Manulife Financial reports 2012 net income of $1.7 billion, core earnings of $2.2 billion, a strong regulatory capital ratio of 211 per cent, and record insurance and wealth sales.
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Substantive progress made on our strategic priorities in the fourth quarter of 2012:
- Developing our Asian opportunity to the fullest - Achieved record wealth sales1,2, more than double last year. Total insurance sales increased 20 per cent compared with fourth quarter 2011, with record insurance sales in
Indonesia driven by robust growth in both the agency and bank channels, and double digit insurance sales growth inHong Kong driven by agency growth. We also enhanced our distribution network with additional partners inJapan . - Growing our wealth and asset management businesses in
Asia ,Canada , and the U.S. -Manulife Asset Management had record institutional sales, we launched theStrategic Income Fund inJapan , contributing to record2 wealth sales inAsia ; we achieved record mutual fund sales and assets under management inCanada ; and also generated record mutual fund and 401(k) sales and assets under management in the U.S., all contributing to record funds under management1 for the company as a whole. - Continuing to build our balanced Canadian franchise - Maintained leading market positions in group businesses with strong sales growth in both Group Benefits and Group Retirement Solutions3; record lending assets for
Manulife Bank ; and completed the acquisition of Benesure Canada in earlyJanuary 2013 . - Continuing to grow higher ROE, lower risk U.S. businesses - Double digit sales growth in life insurance over the fourth quarter of 2011; two additional state approvals for
Long-Term Care in-force re-pricing; recorded$1.2 billion of positive net flows in mutual funds; and added new mutual funds to platforms at key firms.
Highlights for the fourth quarter of 20124:
- Reported net income attributed to shareholders of
$1,057 million . - Delivered core earnings1 of
$537 million , slightly below 3Q12 due to the impact of increased acquisition costs on higher wealth sales, higher insurance sales expenses and systems costs inAsia , and increased macro hedging costs. - Generated strong insurance sales growth5 of 49 per cent to
$929 million . - Delivered a 31 per cent increase in wealth sales to
$10.4 billion . - Strengthened MLI's MCCSR ratio by seven points over prior quarter.
- Achieved record funds under management1 ("FUM") of
$532 billion . - Generated strong investment gains of
$368 million , despite the fact that the impact of equity markets and interest rates was almost neutral. - Increased new business embedded value1 ("NBEV") by 71 per cent to
$245 million . - Reported net income in accordance with U.S. GAAP1 of
$237 million .
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1 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. | |
2 | Wealth sales were a record excluding sales of variable annuities. | |
3 | Based on quarterly LIMRA industry sales report as at |
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4 | Unless otherwise indicated, comparatives refer to the three month period ended |
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5 | Sales, premiums and deposits and funds under management growth (decline) rates are quoted on a constant currency basis. Constant currency is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. | |
In the fourth quarter of 2012
"Since 2010, we have enjoyed a positive progression in earnings and improved our annual net income by
"We are pleased with the strong income we generated this quarter, however investment gains, and to a lesser extent tax items, were significant contributors that cannot be counted on in the future. It is as a result of this variability that we introduced the core earnings metric. Core earnings, which this quarter were lower than net income, helps analysts and investors assess our underlying earnings capacity," added
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6 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. | |
7 | Wealth sales were a record excluding sales of variable annuities. | |
8 | See "Caution regarding forward-looking statements" below. |
Highlights for the Fourth Quarter of 2012 and Full Year 2012:
- Reported net income attributed to shareholders of
$1,057 million for the fourth quarter of 2012 and$1,736 million for the full year 2012: - Fourth quarter earnings included strong investment gains of
$368 million and$264 million of tax related gains that were considered material and exceptional in nature. We released$182 million of provisions related to prior years' uncertain tax positions on one item and we reported a net release of$82 million related to interest on a tax contingency for leasing transactions. - Delivered core earnings of
$537 million for the fourth quarter of 2012, marginally below the third quarter of 2012, and delivered core earnings of$2,187 million for the full year 2012: - Compared with fourth quarter 2011, core earnings increased by
$164 million . The increase was driven by a combination of increased fee income on funds under management and the significant improvement in new business margins as a result of pricing actions and improvement in business mix which was partially offset by a number of items in the fourth quarter 2012 that netted to a small negative. - Compared with third quarter 2012, core earnings declined by
$19 million , due to impact of increased acquisition costs on higher wealth sales, higher insurance sales expenses and systems costs inAsia , and increased macro hedging costs. - Full year core earnings increased by
$18 million compared with 2011. The increase included a number of offsetting items. Improved new business margins, increased fee income, higher scheduled release of variable annuity guarantee margins and the non-recurrence of material Property and Casualty Reinsurance claims were mostly offset by additional macro equity hedging costs and amortization of unrealized pension losses, in addition to higher business development and project related expenses. - Generated strong insurance sales growth of 49 per cent over the fourth quarter of 2011 and delivered record insurance sales for 2012:
- Insurance sales were
$929 million in the fourth quarter of 2012, an increase of 49 per cent compared with fourth quarter of 2011 driven by strong single premium sales in Group Benefits; a 20 per cent increase inAsia insurance sales; and an improvement of 13 per cent in U.S. sales, mainly driven by successful new product offerings with favourable risk characteristics. - Record insurance sales exceeded
$3.3 billion for 2012, an increase of 33 per cent compared with 2011. - Delivered a 31 per cent increase in wealth sales over the fourth quarter of 2011 and record9 wealth sales for 2012:
- Wealth sales of
$10.4 billion in the fourth quarter of 2012 reflected record sales inAsia which were more than double those in the fourth quarter of 2011; record mutual fund sales and increased sales in Group Retirement Solutions inCanada which were more than offset by the decline in annuity sales and lower new loan volumes; and record quarters for both mutual funds and 401(k) businesses in the U.S. - Record9 wealth sales were almost
$36 billion for full year 2012, an increase of four per cent compared with 2011, despite restrictions placed on annuity sales by the Company. - Strengthened The
Manufacturers Life Insurance Company 's ("MLI")Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio by seven points overSeptember 30, 2012 to 211 per cent: - The improvement in MLI's capital position from the end of the third quarter of 2012 reflects the contribution from fourth quarter earnings, reinsurance of a portion of the Japanese life business and a
$200 million preferred share issuance during the quarter. - Further to the 2013 MCCSR Guideline, MLI's MCCSR ratio is estimated to increase by approximately four points on a pro forma basis to 215 per cent as of
January 1, 2013 . The increase is attributable to revisions to lapse risk required capital rules. - Achieved record funds under management of
$532 billion as atDecember 31, 2012 . - Continued to generate strong investment gains of
$368 million during the quarter,$50 million of which is included in core earnings. Fixed income and alternative long-duration asset investing along with excellent credit accounted for the vast majority of our investment gains for both the quarter and the full year. - Reported embedded value10 of
$38.0 billion as atDecember 31, 2012 , representing an increase of$1.9 billion over that reported atDecember 31, 2011 . Increases in embedded value were driven by normal operating activities including the impact of new business, offset by shareholder dividends and depreciating foreign currencies relative to the Canadian dollar. - Generated new business embedded value10 ("NBEV") of
$245 million in the fourth quarter of 2012,an increase of 71 per cent over the fourth quarter of 2011. - Received two additional state approvals on
Long-Term Care price increases on in-force retail business during the quarter bringing our total to 43 states. - Reduced equity market sensitivities during the quarter by adding
$250 million of equity future notional value to the macro hedging program and adding approximately$700 million of in-force guarantee value to the dynamic hedging program. A further$250 million of macro hedges were added inJanuary 2013 due to favourable market conditions. - Reported net income in accordance with U.S. GAAP for the fourth quarter of
$237 million , or$820 million lower than our results under the Canadian version of IFRS11, and total equity in accordance with U.S. GAAP was$16 billion higher than under IFRS. The primary driver of the quarter's lower U.S. GAAP earnings compared to IFRS earnings relates to variable annuity accounting differences. For the full year 2012, net income attributed to shareholders in accordance with U.S. GAAP was$2,557 million versus$1,736 million under IFRS.
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9 | Wealth sales were a record excluding sales of variable annuities. |
10 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
11 | The Canadian version of IFRS uses IFRS as issued by the |
Quarterly Results | Full Year Results | ||||||||||
C$ millions (unless otherwise stated) | 4Q 2012 | 3Q 2012 | 4Q 2011 | 2012 | 2011 | ||||||
Net income (loss) attributed to shareholders | $ | 1,057 | $ | (227) | $ | (69) | $ | 1,736 | $ | 129 | |
Preferred share dividends | 29 | 31 | 21 | 112 | 85 | ||||||
Common shareholders' net income (loss) | $ | 1,028 | $ | (258) | $ | (90) | $ | 1,624 | $ | 44 | |
Reconciliation of core earnings to net income (loss) attributed to shareholders: | |||||||||||
Core earnings(1) | $ | 537 | $ | 556 | $ | 373 | $ | 2,187 | $ | 2,169 | |
Investment related gains in excess of core investment gains | 318 | 363 | 261 | 937 | 1,290 | ||||||
Core earnings plus investment related gains in excess of core investment gains | $ | 855 | $ | 919 | $ | 634 | $ | 3,124 | $ | 3,459 | |
Other reconciling items: | |||||||||||
Direct impact of equity markets and interest rates | (18) | (88) | 153 | (758) | (1,064) | ||||||
Changes in actuarial methods and assumptions (other than URR) and goodwill impairment | (87) | (1,206) | (663) | (1,281) | (1,416) | ||||||
Other items(2) | 307 | 148 | (193) | 651 | (850) | ||||||
Net income (loss) attributed to shareholders | $ | 1,057 | $ | (227) | $ | (69) | $ | 1,736 | $ | 129 | |
Basic earnings (loss) per common share (C$) | $ | 0.56 | $ | (0.14) | $ | (0.05) | $ | 0.90 | $ | 0.02 | |
Diluted earnings (loss) per common share (C$) | $ | 0.56 | $ | (0.14) | $ | (0.05) | $ | 0.88 | $ | 0.02 | |
Diluted core earnings per common share (C$)(1) | $ | 0.28 | $ | 0.29 | $ | 0.19 | $ | 1.12 | $ | 1.14 | |
Return on common shareholders' equity (ROE) (%) | 18.2% | (4.5)% | (1.6)% | 7.1% | 0.2% | ||||||
Core ROE (%)(1) | 9.0% | 9.3% | 6.1% | 9.1% | 9.1% | ||||||
Funds under management (C$ billions) (1) | $ | 532 | $ | 515 | $ | 500 | $ | 532 | $ | 500 |
(1) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(2) | For a more detailed description see Sections B1 and B2 below. |
SALES AND BUSINESS GROWTH
Asia Division
Asia Division's fourth quarter insurance sales were
Indonesia reported record quarterly insurance sales ofUS$34 million , a 51 per cent increase compared with fourth quarter 2011, driven by strong growth in both our agency and bank channels. The strong full year growth of 46 per cent was driven by an expanded bancassurance channel which grew 140 per cent compared to 2011.Japan insurance sales for the fourth quarter ofUS$188 million were 36 per cent higher than fourth quarter 2011. Strong sales of our increasing term product in advance of price increases were partially offset by lower cancer product sales which were impacted by tax changes implemented in the first half of the year. Full year sales reached a record level ofUS$767 million , 11 per cent higher than record sales in 2011, a result of strong cancer product sales in the first half of the year and increasing term sales in the second half of 2012.Hong Kong fourth quarter insurance sales ofUS$65 million were 14 per cent higher than fourth quarter 2011. Full year sales reached a recordUS$257 million , up 23 per cent over 2011. Sales growth over 2011 was primarily driven by expanded agency distribution, as well as continued strong sales throughout 2012 of our participating life product, including a run up of sales prior to price increases in the second quarter of 2012.insurance sales (excludes Hong Kong ,Japan andIndonesia ) for the fourth quarter wereUS$75 million , or nine per cent below the same period in 2011, while full year sales ofUS$302 million were 15 per cent higher than 2011. The decline relative to the fourth quarter 2011 was due to product changes inTaiwan . The full year sales growth over the prior year was driven primarily by expanded agency distribution.
