period of up to seven years. It is expected that
there will be no required funding for this plan in 2020. There are no plan assets set aside for the non-qualified cash balance plan.
The retiree welfare plan subsidizes the cost of life insurance and medical benefits. The majority of those who retired after 1991 receive
a fixed-dollar subsidy from the Company based on service. The plan was closed to all employees hired after 2004. While assets have
been set aside in a qualified trust to pay future retiree welfare benefits, this funding is optional. Retiree welfare benefits offered under
the plan coordinate with the U.S. Medicare program to make optimal use of available federal financial support.
The qualified pension and retiree welfare plans are governed by the U.S. Benefits Committee, while the non-qualified pension plan is
governed by the U.S. Non-Qualified Plans Subcommittee.
Canadian defined benefit pension and retiree welfare plans
The Company’s defined benefit plans in Canada include two registered final average pay pension plans, a non-registered
supplemental final average pay pension plan and a retiree welfare plan, all of which have been closed to new members.
Actuarial valuations to determine the Company’s minimum funding contributions for the registered pension plans are required at least
once every three years. Deficits revealed in the funding valuation must generally be funded over a period of ten years. For 2020, the
required funding for these plans is expected to be $11. The supplemental non-registered pension plan is not funded.
The retiree welfare plan subsidizes the cost of life insurance, medical and dental benefits. These subsidies are a fixed dollar amount for
those who retired after April 30, 2013 and will be eliminated for those who retire after 2019. There are no assets set aside for this
plan.
The registered pension plans are governed by Pension Committees, while the supplemental non-registered plan is governed by the
Board of Directors. The retiree welfare plan is governed by management.
(b) Risks
In final average pay pension plans and retiree welfare plans, the Company generally bears the material risks which include interest
rate, investment, longevity and health care cost inflation risks. In defined contribution plans, these risks are typically borne by the
employee. In cash balance plans, the interest rate, investment and longevity risks are partially transferred to the employee.
158
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Material sources of risk to the Company for all plans include:
■ A decline in discount rates that increases the defined benefit obligations by more than the change in value of plan assets;
■ Lower than expected rates of mortality; and
■ For retiree welfare plans, higher than expected health care costs.
The Company has managed these risks through plan design and eligibility changes that have limited the size and growth of the
defined benefit obligations. Investment risks for funded plans are managed by investing significantly in asset classes which are highly
correlated with the plans’ liabilities.
In the U.S., delegated committee representatives and management review the financial status of the qualified defined benefit pension
plan at least monthly, and steps are taken in accordance with an established dynamic investment policy to increase the plan’s
allocation to asset classes which are highly correlated with the plan’s liabilities and reduce investment risk as the funded status
improves. As at December 31, 2019, the target asset allocation for the plan was 27% return-seeking assets and 73% liability-hedging
assets.
In Canada, internal committees and management review the financial status of the registered defined benefit pension plans on at
least a quarterly basis. As at December 31, 2019, the target asset allocation for the plans was 20% return-seeking assets and 80%
liability-hedging assets.
(c) Pension and retiree welfare plans
For the years ended December 31,
Changes in defined benefit obligation:
Opening balance
Current service cost
Past service cost – amendments and curtailments
Interest cost
Plan participants’ contributions
Actuarial losses (gains) due to:
Experience
Demographic assumption changes
Economic assumption changes
Benefits paid
Impact of changes in foreign exchange rates
Defined benefit obligation, December 31
For the years ended December 31,
Change in plan assets:
Fair value of plan assets, opening balance
Interest income
Return on plan assets (excluding interest income)
Employer contributions
Plan participants’ contributions
Benefits paid
Administration costs
Impact of changes in foreign exchange rates
Fair value of plan assets, December 31
Pension plans
Retiree welfare plans
2019
2018
2019
2018
$ 4,675
40
–
182
1
8
–
413
(358)
(144)
$ 4,706
42
18
165
1
–
35
(250)
(304)
262
$ 640
–
–
25
3
(10)
–
56
(46)
(23)
$ 665
–
12
24
4
(7)
(1)
(56)
(45)
44
$ 4,817
$ 4,675
$ 645
$ 640
Pension plans
Retiree welfare plans
2019
2018
2019
2018
$ 4,190
164
529
75
1
(358)
(9)
(136)
$ 4,328
153
(315)
79
1
(304)
(9)
254
$ 4,456
$ 4,187
$ 610
25
25
12
3
(46)
(2)
(29)
$ 598
$ 587
21
(16)
10
4
(45)
(2)
51
$ 610
(d) Amounts recognized in the Consolidated Statements of Financial Position
As at December 31,
Development of net defined benefit liability
Defined benefit obligation
Fair value of plan assets
Deficit (surplus)
Effect of asset limit(1)
Deficit (surplus) and net defined benefit liability (asset)
Deficit is comprised of:
Funded or partially funded plans
Unfunded plans
Pension plans
Retiree welfare plans
2019
2018
2019
2018
$ 4,817
4,453
$ 4,675
4,190
364
4
368
(391)
759
485
9
494
(248)
742
$ 645
598
47
–
47
$ 640
610
30
–
30
(120)
167
(121)
151
Deficit (surplus) and net defined benefit liability (asset)
$ 368
$ 494
$ 47
$ 30
(1) In 2018, the Company recognized an impairment of $9 on the net defined benefit asset for one of its registered pension plans in Canada. This was due to benefit
changes for future service which reduced the economic benefit that can be derived by the Company from the plan’s surplus.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
159
(e) Disaggregation of defined benefit obligation
U.S. plans
Canadian plans
Pension plans
Retiree welfare plans
Pension plans
Retiree welfare plans
As at December 31,
Active members
Inactive and retired members
Total
2019
2018
$ 550
2,529
$ 621
2,431
$ 3,079
$ 3,052
2019
$ 31
447
$ 478
2018
2019
2018
$ 32
457
$ 301
1,437
$ 332
1,291
$ 489
$ 1,738
$ 1,623
2019
$ 25
142
$ 167
2018
$ 22
129
$ 151
(f) Fair value measurements
The major categories of plan assets and the allocation to each category are as follows.
U.S. plans(1)
Canadian plans(2)
Pension plans
Retiree welfare plans
Pension plans
Retiree welfare plans
As at December 31, 2019
Fair value % of total
Fair value % of total
Fair value % of total
Fair value % of total
Cash and cash equivalents
Equity securities(3)
Debt securities
Other investments(4)
Total
$
32
563
2,155
255
1%
19%
72%
8%
$ 3,005
100%
$ 35
45
511
7
$ 598
6%
8%
85%
1%
$
12
311
1,123
2
1%
21%
78%
0%
$
100%
$ 1,448
100%
$
–
–
–
–
–
–
–
–
–
–
U.S. plans(1)
Canadian plans(2)
Pension plans
Retiree welfare plans
Pension plans
Retiree welfare plans
As at December 31, 2018
Fair value % of total
Fair value % of total
Fair value % of total
Fair value % of total
Cash and cash equivalents
Equity securities(3)
Debt securities
Other investments(4)
Total
$
26
500
2,088
252
1%
17%
73%
9%
$ 2,866
100%
$ 51
38
514
7
$ 610
8%
6%
85%
1%
$
19
269
1,033
3
1%
20%
79%
0%
$
100%
$ 1,324
100%
$
–
–
–
–
–
–
–
–
–
–
(1) All the U.S. pension and retiree welfare plan assets have daily quoted prices in active markets, except for the private equity, timber and agriculture assets. In the
aggregate, the latter assets represent approximately 7% of all U.S. pension and retiree welfare plan assets as at December 31, 2019 (2018 – 7%).
(2) All the Canadian pension plan assets have daily quoted prices in active markets, except for the group annuity contract assets that represent approximately 0.1% of all
Canadian pension plan assets as at December 31, 2019 (2018 – 0.2%).
(3) Equity securities include direct investments in MFC common shares of $1.3 (2018 – $0.9) in the U.S. retiree welfare plan and $nil (2018 – $nil) in Canada.
(4) Other U.S. plan assets include investment in private equity, timberland and agriculture, and managed futures. Other Canadian pension plan assets include investment in
the group annuity contract.
(g) Net benefit cost recognized in the Consolidated Statements of Income
Components of the net benefit cost for the pension plans and retiree welfare plans were as follows.
For the years ended December 31,
Defined benefit current service cost
Defined benefit administrative expenses
Past service cost – plan amendments and curtailments(1),(2)
Service cost
Interest on net defined benefit (asset) liability
Defined benefit cost
Defined contribution cost
Net benefit cost
Pension plans
Retiree welfare plans
2019
2018
2019
2018
$
40
9
–
49
18
67
80
$
42
9
18
69
12
81
78
$ 147
$
159
$
$
–
2
–
2
–
2
–
2
$
–
2
12
14
3
17
–
$
17
(1) Past service cost – plan amendments includes $8 for 2018 for a Canadian pension plan, reflecting a surplus sharing agreement between the Company and certain legacy
employees in Canada, which received regulatory approval in 2018.
(2) Past service cost – curtailments includes $22 for 2018 for the pension plans and retiree welfare plans in total, reflecting the cost of the voluntary exit and voluntary
retirement programs described in section (a) of this note.
160
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(h) Re-measurement effects recognized in Other Comprehensive Income
For the years ended December 31,
Actuarial gains (losses) on defined benefit obligations due to:
Experience
Demographic assumption changes
Economic assumption changes
Return on plan assets (excluding interest income)
Change in effect of asset limit
Total re-measurement effects
Pension plans
Retiree welfare plans
2019
2018
2019
2018
$
(8)
–
(413)
529
5
$
–
(35)
250
(315)
(9)
$ 113
$
(109)
$ 10
–
(56)
25
–
$
(21)
$ 7
1
56
(16)
–
$ 48
(i) Assumptions
The key assumptions used by the Company to determine the defined benefit obligation and net benefit cost for the defined benefit
pension plans and retiree welfare plans were as follows.
For the years ended December 31,
To determine the defined benefit
obligation at end of year(1):
Discount rate
Initial health care cost trend rate(2)
To determine the defined benefit
cost for the year(1):
Discount rate
Initial health care cost trend rate(2)
U.S. Plans
Canadian Plans
Pension plans
Retiree welfare plans
Pension plans
Retiree welfare plans
2019
2018
2019
2018
2019
2018
2019
2018
3.2%
n/a
4.3%
n/a
3.2%
7.5%
4.3%
7.8%
3.1%
n/a
3.8%
n/a
3.1%
5.6%
3.8%
5.7%
4.3%
n/a
3.6%
n/a
4.3%
7.8%
3.6%
8.5%
3.8%
n/a
3.5%
n/a
3.8%
5.7%
3.6%
5.9%
(1) Inflation and salary increase assumptions are not shown as they do not materially affect obligations and cost.
(2) The health care cost trend rate used to measure the U.S. based retiree welfare obligation was 7.5% grading to 4.5% for 2032 and years thereafter (2018 – 7.8% grading
to 5.0% for 2030) and to measure the net benefit cost was 7.8% grading to 5.0% for 2030 and years thereafter (2018 – 8.5% grading to 5.0% for 2032). In Canada,
the rate used to measure the retiree welfare obligation was 5.6% grading to 4.8% for 2026 and years thereafter (2018 – 5.7% grading to 4.8% for 2026) and to
measure the net benefit cost was 5.7% grading to 4.8% for 2026 and years thereafter (2018 – 5.9% grading to 4.8% for 2026).
Assumptions regarding future mortality are based on published statistics and mortality tables. The current life expectancies underlying
the values of the obligations in the defined benefit pension and retiree welfare plans are as follows.
As at December 31, 2019
Life expectancy (in years) for those currently age 65
Males
Females
Life expectancy (in years) at age 65 for those currently age 45
Males
Females
U.S.
Canada
22.6
24.1
24.2
25.7
23.7
25.6
24.7
26.5
(j) Sensitivity of assumptions on obligations
Assumptions used can have a significant effect on the obligations reported for defined benefit pension and retiree welfare plans. The
potential impact on the obligations arising from changes in the key assumptions is set out in the following table. The sensitivities
assume all other assumptions are held constant. In actuality, inter-relationships with other assumptions may exist.
As at December 31, 2019
Discount rate:
Impact of a 1% increase
Impact of a 1% decrease
Health care cost trend rate:
Impact of a 1% increase
Impact of a 1% decrease
Mortality rates(1)
Impact of a 10% decrease
Pension plans
Retiree welfare plans
$ (443)
525
n/a
n/a
136
$ (66)
80
20
(17)
14
(1) If the actuarial estimates of mortality are adjusted in the future to reflect unexpected decreases in mortality, the effect of a 10% decrease in mortality rates at each future
age would be an increase in life expectancy at age 65 of 0.9 years for U.S. males and females and 0.8 years for Canadian males and females.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
161
(k) Maturity profile
The weighted average duration (in years) of the defined benefit obligations is as follows.
As at December 31,
U.S. plans
Canadian plans
Pension plans
Retiree welfare plans
2019
9.3
12.3
2018
8.8
12.4
2019
9.7
14.3
2018
9.0
14.3
(l) Cash flows – contributions
Total cash payments for all employee future benefits, comprised of cash contributed by the Company to funded defined benefit
pension and retiree welfare plans, cash payments directly to beneficiaries in respect of unfunded pension and retiree welfare plans,
and cash contributed to defined contribution pension plans, are as follows.