Asia Division's fourth quarter wealth sales were
Japan fourth quarter wealth sales ofUS$694 million were three times the same period a year ago, and on a full year basis, sales of$1.7 billion were more than double those of the prior year. Growth was fueled by the successful launch of theStrategic Income Fund , which reported sales of overUS$550 million in the fourth quarter, and continued strong sales of the Australian dollar denominated fixed annuity product.Indonesia achieved record wealth sales ofUS$449 million in the fourth quarter, four times higher than fourth quarter 2011, and full year 2012 sales surpassed theUS$1 billion milestone. Strong performance was recorded in all product lines, with mutual fund sales seven times higher than in 2011 and unit linked sales through our bank partners up 157 per cent.Hong Kong fourth quarter wealth sales ofUS$321 million were 74 per cent higher than the same period a year ago and included a successful start in capturing transfer cases following the November launch of the Mandatory Provident Fund's new Employee Choice Arrangement. Full year results ofUS$792 million were down 15 per cent from 2011, primarily as a result of a change in client preferences for bond funds over equity funds in 2012.Asia Other wealth sales (excludesHong Kong ,Japan andIndonesia ) for the fourth quarter wereUS$668 million , 78 per cent higher than the same period a year ago, and full year sales ofUS$2.2 billion were up 13 per cent over 2011. Strong mutual fund sales inTaiwan as well as unit linked sales inthe Philippines were the key contributors to the growth.
Asia Division continues to execute on our longer term growth strategy by expanding agency and bank channel distribution capacity.
- Contracted agents ended the year at 53,700, a seven per cent increase from the end of 2011 with significant growth in
Hong Kong ,Indonesia ,the Philippines andChina . - Bank channel total insurance and wealth sales, on an annualized premium equivalent basis, were
US$159 million in the fourth quarter. This increase of 73 per cent compared with the same period in 2011 was attributed to the expanded distribution inIndonesia , particularly our exclusive agreement with Bank Danamon. InJapan , sales of mutual funds through the bank channel picked up considerably as a result of the successful launch of theStrategic Income Fund .
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12 | Wealth sales were a record excluding sales of variable annuities. |
Canadian Division
"In 2012, we continued to successfully build our diversified Canadian franchise," said
Group Benefits and Group Retirement Solutions ("GRS") both led the Canadian industry in sales in 201213. Group Benefits' full year sales exceeded
Individual Wealth Management's fourth quarter sales of
- Record quarterly MMF sales of
$738 million in the fourth quarter of 2012 increased 61 per cent from the third quarter of 2012 and were more than twice fourth quarter 2011 levels, driving full year sales to a record$2.1 billion . This strong momentum reflects our expanded distribution reach, continued strong performance in balanced and fixed income fund categories, and success of a number of funds launched in 2012. Year-over-year, MMF was the fastest growing mutual fund franchise of the top ten fund companies inCanada 14. Record MMF assets under management ("AUM") of over$20 billion atDecember 31, 2012 increased 17 per cent overDecember 31, 2011 , while the industry grew ten per cent according to IFIC14. Manulife Bank had record assets of over$21 billion atDecember 31, 2012 , seven per cent higher than at the end of 2011, driven by strong client retention and stable new lending volumes of$4.6 billion in 2012, modestly below 2011 levels. New lending volumes of$1.1 billion for the fourth quarter were consistent with third quarter 2012 levels and ten per cent below the same period last year, reflecting the impact of the current regulatory and competitive environment.- Sales of variable annuity products of
$379 million in the fourth quarter and$2 billion for the year were significantly below the comparative 2011 levels, reflecting the anticipated impact of product changes throughout the year. Fixed rate product sales also continued at lower levels, reflecting the continued low interest rate environment.
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13 | Based on quarterly LIMRA industry sales report as at |
14 | Based on reporting from the |
U.S. Division
Wealth management full year sales were
- JH RPS sales of
US$2.0 billion in the fourth quarter of 2012 were a record quarterly result and represented an increase of 44 per cent compared with the fourth quarter 2011. JH RPS capitalized on the high plan turnover in the market including the exit of a key competitor. For the full year, JH RPS achieved record sales ofUS$6.0 billion , an increase of 28 per cent over 2011. Together with favourable equity markets this helped drive funds under management to a recordUS$72 billion as ofDecember 31, 2012 , a 14 per cent increase fromDecember 31, 2011 . In addition, JH RPS' "TotalCare" product, a full service group annuity launched in the third quarter of 2012, has started to gain traction in the 401(k) market. - JH Funds achieved record quarterly sales of
US$3.7 billion in the fourth quarter of 2012, a 54 per cent increase from fourth quarter 2011 and record full year sales ofUS$13 billion with increases across all channels. These results propelled funds under management as ofDecember 31, 2012 to a recordUS$42 billion , a 24 per cent increase fromDecember 31, 2011 . A strong product line and success in adding our funds to strategic partner recommended lists, as well as a focused sales and marketing campaign, helped to drive these results. As ofDecember 31, 2012 , JH Funds offered 23 Four- or Five-Star Morningstar15 rated equity and fixed income mutual funds. - The John Hancock Lifestyle and Target Date portfolios offered through our mutual fund, 401(k), variable annuity and variable life products had assets under management of
US$80.0 billion as ofDecember 31, 2012 , a 13 per cent increase overDecember 31, 2011 . As ofDecember 31, 2012 ,John Hancock was the fourth largest manager of assets in the U.S. for Lifestyle and Target Date funds offered through retail mutual funds and variable insurance products16.
Insurance sales in the U.S. for the fourth quarter of 2012 increased 13 per cent compared with the same period in the prior year, mainly driven by successful new product offerings with favourable risk characteristics. Full year sales were four per cent lower than 2011. We continued to execute on strategies to reduce risk and increase margins.
John Hancock Life ("JH Life") fourth quarter 2012 sales ofUS$163 million were up 18 per cent over fourth quarter 2011. Newly launched products continued to contribute to the sales success, with Protection UL sales ofUS$65 million and Indexed UL sales ofUS$15 million . Full year sales ofUS$543 million outpaced the prior year by 12 per cent and the business successfully executed its transition to lower risk products.- John Hancock Long-Term Care ("JH LTC") sales of
US$10 million in the fourth quarter declined 33 per cent compared with the same period in 2011, reflecting the impact of price increases. Our new product, launched in 43 states as ofDecember 2012 , offers an innovative alternative to traditional inflation options and is gaining traction in the market. Full year sales ofUS$56 million were 61 per cent lower than 2011 due to the non-recurrence of the 2011 Federal Long Term Care plan open enrollment period and the price increases referred to above.
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15 | For each fund with at least a 3-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return that accounts for variation in a fund's monthly performance (including effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category, the next 22.5%, 35%, 22.5% and bottom 10% receive 5, 4, 3, 2 or 1 star, respectively. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance associated with its 3-, 5- and 10 year (if applicable) Morningstar Rating metrics. Past performance is no guarantee of future results. The overall rating includes the effects of sales charges, loads and redemption fees, while the load-waived does not. Load-waived rating for Class A shares should only be considered by investors who are not subject to a front-end sales charge. |
16 | Source: Strategic Insight. Includes Lifestyle and Lifecycle (Target Date) mutual fund assets and fund-of-funds variable insurance product assets (variable annuity and variable life). |
Investment Division
"
Assets managed by
CORPORATE ITEMS
In a separate news release today, the Company announced that the Board of Directors approved a quarterly shareholders' dividend of
The Board of Directors approved that in respect of the Company's
AWARDS & RECOGNITION
In
In
In
In
In Asia, five
Notes:
The conference call will also be webcast through
The Fourth Quarter 2012 Statistical Information Package is also available on the
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is current as of
For further information relating to our risk management practices and risk factors affecting the Company, see "Risk Factors" in our most recent Annual Information Form, "Risk Management and Risk Factors" and "Critical Accounting and Actuarial Policies" in the MD&A in our 2011 Annual Report and the "Risk Management" note to the consolidated financial statements in our most recent annual and interim reports.
Contents | ||||||
A | OVERVIEW | D | RISK MANAGEMENT AND RISK FACTORS UPDATE | |||
1. | Fourth quarter highlights | 1. | General macro-economic risk factors | |||
2. | Full year highlights | 2. | Regulatory capital, actuarial and accounting risks | |||
3. | Other items of note | 3. | Additional risks - Entities within the |
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4. | Variable annuity and segregated fund guarantees | |||||
B | FINANCIAL HIGHLIGHTS | 5. | Publicly traded equity performance risk | |||
1. | Fourth quarter earnings (loss) analysis | 6. | Interest rate and spread risk | |||
2. | Full year earnings (loss) analysis | |||||
3. | Premiums and deposits | E | ACCOUNTING MATTERS AND CONTROLS | |||
4. | Funds under management | 1. | Critical accounting and actuarial policies | |||
5. | Capital | 2. | Actuarial methods and assumptions | |||
6. | U.S. GAAP results | 3. | Sensitivity of policy liabilities to updates to assumptions | |||
4. | Goodwill impairment testing | |||||
C | PERFORMANCE BY DIVISION | 5. | Future accounting and reporting changes | |||
1. | Asia | |||||
2. | Canadian | F | OTHER | |||
3. | U.S. | 1. | Performance and non-GAAP measures | |||
4. | Corporate and Other | 2. | Key planning assumptions and uncertainties | |||
3. | Caution regarding forward-looking statements |
A OVERVIEW
A1 Fourth quarter highlights
In the fourth quarter of 2012, we reported net income attributed to shareholders of
Core earnings increased
The difference between fourth quarter 2012 core earnings and net income attributed to shareholders was a
$318 million of investment related gains in excess of the$50 million included in core earnings. Fixed income and alternative long-duration asset investing along with excellent credit experience accounted for the vast majority of our investment gains for both the quarter and the full year;$264 million of favourable tax related changes that were considered material and exceptional in nature. We released$182 million of provisions related to prior years' taxes due to the resolution of prior years' tax audits with respect to one item. In addition, we reported a net release of$82 million related to interest on our tax contingency for leasing transactions. As previously disclosed, the Company is an investor in a number of leasing transactions and established provisions for possible disallowance of the tax treatment and for interest on past due taxes; and$100 million gain related to our hedged variable annuity guarantees, a third of which relates to the change in provision for adverse deviation. In addition, our equity fund results outperformed indices and the tightening of corporate spreads had a favourable impact on our bond funds;
partially offset by charges of:
$87 million primarily attributed to the estimated impact of modeling refinements relating to a valuation systems conversion;$57 million ($78 million pre tax) restructuring charge for severance related to the Company'sOrganizational Design Project . As outlined at theNovember 2012 Investor Day, the project, started in 2012 and expected to be completed in 2013, is designed to broaden the spans of control and reduce the number of layers in the organization; and$18 million for the direct impact of equity markets and interest rates.
Insurance sales18 were
Wealth sales of
A2 Full year highlights
We reported net income attributed to shareholders for the full year 2012 of
The
The difference between full year 2012 core earnings and full year net income attributed to shareholders was a
Insurance sales exceeded
Wealth sales were almost
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A3 Other items of note
As disclosed in our second quarter 2012 release, we intend to update our ultimate reinvestment rate ("URR") assumptions on a quarterly basis commencing in the first quarter of 2013. If interest rates in 2013 were to remain at
The 2013 MCCSR Guideline contains two changes that will each significantly impact MLI's MCCSR ratio. Together the initial impact of the changes is expected to be positive in the short term and neutral by the end of 2014.
- MLI's MCCSR ratio as of
January 1, 2013 is expected to increase by approximately four points on a pro forma basis as a result of a reduction in lapse risk required capital in the 2013 MCCSR Guideline. - MLI's MCCSR ratio is expected to decrease by approximately five points by
December 31, 2014 as a result of the introduction of the new accounting standard for Employee Benefits (IAS 19R) effectiveJanuary 1, 2013 . The standard will result in a charge to shareholders' equity of$595 million ($872 million pre-tax) primarily related to accumulated unrecognized net actuarial losses on the Company's defined benefit pension plans. The initial charge will be amortized into available capital for MCCSR purposes byDecember 31, 2014 on a straight-line basis. Future actuarial gains and losses related to these pension plans will be amortized over twelve quarters20.
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20 | See "Caution regarding forward-looking statements" below. |
B FINANCIAL HIGHLIGHTS
C$ millions, unless otherwise stated, | Quarterly Results | Full Year Results | ||||||||||||
unaudited | 4Q 2012 | 3Q 2012 | 4Q 2011 | 2012 | 2011 | |||||||||
Net income (loss) attributed to shareholders | $ | 1,057 | $ | (227) | $ | (69) | $ | 1,736 | $ | 129 | ||||
Preferred share dividends | 29 | 31 | 21 | 112 | 85 | |||||||||
Common shareholders' net income (loss) | $ | 1,028 | $ | (258) | $ | (90) | $ | 1,624 | $ | 44 | ||||
Reconciliation of core earnings to net income (loss) attributed to shareholders: | ||||||||||||||
Core earnings(1) | $ | 537 | $ | 556 | $ | 373 | $ | 2,187 | $ | 2,169 | ||||
Investment related gains in excess of core investment gains | 318 | 363 | 261 | 937 | 1,290 | |||||||||
Core earnings plus investment related gains in excess of core investment gains | $ | 855 | $ | 919 | $ | 634 | $ | 3,124 | $ | 3,459 | ||||
Other items to reconcile core earnings to net income (loss) attributed to shareholders: | ||||||||||||||
Direct impact of equity markets and interest rates | (18) | (88) | 153 | (758) | (1,064) | |||||||||
Changes in actuarial methods and assumptions (other than URR) and goodwill impairment | (87) | (1,206) | (663) | (1,281) | (1,416) | |||||||||
Other items | 307 | 148 | (193) | 651 | (850) | |||||||||
Net income (loss) attributed to shareholders | $ | 1,057 | $ | (227) | $ | (69) | $ | 1,736 | $ | 129 | ||||
Basic earnings (loss) per common share (C$) | $ | 0.56 | $ | (0.14) | $ | (0.05) | $ | 0.90 | $ | 0.02 | ||||
Diluted earnings (loss) per common share (C$) | $ | 0.56 | </td> | $ | (0.14) | $ | (0.05) | $ | 0.88 | $ | 0.02 | |||
Diluted core earnings per common share(C$)(1) | $ | 0.28 | $ | 0.29 | $ | 0.19 | $ | 1.12 | $ | 1.14 | ||||
Return on common shareholders' equity | 18.2% | (4.5)% | (1.6)% | 7.1% | 0.2% | |||||||||
U.S. GAAP net income attributed to shareholders(1) | $ | 237 | $ | 481 | $ | 339 | $ | 2,557 | $ | 3,674 | ||||
Sales(1) | ||||||||||||||
Insurance products | $ | 929 | $ | 596 | $ | 640 | $ | 3,349 | $ | 2,507 | ||||
Wealth products | $ | 10,439 | $ | 8,229 | $ | 8,141 | $ | 35,940 | $ | 34,299 | ||||
Premiums and deposits(1) | ||||||||||||||
Insurance products | $ | 6,629 | $ | 5,597 | $ | 5,749 | $ | 24,221 | $ | 22,278 | ||||
Wealth products | $ | 17,499 | $ | 11,149 | $ | 10,168 | $ | 51,280 | $ | 43,783 | ||||
Funds under management(C$ billions)(1) | $ | 532 | $ | 515 | $ | 500 | $ | 532 | $ | 500 | ||||
Capital(C$ billions)(1) | $ | 29.6 | $ | 28.5 | $ | 29.0 | $ | 29.0 | ||||||
MLI's MCCSR ratio | 211% | 204% | 216% | 211% | 216% |
(1) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
B1 Fourth quarter earnings (loss) analysis
The table below reconciles the fourth quarter 2012 core earnings of
C$ millions, unaudited | 4Q 2012 | 3Q 2012 | 4Q 2011 | |||
Core earnings (losses)(1) | ||||||
Asia Division | $ | 180 | $ | 230 | $ | 213 |
Canadian Division | 233 | 229 | 142 | |||
U.S. Division | 293 | 288 | 189 | |||
Corporate & Other (excluding expected cost of macro hedges) | (79) | (117) | (124) | |||
Expected cost of macro hedges(2) | (140) | (124) | (97) | |||
Core investment related gains | 50 | 50 | 50 | |||
Core earnings | $ | 537 | $ | 556 | $ | 373 |
Investment related gains in excess of core investment gains | 318 | 363 | 261 | |||
Core earnings plus investment related gains in excess of core investment gains | $ | 855 | $ | 919 | $ | 634 |
Material and exceptional tax related items(3) | 264 | - | - | |||
Income (charges) on variable annuity guarantee liabilities that are dynamically hedged(4) | 100 | 122 | (193) | |||
Change in actuarial methods and assumptions, excluding URR(5) | (87) | (1,006) | 2 | |||
Restructuring charge related to organizational design(6) | (57) | - | - | |||
Direct impact of equity markets and interest rates (see table below)(7) | (18) | (88) | 153 | |||
Goodwill impairment charge | - | (200) | (665) | |||
Impact of major reinsurance transactions | - | 26 | - | |||
Net income (loss) attributed to shareholders | $ | 1,057 | $ | (227) | $ | (69) |
(1) | Core earnings is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(2) | The fourth quarter 2012 net loss from macro equity hedges was |
(3) | In accordance with our definition of core earnings outlined in section F1, the fourth quarter tax related items described in section A1 were considered material and exceptional in nature and therefore not included in core earnings. Please note that core earnings does include routine type tax transactions and provisions. |
(4) | Our variable annuity guarantee dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks associated with the guarantees embedded in these products. The gain in the fourth quarter 2012 was mostly because our equity fund results outperformed indices, there was a gain on the release of provision for adverse deviation associated with more favourable equity markets and the tightening of corporate spreads had a favourable impact on our bond funds. See the Risk Management section of our 2011 Annual MD&A. |
(5) | The charge for the fourth quarter of 2012 is primarily related to the estimated impact of modeling refinements relating to a valuation system conversion in the U.S. |
(6) | The restructuring charge relates to severance under the Company's |
(7) | The direct impact of equity markets and interest rates is relative to our policy liability valuation assumptions and includes changes to interest rate assumptions as well as experience gains and losses on derivatives associated with our macro equity hedges. We also include gains and losses on the sale of AFS bonds as management may have the ability to partially offset the direct impacts of changes in interest rates reported in the liability segments. |
The gain (loss) related to the direct impact of equity markets and interest rates in the table above is attributable to:
C$ millions, unaudited | 4Q 2012 | 3Q 2012 | 4Q 2011 | |||
Variable annuity guarantee liabilities that are not dynamically hedged | $ | 556 | $ | 298 | $ | 234 |
General fund equity investments supporting policy liabilities(1) | 48 | 55 | 56 | |||
Macro equity hedges relative to expected costs(2) | (292) | (86) | (250) | |||
Fixed income reinvestment rates assumed in the valuation of policy liabilities(3) | (290) | (330) | 122 | |||
Sale of AFS bonds and derivative positions in the Corporate & Other segment | (40) | (25) | (9) | |||
Direct impact of equity markets and interest rates | $ | (18) | $ | (88) | $ | 153 |
(1) | The impact on general fund equity investments supporting policy liabilities includes the capitalized impact on fees for variable universal life policies. |
(2) | Gross equity exposure produced gains of |
(3) | The charge in fourth quarter 2012 for lower assumed fixed income returns was driven by the unfavourable impact that the narrowing of swap spreads relative to corporate spreads had on our reinvestment assumptions and the decline in risk free rates in |
B2 Full year earnings analysis
The table below reconciles the full year 2012 core earnings of
C$ millions, unaudited | ||||
For the years ended December 31, | 2012 | 2011 | ||
Core earnings (losses)(1) | ||||
Asia Division | $ | 963 | $ | 938 |
Canadian Division | 835 | 849 | ||
U.S. Division | 1,085 | 1,005 | ||
Corporate & Other (excluding expected cost of macro hedges) | (407) | (415) | ||
Expected cost of macro hedges(2) | (489) | (408) | ||
Core investment related gains | 200 | 200 | ||
Total Core earnings | $ | 2,187 | $ | 2,169 |
Investment related gains in excess of core investment gains | 937 | 1,290 | ||
Core earnings plus investment related gains above | $ | 3,124 | $ | 3,459 |
Change in actuarial methods and assumptions, excluding URR(3) | (1,081) | (751) | ||
Direct impact of equity markets and interest rates(4) (see table below) | (758) | (1,064) | ||
Goodwill impairment charge | (200) | (665) | ||
Income (charges) on variable annuity guarantee liabilities that are dynamically hedged(5) | 176 | (1,153) | ||
Impact of major reinsurance transactions, in-force product changes and dispositions | 210 | 303 | ||
Material and exceptional tax related items(6) | 322 | - | ||
Restructuring charge related to organizational design(7) | (57) | - | ||
Net income attributed to shareholders | $ | 1,736 | $ | 129 |
(1) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(2) | The 2012 net loss from macro equity hedges was |
(3) | Of the full year 2012 |
(4) | The direct impact of equity markets and interest rates is relative to our policy liability valuation assumptions and includes changes to interest rate assumptions as well as experience gains and losses on derivatives associated with our macro equity hedges. We also include gains and losses on the sale of AFS bonds as management may have the ability to partially offset the direct impacts of changes in interest rates reported in the liability segments. |
(5) | Our variable annuity guarantee dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks associated with the guarantees embedded in these products. See the Risk Management section of our 2011 Annual MD&A. The gain in 2012 mostly related to the same items as reported in fourth quarter 2012 above. |
(6) | Included in the tax items are |
(7) | See fourth quarter table above. |
The gain (loss) related to the direct impact of equity markets and interest rates included in the table above is attributable to:
C$ millions, unaudited | ||||
For the years ended December 31, | 2012 | 2011 | ||
Variable annuity guarantee liabilities that are not dynamically hedged | $ | 1,078 | $ | (1,092) |
General fund equity investments supporting policy liabilities(1) | 108 | (214) | ||
Macro equity hedges relative to expected costs(2) | (511) | 636 | ||
Lower fixed income reinvestment rates assumed in the valuation of policy liabilities | (740) | (281) | ||
Sale of AFS bonds and derivative positions in the Corporate & Other segment | (16) | 324 | ||
Charges due to lower fixed income URR assumptions used in the valuation of policy liabilities | (677) | (437) | ||
Direct impact of equity markets and interest rates | $ | (758) | $ | (1,064) |
<sup>(1) | The impact on general fund equity investments supporting policy liabilities includes the capitalized impact on fees for variable universal life policies. |
(2) | Gross equity exposure produced gains of |
B3 Premiums and deposits ("P&D")
Premiums and deposits21 for insurance products were
Premiums and deposits for wealth products were
B4 Funds under management
Funds under management21 at the end of 2012 were a record
__________________________ | |
21 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
B5 Capital
MFC's total capital22 as at
As noted in section A1 above, MLI's MCCSR ratio closed the quarter at 211 per cent compared with 204 per cent at the end of the third quarter.