For the years ended December 31,
Defined benefit plans
Defined contribution plans
Total
Pension plans
Retiree welfare plans
2019
$ 75
80
$ 155
2018
$ 79
78
$ 157
2019
$ 12
–
$ 12
2018
$ 10
–
$ 10
The Company’s best estimate of expected cash payments for employee future benefits for the year ending December 31, 2020 is $77
for defined benefit pension plans, $80 for defined contribution pension plans and $12 for retiree welfare plans.
Note 16
Income Taxes
(a) Income tax expense
The following table presents income tax expense (recovery) recognized in the Consolidated Statements of Income.
For the years ended December 31,
Current tax
Current year
Adjustments related to prior year
Total current tax
Deferred tax
Change related to temporary differences
Impact of U.S. Tax Reform
Total deferred tax
Income tax expense
The following table discloses income tax expense (recovery) recognized directly in equity.
For the years ended December 31,
Recognized in other comprehensive income
Current income tax expense (recovery)
Deferred income tax expense (recovery)
Total recognized in other comprehensive income
Recognized in equity, other than other comprehensive income
Current income tax expense (recovery)
Deferred income tax expense (recovery)
Total income tax recognized directly in equity
2019
2018
$ 1,246
(74)
$ (327)
29
1,172
(298)
(454)
–
(454)
1,250
(320)
930
$ 718
$ 632
2019
2018
$
92
366
$
2
(148)
$ 458
$ (146)
$
$
5
(6)
(1)
$
$
6
(7)
(1)
(b) Current tax receivable and payable
As at December 31, 2019, the Company had approximately $600 and $121 of current tax receivable and current tax payable,
respectively (2018 – $1,712 and $118).
162
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
(c) Tax reconciliation
The effective income tax rate reflected in the Consolidated Statements of Income varies from the Canadian tax rate of 26.75 per cent
for the year ended December 31, 2019 (2018 – 26.75 per cent) due to the following reasons.
For the years ended December 31,
Income before income taxes
Income tax expense at Canadian statutory tax rate
Increase (decrease) in income taxes due to:
Tax-exempt investment income
Differences in tax rate on income not subject to tax in Canada
Adjustments to taxes related to prior years
Impact of U.S. Tax Reform
Other differences
Income tax expense
2019
2018
$ 6,220
$ 5,519
$ 1,664
$ 1,476
(260)
(754)
(106)
–
174
(200)
(391)
(71)
(320)
138
$
718
$ 632
Impact of U.S. Tax Reform
On December 22, 2017, the U.S. government enacted new tax legislation with broad and complex changes to the U.S. tax code,
effective January 1, 2018. In 2018, the Company finalized its estimate of the impact of these changes and reported a gain of $124
including a $196 increase in insurance contract liabilities. Refer to note 6(g) for the impact of U.S. Tax Reform on the Company’s
insurance contract liabilities.
(d) Deferred tax assets and liabilities
The following table presents the Company’s deferred tax assets and liabilities reflected on the Consolidated Statement of Financial
Position.
As at December 31,
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
The following table presents movement of deferred tax assets and liabilities.
2019
2018
$ 4,574
(1,972)
$ 4,318
(1,814)
$ 2,602
$ 2,504
As at December 31, 2019
Loss carry forwards
Actuarial liabilities
Pensions and post-employment benefits
Tax credits
Accrued interest
Real estate
Securities and other investments
Sale of investments
Goodwill and intangible assets
Other
Balance,
January 1,
2019 Disposals
Recognized
in Income
Statement
Recognized in
Other
Comprehensive
Income
Recognized
in Equity
Translation
and Other
Balance,
December 31,
2019
$ 1,019
5,466
242
261
1
(959)
(2,689)
(87)
(847)
97
$
(18)
–
–
–
–
–
–
–
–
(37)
$ (278)
3,093
4
(253)
–
(110)
(1,863)
17
(49)
(107)
$
–
–
(20)
–
–
–
(347)
–
–
1
$
(1)
(1)
–
–
–
–
39
–
–
(31)
$
(17)
(115)
–
(8)
–
23
156
1
20
(1)
$
705
8,443
226
–
1
(1,046)
(4,704)
(69)
(876)
(78)
Total
$ 2,504
$
(55)
$ 454
$ (366)
$
6
$
59
$ 2,602
As at December 31, 2018
Loss carry forwards
Actuarial liabilities
Pensions and post-employment benefits
Tax credits
Accrued interest
Real estate
Securities and other investments
Sale of investments
Goodwill and intangible assets
Other
Total
Balance,
January 1,
2018 Disposals
Recognized
in Income
Statement
Recognized in
Other
Comprehensive
Income
Recognized
in Equity
Translation
and Other
Balance,
December 31,
2018
$
$
596
7,878
208
454
1
(1,062)
(3,807)
(105)
(825)
(50)
$ 3,288
$
–
–
–
–
–
–
–
–
–
–
–
$ 387
(2,697)
27
(224)
–
150
1,234
18
18
157
$
(930)
$
$
–
–
7
–
–
(1)
136
–
–
6
$ 148
$
7
3
–
–
–
–
1
–
–
(4)
7
$
29
282
–
31
–
(46)
(253)
–
(40)
(12)
$ 1,019
5,466
242
261
1
(959)
(2,689)
(87)
(847)
97
$
(9)
$ 2,504
The total deferred tax assets as at December 31, 2019 of $4,574 (2018 – $4,318) include $98 (2018 – $3,508) where the Company
has suffered losses in either the current or preceding year and where the recognition is dependent on future taxable profits in the
relevant jurisdictions and feasible management actions.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
163
As at December 31, 2019, tax loss carryforwards available were approximately $3,440 (2018 – $4,838) of which $3,293 expire
between the years 2022 and 2039 while $147 have no expiry date, and capital loss carryforwards available were approximately $31
(2018 – $20) and have no expiry date. A $705 (2018 – $1,019) tax benefit related to these tax loss carryforwards has been recognized
as a deferred tax asset as at December 31, 2019, and a benefit of $93 (2018 – $121) has not been recognized. In addition, the
Company has approximately $157 (2018 – $426) of tax credit carryforwards which will expire between the years 2027 and 2029 of
which a benefit of $157 (2018 – $165) has not been recognized.
The total deferred tax liability as at December 31, 2019 was $1,972 (2018 – $1,814). This amount includes the deferred tax liability of
consolidated entities. The aggregate amount of taxable temporary differences associated with the Company’s own investments in
subsidiaries is not included in the Consolidated Financial Statements and was $19,623 (2018 – $16,570).
Note 17
Interests in Structured Entities
The Company is involved with both consolidated and unconsolidated structured entities (“SEs”) which are established to generate
investment and fee income. The Company is also involved with SEs that are used to facilitate financing for the Company. These
entities may have some or all the following features: control is not readily identified based on voting rights; restricted activities
designed to achieve a narrow objective; high amount of leverage; and/or highly structured capital.
The Company only discloses its involvement in significant consolidated and unconsolidated SEs. In assessing the significance, the
Company considers the nature of its involvement with the SE, including whether it is sponsored by the Company (i.e. initially
organized and managed by the Company). Other factors considered include the Company’s investment in the SE as compared to total
investments, its returns from the SE as compared to total net investment income, the SE’s size as compared to total funds under
management, and its exposure to any other risks from its involvement with the SE.
The Company does not provide financial or other support to its SEs, when it does not have a contractual obligation to do so.
(a) Consolidated SEs
Investment SEs
The Company acts as an investment manager of timberlands and timber companies. The Company’s general fund and segregated
funds invest in many of these companies. The Company has control over one timberland company which it manages, Hancock
Victoria Plantations Holdings PTY Limited (“HVPH”). HVPH is a SE primarily because the Company’s employees exercise voting rights
over it on behalf of other investors. As at December 31, 2019, the Company’s consolidated timber assets relating to HVPH were $936
(2018 – $920). The Company does not provide guarantees to other parties against the risk of loss from HVPH.
Financing SEs
The Company securitizes certain insured and variable rate commercial and residential mortgages and HELOC. This activity is facilitated
by consolidated entities that are SEs because their operations are limited to issuing and servicing the Company’s funding. Further
information regarding the Company’s mortgage securitization program is included in note 3.
(b) Unconsolidated SEs
Investment SEs
The following table presents the Company’s investments and maximum exposure to loss from significant unconsolidated investment
SEs, some of which are sponsored by the Company. The Company does not provide guarantees to other parties against the risk of loss
from these SEs.
As at December 31,
Leveraged leases(3)
Timberland companies(4)
Real estate companies(5)
Total
Company’s investment(1)
Company’s maximum
exposure to loss(2)
2019
2018
2019
2018
$ 3,371
752
541
$ 3,575
788
413
$ 3,371
765
541
$ 3,575
821
413
$ 4,664
$ 4,776
$ 4,677
$ 4,809
(1) The Company’s investments in these unconsolidated SEs are included in invested assets and the Company’s returns from them are included in net investment income and
AOCI.
(2) The Company’s maximum exposure to loss from each SE is limited to amounts invested in each, plus unfunded capital commitments, if any. The Company’s investment
commitments are disclosed in note 18. The maximum loss is expected to occur only upon the entity’s bankruptcy/liquidation, or in case a natural disaster in the case of
the timber companies.
(3) These entities are statutory business trusts which use capital provided by the Company and senior debt provided by other parties to finance the acquisition of assets.
These assets are leased to third-party lessees under long-term leases. The Company owns equity capital in these business trusts. The Company does not consolidate any of
the trusts that are party to the lease arrangements because the Company does not have decision-making power over them.
(4) These entities own and operate timberlands. The Company invests in their equity and debt. The Company’s returns include investment income, investment advisory fees,
forestry management fees and performance advisory fees. The Company does not control these entities because it either does not have the power to govern their
financial and operating policies or does not have significant variable returns from them, or both.
(5) These entities, which include the Manulife U.S. REIT, own and manage commercial real estate. The Company invests in their equity. The Company’s returns include
investment income, investment management fees, property management fees, acquisition/disposition fees, and leasing fees. The Company does not control these entities
because it either does not have the power to govern their financial and operating policies or does not have significant variable returns from them, or both.
164
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Financing SEs
The Company’s interests and maximum exposure to loss from significant unconsolidated financing SEs are as follows.
As at December 31,
Manulife Finance (Delaware), L.P.(2)
Manulife Financial Capital Trust II(3)
Total
Company’s interests(1)
2019
2018
$ 852
1
$ 853
$ 821
999
$ 1,820
(1) The Company’s interests include amounts borrowed from the SEs and the Company’s investment in their subordinated capital, and foreign currency and interest swaps
with them, if any.
(2) This entity is a wholly-owned partnership used to facilitate the Company’s financing. Refer to notes 10 and 18.
(3) This entity is an open-ended trust that was used to facilitate the Company’s financing. The Company redeemed all of its outstanding $1 billion principal amount of MFCT
II Senior debenture notes, at par, on December 30, 2019. Using these proceeds, the trust redeemed MFCT II Series 1 held by 3rd parties, at par, on December 31, 2019.
Refer to note 10.
(i) Other invested assets
The Company has investment relationships with a variety of other entities, which result from its direct investment in their debt and/or
equity and which have been assessed for control. These other entities’ investments include but are not limited to investments in power
and infrastructure, oil and gas, private equity, real estate and agriculture, organized as limited partnerships and limited liability
companies. Most of these other entities are not sponsored by the Company. The Company’s involvement with these other entities is
not individually significant. As such, the Company neither provides summary financial data for these entities nor individually assesses
whether they are SEs. The Company’s maximum exposure to losses because of its involvement with these other entities is limited to its
investment in them and amounts committed to be invested but not yet funded. The Company records its income from these entities
in net investment income and AOCI. The Company does not provide guarantees to other parties against the risk of loss from these
other entities.
(ii) Interest in securitized assets
The Company invests in mortgage/asset-backed securities issued by securitization vehicles sponsored by other parties, including private
issuers and government sponsored issuers, to generate investment income. The Company does not own a controlling financial interest
in any of the issuers. These securitization vehicles are SEs based on their narrow scope of activities and highly leveraged capital
structures. Investments in mortgage/asset-backed securities are reported on the Consolidated Statements of Financial Position as debt
securities and private placements, and their fair value and carrying value are disclosed in note 3. The Company’s maximum loss from
these investments is limited to amounts invested.
Commercial mortgage-backed securities (“CMBS”) are secured by commercial mortgages and residential mortgage-backed securities
(“RMBS”) are secured by residential mortgages. Asset-backed securities (“ABS”) may be secured by various underlying assets including
credit card receivables, automobile loans and aviation leases. The mortgage/asset-backed securities that the Company invests in
primarily originate in North America.
The following table presents investments in securitized holdings by the type and asset quality.
As at December 31,
AAA
AA
A
BBB
Total company exposure
2019
2018
CMBS
RMBS
ABS
Total
Total
$ 1,580
–
69
–
$ 1,649
$
7
–
7
–
$ 1,218
648
296
63
$ 2,805
648
372
63
$ 2,471
306
453
70
$ 14
$ 2,225
$ 3,888
$ 3,300
(iii) Mutual funds
The Company sponsors and may invest in a range of public mutual funds with a broad range of investment styles. As sponsor, the
Company organizes mutual funds that implement investment strategies on behalf of current and future investors. The Company earns
fees which are at market rates for providing advisory and administrative services to these mutual funds. Generally, the Company does
not control its sponsored mutual funds because either the Company does not have power to govern their financial and operating
policies, or its returns in the form of fees and ownership interests are not significant, or both. Certain mutual funds are SEs because
their decision-making rights are not vested in voting equity interests and their investors are provided with redemption rights.