B6 U.S. GAAP results
Net income attributed to shareholders in accordance with U.S. GAAP22 for the fourth quarter of 2012 was
As we are no longer reconciling our financial results under U.S. GAAP in our consolidated financial statements, net income in accordance with U.S. GAAP is considered a non-GAAP financial measure. A reconciliation of the major differences in net income (loss) attributed to shareholders in accordance with IFRS to net income attributed to shareholders in accordance with U.S. GAAP for the fourth quarter and full year is as follows with the major differences expanded upon below:
C$ millions, unaudited | Quarterly Results | Full Year Results | |||||||
For the periods ended December 31, | 2012 | 2011(1) | 2012 | 2011(1) | |||||
Net income (loss) attributed to shareholders in accordance with IFRS | $ | 1,057 | $ | (69) | $ | 1,736 | $ | 129 | |
Key earnings differences: | |||||||||
For variable annuity guarantee liabilities | $ | (668) | $ | 297 | $ | (1,225) | $ | 2,927 | |
Related to the impact of mark-to-market accounting and investing activities on investment income and policy liabilities | (130) | (179) | 432 | (120) | |||||
New business differences including acquisition costs | (161) | (64) | (650) | (322) | |||||
Charges due to lower fixed income ultimate reinvestment rate assumptions used in the valuation of policy liabilities under IFRS | - | - | 677 | 437 | |||||
Changes in actuarial methods and assumptions, excluding URR | (40) | (53) | 492 | 349 | |||||
Goodwill impairment charge | - | 153 | 200 | 153 | |||||
Changes related to major reinsurance transactions | 5 | 5 | 60 | (303) | |||||
Other differences | 174 | 249 | 835 | 424 | |||||
Total earnings differences | $ | (820) | $ | 408 | $ | 821 | $ | 3,545 | |
Net income attributed to shareholders in accordance with U.S. GAAP | $ | 237 | $ | 339 | $ | 2,557 | $ | 3,674 |
(1) | Restated as a result of adopting Accounting Standards Update # 2010-26, "Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts" ("ASU 2010-26") effective |
__________________________ | |
22 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below |
Accounting for variable annuity guarantee liabilities
IFRS follows a predominantly "mark-to-market" accounting approach to measure variable annuity guarantee liabilities while U.S. GAAP only uses "mark-to-market" accounting for certain benefit guarantees. The U.S. GAAP accounting results in an accounting mismatch between the hedged assets supporting the dynamically hedged guarantees and the guarantees not accounted for on a mark-to-market basis. Another difference is that U.S. GAAP reflects the Company's own credit standing in the measurement of the liability. In the fourth quarter of 2012, we reported a net loss of
Investment income and policy liabilities
Under IFRS, accumulated unrealized gains and losses arising from fixed income investments and interest rate derivatives supporting policy liabilities are largely offset in the valuation of the policy liabilities. The fourth quarter 2012 IFRS impacts of fixed income reinvestment assumptions, general fund equity investments, fixed income and alternative long-duration asset investing totaled a net
Differences in the treatment of acquisition costs and other new business items
Acquisition costs that are related to and vary with the production of new business are explicitly deferred and amortized under U.S. GAAP but are recognized as an implicit reduction in insurance liabilities along with other new business gains and losses under IFRS.
Total equity in accordance with U.S. GAAP23 as at
A reconciliation of the major differences in total equity is as follows:
As at C$ millions, unaudited |
2012 | 2011(1) | |||
Total equity in accordance with IFRS | $ | 26,096 | $ | 24,879 | |
Differences in shareholders' retained earnings and participating policyholders' equity | 9,793 | 8,869 | |||
Differences in Accumulated Other Comprehensive Income attributable to: | |||||
(i) Available-for-sale securities and other | 4,967 | 4,473 | |||
(ii) Cash flow hedges | 2,440 | 2,570 | |||
(iii) Translation of net foreign operations(2) | (1,481) | (1,309) | |||
Differences in share capital, contributed surplus and non-controlling interest in subsidiaries | 40 | 148 | |||
Total equity in accordance with U.S. GAAP | $ | 41,855 | $ | 39,630 |
(1) | 2011 equity has been restated to reflect the adoption of ASU # 2010-26. |
(2) | Reflects the net difference in the currency translation account after the reset to zero through retained earnings upon adoption of IFRS at |
__________________________ | |
23 | Total equity in accordance with U.S. GAAP is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
C PERFORMANCE BY DIVISION
C1 Asia Division
($ millions, unless otherwise stated) | Quarterly Results | Full Year Results | ||||||||
Canadian dollars | 4Q 2012 | 3Q 2012 | 4Q 2011 | 2012 | 2011 | |||||
Net income (loss) attributed to shareholders | $ | 682 | $ | 491 | $ | 285 | $ | 1,969 | $ | (48) |
Core earnings | 180 | 230 | 213 | 963 | 938 | |||||
Premiums and deposits | 4,403 | 2,944 | 2,625 | 13,461 | 10,303 | |||||
Funds under management (billions) | 77.7 | 76.2 | 71.4 | 77.7 | 71.4 | |||||
U.S. dollars | ||||||||||
Net income (loss) attributed to shareholders | $ | 689 | $ | 492 | $ | 279 | $ | 1,979 | $ | (62) |
Core earnings | 182 | 231 | 209 | 963 | 950 | |||||
Premiums and deposits | 4,441 | 2,958 | 2,567 | 13,477 | 10,422 | |||||
Funds under management (billions) | 78.1 | 77.5 | 70.2 | 78.1 | 70.2 | |||||
Asia Division's net income attributed to shareholders was
The fourth quarter decline in core earnings compared with the third quarter was a result of increased sales incentive expenses due to higher sales, increased systems costs and investments in branding and communication, and increased new business strain in
Full year net income attributed to shareholders was
Premiums and deposits for the fourth quarter of 2012 were
Funds under management as at
C2 Canadian Division(1)
($ millions, unless otherwise stated) | Quarterly Results | Full Year Results | ||||||||
Canadian dollars | 4Q 2012 | 3Q 2012 | 4Q 2011 | 2012 | 2011 | |||||
Net income attributed to shareholders | $ | 251 | $ | 378 | $ | 246 | $ | 1,169 | $927 | |
Core earnings | 233 | 229 | 142 | 835 | 849 | |||||
Premiums and deposits | 4,668 | 4,160 | 4,393 | 18,119 | 17,816 | |||||
Funds under management (billions) | 133.2 | 131.1 | 122.1 | 133.2 | 122.1 |
(1) | The Company moved its International Group Program business unit from U.S. Division to Canadian Division in 2012. Prior period results have been restated to reflect this change. |
Canadian Division's net income attributed to shareholders was
Full year net income attributed to shareholders was
Premiums and deposits in the fourth quarter of 2012 were
Funds under management were a record
C3 U.S. Division(1),(2)
($ millions, unless otherwise stated) | Quarterly Results | Full Year Results | ||||||||
4Q 2012 | 3Q 2012 | 4Q 2011 | 2012 | 2011 | ||||||
Net income attributed to shareholders | $ | 724 | $ | 436 | $ | 505 | $ | 1,911 | $ | 621 |
Core earnings | 293 | 288 | 189 | 1,085 | 1,005 | |||||
Premiums and deposits | 9,661 | 8,510 | 8,210 | 35,944 | 34,412 | |||||
Funds under management (billions)(3) | 292.6 | 287.2 | 279.6 | 292.6 | 279.6 | |||||
U.S. dollars | ||||||||||
Net income attributed to shareholders | $ | 731 | $ | 439 | $ | 493 | $ | 1,918 | $ | 614 |
Core earnings | 297 | 289 | 184 | 1,088 | 1,018 | |||||
Premiums and deposits | 9,743 | 8,552 | 8,025 | 35,967 | 34,807 | |||||
Funds under management (billions)(3) | 294.1 | 292.0 | 274.9 | 294.1 | 274.9 |
(1) | The Company moved its International Group Program business unit to Canadian Division in 2012. Prior period results have been restated to reflect this change. |
(2) | The Company moved its Privately Managed Accounts unit to Corporate and Other in 2012. Prior period results have been restated to reflect this change. |
(3) | Reflects the impact of annuity reinsurance transactions in Q3 and Q2 2012. |
U.S. Division's net income attributed to shareholders was
Full year net income attributed to shareholders was
In line with the 2010 in-force repricing efforts in our JH LTC business, the Company has filed for premium rate increases with 50 state regulators. The rate increases requested average approximately 40 per cent on the majority of our in-force retail and group business. To date, approvals have been received from 43 states.
Premiums and deposits for the fourth quarter of 2012 were
Funds under management as at
C4 Corporate and Other(1)
($ millions, unless otherwise stated) | Quarterly Results | Full Year Results | |||||||||
Canadian dollars | 4Q 2012 | 3Q 2012 | 4Q 2011 | 2012 | 2011 | ||||||
Net loss attributed to shareholders | $ | (600) | $ | (1,532) | $ | (1,105) | $ | (3,313) | $ | (1,371) | |
Core losses (excl. macro hedges and core investment gains) | (79) | (117) | (124) | (407) | (415) | ||||||
Expected cost of macro hedges | (140) | (124) | (97) | (489) | (408) | ||||||
Core investment gains | 50 | 50 | 50 | 200 | 200 | ||||||
Total core losses | $ | (169) | $ | (191) | $ | (171) | $ | (696) | $ | (623) | |
Premiums and deposits | 5,396 | 1,132 | 688 | 7,977 | 3,530 | ||||||
Funds under management (billions) | 28.4 | 20.1 | 26.6 | 28.4 | 26.6 | ||||||
(1) | As a result of the sale of the Life Retrocession business effective |
Corporate and Other is composed of: Investment performance on assets backing capital, net of amounts allocated to operating divisions and financing costs, Investment Division's external asset management business, Property and Casualty ("P&C") Reinsurance business, as well as run-off reinsurance operations including variable annuities and accident and health.
For segment reporting purposes, the impact of updates to actuarial assumptions, settlement costs for macro equity hedges and other non-operating items are included in this segment's earnings.
Corporate and Other reported a net loss attributed to shareholders of
Charges in the fourth quarter of 2012 not included in core earnings totaled
The core losses of
Corporate and Other reported a full year net loss attributed to shareholders of
Excluded from 2012 core losses were net charges of
The
Premiums and deposits for the fourth quarter of 2012 were
Funds under management of
D RISK MANAGEMENT AND RISK FACTORS UPDATE
This section provides an update to our risk management practices and risk factors outlined in the MD&A in our 2011 Annual Report.
D1 General macro-economic risk factors
In our 2011 Annual Report, we outlined potential impacts of macro-economic factors including the impact of a low interest environment.
In our Third Quarter 2012 Report to Shareholders, we disclosed that we have shifted our objective of
_____________________ | |
24 | See "Caution regarding forward-looking statements" below. |
D2 Regulatory capital, actuarial and accounting risks
As outlined in our 2011 Annual Report, as a result of the recent financial crisis, financial authorities and regulators in many countries are reviewing their capital, actuarial and accounting requirements, and the changes may have a material adverse effect on the Company's consolidated financial statements and regulatory capital, both at transition and subsequently. We may be required to raise additional capital, which could be dilutive to existing shareholders, or to limit the new business we write. Subsequent updates to regulatory and professional standards are outlined below.
- Changes to U.S. statutory accounting practices concerning actuarial reserving standards for certain universal life ("UL") products pursuant to Actuarial Guideline 38 ("AG38") have now been promulgated by the
National Association of Insurance Commissioners ("NAIC"). The new requirements for in-force business will affect policies issued sinceJuly 1, 2005 and in-force onDecember 31, 2012 . The implementation of this standard requires actuarial judgment and interpretation. To the extent that regulatory guidance emerges that is different than our interpretations it could have a material impact on our statutory reserves and local capital position. - On
December 24, 2012 , theCanadian Actuarial Standards Board ("ASB") issued a Notice of Intent proposing to revise the Standards of Practice of theCanadian Institute of Actuaries with respect to the economic reinvestment assumptions and investment strategies utilized for long-tail liability cash flows under the Canadian Asset Liability Method ("CALM"). The proposed changes are to incorporate calibration criteria for stochastic interest rate models used for CALM, to revise the deterministic scenarios to provide results comparable to those provided by the stochastic methodology, to establish maximum assumed net risk premiums which may include a possible revision to the 20 year horizon for re-investing in corporate bonds and to establish limits on the extent to which investment in alternative assets can be assumed. The ASB hopes to issue an exposure draft byJune 2013 and adopt the final standards in 2013, with a proposed effective date ofOctober 15, 2013 . The ASB recognizes that this timetable is aggressive. Given the early stage of the ASB review, the net impact of any changes in actuarial standards on earnings and thus capital is unknown. - Consistent with the high levels of regulatory activity internationally, the NAIC has been reviewing reserving and capital methodologies as well as the overall risk management framework. These reviews will affect U.S. life insurers, including
John Hancock , and could lead to increased reserving and / or capital requirements for our business inthe United States . - In 2010, the
International Accounting Standards Board ("IASB") issued its Insurance Contracts (Phase II) Exposure Draft and theU.S. Financial Accounting Standards Board ("FASB") issued its Insurance Contract Discussion paper. The IASB recently announced that it expects to issue a limited re-exposure draft in 2013 and the FASB announced it expects to issue an Exposure Draft in 2013. The final standards are not expected to be effective until 2018. As previously outlined, the insurance industry inCanada is working with OSFI and the federal government with respect to the potential impact of these proposals on Canadian insurance companies, and the industry is urging policymakers to ensure that any future accounting and capital proposals appropriately consider the underlying business model of a life insurance company and, in particular, the implications for long-duration guaranteed products which are much more prevalent inNorth America than elsewhere.
D3 Additional risks - Entities within the
There have been inquiries relating to the sale or spin-off of all or a part of our U.S. Division. We remain committed to our U.S. Division. In addition, linkages between MFC and its subsidiaries, including our U.S. operations, may make it difficult to dispose of or separate a subsidiary within the group by way of spin-off or similar transaction. See the Company's Annual Information Form - "Risk Factors - Additional risks - Entities within the
D4 Variable annuity and segregated fund guarantees
As at
The table below shows selected information regarding the Company's variable annuity and segregated funds guarantees gross and net of reinsurance and the business dynamically hedged.
Variable annuity and segregated fund guarantees
As at | |||||||||||||
(C$ millions) | Guarantee value |
Fund value | Amount at risk(4) |
Guarantee value |
Fund value | Amount at risk(4) |
|||||||
Guaranteed minimum income benefit(1) | $ | 6,581 | $ | 4,958 | $ | 1,630 | $ | 6,707 | $ | 5,062 | $ | 1,654 | |
Guaranteed minimum withdrawal benefit | 65,481 | 58,659 | 7,183 | 65,210 | 58,538 | 7,107 | |||||||
Guaranteed minimum accumulation benefit | 20,380 | 21,468 | 1,383 | 21,846 | 22,182 | 2,089 | |||||||
Gross living benefits(2) | $ | 92,442 | $ | 85,085 | $ | 10,196 | $ | 93,763 | $ | 85,782 | $ | 10,850 | |
Gross death benefits(3) | 13,316 | 10,622 | 2,206 | 13,764 | 11,365 | 2,315 | |||||||
Total gross of reinsurance and hedging | $ | 105,758 | $ | 95,707 | $ | 12,402 | $ | 107,527 | $ | 97,147 | $ | 13,165 | |
Living benefits reinsured | $ | 5,780 | $ | 4,358 | $ | 1,427 | $ | 5,837 | $ | 4,410 | $ | 1,433 | |
Death benefits reinsured | 3,673 | 3,140 | 709 | 3,821 | 3,249 | 770 | |||||||
Total reinsured | $ | 9,453 | $ | 7,498 | $ | 2,136 | $ | 9,658 | $ | 7,659 | $ | 2,203 | |
Total, net of reinsurance | $ | 96,305 | $ | 88,209 | $ | 10,266 | $ | 97,869 | $ | 89,488 | $ | 10,962 | |
Living benefits dynamically hedged | $ | 55,464 | $ | 52,585 | $ | 4,528 | $ | 54,600 | $ | 51,876 | $ | 4,288 | |
Death benefits dynamically hedged | 5,453 | 3,945 | 558 | 5,353 | 4,063 | 485 | |||||||
Total dynamically hedged | $ | 60,917 | $ | 56,530 | $ | 5,086 | $ | 59,953 | $ | 55,939 | $ | 4,773 | |
Living benefits retained | $ | 31,198 | $ | 28,142 | $ | 4,241 | $ | 33,326 | $ | 29,496 | $ | 5,129 | |
Death benefits retained | 4,190 | 3,537 | 939 | 4,590 | 4,053 | 1,060 | |||||||
Total, net of reinsurance and dynamic hedging | $ | 35,388 | $ | 31,679 | $ | 5,180 | $ | 37,916 | $ | 33,549 | $ | 6,189 |
(1) | Contracts with guaranteed long-term care benefits are included in this category. |
(2) | Where a policy includes both living and death benefits, the guarantee in excess of the living benefit is included in the death benefit category as outlined in footnote (3). |
(3) | Death benefits include stand-alone guarantees and guarantees in excess of living benefit guarantees where both death and living benefits are provided on a policy. |
(4) | Amount at risk (in-the-money amount) is the excess of guarantee values over fund values on all policies where the guarantee value exceeds the fund value. This amount is not currently payable. For guaranteed minimum death benefit, the net amount at risk is defined as the current guaranteed minimum death benefit in excess of the current account balance. For guaranteed minimum income benefit, the net amount at risk is defined as the excess of the current annuitization income base over the current account value. For all guarantees, the net amount at risk is floored at zero at the single contract level. |
As at December 31, | 2012 | 2011 | ||||||||||
(C$ millions) | Guarantee value |
Fund value | Amount at risk(4) |
Guarantee value |
Fund value | Amount at risk(4) |
||||||
Guaranteed minimum income benefit(1) | $ | 6,581 | $ | 4,958 | $ | 1,630 | $ | 7,518 | $ | 5,358 | $ | 2,163 |
Guaranteed minimum withdrawal benefit | 65,481 | 58,659 | 7,183 | 66,655 | 56,954 | 9,907 | ||||||
Guaranteed minimum accumulation benefit | 20,380 | 21,468 | 1,383 | 23,509 | 23,030 | 2,813 | ||||||
Gross living benefits(2) | $ | 92,442 | $ | 85,085 | $ | 10,196 | $ | 97,682 | $ | 85,342 | $ | 14,883 |
Gross death benefits(3) | 13,316 | 10,622 | 2,206 | 15,202 | 11,614 | 3,232 | ||||||
Total gross of reinsurance and hedging | $ | 105,758 | $ | 95,707 | $ | 12,402 | $ | 112,884 | $ | 96,956 | $ | 18,115 |
Living benefits reinsured | $ | 5,780 | $ | 4,358 | $ | 1,427 | $ | 6,491 | $ | 4,622 | $ | 1,871 |
Death benefits reinsured | 3,673 | 3,140 | 709 | 4,360 | 3,430 | 1,104 | ||||||
Total reinsured | $ | 9,453 | $ | 7,498 | $ | 2,136 | $ | 10,851 | $ | 8,052 | $ | 2,975 |
Total, net of reinsurance | $ | 96,305 | $ | 88,209 | $ | 10,266 | $ | 102,033 | $ | 88,904 | $ | 15,140 |
Living benefits dynamically hedged | $ | 55,464 | $ | 52,585 | $ | 4,528 | $ | 55,522 | $ | 50,550 | $ | 6,346 |
Death benefits dynamically hedged | 5,453 | 3,945 | 558 | 5,133 | 3,461 | 739 | ||||||
Total dynamically hedged | $ | 60,917 | $ | 56,530 | $ | 5,086 | $ | 60,655 | $ | 54,011 | $ | 7,085 |
Living benefits retained | $ | 31,198 | $ | 28,142 | $ | 4,241 | $ | 35,669 | $ | 30,170 | $ | 6,666 |
Death benefits retained | 4,190 | 3,537 | 939 | 5,709 | 4,723 | 1,389 | ||||||
Total, net of reinsurance and dynamic hedging | $ | 35,388 | $ | 31,679 | $ | 5,180 | $ | 41,378 | $ | 34,893 | $ | 8,055 |
(1) | Contracts with guaranteed long-term care benefits are included in this category. |
(2) | Where a policy includes both living and death benefits, the guarantee in excess of the living benefit is included in the death benefit category as outlined in footnote (3). |
(3) | Death benefits include stand-alone guarantees and guarantees in excess of living benefit guarantees where both death and living benefits are provided on a policy. |
(4) | Amount at risk (in-the-money amount) is the excess of guarantee values over fund values on all policies where the guarantee value exceeds the fund value. This amount is not currently payable. For guaranteed minimum death benefit, the net amount at risk is defined as the current guaranteed minimum death benefit in excess of the current account balance. For guaranteed minimum income benefit, the net amount at risk is defined as the excess of the current annuitization income base over the current account value. For all guarantees, the net amount at risk is floored at zero at the single contract level. |
The policy liabilities established for these benefits were
Caution related to sensitivities
In this document, we have provided sensitivities and risk exposure measures for certain risks. These include sensitivities due to specific changes in market prices and interest rate levels projected using internal models as at a specific date, and are measured relative to a starting level reflecting the Company's assets and liabilities at that date and the actuarial factors, investment returns and investment activity we assume in the future. The risk exposures measure the impact of changing one factor at a time and assume that all other factors remain unchanged. Actual results can differ significantly from these estimates for a variety of reasons including the interaction among these factors when more than one changes, changes in actuarial and investment return and future investment activity assumptions, actual experience differing from the assumptions, changes in business mix, effective tax rates and other market factors, and the general limitations of our internal models. For these reasons, the sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions outlined below. Given the nature of these calculations, we cannot provide assurance that the actual impact on net income attributed to shareholders or on MLI's MCCSR ratio will be as indicated.
D5 Publicly traded equity performance risk
As a result of our dynamic and macro hedging program, as at
As outlined in our 2011 Annual Report, the macro hedging strategy is designed to mitigate public equity risk arising from variable annuity guarantees not dynamically hedged and from other products and fees. In addition, our variable annuity guarantee dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks associated with the guarantees embedded in these products (see MD&A in our 2011 Annual Report).