The Company’s relationships with these mutual funds are not individually significant. As such, the Company neither provides summary
financial data for these mutual funds nor individually assesses whether they are SEs. The Company’s interest in mutual funds is limited
to its investment and fees earned, if any. The Company’s investments in mutual funds are recorded as part of its investment in public
equities within the Consolidated Statements of Financial Position. For information regarding the Company’s invested assets, refer to
note 3. The Company does not provide guarantees to other parties against the risk of loss from these mutual funds.
As sponsor, the Company’s investment in startup capital of mutual funds as at December 31, 2019 was $1,576 (2018 – $1,711). The
Company’s retail mutual fund assets under management as at December 31, 2019 were $217,015 (2018 – $188,729).
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
165
Note 18 Commitments and Contingencies
(a) Legal proceedings
The Company is regularly involved in legal actions, both as a defendant and as a plaintiff. The legal actions where the Company is a
party ordinarily relate to its activities as a provider of insurance protection or wealth management products, reinsurance, or in its
capacity as an investment adviser, employer, or taxpayer. Other life insurers and asset managers, operating in the jurisdictions in which
the Company does business, have been subject to a wide variety of other types of actions, some of which resulted in substantial
judgments or settlements against the defendants; it is possible that the Company may become involved in similar actions in the future.
In addition, government and regulatory bodies in Canada, the United States, Asia and other jurisdictions where the Company
conducts business regularly make inquiries and, from time to time, require the production of information or conduct examinations
concerning the Company’s compliance with, among other things, insurance laws, securities laws, and laws governing the activities of
broker-dealers.
In June 2018, a class action was initiated against John Hancock Life Insurance Company (U.S.A.) (“JHUSA”) and John Hancock Life
Insurance Company of New York (“JHNY”) in the U.S. District Court for the Southern District of New York on behalf of owners of
approximately 1,500 Performance Universal Life policies issued between 2003 and 2009 whose policies were subject to a Cost of
Insurance (“COI”) increase announced in 2018. In October 2018, a second and almost identical class action was initiated against
JHUSA and JHNY in the U.S. District Court for the Southern District of NY. The two cases were determined to be related, and they
were assigned to the same judge. Discovery has commenced in these cases. No hearings on substantive matters have been scheduled.
It is too early to assess the range of potential outcomes for these two related lawsuits. In addition to the consolidated class action,
there are six non-class lawsuits opposing the Performance UL COI increases that also have been filed. Each of the lawsuits, except one,
is brought by plaintiffs owning multiple policies and by entities managing them for investment purposes. Two of the non-class
lawsuits are pending in New York state court; two of the lawsuits are pending in the U.S. District Court for the Southern District of
New York; and the last two lawsuits are pending in the U.S. District Court for the Central District of California. Whether individually or
on a combined basis, it remains premature, given the procedural status of these cases, as well as the relatively early development of
parties’ respective legal theories, to provide a reliable estimate of potential outcomes.
(b) Investment commitments
In the normal course of business, various investment commitments are outstanding which are not reflected in the Consolidated
Financial Statements. There were $8,682 (2018 – $10,372) of outstanding investment commitments as at December 31, 2019, of
which $411 (2018 – $888) mature in 30 days, $2,507 (2018 – $3,546) mature in 31 to 365 days and $5,764 (2018 – $5,938) mature
after one year.
(c) Letters of credit
In the normal course of business, third-party relationship banks issue letters of credit on the Company’s behalf. The Company’s
businesses utilize letters of credit for which third parties are the beneficiaries, as well as for affiliate reinsurance transactions between
its subsidiaries. As at December 31, 2019, letters of credit for which third parties are beneficiary, in the amount of $57 (2018 – $74),
were outstanding.
(d) Guarantees
(i) Guarantees regarding Manulife Finance (Delaware), L.P. (“MFLP”)
MFC has guaranteed the payment of amounts on the $650 subordinated debentures due on December 15, 2041 issued by MFLP, a
wholly-owned unconsolidated partnership.
(ii) Guarantees regarding The Manufacturers Life Insurance Company
On January 29, 2007, MFC provided a subordinated guarantee, as amended and restated on January 13, 2017, of Class A Shares and
Class B Shares of MLI and any other class of preferred shares that rank in parity with Class A Shares or Class B Shares of MLI. MFC has
also provided a subordinated guarantee on the day of issuance for the following subordinated debentures issued by MLI: $500 issued
on December 1, 2014; $750 issued on March 10, 2015; $350 issued on June 1, 2015; and $1,000 issued on November 20, 2015.
166
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The following table sets forth certain condensed consolidated financial information for MFC and MFLP.
Condensed Consolidated Statements of Income Information
For the year ended December 31, 2019
MFC
(Guarantor)
MLI
consolidated
Other
subsidiaries of
MFC on a
combined basis
Consolidation
adjustments
Total
consolidated
amounts
Total revenue
Net income (loss) attributed to shareholders
$
371
5,602
$ 79,711
5,963
$ 417
(401)
$
(929) $ 79,570
5,602
(5,562)
For the year ended December 31, 2018
MFC
(Guarantor)
MLI
consolidated
Other
subsidiaries of
MFC on a
combined basis
Consolidation
adjustments
Total
consolidated
amounts
Total revenue
Net income (loss) attributed to shareholders
$
443
4,800
$ 38,994
5,076
$ 434
(419)
$
(899) $ 38,972
4,800
(4,657)
Condensed Consolidated Statements of Financial Position
As at December 31, 2019
Invested assets
Total other assets
Segregated funds net assets
Insurance contract liabilities
Investment contract liabilities
Segregated funds net liabilities
Total other liabilities
As at December 31, 2018
Invested assets
Total other assets
Segregated funds net assets
Insurance contract liabilities
Investment contract liabilities
Segregated funds net liabilities
Total other liabilities
MFC
(Guarantor)
MLI
consolidated
$
21
57,474
–
–
–
–
8,357
$ 378,496
87,774
343,108
351,161
3,104
343,108
53,998
MFC
(Guarantor)
MLI
consolidated
$
21
54,346
–
–
–
–
8,403
$ 353,632
83,523
313,209
328,654
3,265
313,209
50,043
Other
subsidiaries of
MFC on a
combined basis
$
10
3
–
–
–
–
–
Other
subsidiaries of
MFC on a
combined basis
$
11
3
–
–
–
–
–
Consolidation
adjustments
$
–
(57,756)
–
–
–
–
(704)
Consolidation
adjustments
$
–
(54,474)
–
–
–
–
(454)
Total
consolidated
amounts
$ 378,527
87,495
343,108
351,161
3,104
343,108
61,651
Total
consolidated
amounts
$ 353,664
83,398
313,209
328,654
3,265
313,209
57,992
$
MFLP
32
(1)
$
MFLP
62
22
$
MFLP
6
1,088
–
–
–
–
858
$
MFLP
11
1,059
–
–
–
–
833
(iii) Guarantees regarding John Hancock Life Insurance Company (U.S.A.) (“JHUSA”)
Details of guarantees regarding certain securities issued or to be issued by JHUSA are outlined in note 23.
(e) Pledged assets
In the normal course of business, the Company pledges its assets in respect of liabilities incurred, strictly for providing collateral to the
counterparty. In the event of the Company’s default, the counterparty is entitled to apply the collateral to settle the liability. The
pledged assets are returned to the Company if the underlying transaction is terminated or, in the case of derivatives, if there is a
decrease in the net exposure due to market value changes.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
167
The amounts pledged are as follows.
As at December 31,
In respect of:
Derivatives
Regulatory requirements
Repurchase agreements
Non-registered retirement plans in trust
Other
Total
2019
2018
Debt securities
Other
Debt securities
Other
$ 4,257
433
330
–
3
$ 5,023
$ 17
67
–
407
331
$ 822
$ 3,655
412
64
–
3
$ 4,134
$ 102
84
–
420
301
$ 907
(f) Lease obligations
The Company has a number of lease obligations, primarily for the use of office space. The aggregate future minimum lease payments
under non-cancelable leases are $374 (2018 – $575). Payments by year are included in the “Risk Management” section of the
Company’s 2019 MD&A under Liquidity Risk.
(g) Participating business
In some territories where the Company maintains participating accounts, there are regulatory restrictions on the amounts of profit
that can be transferred to shareholders. Where applicable, these restrictions generally take the form of a fixed percentage of
policyholder dividends. For participating businesses operating as separate “closed blocks”, transfers are governed by the terms of
MLI’s and John Hancock Mutual Life Insurance Company’s plans of demutualization.
(h) Fixed surplus notes
A third party contractually provides standby financing arrangements for the Company’s U.S. operations under which, in certain
circumstances, funds may be provided in exchange for the issuance of fixed surplus notes. As at December 31, 2019, the Company
had no fixed surplus notes outstanding.
Note 19 Segmented Information
The Company’s reporting segments are Asia, Canada, U.S., Global WAM and Corporate and Other. Each reporting segment is
responsible for managing its operating results, developing products, defining strategies for services and distribution based on the
profile and needs of its business and market. The Company’s significant product and service offerings by the reporting segments are
mentioned below.
Wealth and asset management businesses (Global WAM) – include mutual funds and exchange-traded funds, group retirement
and savings products, and institutional asset management services across all major asset classes. These products and services are
distributed through multiple distribution channels, including agents and brokers affiliated with the Company, independent securities
brokerage firms and financial advisors pension plan consultants and banks.
Insurance and annuity products (Asia, Canada and U.S.) – includes a variety of individual life insurance, individual and group
long-term care insurance and guaranteed and partially guaranteed annuity products. Products are distributed through multiple
distribution channels, including insurance agents, brokers, banks, financial planners and direct marketing. Manulife Bank of Canada
offers a variety of deposit and credit products to Canadian customers.
Corporate and Other Segment – comprised of investment performance on assets backing capital, net of amounts allocated to
operating segments; costs incurred by the corporate office related to shareholder activities (not allocated to operating segments);
financing costs; Property and Casualty (“P&C”) Reinsurance Business; and run-off reinsurance operations including variable annuities
and accident and health.
Reporting segments
Effective January 1, 2019, the Company updated its methodology for allocating capital and the related earnings to each reporting
segment from the Corporate and Other segment.
168
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The following table presents results by reporting segments.
As at and for the year ended
December 31, 2019
Revenue
Life and health insurance
Annuities and pensions
Net premium income
Net investment income (loss)
Other revenue
Total revenue
Contract benefits and expenses
Life and health insurance
Annuities and pensions
Net benefits and claims
Interest expense
Other expenses
Total contract benefits and expenses
Income (loss) before income taxes
Income tax recovery (expense)
Net income (loss)
Less net income (loss) attributed to:
Non-controlling interests
Participating policyholders
Asia
Canada
U.S.
Global WAM
Corporate
and Other
Total
$ 17,107
2,900
$
20,007
7,451
1,215
28,673
17,975
3,090
21,065
236
5,148
26,449
2,224
(277)
1,947
228
(216)
8,714
361
9,075
9,446
1,088
19,609
10,572
4,312
14,884
508
3,237
18,629
980
25
1,005
–
(117)
$
6,522
(138)
$
–
–
$
112
–
$ 32,455
3,123
6,384
15,556
2,654
24,594
19,320
599
19,919
43
2,944
22,906
1,688
(260)
1,428
–
–
–
33
5,562
5,595
–
83
83
6
4,362
4,451
1,144
(122)
1,022
–
–
112
1,107
(120)
1,099
(36)
–
(36)
526
425
915
184
(84)
100
5
–
35,578
33,593
10,399
79,570
47,831
8,084
55,915
1,319
16,116
73,350
6,220
(718)
5,502
233
(333)
Net income (loss) attributed to shareholders
$
1,935
$
1,122
$
1,428
$
1,022
$
95
$
5,602
Total assets
$ 127,367
$ 159,042
$ 274,993
$ 216,348
$ 31,380
$ 809,130
As at and for the year ended
December 31, 2018
Revenue
Life and health insurance
Annuities and pensions(1)
Net premium income
Net investment income (loss)
Other revenue
Total revenue
Contract benefits and expenses
Life and health insurance
Annuities and pensions
Net benefits and claims
Interest expense
Other expenses
Total contract benefits and expenses
Income (loss) before income taxes
Income tax recovery (expense)
Net income (loss)
Less net income (loss) attributed to:
Non-controlling interests
Participating policyholders
Asia
Canada
U.S.
Global WAM
Corporate
and Other
Total
$ 14,938
3,175
$
18,113
301
1,296
19,710
10,875
1,986
12,861
187
4,749
17,797
1,913
(361)
1,552
208
(360)
8,975
452
9,427
2,725
1,446
13,598
8,044
518
8,562
447
3,063
12,072
1,526
(311)
1,215
–
233
982
$
6,341
(9,967)
(3,626)
1,670
2,542
586
4,255
(9,784)
(5,529)
56
3,428
(2,045)
2,631
(340)
2,291
–
–
$
$
–
–
–
(9)
5,472
5,463
–
77
77
2
4,322
4,401
1,062
(108)
954
–
–
98
–
98
(155)
(328)
(385)
(37)
–
(37)
583
682
1,228
(1,613)
488
(1,125)
6
–
$ 30,352
(6,340)
24,012
4,532
10,428
38,972
23,137
(7,203)
15,934
1,275
16,244
33,453
5,519
(632)
4,887
214
(127)
$
2,291
$
954
$ (1,131)
$
4,800
Net income (loss) attributed to shareholders
$
1,704
$
Total assets
$ 113,781
$ 149,219
$ 270,601
$ 194,214
$ 22,456
$ 750,271
(1) In 2018, the Company ceded premiums to RGA and Jackson for the JHNY transactions, refer to note 6(k) for details.