The tables below show the potential impact on net income attributed to shareholders resulting from an immediate 10, 20 and 30 per cent change in market values of publicly traded equities followed by a return to the expected level of growth assumed in the valuation of policy liabilities. The potential impact is shown before and after taking into account the impact of the change in markets on the hedge assets. The potential impact is shown assuming that (a) the change in value of the hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities, including the provisions for adverse deviation and (b) that the change in value is not completely offset. In the fourth quarter 2012 we refined our methodology related to the estimated amount that would not be completely offset. The refinement in methodology assumes that provision for adverse deviation is not offset and that the hedge assets are based on the actual position at the period end. (Previously the methodology assumed that for a 10, 20 and 30 per cent decrease in the market value of equities, the profit from the hedge assets offsets 80, 75 and 70 per cent, respectively, of the loss arising from the change in the policy liabilities associated with the guarantees dynamically hedged. For a 10, 20 and 30 per cent market increase in the market value of equities, the loss on the dynamic hedges was assumed to be 120, 125 and 130 per cent of the gain from the dynamically hedged variable annuity guarantee liabilities, respectively.)
While we cannot reliably estimate the amount of the change in dynamically hedged variable annuity guarantee liabilities that will not be offset by the profit or loss on the dynamic hedge assets, we make certain assumptions for the purposes of estimating the impact on shareholders' net income. It is also important to note that these estimates are illustrative, and that the hedge program may underperform these estimates, particularly during periods of high realized volatility and/or periods where both interest rates and equity market movements are unfavourable.
Potential impact on net income attributed to shareholders arising from changes to public equity returns (1) | |||||||||||||
As at |
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(C$ millions) | -30% | -20% | -10% | 10% | 20% | 30% | |||||||
Underlying sensitivity to net income attributed to shareholders(2) | |||||||||||||
Variable annuity guarantees | $ | (5,640) | $ | (3,510) | $ | (1,580) | $ | 1,260 | $ | 2,220 | $ | 2,930 | |
Asset based fees | (270) | (180) | (90) | 90 | 180 | 270 | |||||||
General fund equity investments(3) | (380) | (260) | (130) | 120 | 230 | 350 | |||||||
Total underlying sensitivity | $ | (6,290) | $ | (3,950) | $ | (1,800) | $ | 1,470 | $ | 2,630 | $ | 3,550 | |
Impact of hedge assets | |||||||||||||
Impact of macro hedged assets | $ | 2,010 | $ | 1,340 | $ | 670 | $ | (670) | $ | (1,340) | $ | (2,010) | |
Impact of dynamic hedge assets assuming the change in the value of the hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | 3,070 | 1,890 | 820 | (600) | (1,000) | (1,300) | |||||||
Total impact of hedge assets assuming the change in value of the dynamic hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | $ | 5,080 | $ | 3,230 | $ | 1,490 | $ | (1,270) | $ | (2,340) | $ | (3,310) | |
Net impact assuming the change in the value of the hedged assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | $ | (1,210) | $ | (720) | $ | (310) | $ | 200 | $ | 290 | $ | 240 | |
Impact of assuming that the provisions for adverse deviation for dynamically hedged liabilities are not offset and that the hedging program rebalances at 5% market intervals(5) | (710) | (470) | (190) | (10) | (50) | (70) | |||||||
Net impact assuming the change in value of the dynamic hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities, as described above(5) | $ | (1,920) | $ | (1,190) | $ | (500) | $ | 190 | $ | 240 | $ | 170 | |
Percentage of underlying earnings sensitivitiy to movements in equity markets that is offset by hedges if dynamic hedge assets completely offset the change in the dynamically hedged variable annuity guarantee liability | 81% | 82% | 83% | 86% | 89% | 93% | |||||||
Percentage of underlying earnings sensitivity to movements in equity markets that is offset by hedge assets if dynamic hedge assets do not completely offset the change in the dynamically hedged variable annuity guarantee liability(5) | 69% | 70% | 72% | 87% | 91% | 95% | |||||||
(1) | See "Caution related to sensitivities" above. |
(2) | Defined as earnings sensitivity to a change in public equity markets including settlements on reinsurance contracts, but before the offset of hedge assets or other risk mitigants. |
(3) | This impact for general fund equities is calculated as at a point-in-time and does not include: (i) any potential impact on public equity weightings; (ii) any gains or losses on public equities held in the Corporate and Other segment; or (iii) any gains or losses on public equity investments held in |
(4) | Best estimate liabilities and associated provisions for adverse deviation. |
(5) | Represents the impact of re-balancing equity hedges for dynamically hedged variable annuity guarantee liabilities at 5% market intervals. Also represents the impact of changes in markets on provisions for adverse deviation that are not hedged, but does not include any impact in respect of other sources of hedge ineffectiveness e.g. basis risk, realized volatility and equity, interest rate correlations different from expected among other factors. For presentation purposes, numbers are rounded. |
Potential impact on net income attributed to shareholders arising from changes to public equity returns (1) | |||||||||||||
As at |
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(C$ millions) | -30% | -20% | -10% | 10% | 20% | 30% | |||||||
Underlying sensitivity to net income attributed to shareholders(2) | |||||||||||||
Variable annuity guarantees | $ | (5,950) | $ | (3,730) | $ | (1,690) | $ | 1,360 | $ | 2,450 | $ | 3,300 | |
Asset based fees | (270) | (180) | (90) | 90 | 180 | 270 | |||||||
General fund equity investments(3) | (320) | (210) | (110) | 100 | 200 | 300 | |||||||
Total underlying sensitivity | $ | (6,540) | $ | (4,120) | $ | (1,890) | $ | 1,550 | $ | 2,830 | $ | 3,870 | |
Impact of hedge assets | |||||||||||||
Impact of macro hedged assets | $ | 1,860 | $ | 1,240 | $ | 620 | $ | (620) | $ | (1,240) | $ | (1,860) | |
Impact of dynamic hedge assets assuming the change in the value of the hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | 3,180 | 1,960 | 860 | (620) | (1,060) | (1,380) | |||||||
Total impact of hedge assets assuming the change in value of the dynamic hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | $ | 5,040 | $ | 3,200 | $ | 1,480 | $ | (1,240) | $ | (2,300) | $ | (3,240) | |
Net impact assuming the change in the value of the hedged assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | $ | (1,500) | $ | (920) | $ | (410) | $ | 310 | $ | 530 | $ | 630 | |
Impact of assuming that the provisions for adverse deviation for dynamically hedged liabilities are not offset and that the hedging program rebalances at 5% market intervals(5) | (760) | (500) | (210) | (40) | (90) | (130) | |||||||
Net impact assuming the change in value of the dynamic hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities(5) | $ | (2,260) | $ | (1,420) | $ | (620) | $ | 270 | $ | 440 | $ | 500 | |
Percentage of underlying earnings sensitivitiy to movements in equity markets that is offset by hedges if dynamic hedge assets completely offset the change in the dynamically hedged variable annuity guarantee liability | 77% | 78% | 78% | 80% | 81% | 84% | |||||||
Percentage of underlying earnings sensitivity to movements in equity markets that is offset by hedge assets if dynamic hedge assets do not completely offset the change in the dynamically hedged variable annuity guarantee liability(5) | 65% | 66% | 67% | 83% | 84% | 87% | |||||||
(1) | See "Caution related to sensitivities" above. |
(2) | Defined as earnings sensitivity to a change in public equity markets including settlements on reinsurance contracts, but before the offset of hedge assets or other risk mitigants. |
(3) | This impact for general fund equities is calculated as at a point-in-time and does not include: (i) any potential impact on public equity weightings; (ii) any gains or losses on public equities held in the Corporate and Other segment; or (iii) any gains or losses on public equity investments held in |
(4) | Best estimate liabilities and associated provisions for adverse deviation |
(5) | Represents the impact of re-balancing equity hedges for dynamically hedged variable annuity guarantee liabilities at 5% market intervals. Also represents the impact of changes in markets on provisions for adverse deviation that are not hedged, but does not include any impact in respect of other sources of hedge ineffectiveness e.g. basis risk, realized volatility and equity, interest rate correlations different from expected among other factors. For presentation purposes, numbers are rounded. |
Potential impact on net income attributed to shareholders arising from changes to public equity returns (1) | |||||||
As at |
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(C$ millions) | -30% | -20% | -10% | 10% | 20% | 30% | |
Underlying sensitivity to net income attributed to shareholders(2) | |||||||
Variable annuity guarantees | |
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Asset based fees | (260) | (180) | (80) | 90 | 180 | 260 | |
General fund equity investments(3) | (300) | (200) | (110) | 100 | 200 | 300 | |
Total underlying sensitivity | |
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Impact of hedge assets | |||||||
Impact of macro hedged assets | |
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Impact of dynamic hedge assets assuming the change in the value of the hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | 3,170 | 1,980 | 900 | (710) | (1,240) | (1,610) | |
Total impact of hedge assets assuming the change in value of the dynamic hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | |
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Net impact assuming the change in the value of the hedged assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | |
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Impact of assuming that the provisions for adverse deviation for dynamically hedged liabilities are not offset and that the hedging program rebalances at 5% market intervals(5) | (700) | (460) | (200) | (10) | (20) | (30) | |
Net impact assuming the change in value of the dynamic hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities(5) | |
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Percentage of underlying earnings sensitivitiy to movements in equity markets that is offset by hedges if dynamic hedge assets completely offset the change in the dynamically hedged variable annuity guarantee liability | 69% | 70% | 70% | 70% | 71% | 71% | |
Percentage of underlying earnings sensitivity to movements in equity markets that is offset by hedge assets if dynamic hedge assets do not completely offset the change in the dynamically hedged variable annuity guarantee liability(5) | 59% | 59% | 59% | 71% | 71% | 72% | |
(1) | See "Caution related to sensitivities" above. |
(2) | Defined as earnings sensitivity to a change in public equity markets including settlements on reinsurance contracts, but before the offset of hedge assets or other risk mitigants. |
(3) | This impact for general fund equities is calculated as at a point-in-time and does not include: (i) any potential impact on public equity weightings; (ii) any gains or losses on public equities held in the Corporate and Other segment; or (iii) any gains or losses on public equity investments held in |
(4) | Best estimate liabilities and associated provisions for adverse deviation. |
(5) | Represents the impact of re-balancing equity hedges for dynamically hedged variable annuity guarantee liabilities at 5% market intervals. Also represents the impact of changes in markets on provisions for adverse deviation that are not hedged, but does not include any impact in respect of other sources of hedge ineffectiveness e.g. basis risk, realized volatility and equity, interest rate correlations different from expected among other factors. For presentation purposes, numbers are rounded. |
Potential impact on MLI's MCCSR ratio arising from public equity returns different than the expected return for policy liability valuation(1),(2)
Impact on MLI MCCSR ratio | ||||||
percentage points | -30% | -20% | -10% | +10% | +20% | +30% |
(17) | (11) | (5) | 1 | 2 | 6 | |
(20) | (12) | (6) | 1 | 1 | 1 | |
(27) | (15) | (7) | 2 | 3 | 4 |
(1) | See "Caution related to sensitivities" above. |
(2) | The potential impact is shown assuming that the change in value of the hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities, including the provisions for adverse deviation. The estimated amount that would not be completely offset assumes that provision for adverse deviation is not offset and that the hedge assets are based on the actual position at the period end. |
The following table shows the notional value of shorted equity futures contracts utilized for our variable annuity guarantee dynamic hedging and our macro equity risk hedging strategies.