Geographical location
The results of the Company’s reporting segments differ from its geographical location primarily due to the allocation of Global WAM
and Corporate and Other segments into the geographical location to which its businesses relate.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
169
The following table presents results by geographical location.
For the year ended
December 31, 2019
Revenue
Life and health insurance
Annuities and pensions
Net premium income
Net investment income (loss)
Other revenue
Total revenue
For the year ended
December 31, 2018
Revenue
Life and health insurance
Annuities and pensions
Net premium income
Net investment income (loss)
Other revenue
Total revenue
Asia
Canada
U.S.
Other
Total
$ 17,178
2,900
$ 8,388
361
$ 6,523
(138)
$ 366
–
$ 32,455
3,123
20,078
7,750
2,100
8,749
9,801
2,651
6,385
15,816
5,641
366
226
7
35,578
33,593
10,399
$ 29,928
$ 21,201
$27,842
$ 599
$ 79,570
Asia
Canada
U.S.
Other
Total
$ 15,010
3,175
$ 8,561
452
$ 6,342
(9,967)
$ 439
–
$ 30,352
(6,340)
18,185
371
2,115
9,013
2,933
2,904
(3,625)
1,032
5,395
439
196
14
24,012
4,532
10,428
$ 20,671
$ 14,850
$ 2,802
$ 649
$ 38,972
Note 20 Related Parties
The Company enters into transactions with related parties in the normal course of business and at the terms that would exist in
arm’s-length transactions.
(a) Transactions with certain related parties
Transactions with MFLP, a wholly owned unconsolidated partnership, and MFCT, a wholly owned unconsolidated trust, are described
in notes 10, 17 and 18. Refer to note 3(a) for additional transactions with related parties.
(b) Compensation of key management personnel
The Company’s key management personnel are those personnel who have the authority and responsibility for planning, directing and
controlling the activities of the Company. Directors (both executive and non-executive) and senior management are considered key
personnel. A summary of compensation of key management personnel is as follows.
For the years ended December 31,
Short-term employee benefits
Post-employment benefits
Share-based payments
Termination benefits
Other long-term benefits
Total
Note 21 Subsidiaries
2019
$ 67
5
55
8
2
$ 137
2018
$ 65
5
50
5
2
$ 127
The following is a list of Manulife’s directly and indirectly held major operating subsidiaries.
As at December 31, 2019
(100% owned unless otherwise noted in brackets
beside company name)
Equity Interest
Address
Description
The Manufacturers Life Insurance
$56,795
Toronto, Canada
Company
Leading Canadian-based financial services company
that offers a diverse range of financial protection
products and wealth management services
Manulife Holdings (Alberta) Limited
$21,673
Calgary, Canada
Holding company
John Hancock Financial Corporation
The Manufacturers Investment
Corporation
John Hancock Reassurance
Company Ltd.
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Holding company
Holding company
Boston,
Massachusetts, U.S.A.
Captive insurance subsidiary that provides life,
annuity and long-term care reinsurance to affiliates
170
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
As at December 31, 2019
(100% owned unless otherwise noted in
brackets beside company name)
John Hancock Life Insurance
Company (U.S.A.)
John Hancock Subsidiaries LLC
Equity Interest
Address
Description
Boston,
Massachusetts, U.S.A.
U.S. life insurance company licensed in all states,
except New York
John Hancock Financial
Network, Inc.
John Hancock Investment
Management LLC
John Hancock Investment
Management Distributors LLC
Manulife Investment
Management (US) LLC
Hancock Natural Resource
Group, Inc.
John Hancock Life Insurance
Company of New York
John Hancock Variable Trust
Advisers LLC
John Hancock Life & Health
Insurance Company
John Hancock Distributors LLC
John Hancock Insurance Agency,
Inc.
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Holding company
Financial services distribution organization
Investment advisor
Broker-dealer
Investment advisor
Boston,
Massachusetts, U.S.A.
Manager of globally diversified timberland and
agricultural portfolios
New York, U.S.A.
U.S. life insurance company licensed in New York
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Boston,
Massachusetts, U.S.A.
Investment advisor for open-end mutual funds
U.S. life insurance company licensed in all states
Broker-dealer
Insurance agency
Manulife Reinsurance Limited
Hamilton, Bermuda
Provides life and financial reinsurance to affiliates
Manulife Reinsurance
(Bermuda) Limited
Hamilton, Bermuda
Provides life and annuity reinsurance to affiliates
Manulife Bank of Canada
$1,570
Waterloo, Canada
Provides integrated banking products and service
options not available from an insurance company
Manulife Investment Management
Holdings (Canada) Limited
Manulife Investment Management
Limited
First North American Insurance Company
NAL Resources Management Limited
Manulife Resources Limited
Manulife Property Limited Partnership
Manulife Property Limited Partnership II
Manulife Western Holdings Limited
Partnership
$935
Toronto, Canada
Holding company
$7
$8
$19
$4
$835
Toronto, Canada
Provides investment counseling, portfolio and
mutual fund management in Canada
Toronto, Canada
Property and casualty insurance company
Calgary, Canada
Management company for oil and gas properties
Calgary, Canada
Holds oil and gas properties
Toronto, Canada
Holds oil and gas royalties
Toronto, Canada
Calgary, Canada
Holds oil and gas royalties and foreign bonds and
equities
Holds oil and gas properties
Manulife Securities Investment Services
$72
Oakville, Canada
Mutual fund dealer for Canadian operations
Inc.
Manulife Holdings (Bermuda) Limited
$17,597
Hamilton, Bermuda Holding company
Manufacturers P&C Limited
Manulife Financial Asia Limited
Manulife (Cambodia) PLC
Manufacturers Life Reinsurance
Limited
Manulife (Vietnam) Limited
Manulife Investment Fund
Management (Vietnam) Company Limited
Manulife International Holdings
Limited
St. Michael, Barbados Provides property and casualty reinsurance
Hong Kong, China
Holding company
Phnom Penh,
Cambodia
Life insurance company
St. Michael, Barbados Provides life and annuity reinsurance to affiliates
Ho Chi Minh City,
Vietnam
Ho Chi Minh City,
Vietnam
Life insurance company
Fund management company
Hong Kong, China
Holding company
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
171
As at December 31, 2019
(100% owned unless otherwise noted in brackets
beside company name)
Equity Interest
Address
Description
Manulife (International) Limited
Manulife-Sinochem Life Insurance
Co. Ltd. (51%)
Manulife Investment Management
International Holdings Limited
Manulife Investment Management
(Hong Kong) Limited
Manulife Investment
Management (Taiwan) Co., Ltd.
Manulife Life Insurance Company
(Japan)
Hong Kong, China
Life insurance company
Shanghai, China
Life insurance company
Hong Kong, China
Holding company
Hong Kong, China
Investment management and advisory company
marketing mutual funds
Taipei, Taiwan (China) Asset management company
Tokyo, Japan
Life insurance company
Manulife Asset Management (Japan)
Tokyo, Japan
Investment management and advisory company and
mutual fund business
Limited
Manulife Insurance (Thailand) Public
Company Limited (85.6%)(1)
Manulife Asset Management
(Thailand) Company Limited (93.0%)(1)
Manulife Holdings Berhad (59.5%)
Manulife Insurance Berhad (59.5%)
Manulife Investment Management
(Malaysia) Bhd (59.5%)
Manulife (Singapore) Pte. Ltd.
Manulife Investment Management
(Singapore) Pte. Ltd.
The Manufacturers Life Insurance Co.
(Phils.), Inc.
Manulife Chinabank Life Assurance
Corporation (60%)
Bangkok, Thailand
Life insurance company
Bangkok, Thailand
Investment management company
Kuala Lumpur,
Malaysia
Kuala Lumpur,
Malaysia
Kuala Lumpur,
Malaysia
Holding company
Life insurance company
Asset management company
Singapore
Life insurance company
Singapore
Asset management company
Makati City,
Philippines
Makati City,
Philippines
Life insurance company
Life insurance company
PT Asuransi Jiwa Manulife Indonesia
$812
Jakarta, Indonesia
Life insurance company
PT Manulife Aset Manajemen Indonesia
Jakarta, Indonesia
Investment management and investment advisor
Manulife Investment Management (Europe)
$25
London, England
Limited
Investment management company for Manulife
Financial’s international funds
Manulife Assurance Company of Canada
EIS Services (Bermuda) Limited
$68
$980
Toronto, Canada
Life insurance company
Hamilton, Bermuda
Investment holding company
Berkshire Insurance Services Inc.
$1,637
Toronto, Canada
Investment holding company
JH Investments (Delaware), LLC
Manulife Securities Incorporated
Manulife Investment Management (North
America) Limited
Boston,
Massachusetts, U.S.A.
Investment holding company
$117
$4
Oakville, Canada
Investment dealer
Toronto, Canada
Investment advisor
(1) MFC voting rights percentages are the same as the ownership percentages except for Manulife Insurance (Thailand) Public Company Limited and Manulife Asset
Management (Thailand) Company Limited where MFC’s voting rights are 97.0% and 98.5%, respectively.
Note 22 Segregated Funds
The Company manages segregated funds on behalf of policyholders. Policyholders are provided with the opportunity to invest in
different categories of segregated funds that respectively hold a range of underlying investments. The Company retains legal title to
the underlying investments; however, returns from these investments belong to the policyholders. Accordingly, the Company does not
bear the risk associated with these assets outside of guarantees offered on certain variable life and annuity products. The “Risk
Management” section of the Company’s 2019 MD&A provides information regarding the variable annuity and segregated fund
guarantees.
172
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The composition of net assets by categories of segregated funds was within the following ranges for the years ended December 31,
2019 and 2018.
Type of fund
Money market funds
Fixed income funds
Balanced funds
Equity funds
Ranges in per cent
2019
2018
2% to 3%
14% to 15%
24% to 25%
58% to 60%
2% to 3%
14% to 15%
25% to 26%
58% to 60%
Money market funds consist of investments that have a term to maturity of less than one year. Fixed income funds primarily consist of
investments in fixed grade income securities and may contain smaller investments in diversified equities or high-yield bonds. Relative
to fixed income funds, balanced funds consist of fixed income securities and a larger equity investment component. The types of
equity funds available to policyholders range from low volatility equity funds to aggressive equity funds. Equity funds invest in a
varying mix of Canadian, U.S. and global equities.
The underlying investments of the segregated funds consist of both individual securities and mutual funds (collectively “net assets”),
some of which may be structured entities. The carrying value and change in segregated funds net assets are as follows. Fair value
related information of segregated funds is disclosed in note 3(g).
Segregated funds net assets
As at December 31,
Investments at market value
Cash and short-term securities
Debt securities
Equities
Mutual funds
Other investments
Accrued investment income
Other assets and liabilities, net
Total segregated funds net assets
Composition of segregated funds net assets
Held by policyholders
Held by the Company
Total segregated funds net assets
Changes in segregated funds net assets
For the years ended December 31,
Net policyholder cash flow
Deposits from policyholders
Net transfers to general fund
Payments to policyholders
Investment related
Interest and dividends
Net realized and unrealized investment gains (losses)
Other
Management and administration fees
Impact of changes in foreign exchange rates
Net additions (deductions)
Segregated funds net assets, beginning of year
Segregated funds net assets, end of year
2019
2018
$
3,364
16,883
12,989
304,753
4,785
1,678
(975)
$
3,700
15,313
11,661
277,133
4,678
1,811
(700)
$ 343,477
$ 313,596
$ 343,108
369
$ 313,209
387
$ 343,477
$ 313,596
2019
2018
$ 38,561
(1,000)
(49,372)
$ 38,236
(1,089)
(47,475)
(11,811)
(10,328)
18,872
37,643
56,515
(3,926)
(10,897)
(14,823)
29,881
313,596
19,535
(34,683)
(15,148)
(3,985)
18,249
14,264
(11,212)
324,808
$ 343,477
$ 313,596
Segregated funds assets may be exposed to a variety of financial and other risks. These risks are primarily mitigated by investment
guidelines that are actively monitored by professional and experienced portfolio advisors. The Company is not exposed to these risks
beyond the liabilities related to guarantees associated with certain variable life and annuity products. Accordingly, the Company’s
exposure to loss from segregated fund products is limited to the value of these guarantees.
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
173
These guarantees are recorded within the Company’s insurance contract liabilities. Assets supporting these guarantees are recognized
in invested assets according to their investment type.
Note 23
SignatureNotes Issued or Assumed by John Hancock Life Insurance Company (U.S.A.)
Information Provided in Connection with Investments in Deferred Annuity Contracts and
The following condensed consolidated financial information, presented in accordance with IFRS, and the related disclosure have been
included in these Consolidated Financial Statements with respect to JHUSA in compliance with Regulation S-X and Rule 12h-5 of the
United States Securities and Exchange Commission (the “Commission”). These financial statements are incorporated by reference in
the MFC and its subsidiaries registration statements that are described below and which relate to MFC’s guarantee of certain
securities to be issued by its subsidiaries.
JHUSA maintains a book of deferred annuity contracts that feature a market value adjustment, some of which are registered with the
Commission. The deferred annuity contracts may contain variable investment options along with fixed investment period options, or
may offer only fixed investment period options. The fixed investment period options enable the participant to invest fixed amounts of
money for fixed terms at fixed interest rates, subject to a market value adjustment if the participant desires to terminate a fixed
investment period before its maturity date. The annuity contract provides for the market value adjustment to keep the parties whole
with respect to the fixed interest bargain for the entire fixed investment period. These fixed investment period options that contain a
market value adjustment feature are referred to as “MVAs”.