As at C$ millions |
December 31, 2012 |
September 30, 2012 |
December 31, 2011 |
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For variable annuity guarantee dynamic hedging strategy | $ | 9,500 | $ | 9,800 | $ | 10,600 |
For macro equity risk hedging strategy | 7,800 | 7,300 | 5,600 | |||
Total | $ | 17,300 | $ | 17,100 | $ | 16,200 |
During the quarter, we added approximately
In the macro hedging program approximately
D6 Interest rate and spread risk
As at
The 100 basis point parallel decline includes a change of one per cent in current government, swap and corporate rates for all maturities across all markets with no change in credit spreads between government, swap and corporate rates, and with a floor of zero on government rates and corporate spreads, relative to the rates assumed in the valuation of policy liabilities, including embedded derivatives. Based on interest rates at the end of the third and fourth quarters of 2012, a 100 basis point decline in interest rates would result in a movement to a different prescribed reinvestment scenario for policy liability valuation in some jurisdictions, which would produce a higher reserve. The potential earnings impact of a 100 basis point decline in the third and fourth quarters includes approximately
The income impact does not allow for any future potential changes to the URR assumptions or other potential impacts of lower interest rate levels, for example, increased strain on the sale of new business, lower interest earned on our surplus assets, or updates to actuarial assumptions related to variable annuity bond fund calibration. It also does not reflect potential management actions to realize gains or losses on AFS fixed income assets held in the surplus segment in order to partially offset changes in MLI's MCCSR ratio due to changes in interest rate levels.
Potential impact on net income attributed to shareholders and MLI's MCCSR ratio of an immediate one per cent parallel change in interest rates relative to rates assumed in the valuation of policy liabilities(1),(2),(3),(4)
As at | ||||||
-100bp | +100bp | -100bp | +100bp | -100bp | +100bp | |
Net income attributed to shareholders (C$ millions): | ||||||
Excluding change in market value of AFS fixed income assets held in the surplus segment | |
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From fair value changes in AFS assets held in surplus, if realized | 800 | (700) | 900 | (800) | 800 | (700) |
MLI's MCCSR ratio (Percentage points): | ||||||
Before impact of change in market value of AFS fixed income assets held in the surplus segment(5) | (16) | 10 | (17) | 9 | (18) | 13 |
From fair value changes in AFS assets held in surplus, if realized | 5 | (5) | 5 | (5) | 5 | (5) |
(1) | See "Caution related to sensitivities" above. |
(2) | Includes guaranteed insurance and annuity products, including variable annuity contracts as well as adjustable benefit products where benefits are generally adjusted as interest rates and investment returns change, a portion of which have minimum credited rate guarantees. For adjustable benefit products subject to minimum rate guarantees, the sensitivities are based on the assumption that credited rates will be floored at the minimum. |
(3) | The amount of gain or loss that can be realized on AFS fixed income assets held in the surplus segment will depend on the aggregate amount of unrealized gain or loss. The table above only reflects the impact of the change in the unrealized position, as the total unrealized position will depend upon the unrealized position at the beginning of the period. |
(4) | Sensitivities are based on projected asset and liability cash flows at the beginning of the quarter adjusted for the estimated impact of new business, investment markets and asset trading during the quarter. Any true-up to these estimates, as a result of the final asset and liability cash flows to be used in the next quarter's projection, are reflected in the next quarter's sensitivities. Impact of realizing 100% of market value of AFS fixed income is as of the end of the quarter. |
(5) | The impact on MLI's MCCSR ratio includes both the impact of lower earnings on available capital as well as the increase in required capital that results from a decline in interest rates. The potential increase in required capital accounted for 11 of the 16 points impact of a 100 bp decline in interest rates on MLI's MCCSR ratio. |
The following table shows the potential impact on net income attributed to shareholders resulting from a change in credit spreads and swap spreads over government bond rates for all maturities across all markets with a floor of zero on the total interest rate, relative to the spreads assumed in the valuation of policy liabilities.
Potential impact on net income attributed to shareholders arising from changes to corporate spreads and swap spreads(1),(2),(3)
C$ millions As at |
<b>December 31, 2012 |
September 30, 2012 |
December 31, 2011 |
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Corporate spreads(4) | ||||||||||
Increase 50 basis points | $ | 500 | $ | 600 | $ | 500 | ||||
Decrease 50 basis points | (1,000) | (1,200) | (900) | |||||||
Swap spreads | ||||||||||
Increase 20 basis points | $ | (600) | $ | (700) | $ | (600) | ||||
Decrease 20 basis points | 600 | 700 | 600 |
(1) | See "Caution related to sensitivities" above. |
(2) | The impact on net income attributed to shareholders assumes no gains or losses are realized on our AFS fixed income assets held in the surplus segment and excludes the impact arising from changes in off-balance sheet bond fund value arising from changes in credit spreads. The sensitivities assume that the participating policy funds are self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in corporate spreads. |
(3) | Sensitivities are based on projected asset and liability cash flows at the beginning of the quarter adjusted for the estimated impact of new business, investment markets and asset trading during the quarter. Any true-up to these estimates, as a result of the final asset and liability cash flows to be used in the next quarter's projection, are reflected in the next quarter's sensitivities. |
(4) | Corporate spreads are assumed to grade to an expected long-term average over five years. |
Based on spreads at the end of the third and fourth quarters, a 50 basis point decline in corporate spreads would result in a movement to a different prescribed reinvestment scenario for policy liability valuation in some jurisdictions, which would produce a higher reserve. The potential earnings impact of a 50 basis point decline in the third and fourth quarter includes approximately
E ACCOUNTING MATTERS AND CONTROLS
E1 Critical accounting and actuarial policies
Our significant accounting policies under IFRS are described in note 1 to our Consolidated Financial Statements for the year ended December 31, 2011. The critical accounting policies and the estimation processes related to the determination of insurance contract liabilities, fair values of financial instruments, the application of derivative and hedge accounting, the determination of pension and other post-employment benefit obligations and expenses, and accounting for income taxes and uncertain tax positions are described on pages 65 to 73 of our 2011 Annual Report.
E2 Actuarial methods and assumptions
As noted in section A1 above, in the fourth quarter we reported a charge of
The following table summarizes the significant items contained in the fourth quarter changes to Actuarial Methods and Assumptions.
C$ millions | To | To Net Income Attributed | |||||
Assumption | Policy Liabilities | to Shareholders | |||||
Model refinements related to the estimated impact of a systems conversion | $ | 218 | $ | (141) | |||
Other | (65) | 54 | |||||
Net impact | $ | 153 | $ | (87) |
In the third quarter, the Company completed its annual review of actuarial methods and assumptions which resulted in a charge of
E3 Sensitivity of policy liabilities to updates to assumptions
When the assumptions underlying our determination of policy liabilities are updated to reflect recent and emerging experience or change in outlook, the result is a change in the value of policy liabilities which in turn affects income. The sensitivity of after-tax income to updates to asset related assumptions underlying policy liabilities is shown below, assuming that there is a simultaneous update to the assumption across all business units.
For updates to asset related assumptions, the sensitivity is shown net of the corresponding impact on income of the change in the value of the assets supporting liabilities. In practice, experience for each assumption will frequently vary by geographic market and business and assumption updates are made on a business/geographic specific basis. Actual results can differ materially from these estimates for a variety of reasons including the interaction among these factors when more than one changes, changes in actuarial and investment return and future investment activity assumptions, actual experience differing from the assumptions, changes in business mix, effective tax rates and other market factors, and the general limitations of our internal models.
Most participating business is excluded from this analysis because of the ability to pass both favourable and adverse experience to the policyholders through the participating dividend adjustment.
We have updated our disclosure to show the estimated impact on net income for the next five years and the following five years from changes in ultimate fixed income reinvestment rates ("URR") driven by changes in risk free rates.
The table below shows the potential impact on annual net income attributable to shareholders where the URR is determined assuming that risk free rates remain at their starting
Canadian actuarial standards of practice require that reserves be at least as great as the largest value produced by a set of prescribed reinvestment scenarios. The impacts below assume that the URR changes implied by these shocks do not change which reinvestment scenario produces the largest reserve.
Potential impact on aggregate net income over the next five years and the following five years net income attributed to shareholders arising from potential changes to the fixed income ultimate reinvestment rates ("URR")(1)
As at C$ millions |
2012 | 2011 | ||
For the periods | 2013-2017 | 2018-2022 | 2012-2016 | 2017-2021 |
Risk free rates remain at |
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Risk free rates rise 50 bp immediately from their or |
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Risk free rates fall 50 bp immediately from their or |
(1) | Current URRs in Canada are 1.00% per annum and 3.00% per annum for short and long-term bonds, respectively, and in the U.S. are 0.80% per annum and 3.60% per annum for short and long-term bonds, respectively. Since the URRs are based upon a five and ten year rolling average of government bond rates and the URR valuation assumptions are currently higher than the |
Potential impact on net income attributed to shareholders arising from changes to asset related assumptions supporting actuarial liabilities, excluding the fixed income ultimate reinvestment rate discussed above
C$ millions | Increase (decrease) in after-tax income | ||||||
As at | |||||||
Asset related assumptions updated periodically in valuation basis changes | Increase | Decrease | Increase | Decrease | Increase | Decrease | |
100 basis point change in future annual returns for public equities(1) | |
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100 basis point change in future annual returns for alternative long-duration assets(2) | 3,900 | (4,000) | 4,000 | (3,900) | 4,200 | (3,800) | |
100 basis point change in equity volatility assumption for stochastic segregated fund modeling(3) | (300) | 300 | (300) | 300 | (300) | 300 |
(1) | The sensitivity to public equity returns above includes the impact on both segregated fund guarantee reserves and on other policy liabilities. For a 100 basis point increase in expected growth rates, the impact from segregated fund guarantee reserves is |
(2) | Alternative long-duration assets include commercial real estate, timber and agricultural real estate, oil and gas, and private equities. The increase of |
(3) | Volatility assumptions for public equities are based on long-term historic observed experience and compliance with actuarial standards. The resulting volatility assumptions are 17.15% per annum in Canada and 17.15% per annum in the U.S. for large cap public equities, and 19% per annum in Japan. For European equity funds, the volatility assumptions vary between 16.15% and 18.35%. |
E4 Goodwill impairment testing
In the third quarter of 2012, we reported a charge of
The Company completed its 2012 goodwill and intangible assets tests in the fourth quarter of 2012, and as a result, management concluded that there was no further impairment of goodwill or intangible assets with indefinite lives.
E5 Future accounting and reporting changes
There are a number of accounting and reporting changes issued under IFRS including those still under development by the
Topic | Effective date | Measurement / Presentation | Expected impact |
IFRS 10, IFRS 11, IFRS 12 (and related amendments) and amendments to IAS 27, and IAS 28 regarding consolidation, disclosures and related matters |
Measurement and disclosure | Not expected to have a significant impact. | |
IFRS 13 "Fair Value Measurement" | Measurement and disclosure | Not expected to have a significant impact. | |
Amendments to IAS 1 "Presentation of Financial Statements" | Presentation | Not expected to have a significant impact. | |
Amendments to IAS 19 "Employee Benefits" | Measurement | See below | |
IFRS 9 "Financial Instruments" | Measurement | Currently assessing. |
Expected impact of amendments to IAS 19 "Employee Benefits": The new standard will result in an increase in the defined benefit liability, primarily related to unrecognized net actuarial losses on the Company's pension and other post-employment benefit plans with an offsetting charge to opening Accumulated Other Comprehensive Income ("AOCI"). Upon adoption, 2012 net income will be retrospectively restated primarily to remove the amortization of unrecognized net actuarial losses. This has the impact of increasing ROE by 0.6 per cent. Future actuarial gains and losses related to these plans will adjust the amount of AOCI.