JHUSA may also sell medium-term notes to retail investors under its SignatureNotes program.
Effective December 31, 2009, John Hancock Variable Life Insurance Company (the “Variable Company”) and John Hancock Life
Insurance Company (the “Life Company”) merged with and into JHUSA. In connection with the mergers, JHUSA assumed the Variable
Company’s rights and obligations with respect to the MVAs issued by the Variable Company and the Life Company’s rights and
obligations with respect to the SignatureNotes issued by the Life Company.
MFC fully and unconditionally guaranteed the payment of JHUSA’s obligations under the MVAs and under the SignatureNotes
(including the MVAs and SignatureNotes assumed by JHUSA in the merger), and such MVAs and the SignatureNotes were registered
with the Commission. The SignatureNotes and MVAs assumed or issued by JHUSA are collectively referred to in this note as the
“Guaranteed Securities”. JHUSA is, and each of the Variable Company and the Life Company was, a wholly owned subsidiary of MFC.
MFC’s guarantees of the Guaranteed Securities are unsecured obligations of MFC and are subordinated in right of payment to the
prior payment in full of all other obligations of MFC, except for other guarantees or obligations of MFC which by their terms are
designated as ranking equally in right of payment with or subordinate to MFC’s guarantees of the Guaranteed Securities.
The laws of the State of New York govern MFC’s guarantees of the SignatureNotes issued or assumed by JHUSA and the laws of the
Commonwealth of Massachusetts govern MFC’s guarantees of the MVAs issued or assumed by JHUSA. MFC has consented to the
jurisdiction of the courts of New York and Massachusetts. However, because a substantial portion of MFC’s assets are located outside
the United States, the assets of MFC located in the United States may not be sufficient to satisfy a judgment given by a federal or
state court in the United States to enforce the subordinate guarantees. In general, the federal laws of Canada and the laws of the
Province of Ontario, where MFC’s principal executive offices are located, permit an action to be brought in Ontario to enforce such a
judgment provided that such judgment is subsisting and unsatisfied for a fixed sum of money and not void or voidable in the United
States and a Canadian court will render a judgment against MFC in a certain dollar amount, expressed in Canadian dollars, subject to
customary qualifications regarding fraud, violations of public policy, laws limiting the enforcement of creditor’s rights and applicable
statutes of limitations on judgments. There is currently no public policy in effect in the Province of Ontario that would support
avoiding the recognition and enforcement in Ontario of a judgment of a New York or Massachusetts court on MFC’s guarantees of
the SignatureNotes issued or assumed by JHUSA or a Massachusetts court on guarantees of the MVAs issued or assumed by JHUSA.
MFC is a holding company. MFC’s assets primarily consist of investments in its subsidiaries. MFC’s cash flows primarily consist of
dividends and interest payments from its operating subsidiaries, offset by expenses and shareholder dividends and MFC stock
repurchases. As a holding company, MFC’s ability to meet its cash requirements, including, but not limited to, paying any amounts
due under its guarantees, substantially depends upon dividends from its operating subsidiaries.
These subsidiaries are subject to certain regulatory restrictions under laws in Canada, the United States and certain other countries,
which may limit their ability to pay dividends or make contributions or loans to MFC. For example, some of MFC’s subsidiaries are
subject to restrictions prescribed by the ICA on their ability to declare and pay dividends. The restrictions related to dividends imposed
by the ICA are described in note 12.
In the United States, insurance laws in Michigan, New York, and Massachusetts, the jurisdictions in which certain of MFC’s U.S.
insurance company subsidiaries are domiciled, impose general limitations on the payment of dividends and other upstream
distributions or loans by these insurance subsidiaries. These limitations are described in note 12.
In Asia, the insurance laws of the jurisdictions in which MFC operates either provide for specific restrictions on the payment of
dividends or other distributions or loans by subsidiaries or impose solvency or other financial tests, which could affect the ability of
subsidiaries to pay dividends in certain circumstances.
There can be no assurance that any current or future regulatory restrictions in Canada, the United States or Asia will not impair MFC’s
ability to meet its cash requirements, including, but not limited to, paying any amounts due under its guarantee.
174
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
The following condensed consolidated financial information, presented in accordance with IFRS, reflects the effects of the mergers
and is provided in compliance with Regulation S-X and in accordance with Rule 12h-5 of the Commission.
Condensed Consolidated Statement of Financial Position
As at December 31, 2019
Assets
Invested assets
Investments in unconsolidated subsidiaries
Reinsurance assets
Other assets
Segregated funds net assets
Total assets
Liabilities and equity
Insurance contract liabilities
Investment contract liabilities
Other liabilities
Long-term debt
Capital instruments
Segregated funds net liabilities
Shareholders’ equity
Participating policyholders’ equity
Non-controlling interests
Total liabilities and equity
Condensed Consolidated Statement of Financial Position
As at December 31, 2018
Assets
Invested assets
Investments in unconsolidated subsidiaries
Reinsurance assets
Other assets
Segregated funds net assets
Total assets
Liabilities and equity
Insurance contract liabilities
Investment contract liabilities
Other liabilities
Long-term debt
Capital instruments
Segregated funds net liabilities
Shareholders’ equity
Participating policyholders’ equity
Non-controlling interests
Total liabilities and equity
MFC
(Guarantor)
JHUSA
(Issuer)
Other
subsidiaries
Consolidation
adjustments
Consolidated
MFC
$
21 $ 107,746 $ 271,100 $
57,068
–
406
–
7,467
61,310
20,859
181,982
16,983
10,080
45,111
162,845
(340) $ 378,527
–
41,446
46,049
343,108
(81,518)
(29,944)
(20,327)
(1,719)
$ 57,495 $ 379,364 $ 506,119 $ (133,848) $ 809,130
$
– $ 157,398 $ 224,378 $
–
537
4,543
3,277
–
49,138
–
–
2,014
48,226
–
3,244
162,845
64,444
(243)
1,211
1,091
21,311
–
599
181,982
16,983
–
–
(30,615) $ 351,161
3,104
49,988
4,543
7,120
343,108
49,138
(243)
1,211
(1)
(20,086)
–
–
(1,719)
(81,427)
–
–
$ 57,495 $ 379,364 $ 506,119 $ (133,848)
$ 809,130
MFC
(Guarantor)
JHUSA
(Issuer)
Other
subsidiaries
Consolidation
adjustments
Consolidated
MFC
$
21 $ 105,043 $ 248,962 $
54,015
–
331
–
7,356
63,435
17,025
168,476
17,738
9,136
42,534
146,671
(362) $ 353,664
–
43,053
40,345
313,209
(79,109)
(29,518)
(19,545)
(1,938)
$ 54,367 $ 361,335 $ 465,041 $ (130,472)
$ 750,271
$
– $ 155,162 $ 203,682 $
–
275
4,769
3,359
–
45,964
–
–
2,076
45,393
–
4,741
146,671
61,291
94
1,093
1,191
18,136
–
632
168,476
17,738
–
–
(30,190) $ 328,654
3,265
44,491
4,769
8,732
313,209
45,964
94
1,093
(2)
(19,313)
–
–
(1,938)
(79,029)
–
–
$ 54,367 $ 361,335 $ 465,041 $ (130,472) $ 750,271
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
175
Condensed Consolidated Statement of Income
For the year ended December 31, 2019
Revenue
Gross premiums
Premiums ceded to reinsurers
Net premium income
Net investment income (loss)
Net other revenue
Total revenue
Contract benefits and expenses
Net benefits and claims
Commissions, investment and general expenses
Other expenses
Total contract benefits and expenses
Income (loss) before income taxes
Income tax (expense) recovery
Income (loss) after income taxes
Equity in net income (loss) of unconsolidated subsidiaries
Net income (loss)
Net income (loss) attributed to:
Non-controlling interests
Participating policyholders
Shareholders
Condensed Consolidated Statement of Income
For the year ended December 31, 2018
Revenue
Gross premiums
Premiums ceded to reinsurers
Net premium income
Net investment income (loss)
Net other revenue
Total revenue
Contract benefits and expenses
Net benefits and claims
Commissions, investment and general expenses
Other expenses
Total contract benefits and expenses
Income (loss) before income taxes
Income tax (expense) recovery
MFC
(Guarantor)
JHUSA
(Issuer)
Other
subsidiaries
Consolidation
adjustments
Consolidated
MFC
$
–
–
–
355
16
371
–
20
421
441
(70)
18
(52)
5,654
$ 8,599
(3,575)
$33,620
(3,066)
$ (1,160)
1,160
$41,059
(5,481)
5,024
12,128
2,866
20,018
17,133
3,299
206
20,638
(620)
347
(273)
772
30,554
22,108
11,447
64,109
41,220
13,938
2,041
57,199
6,910
(1,083)
5,827
499
–
(998)
(3,930)
(4,928)
(2,438)
(1,530)
(960)
(4,928)
–
–
–
(6,925)
35,578
33,593
10,399
79,570
55,915
15,727
1,708
73,350
6,220
(718)
5,502
–
$ 5,602
$
499
$ 6,326
$ (6,925)
$ 5,502
$
–
–
5,602
$ 5,602
$
–
2
497
$
233
(333)
6,426
$
–
(2)
(6,923)
$
233
(333)
5,602
$
499
$ 6,326
$ (6,925)
$ 5,502
MFC
(Guarantor)
JHUSA
(Issuer)
Other
subsidiaries
Consolidation
adjustments
Consolidated
MFC
$
–
–
–
445
(2)
443
–
19
380
399
44
(11)
$ 8,452
(14,149)
$ 31,814
(2,105)
$ (1,116)
1,116
$39,150
(15,138)
(5,697)
907
1,799
(2,991)
(7,403)
3,427
233
(3,743)
752
223
975
1,206
29,709
4,126
9,791
43,626
22,862
14,052
1,989
38,903
4,723
(844)
3,879
2,181
–
(946)
(1,160)
(2,106)
475
(1,660)
(921)
(2,106)
–
–
–
(8,154)
24,012
4,532
10,428
38,972
15,934
15,838
1,681
33,453
5,519
(632)
4,887
–
Income (loss) after income taxes
Equity in net income (loss) of unconsolidated subsidiaries
33
4,767
Net income (loss)
Net income (loss) attributed to:
Non-controlling interests
Participating policyholders
Shareholders
$ 4,800
$ 2,181
$ 6,060
$ (8,154)
$ 4,887
$
–
–
4,800
$ 4,800
$
–
(10)
2,191
$
214
(127)
5,973
$
–
10
(8,164)
$ 214
(127)
4,800
$ 2,181
$ 6,060
$ (8,154)
$ 4,887
176
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Consolidated Statement of Cash Flows
For the year ended December 31, 2019
Operating activities
Net income (loss)
Adjustments:
Equity in net income of unconsolidated subsidiaries
Increase (decrease) in insurance contract liabilities
Increase (decrease) in investment contract liabilities
(Increase) decrease in reinsurance assets excluding coinsurance
transactions
Amortization of (premium) discount on invested assets
Other amortization
Net realized and unrealized (gains) losses and impairment on assets
Deferred income tax expense (recovery)
Stock option expense
Cash provided by (used in) operating activities before undernoted items
Dividends from unconsolidated subsidiary
Changes in policy related and operating receivables and payables
Cash provided by (used in) operating activities
Investing activities
Purchases and mortgage advances
Disposals and repayments
Changes in investment broker net receivables and payables
Investment in common shares of subsidiaries
Net cash flows from acquisition and disposal of subsidiaries and
businesses
Capital contribution to unconsolidated subsidiaries
Return of capital from unconsolidated subsidiaries
Notes receivable from parent
Notes receivable from subsidiaries
Cash provided by (used in) investing activities
Financing activities
Change in repurchase agreements and securities sold but not yet
purchased
Redemption of capital instruments
Secured borrowings from securitization transactions
Changes in deposits from Bank clients, net
Lease payments
Shareholders’ dividends paid in cash
Dividends paid to parent
Contributions from (distributions to) non-controlling interests, net
Common shares repurchased
Common shares issued, net
Capital contributions by parent
Return of capital to parent
Notes payable to parent
Notes payable to subsidiaries
Cash provided by (used in) financing activities
Cash and short-term securities
Increase (decrease) during the year
Effect of foreign exchange rate changes on cash and short-term securities
Balance, beginning of year
Balance, end of year
Cash and short-term securities
Beginning of year
Gross cash and short-term securities
Net payments in transit, included in other liabilities
Net cash and short-term securities, beginning of year
End of year
Gross cash and short-term securities
Net payments in transit, included in other liabilities
Net cash and short-term securities, end of year
Supplemental disclosures on cash flow information:
Interest received
Interest paid
Income taxes paid (refund)
MFC
(Guarantor)
JHUSA
(Issuer)
Other
subsidiaries
Consolidation
adjustments
Consolidated
MFC
$ 5,602
$
499
$ 6,326
$ (6,925) $
5,502
(5,654)
–
–
–
–
5
(12)
(18)
–
(77)
3,000
(39)
2,884
–
–
–
(404)
–
–
–
–
(1)
(772)
11,381
51
(1,236)
40
118
(7,105)
(192)
(1)
2,783
623
(146)
3,260
(24,898)
22,324
631
–
–
(1)
177
–
13
(499)
22,346
119
679
77
503
(13,148)
(244)
12
16,171
1,123
1,850
19,144
(55,712)
43,009
528
–
288
–
–
(157)
–
(405)
(1,754)
(12,044)
–
–
–
–
–
(1,398)
–
–
(1,339)
104
–
–
–
157
(2,476)
3
(2)
21
22
21
–
21
22
–
22
–
–
–
–
(8)
–
(1,123)
–
–
–
–
–
–
–
(1,131)
375
(128)
2,317
2,564
266
(1,500)
107
1,819
(109)
–
(3,623)
(22)
–
404
1
(177)
(12)
–
(2,846)
4,254
(336)
13,044
16,962
2,783
(466)
2,317
13,411
(367)
13,044
3,058
(494)
17,220
(258)
$ 2,564
$ 16,962
422
423
–
$ 4,252
83
(788)
$ 7,823
1,741
892
$
$
6,925
–
–
–
–
–
–
–
–
–
(4,746)
–
(4,746)
–
–
–
404
–
1
(177)
157
(12)
373
–
–
–
–
–
–
4,746
–
–
(404)
(1)
177
12
(157)
4,373
–
–
–
–
–
–
–
–
–
–
–
33,727
170
(557)
117
626
(20,265)
(454)
11
18,877
–
1,665
20,542
(80,610)
65,333
1,159
–
288
–
–
–
–
(13,830)
266
(1,500)
107
1,819
(117)
(1,398)
–
(22)
(1,339)
104
–
–
–
–
(2,080)
4,632
(466)
15,382
19,548
16,215
(833)
15,382
20,300
(752)
$ 19,548
(948) $ 11,549
1,299
(948)
104
–
$
$
Notes to Consolidated Financial Statements | Manulife Financial Corporation | 2019 Annual Report
177
Consolidated Statement of Cash Flows
For the year ended December 31, 2018
Operating activities
Net income (loss)
Adjustments:
Equity in net income of unconsolidated subsidiaries
Increase (decrease) in insurance contract liabilities
Increase (decrease) in investment contract liabilities
(Increase) decrease in reinsurance assets excluding coinsurance
transactions
Amortization of (premium) discount on invested assets
Other amortization
Net realized and unrealized (gains) losses and impairment on assets
Deferred income tax expense (recovery)
Stock option expense
Cash provided by (used in) operating activities before undernoted items
Dividends from unconsolidated subsidiary
Changes in policy related and operating receivables and payables
Cash provided by (used in) operating activities
Investing activities
Purchases and mortgage advances
Disposals and repayments
Changes in investment broker net receivables and payables
Investment in common shares of subsidiaries
Net cash flows from acquisition and disposal of subsidiaries and businesses
Capital contribution to unconsolidated subsidiaries
Return of capital from unconsolidated subsidiaries
Notes receivable from parent
Notes receivable from subsidiaries
Cash provided by (used in) investing activities
Financing activities
Change in repurchase agreements and securities sold but not yet
purchased
Redemption of long-term debt
Issue of capital instruments, net
Redemption of capital instruments
Secured borrowings from securitization transactions
Changes in deposits from Bank clients, net
Shareholders’ dividends paid in cash
Contributions from (distributions to) non-controlling interests, net
Common shares repurchased
Common shares issued, net
Preferred shares issued, net
Dividends paid to parent
Capital contributions by parent
Return of capital to parent
Notes payable to parent
Notes payable to subsidiaries
Cash provided by (used in) financing activities
Cash and short-term securities
Increase (decrease) during the year
Effect of foreign exchange rate changes on cash and short-term securities
Balance, beginning of year
Balance, end of year
Cash and short-term securities
Beginning of year
Gross cash and short-term securities
Net payments in transit, included in other liabilities
Net cash and short-term securities, beginning of year
End of year
Gross cash and short-term securities
Net payments in transit, included in other liabilities
Net cash and short-term securities, end of year
Supplemental disclosures on cash flow information:
Interest received
Interest paid
Income taxes paid (refund)
MFC
(Guarantor)
JHUSA
(Issuer)
Other
subsidiaries
Consolidation Consolidated
MFC
adjustments
$ 4,800
$ 2,181
$ 6,060
$ (8,154)
$ 4,887
(4,767)
–
–
–
–
4
(11)
11
–
37
2,700
251
2,988
–
–
–
(1,284)
–
–
–
–
(23)
(1,307)
–
(400)
597
–
–
–
(1,788)
–
(478)
59
245
–
–
–
–
83
(1,682)
(1)
1
21
21
21
–
21
21
–
21
(1,206)
(5,273)
(86)
1,609
58
225
4,158
679
–
2,345
819
(907)
2,257
(38,799)
35,817
(169)
–
–
(14)
72
–
(61)
(3,154)
–
–
–
–
–
–
–
–
–
–
–
(777)
–
–
–
–
(777)
(2,181)
8,180
121
(716)
154
518
4,580
240
10
16,966
777
496
18,239
(62,373)
46,294
41
–
187
–
–
(83)
–
(15,934)
(189)
–
–
(450)
250
1,490
–
(60)
–
1,284
–
(3,519)
14
(72)
84
–
(1,168)
(1,674)
353
3,638
2,317
1,137
468
11,439
13,044
4,133
(495)
3,638
11,811
(372)
11,439
2,783
(466)
13,411
(367)
$ 2,317
$ 13,044
427
373
(59)
$ 4,381
92
286
$ 7,074
1,677
234
$
$
8,154
–
–
–
–
–
–
–
–
–
(4,296)
–
(4,296)
–
–
–
1,284
–
14
(72)
83
84
1,393
–
–
–
–
–
–
–
–
–
(1,284)
–
4,296
(14)
72
(84)
(83)
2,903
–
–
–
–
–
–
–
–
–
–
–
2,907
35
893
212
747
8,727
930
10
19,348
–
(160)
19,188
(101,172)
82,111
(128)
–
187
–
–
–
–
(19,002)
(189)
(400)
597
(450)
250
1,490
(1,788)
(60)
(478)
59
245
–
–
–
–
–
(724)
(538)
822
15,098
15,382
15,965
(867)
15,098
16,215
(833)
$ 15,382
(930)
(930)
–
$ 10,952
1,212
461
$
$
Note 24 Comparatives
Certain comparative amounts have been reclassified to conform to the current year’s presentation.
178
Manulife Financial Corporation | 2019 Annual Report | Notes to Consolidated Financial Statements
Additional Actuarial Disclosures
Source of Earnings
Manulife uses a Source of Earnings (“SOE”) to identify the primary sources of gains or losses in each reporting period. It is one of the
key tools the Company uses to understand and manage its business. The SOE is prepared following OSFI’s regulatory guidelines, and
in accordance with educational notes published by the Canadian Institute of Actuaries (“CIA”). The SOE attributes each component of
earnings to one of ten categories: expected profit from in-force business, the impact of new business, experience gains or losses
(comparing actual to expected outcomes), the impact of management actions and changes in assumptions, earnings on surplus funds,
other insurance earnings, Global Wealth and Asset Management earnings, Manulife Bank earnings, unallocated overhead expenses,
and income taxes. In aggregate, these elements explain the $5,602 million of net income attributed to shareholders in 2019.
Each of these ten categories is described below:
Expected profit from in-force business represents the formula-driven release of Provisions for Adverse Deviation (“PfADs”) on
non-fee income insurance businesses, the expected net income on fee businesses, and the planned margins on one-year renewable
businesses such as Group Benefits. PfADs are a requirement of the Canadian Actuarial Standards of Practice, and represent additional
amounts held in excess of the expected cost of discharging policy obligations in order to provide a margin of conservatism. These
amounts are released over time as the Company is released from the risks associated with the policy obligations.
The increase in 2019 over 2018 was primarily due to in-force business growth in Asia, partially offset by actions taken over the last 12
months to improve the capital efficiency of our legacy businesses.
Impact of new business represents the financial impact of new business written in the period, including acquisition expenses.
Writing new business creates economic value, which is offset by PfADs and other limits on capitalization of this economic value in
actuarial liabilities.
The new business gain in 2019 has improved compared to 2018, driven by higher sales volume in the U.S., Hong Kong, Asia Other, as
well as improved product margins in the U.S. These items were partially offset by lower new business volumes in Japan.
Experience gains or losses arise from items such as claims, policy persistency, fee income, and expenses, where the actual
experience in the current period differs from the expected results assumed in the insurance and investment contract liabilities. It also
includes experience gains or losses associated with actual investment returns and movements in investment markets differing from
those expected on assets supporting insurance and investment contract liabilities. For most businesses, the expected future investment
returns underlying policy valuations are updated quarterly for investment market movements and this impact is also included in
experience gains and losses. This component also includes the impact of currency changes to the extent they are separately quantified.
Experience gains do not include the impact of management actions or changes in assumptions during the reporting period, which are
reported in “Management actions and changes in assumptions”.
The experience losses in 2019 were primarily driven by the unfavourable impact from interest rates movements, charges related to
changes in the URR, as well as unfavourable policyholder experience, partially offset by favourable investment related experience on
general fund liabilities and impacts from gross equity markets exposure. The unfavourable impact of interest rate movements was
driven by the narrowing of corporate spreads, the impact of lower risk-free rates and a steepening of the yield curve. The favourable
investment related experience on general fund liabilities was driven by fixed income reinvestment activities on the measurement of our
policy liabilities, strong returns (including changes in fair value) on ALDA, and strong credit experience.
The experience gains in 2018 were primarily driven by favourable investment related experience on general fund liabilities, the
favourable impact from interest rate movements and favourable policyholder experience. The favourable investment related
experience on general fund liabilities was driven by the favourable impact of fixed income reinvestment activities on the measurement
of our policy liabilities and strong credit experience, partially offset by lower than expected returns on alternative long-duration assets
(“ALDA”), including oil & gas in the fourth quarter. The favourable impact of interest rate movements was driven by increases in
corporate spreads, partially offset by the movement in risk free rates and the increases in swap spreads. The experience gains were
partially offset by the unfavourable impacts from gross equity market exposure.
Management actions and changes in assumptions reflect the income impact of changes to valuation methods and assumptions
for insurance and investment contract liabilities and other management-initiated actions in the year that are outside the normal course
of business.
The 2019 pre-tax earnings impact of changes in methods and assumptions was a $61 million charge compared to a $65 million
charge in 2018. The $61 million charge in 2019 was primarily the result of charges from updates to lapse and premium persistency
rates across several term and whole life product lines within our Canada Individual Insurance business, partially offset by gains from
updates to our senior secured loan default rates to reflect recent experience, as well as updates to our investment and crediting rate
strategy for certain universal life products. In addition, U.S. Insurance completed a comprehensive long-term care review, which
included all aspects of claim assumptions, the impact of policyholder benefit reductions as well as the progress on future premium
rate increases and a review of margins on the business. The impact of the LTC review was approximately net neutral to net income
attributed to shareholders. Note 6 of the Consolidated Financial Statements provides additional detail on the changes in actuarial
methods and assumptions.
Additional Actuarial Disclosures | Manulife Financial Corporation | 2019 Annual Report
179
Impacts from material management action items reported in the Corporate segment in 2019 included gains from the sale of bonds
designated as available for sale (“AFS”), as well as gains resulting from reinsurance transactions primarily related to our legacy
businesses in Canada and the U.S.
Earnings on surplus funds reflect the actual investment returns on assets supporting the Company’s surplus (shareholders’ equity).
These assets comprise a diversified portfolio and returns will vary with the underlying asset categories.
Other represents pre-tax earnings items on insurance business that are not included in any other line of the SOE.
Global Wealth and Asset Management (“Global WAM”) represents pre-tax net income from the Global Wealth and Asset
Management segment.
Manulife Bank represents pre-tax net income from Manulife Bank.
Unallocated overhead represents pre-tax unallocated overhead expenses from the Corporate and Other segments.
Income taxes represent tax charges to earnings based on the varying tax rates in the jurisdictions in which Manulife conducts
business.
Manulife’s net income attributed to shareholders for the full year 2019 increased to $5,602 million from $4,800 million the previous
year.
For the year ended December 31, 2019
(C$ millions)
Expected Profit from In-force Business
Impact of New Business
Experience gains (losses)
Management actions and changes in assumptions
Earnings on surplus
Other
Insurance
Global Wealth and Asset Management
Manulife Bank
Unallocated overhead
Income (loss) before income taxes attributed to shareholders
Income tax recovery (expense)
Asia
Canada
U.S.
$1,131
747
(29)
(13)
219
157
$1,003 $ 1,798
205
(1,066)
242
483
26
44
(214)
(193)
342
(3)
2,212
–
–
–
979
–
202
–
1,688
–
–
–
Corporate
and Other
Global
WAM
$
96 $
–
(55)
566
23
32
662
–
–
(479)
–
–
–
–
–
–
–
1,144
–
–
$2,212 $1,181 $ 1,688
(260)
(277)
(59)
$ 183 $1,144
(122)
(88)
Total
4,028
996
(1,364)
602
1,067
212
5,541
1,144
202
(479)
6,408
(806)
Net income (loss) attributed to shareholders
$1,935 $1,122 $ 1,428
$
95 $1,022
5,602
For the year ended December 31, 2018
(C$ millions)
Expected Profit from In-force Business
Impact of New Business
Experience gains (losses)
Management actions and changes in assumptions
Earnings on surplus
Other
Insurance
Global Wealth and Asset Management
Manulife Bank
Unallocated overhead
Income (loss) before income taxes attributed to shareholders
Income tax recovery (expense)
Asia
Canada
U.S.
Corporate
and Other
Global
WAM
$1,010 $1,015 $ 1,753
45
303
283
468
(174)
844
(192)
39
196
166
27
29
(377)
375
3
$
79 $
1
35
(703)
(639)
28
–
–
–
–
–
–
2,063
–
–
–
1,072
–
173
–
2,678
–
–
–
(1,199)
–
–
(419)
–
1,063
–
–
$2,063 $1,245 $ 2,678
(387)
(263)
(359)
$(1,618) $1,063
(109)
487
Total
3,857
917
175
(758)
400
23
4,614
1,063
173
(419)
5,431
(631)
Net income (loss) attributed to shareholders
$1,704 $ 982 $ 2,291
$(1,131) $ 954
4,800
Embedded Value
The embedded value (“EV”) as of December 31, 2019 will be disclosed later.
180
Manulife Financial Corporation | 2019 Annual Report | Additional Actuarial Disclosures
Board of Directors
Current as of March 1, 2020
“Director Since” refers to the year of first election to the Board of Directors of The Manufacturers Life Insurance Company.
John M. Cassaday
Chairman of the Board
Manulife
Toronto, ON, Canada
Director Since: 1993
Susan F. Dabarno
Corporate Director
Bracebridge, ON, Canada
Director Since: 2013
Tsun-yan Hsieh
Chairman
LinHart Group PTE Ltd.
Singapore, Singapore
Director Since: 2011
C. James Prieur
Corporate Director
Chicago, IL, U.S.A.
Director Since: 2013
Hon. Ronalee H. Ambrose
Corporate Director
Calgary, AB, Canada
Director Since: 2017
Julie E. Dickson
Corporate Director
Ottawa, ON, Canada
Director Since: 2019
P. Thomas Jenkins
Chairman of the Board
OpenText Corporation
Georgetown, Cayman Islands
Director Since: 2015
Andrea S. Rosen
Corporate Director
Toronto, ON, Canada
Director Since: 2011
Guy L.T. Bainbridge
Corporate Director
Edinburgh, Midlothian,
United Kingdom
Director Since: 2019
Sheila S. Fraser
Corporate Director
Ottawa, ON, Canada
Director Since: 2011
Donald R. Lindsay
President and Chief Executive
Officer
Teck Resources Limited
Vancouver, BC, Canada
Director Since: 2010
Lesley D. Webster
President and Founder
Daniels Webster Capital Advisors
Naples, FL, U.S.A.
Director Since: 2012
Joseph P. Caron
Corporate Director
West Vancouver, BC, Canada
Director Since: 2010
Roy Gori
President and Chief Executive
Officer
Manulife
Toronto, ON, Canada
Director Since: 2017
John R.V. Palmer
Corporate Director
Toronto, ON, Canada
Director Since: 2009
Executive Leadership Team
Current as of March 1, 2020
Roy Gori
President and Chief Executive Officer
Marianne Harrison
President and Chief Executive Officer,
John Hancock
Michael J. Doughty
President and Chief Executive
Officer, Manulife Canada
Steven A. Finch
Chief Actuary
James D. Gallagher
General Counsel
Scott S. Hartz
Chief Investment Officer
Rahim Hirji
Chief Risk Officer
Rahul M. Joshi
Chief Operations Officer
Pamela O. Kimmet
Chief Human Resources Officer
Karen A. Leggett
Chief Marketing Officer
Anil Wadhwani
President and Chief Executive Officer,
Manulife Asia
Shamus E. Weiland
Chief Information Officer
Philip J. Witherington
Chief Financial Officer
Naveed Irshad
Head of North American Legacy
Business
Paul R. Lorentz
President and Chief Executive Officer,
Global Wealth and Asset Management
Board of Directors and Executive Leadership Team | Manulife Financial Corporation | 2019 Annual Report
181
Office Listing
Corporate Headquarters
Manulife Financial Corporation
200 Bloor Street East
Toronto, ON M4W 1E5
Canada
Tel: +1 416-926-3000
Belgium
International Group Program –
Europe
John Hancock International
Services S.A.
Avenue de Tervuren 270-272
B-1150 Brussels
Belgium
Tel: +32 02 775 2940
Cambodia
Manulife (Cambodia) PLC
8/F, Siri Tower
104 Russian Federation Boulevard
Sangkat Toeuk Laak I
Khan Toul Kork
Phnom Penh, Cambodia
Tel: +855 23 965 999
Canada
Canada Head Office
500 King Street North
Waterloo, ON N2J 4C6
Canada
Tel: +1 519-747-7000
Affinity Markets
200 Bloor Street East
Toronto, ON M4W 1E5
Canada
Tel: +1 800-668-0195
Group Benefits
500 King Street North
Kitchener, ON N2G 4C6
Canada
Tel: +1 519-747-7000
Individual Insurance
500 King Street North
Waterloo, ON N2J 4C6
Canada
Tel: +1 519-747-7000
Manulife Advisory Services
1235 North Service Road West
Oakville, ON L6M 2W2
Canada
Tel: +1 905-469-2100
Manulife Investment
Management Ltd.
200 Bloor Street East
Toronto, ON M4W 1E5
Canada
Tel: +1 416-852-2204
Manulife Bank of Canada
500 King Street North
Waterloo, ON N2J 4C6
Canada
Tel: +1 519-747-7000
Manulife Capital
200 Bloor Street East
Toronto, ON M4W 1E5
Canada
Tel: +1 800-286-1909 (Canada)
+1 800-809-3082 (U.S.A.)
Manulife Investments
500 King St North
Waterloo, ON N2J 4C6
Canada
Tel: +1 519-747-7000
Manulife Quebec
Maison Manuvie
900 de Maisonneuve Ouest
Montréal, QC H3A 0A8
Canada
Tel: +1 514-499-7999
Manulife Real Estate
250 Bloor Street East, 15th Floor
Toronto, ON M4W 1E5
Canada
Tel: +1 416-926-5500
NAL Resources Management
Ltd.
550 6th Avenue S.W., Suite 600
Calgary, AB T2P 0S2
Canada
Tel: +1 403-294-3600
China
Manulife-Sinochem Life
Insurance Co., Ltd.
6/F, Jin Moa Tower
88 Century Boulevard
Pudong New Area
Shanghai 200121
P.R. China
Tel: +86 21 2069-8888
+86 21 2069-8930
Manulife-Teda Fund
Management Co., Ltd.
3/F, South Block, Winland
International Financial Center
No. 7 Financial Street
XiCheng District
Beijing 100033
P.R. China
Tel: +86 10 6657-7777
Hong Kong
Asia Head Office
10/F, The Lee Gardens
33 Hysan Avenue
Causeway Bay, Hong Kong
Tel: +852 2510-5888
Manulife Investment
Management (Asia), a
division of Manulife
Investment Management
(Hong Kong) Ltd.
16/F, The Lee Gardens
33 Hysan Avenue
Causeway Bay, Hong Kong
Tel: +852 2910-2600
Manulife (International) Ltd.
22/F, Tower A
Manulife Financial Centre
223-231 Wai Yip Street
Kwun Tong, Kowloon
Hong Kong
Tel: +852 2310-5600
Manulife Provident Funds
Trust Co., Ltd.
22/F, Tower A
Manulife Financial Centre
223-231 Wai Yip Street
Kwun Tong, Kowloon
Hong Kong
Tel: +852 2310-5600
Indonesia
PT Asuransi Jiwa Manulife
Indonesia
Sampoerna Strategic Square
Jl. Jend. Sudirman Kav 45-46
South Tower
Jakarta 12930
Indonesia
Tel: +62 21 2555-7788
PT Manulife Aset
Manajemen Indonesia
Sampoerna Strategic Square
Jl. Jend, Sudirman Kav. 45-46
31/F, South Tower
Jakarta 12930
Indonesia
Tel: +6221 2555-7788
Ireland
Thailand
Manulife Investment
Management (Ireland) Ltd.
Alexandra House
The Sweepstakes
Ballsbridge Park
Merrion Road
Dublin 4
D04 C7H2
Ireland
Japan
Manulife Asset Management
(Japan) Ltd.
15/F Marunouchi Trust Tower
North Building
1-6-1 Marunouchi, Chiyoda-ku
Tokyo, Japan 100-0005
Tel: +81 3 6267-1955
Manulife Life Insurance Co.
30th Floor, Tokyo Opera City
3-20-2 Nishi Shinjuku, Shinjuku-ku
Tokyo, Japan 160-0023
Tel: +81 3 6331-7000
Macau
Manulife (International) Ltd.
Avenida De Almeida Ribeiro No. 61
Circle Square, 14 andar A
Macau
Tel: +853 8398-0388
Malaysia
Manulife Investment
Management (M) Berhad
16th Floor, Menara Manulife
No. 6 Jalan Gelenggang
Damansara Heights
50490 Kuala Lumpur, Malaysia
Tel: +60 3 2719-9228
Manulife Holdings Berhad
Menara Manulife
No. 6 Jalan Gelenggang
Damansara Heights
50490 Kuala Lumpur, Malaysia
Tel: +60 3 2719-9228
Philippines
The Manufacturers Life
Insurance Co. (Phils.), Inc.
10/F, NEX Tower, 6786 Ayala
Avenue, 1229 Makati City, Metro
Manila
Philippines
Tel: +632 8884 7000
Singapore
Manulife Investment
Management
(Singapore) Pte. Ltd.
8 Cross Street
#15-01 Manulife Tower
Singapore 068579
Tel: +65 6501-5411
Manulife (Singapore) Pte
Ltd.
8 Cross Street
#15-01 Manulife Tower
Singapore 068579
Tel: +65 6501-5411
Taiwan
Manulife Investment
Management (Taiwan) Co.,
Ltd.
6/F No., 1 Exchange Square, 89
Sungren Road
Taipei 11073,
Northern Taiwan, R.O.C.
Tel: +886 2 2757-5969
Manulife Asset Management
(Thailand) Co., Ltd.
18/F Singha Complex
1788 New Petchaburi Road, Bang
Kapi
Huai Khwang, Bangkok 10310
Thailand
Tel: +66 0-2844-0123
Manulife Insurance
(Thailand) Public Co., Ltd.
18/F Singha Complex,
1788 New Petchaburi Road, Bang
Kapi
Huai Khwang, Bangkok 10310
Thailand
Tel: +66 2 033-9000
United Kingdom
Manulife Investment
Management
(Europe) Ltd.
One London Wall
London EC2Y 5EA
United Kingdom
Tel: +44 20 7256 3500
United States
John Hancock Financial
Head Office and U.S. Wealth
Management
197 Clarendon Street
Boston, MA 02116-5010
U.S.A.
Tel: +1 617-663-3000
Tel: +1 617-572-6000
Hancock Natural Resource
Group
197 Clarendon Street, 8th Floor
Boston, MA 02116-5010
U.S.A.
Tel: +1 617-747-1600
International Group Program
200 Berkeley Street
Boston, MA 02116-5023
U.S.A.
Tel: +1 617-572-6000
John Hancock Insurance
200 Berkeley Street
Boston, MA 02116-5023
U.S.A.
Tel: +1 617-572-6000
Manulife Investment
Management (US) LLC
197 Clarendon Street
Boston, MA 02116-5010
U.S.A.
Tel: +1 617-375-1500
Vietnam
Manulife Investment Fund
Management
(Vietnam) Co., Ltd.
4/F, Manulife Plaza
75 Hoang Van Thai Street
Tan Phu Ward, District 7
Ho Chi Minh City
Vietnam
Tel: +84 8 5416-6777
Manulife (Vietnam) Ltd.
Manulife Plaza
75 Hoang Van Thai Street
Tan Phu Ward, District 7
Ho Chi Minh City
Vietnam
Tel: +84 8 5416-6888
West Indies
Manulife Re
Manulife P&C Limited
The Goddard Building
Haggatt Hall
St. Michael, BB-11059
Barbados, West Indies
Tel: +246 228-4910
182
Manulife Financial Corporation | 2019 Annual Report | Office Listing
Glossary of Terms
Available-For-Sale (AFS) Financial Assets: Non-derivative
financial assets that are designated as available-for-sale or that
are not classified as loans and receivables, held-to-maturity
investments, or held for trading.
Accumulated Other Comprehensive Income (AOCI): A
separate component of shareholders’ equity which includes net
unrealized gains and losses on AFS securities, net unrealized
gains and losses on derivative instruments designated within an
effective cash flow hedge, and unrealized foreign currency
translation gains and losses. These items have been recognized
in other comprehensive income and may be subsequently
reclassified to net income. AOCI also includes remeasurement
of pension and other post-employment plans and real estate
revaluation reserve. These items are recognized in other
comprehensive income and will never be reclassified to net
income.
Assets Under Management and Administration (AUMA):
A measure of the size of the Company. It is comprised of the
non-GAAP measures assets under management (“AUM”),
which includes both assets of general account and external
client assets for which we provide investment management
services, and assets under administration (“AUA”), which
includes assets for which we provide administrative services
only.
Book Value per Share: Ratio obtained by dividing common
shareholders’ equity by the number of common shares
outstanding at the end of the period.
Cash Flow Hedges: A hedge of the exposure to variability in
cash flows associated with a recognized asset or liability, a
forecasted transaction or a foreign currency risk in an
unrecognized firm commitment that is attributable to a
particular risk and could affect reported net income.
Constant Currency Basis: Amounts stated on a constant
currency basis are calculated by applying the most recent
quarter’s exchange rates to all prior periods.
Core Earnings (Loss): A measure to help investors better
understand the long-term earnings capacity and valuation of
the business. Core earnings excludes the direct impact of equity
markets and interest rates as well as a number of other items
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.
Deferred Acquisition Costs (DAC): Costs directly attributable
to the acquisition of new business, principally agents’
compensation, which are capitalized on the Company’s
Consolidated Statements of Financial Position and amortized
into income over a specified period.
Embedded Value: A measure of shareholders’ value
embedded in the current balance sheet of the Company,
excluding any value associated with future new business.
Guarantee Value: Typically within variable annuity products,
the guarantee value refers to the level of the policyholder’s
protected account balance which is unaffected by market
fluctuations.
Hedging: The practice of making an investment in a market or
financial instrument for the purpose of offsetting or limiting
potential losses from other investments or financial exposures.
Dynamic Hedging: A hedging technique which seeks to
limit an investment’s market exposure by adjusting the
hedge as the underlying security changes (hence,
“dynamic”).
Macro hedging: An investment technique used to offset
the risk of an entire portfolio of assets. A macro hedge
reflects a more broad-brush approach which is not
frequently adjusted to reflect market changes.
International Financial Reporting Standards (IFRS): Refers
to the international accounting standards in Canada.
Impaired Assets: Mortgages, debt securities and other
investment securities in default where there is no longer
reasonable assurance of collection.
In-Force: Refers to the policies that are currently active.
Long-Term Care (LTC) Insurance: Insurance coverage
available on an individual or group basis to provide
reimbursement for medical and other services to the chronically
ill, disabled, or mentally challenged.
Life Insurance Capital Adequacy Test (LICAT): The ratio of
the available capital of a life insurance company to its required
capital, each as calculated under the Office of the
Superintendent of Financial Institutions’ (OSFI) published
guidelines.
New Business Value (NBV): The change in shareholders’
economic value as a result of sales in the period. NBV is
calculated as the present value of shareholders’ interests in
expected future distributable earnings, after the cost of capital,
on actual new business sold in the period using assumptions
that are consistent with the assumptions used in the calculation
of embedded value. NBV excludes businesses with immaterial
insurance risks, such as Manulife’s wealth and asset
management businesses and Manulife Bank.
New Business Strain: The initial expense of writing an
insurance policy that is incurred when the policy is written, and
has an immediate negative impact on the Company’s financial
position. Over the life of the contract, future income
(premiums, investment income, etc.) is expected to repay this
initial outlay.
Other than Temporary Impairment (OTTI): A write down
that is made if the institution does not expect the fair value of
the security to recover prior to its maturity or the expected time
of sale.
Premiums and Deposits: A 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 Statements of Income, (ii)
segregated fund deposits, excluding seed money (“deposits
from policyholders”), (iii) investment contract deposits,
(iv) mutual fund deposits, (v) deposits into institutional advisory
accounts, (vi) premium equivalents for “administration services
only” group benefits contracts (“ASO premium equivalents”),
Glossary of Terms | Manulife Financial Corporation | 2019 Annual Report
183
(vii) premiums in the Canadian Group Benefits reinsurance
ceded agreement, and (viii) other deposits in other managed
funds.
Policyholder Experience: The actual cost in a reporting period
from contingent events such as mortality, lapse and morbidity
compared to the expected cost in that same reporting period
using best estimate valuation assumptions.
Provisions for Adverse Deviation (PfAD): The amounts
contained in the insurance and investment contract liabilities
that represent conservatism against potential future
deterioration of best estimate assumptions. These PfADs are
released into income over time, and the release of these
margins represents the future expected earnings stream.
Insurance and Investment Contract Liabilities: The amount
of money set aside today, together with the expected future
premiums and investment income, that will be sufficient to
provide for future expected policyholder obligations and
expenses while also providing some conservatism in the
assumptions. Expected assumptions are reviewed and updated
annually.
Return on Common Shareholders’ Equity: A profitability
measure that presents the net income available to common
shareholders as a percentage of the average capital deployed to
earn the income.
Sales, Gross Flows and Net Flows are measured according to
product type:
Individual Insurance: Sales include 100% of new
annualized premiums and 10% of both excess and single
premiums. New annualized premiums reflect the
annualized premium expected in the first year of a policy
that requires premium payments for more than one year.
Single premium is the lump sum premium from the sale of
a single premium product, e.g. travel insurance. Sales are
reported gross before the impact of reinsurance.
Group Insurance: Sales include new annualized premiums
and administrative service only premium equivalents on
new cases, as well as the addition of new coverages and
amendments to contracts, excluding rate increases.
WAM: Sales include all deposits into mutual funds, college
savings 529 plans, group pension/retirement savings
products, private wealth and institutional asset
management products.
Gross Flows: A measure for WAM businesses and includes
all deposits into mutual funds, college savings 529 plans,
group pension/retirement savings products, private wealth
and institutional asset management products.
Net Flows: A measure for WAM businesses and includes
gross flows less redemptions for the mutual funds, college
savings 529 plans, group pension/retirement savings
products, private wealth and institutional asset
management products.
Consolidated 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. Consolidated capital
is calculated as the sum of: (i) total equity excluding
accumulated other comprehensive income (“AOCI”) on cash
flow hedges; and (ii) liabilities for capital instruments.
Universal Life Insurance: A form of permanent life insurance
with flexible premiums. The customer may vary the premium
payment and death benefit within certain restrictions. The
contract is credited with a rate of interest based on the return
of a portfolio of assets held by the Company, possibly with a
minimum rate guarantee, which may be reset periodically at the
discretion of the Company.
Variable Annuity: Funds are invested in segregated funds (also
called separate accounts in the U.S.) and the return to the
contract holder fluctuates according to the earnings of the
underlying investments. In some instances, guarantees are
provided.
Variable Universal Life Insurance: A form of permanent life
insurance with flexible premiums in which the cash value and
possibly the death benefit of the policy fluctuate according to
the investment performance of segregated funds (or separate
accounts).
184
Manulife Financial Corporation | 2019 Annual Report | Glossary of Terms
Shareholder Information
MANULIFE FINANCIAL CORPORATION
HEAD OFFICE
200 Bloor Street East
Toronto, ON Canada M4W 1E5
Telephone: 416 926-3000
Website: www.manulife.com
ANNUAL MEETING OF SHAREHOLDERS
Shareholders are invited to attend the annual
meeting of Manulife Financial Corporation to
be held on May 7, 2020 at 11:00 a.m. in the
International Room at 200 Bloor Street East,
Toronto, ON, Canada M4W 1E5.
STOCK EXCHANGE LISTINGS
Manulife Financial Corporation’s common
shares are listed on:
Toronto Stock Exchange (MFC)
The New York Stock Exchange (MFC)
The Stock Exchange of Hong Kong (945)
Philippine Stock Exchange (MFC)
INVESTOR RELATIONS
Financial analysts, portfolio managers and
other investors requiring financial information
may contact our Investor Relations
department or access our website at
www.manulife.com.
Email: investrel@manulife.com
SHAREHOLDER SERVICES
For information or assistance regarding
your share account, including dividends,
changes of address or ownership, lost
certificates, to eliminate duplicate
mailings or to receive shareholder
material electronically, please contact our
Transfer Agents in Canada, the United States,
Hong Kong or the Philippines. If you live
outside one of these countries, please
contact our Canadian Transfer Agent.
Direct Deposit of Dividends
Shareholders resident in Canada, the United
States and Hong Kong may have their
Manulife common share dividends deposited
directly into their bank account. To arrange
for this service please contact our Transfer
Agents.
Dividend Reinvestment Program
Canadian and U.S. resident common
shareholders may purchase additional
common shares without incurring brokerage
or administrative fees by reinvesting their
cash dividend through participation in
Manulife’s Dividend Reinvestment and Share
Purchase Programs. For more information
please contact our stock transfer agents: in
Canada – AST Trust Company (Canada); in
the United States - American Stock
Transfer & Trust Company, LLC
For other shareholder issues please
contact Manulife Shareholder Services via
e-mail to shareholder_services@manulife.com
More information
Information about Manulife Financial
Corporation, including electronic versions of
documents and share and dividend
information is available online at
www.manulife.com
Normal Course Issuer Bid
A copy of the Notice of Intention to
commence the Normal Course Issuer Bid is
available without charge by contacting the
Corporate Secretary at the Head Office
address referred to above or via email at
corporate_governance@manulife.com
TRANSFER AGENTS
Canada
AST Trust Company (Canada)
P.O. Box 700 Station B
Montreal, QC
Canada H3B 3K3
Toll Free: 1 800 783-9495
Collect: 416 682-3864
E-mail: manulifeinquiries@astfinancial.com
Website: www.astfinancial.com/ca-en
AST Trust Company (Canada) offices are also
located in Toronto, Vancouver and Calgary.
United States
American Stock Transfer & Trust
Company, LLC
P.O. Box 199036
Brooklyn, NY
United States 11219
Toll Free: 1 800 249-7702
Collect: 416 682-3864
E-mail: manulifeinquiries@astfinancial.com
Website: www.astfinancial.com
Hong Kong
Tricor Investor Services Limited
Level 54, Hopewell Centre
183 Queen’s Road East
Wan Chai, Hong Kong
Telephone: 852 2980-1333
E-mail: is-enquiries@hk.tricorglobal.com
Website: www.tricorglobal.com/services/
investor-services
Philippines
Rizal Commercial Banking Corporation
Ground Floor, West Wing,
GPL (Grepalife) Building,
221 Senator Gil Puyat Avenue,
Makati City, Metro Manila, Philippines
Telephone: 632 5318-8567
E-mail: rcbcstocktransfer@rcbc.com
Website: www.rcbc.com
AUDITORS
Ernst & Young LLP
Chartered Accountants
Licensed Public Accountants
Toronto, Canada
MFC DIVIDENDS
Common Share Dividends Paid for 2019 and 2018
Record Date
Payment Date
Per Share Amount
Canadian ($)
Year 2019
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Year 2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
February 25, 2020
March 19, 2020
November 19, 2019 December 19, 2019
August 20, 2019 September 19, 2019
June 19, 2019
May 14, 2019
February 27, 2019
March 19, 2019
November 20, 2018 December 19, 2018
August 21, 2018 September 19, 2018
June 19, 2018
May 15, 2018
$ 0.28
$ 0.25
$ 0.25
$ 0.25
$ 0.25
$ 0.25
$ 0.22
$ 0.22
Common and Preferred Share Dividend Dates in 2020*
* Dividends are not guaranteed and are subject to approval by the Board of
Directors.
Record date
Common and
Preferred Shares
Payment date
Common Shares
Preferred Shares
February 25, 2020
May 19, 2020
August 17, 2020
November 23, 2020
March 19, 2020
March 19, 2020
June 19, 2020
June 19, 2020
September 21, 2020
September 19, 2020
December 21, 2020 December 19, 2020
Shareholder Information | Manulife Financial Corporation | 2019 Annual Report
185
Our diverse
range of
products
and services
by market
Exchange-traded funds (ETFs)*
Financial planning & advice*
Goals-based investing*
Guaranteed interest annuities (GIAs)
Group life, health & disability insurance
Group retirement savings plans*
Individual life, health & travel insurance
Individual retirement savings plans*
Institutional pooled funds*
Mortgage creditor insurance
Mutual funds*
Outsourced chief investment officer (OCIO)*
Retail banking
Segregated funds
In Europe
Undertakings for the Collective Investment
in Transferable Securities (UCITS)*
Segregated accounts*
Our investment capabilities
Asset allocation & solutions*
Infrastructure equity*
Liability-driven investing (LDI)*
Liquid alternatives*
Private equity & credit*
Public equity & debt*
Real estate equity & debt*
Timberland & farmland*
Separately managed accounts (SMAs)*
*Products and services provided by our Global Wealth
and Asset Management segment
.
In the U.S.
Annuities
Closed-end funds*
Collective investment trusts (CITs)*
ESG funds*
Exchange-traded funds (ETFs)*
Financial planning & advice
Group retirement savings plans*
Individual life insurance
IRA rollover & advice services
Outsourced chief investment officer (OCIO)*
Mutual funds*
Segregated accounts*
Separately managed accounts (SMAs)*
Target-date funds*
Institutional commingled funds*
Model portfolios*
Education savings plans (529)*
In Asia
Annuities
Creditor insurance
Education savings plans
Group life & health insurance
About Manulife
Manulife Financial Corporation is a leading
international financial services group that helps
people make their decisions easier and lives
better. With our global headquarters in Toronto,
Canada, we operate as Manulife across our offices
in Canada, Asia, and Europe, and primarily as
John Hancock in the United States. We provide
financial advice, insurance, and wealth and asset
management solutions for individuals, groups
and institutions. At the end of 2019, we had more
than 35,000 employees, over 98,000 agents, and
thousands of distribution partners, serving almost
30 million customers. As of December 31, 2019,
we had $1.2 trillion (US$0.9 trillion) in assets
under management and administration, and in
the previous 12 months we made $29.7 billion
in payments to our customers. Our principal
operations are in Asia, Canada, and the United
States where we have served customers for more
than 100 years. We trade as ‘MFC’ on the Toronto,
New York, and the Philippine stock exchanges
and under ‘945’ in Hong Kong.
Group retirement savings plans*
Learn more by visiting Manulife.com
Individual life & health insurance
Individual retirement savings plans*
Investment-linked products
Mutual funds*
Segregated investment mandates*
Manulife, Manulife & Stylized M Design, and Stylized M Design
are trademarks of The Manufacturers Life Insurance Company
and are used by it, and by its affiliates, including Manulife
Financial Corporation, under license.
IR3932E