Below is a summary of the expected impacts of the amendments as at and for the year ended
(C$ million) | Pension plans | Other post- employment. benefits |
Total | ||||||
Increase (decrease) in defined benefit liability | $ | 872 | $ | (33) | $ | 839 | |||
Increase (decrease) in deferred tax liability | (277) | 11 | (266) | ||||||
Increase (decrease) in AOCI | (669) | 15 | 654 | ||||||
Increase (decrease) in 2012 net income | 74 | (7) | 67 |
F Other
F1 Performance and Non-GAAP Measures
We use a number of non-GAAP financial measures to measure overall performance and to assess each of our businesses. Non-GAAP measures include: Core Earnings; Net Income in Accordance with U.S. GAAP; Total Equity in Accordance with U.S. GAAP; Core ROE; Core Earnings Per Share; Constant Currency Basis; Premiums and Deposits; Funds under Management; Capital; Embedded Value; New Business Embedded Value; and Sales. Non-GAAP financial measures are not defined terms under GAAP and, therefore, with the exception of Net Income in Accordance with U.S. GAAP and Total Equity in Accordance with U.S. GAAP (which are comparable to the equivalent measures of issuers whose financial statements are prepared in accordance with U.S. GAAP), are unlikely to be comparable to similar terms used by other issuers. Therefore, they should not be considered in isolation or as a substitute for any other financial information prepared in accordance with GAAP.
Core earnings (losses) is a non-GAAP measure which we use to better understand the long-term earnings capacity and valuation of the business. Core earnings excludes the direct impact of changes in equity markets and interest rates as well as a number of other items, outlined below, that are considered material and exceptional in nature. While this metric is relevant to how we manage our business and offers a consistent methodology, it is not insulated from macro-economic factors, which can have a significant impact.
Any future changes to the core earnings definition referred to below, will be disclosed.
Items that are included in core earnings are:
- Expected earnings on in-force, including expected release of provisions for adverse deviation, fee income, margins on group business and spread business such as
Manulife Bank and asset fund management. - Macro hedging costs based on expected market returns.
- New business strain.
- Policyholder experience gains or losses.
- Acquisition and operating expenses compared to expense assumptions used in the measurement of policy liabilities.
- Up to
$200 million of investment gains reported in a single year, which are referred to as "core investment gains". - Earnings on surplus other than mark-to-market items. Gains on available-for-sale ("AFS") equities and seed money investments are included in core earnings.
- Routine or non-material legal settlements.
- All other items not specifically excluded.
- Tax on the above items.
- All tax related items except the impact of enacted or substantially enacted income tax rate changes.
Items excluded from core earnings are:
- The direct impact of equity markets and interest rates, consisting of:
- Income (charges) on variable annuity guarantee liabilities not dynamically hedged.
- Gains (charges) on general fund equity investments supporting policy liabilities and on fee income.
- Gains (losses) on macro equity hedges relative to expected costs. The expected cost of macro hedges is calculated using the equity assumptions used in the valuation of policy liabilities.
- Gains (charges) on higher (lower) fixed income reinvestment rates assumed in the valuation of policy liabilities, including the impact on the fixed income ultimate reinvestment rate ("URR").
- Gains (charges) on sale of AFS bonds and open derivatives not in hedging relationships in the Corporate and Other segment.
- The earnings impact of the difference between the net increase (decrease) in variable annuity liabilities that are dynamically hedged and the performance of the related hedge assets. Our variable annuity dynamic hedging strategy is not designed to completely offset the sensitivity of policy liabilities to all risks or measurements associated with the guarantees embedded in these products for a number of reasons, including: provisions for adverse deviation, fund performance, the portion of the interest rate risk that is not dynamically hedged, realized equity and interest rate volatilities and changes to policyholder behaviour.
- Net investment related gains in excess of
$200 million per annum or net losses on a year-to-date basis. Investment gains (losses) relate to fixed income trading, alternative long-duration asset returns, credit experience and asset mix changes. These gains and losses are a combination of reported investment experience as well as the impact of investing activities on the measurement of our policy liabilities. The maximum of$200 million per annum to be reported in core earnings compares with an average of over$80 million per quarter of investment gains reported since first quarter 2007. - Mark-to-market gains or losses on assets held in the Corporate and Other segment other than gains on AFS equities and seed money investments in new segregated or mutual funds.
- Changes in actuarial methods and assumptions, excluding URR.
- The impact on the measurement of policy liabilities of changes in product features or new reinsurance transactions, if material.
- Goodwill impairment charges.
- Gains or losses on disposition of a business.
- Material one-time only adjustments, including highly unusual/extraordinary and material legal settlements or other items that are material and exceptional in nature.
- Tax on the above items.
- Impact of enacted or substantially enacted income tax rate changes.
The following table summarizes for the past eight quarters core earnings and net income (loss) attributed to shareholders.
Quarterly Results | ||||||||||||||||||||||||
C$ millions, unaudited | 2012 | 2011 | ||||||||||||||||||||||
For the quarter | 4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | ||||||||||||||||
Core earnings (losses) | ||||||||||||||||||||||||
Asia Division | $ | 180 | $ | 230 | $ | 286 | $ | 267 | $ | 213 | $ | 220 | $ | 253 | $ | 252 | ||||||||
Canadian Division | 233 | 229 | 201 | 172 | 142 | 259 | 233 | 215 | ||||||||||||||||
U.S. Division | 293 | 288 | 247 | 257 | 189 | 260 | 266 | 290 | ||||||||||||||||
Corporate & Other (excluding expected cost of macro hedges and core investment gains) | (79) | (117) | (83) | (128) | (124) | (58) | (8) | (225) | ||||||||||||||||
Expected cost of macro hedges | (140) | (124) | (118) | (107) | (97) | (107) | (104) | (100) | ||||||||||||||||
Core investment gains | 50 | 50 | 50 | 50 | 50 | 50 | 50 | 50 | ||||||||||||||||
Total core earnings | $ | 537 | $ | 556 | $ | 583 | $ | 511 | $ | 373 | $ | 624 | $ | 690 | $ | 482 | ||||||||
Investment related gains in excess of core investment gains | 318 | 363 | 51 | 205 | 261 | 236 | 323 | 470 | ||||||||||||||||
Core earnings plus investment related gains in excess of core investment gains | $ | 855 | $ | 919 | $ | 634 | $ | 716 | $ | 634 | $ | 860 | $ | 1,013 | $ | 952 | ||||||||
Other items to reconcile core earnings to net income (loss) attributed to shareholders | </td> | |||||||||||||||||||||||
Income (charges) on variable annuity guarantee liabilities that are dynamically hedged | 100 | 122 | (269) | 223 | (193) | (900) | (52) | (8) | ||||||||||||||||
Impact of major reinsurance transactions, in-force product changes | - | 26 | 112 | 122 | - | - | - | - | ||||||||||||||||
Direct impact of equity markets and interest rates (see table below) | (18) | (88) | (727) | 75 | 153 | (889) | (439) | 111 | ||||||||||||||||
Change in actuarial methods and assumptions, excluding URR | (87) | (1,006) | - | 12 | 2 | (651) | (32) | (70) | ||||||||||||||||
Goodwill impairment charge | - | (200) | - | - | (665) | - | - | - | ||||||||||||||||
Gain (loss) on sale of Life Retrocession Business | - | - | (50) | - | - | 303 | - | - | ||||||||||||||||
Tax items and restructuring charge related to organizational design | 207 | - | - | 58 | - | - | - | - | ||||||||||||||||
Net income (loss) attributed to shareholders | $ | 1,057 | $ | (227) | $ | (300) | $ | 1,206 | |
$ | (1,277) | $ | 490 | $ | 985 | |||||||||
Direct impact of equity markets and interest rates: | ||||||||||||||||||||||||
Income (charges) on variable annuity liabilities that are not dynamically hedged | $ | 556 | $ | 298 | $ | (758) | $ | 982 | $ | 234 | $ | (1,211) | $ | (217) | $ | 102 | ||||||||
Gains (charges) on general fund equity investments supporting policy liabilities and on fee income | 48 | 55 | (116) | 121 | 56 | (227) | (73) | 30 | ||||||||||||||||
Gains (losses) on macro equity hedges relative to expected costs | (292) | (86) | 423 | (556) | (250) | 882 | 142 | (138) | ||||||||||||||||
Gains (charges) on higher (lower) fixed income reinvestment rates assumed in the valuation of policy liabilities | (290) | (330) | 305 | (425) | 122 | (567) | (28) | 192 | ||||||||||||||||
Gains (charges) on sale of AFS bonds and derivative positions in the Corporate segment | (40) | (25) | 96 | (47) | (9) | 301 | 107 | (75) | ||||||||||||||||
Charges due to lower fixed income URR assumptions used in the valuation of policy liabilities | - | - | (677) | - | - | (67) | (370) | - | ||||||||||||||||
Direct impact of equity markets and interest rates | $ | (18) | $ | (88) | $ | (727) | $ | 75 | $ | 153 | $ | (889) | $ | (439) | $ | 111 |
Asia Division
Quarterly Results | ||||||||||||||||||||||||
C$ millions, unaudited | 2012 | 2011 | ||||||||||||||||||||||
For the quarter | 4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | ||||||||||||||||
Asia Division core earnings | $ | 180 | $ | 230 | $ | 286 | $ | 267 | $ | 213 | $ | 220 | $ | 253 | $ | 252 | ||||||||
Investment related gains in excess of core investment gains | 33 | 12 | 28 | (18) | 47 | 126 | 7 | 24 | ||||||||||||||||
Core earnings plus investment related gains in excess of core investment gains | $ | 213 | $ | 242 | $ | 314 | $ | 249 | $ | 260 | $ | 346 | $ | 260 | $ | 276 | ||||||||
Other items to reconcile core earnings to net income (loss) attributed to shareholders | ||||||||||||||||||||||||
Income (charges) on variable annuity guarantee liabilities that are dynamically hedged | 9 | 11 | (18) | 3 | (16) | (3) | (11) | (1) | ||||||||||||||||
Direct impact of equity markets and interest rates | 460 | 238 | (611) | 819 | 41 | (1,055) | (221) | 76 | ||||||||||||||||
Tax items | - | - | - | 40 | - | - | - | - | ||||||||||||||||
Net income (loss) attributed to shareholders | $ | 682 | $ | 491 | $ | (315) | $ | 1,111 | 285 | (712) | |
|
Canadian Division
Quarterly Results | ||||||||||||||||||||||||
C$ millions, unaudited | 2012 | 2011 | ||||||||||||||||||||||
For the quarter | 4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | ||||||||||||||||
Canadian Division core earnings | $ | 233 | $ | 229 | $ | 201 | $ | 172 | $ | 142 | $ | 259 | $ | 233 | $ | 215 | ||||||||
Investment related gains in excess of core investment gains | (31) | 20 | (115) | 116 | 72 | (47) | 67 | 252 | ||||||||||||||||
Core earnings plus investment related gains in excess of core investment gains | $ | 202 | $ | 249 | $ | 86 | $ | 288 | $ | 214 | $ | 212 | $ | 300 | $ | 467 | ||||||||
Other items to reconcile core earnings to net income (loss) attributed to shareholders | ||||||||||||||||||||||||
Income (charges) on variable annuity guarantee liabilities that are dynamically hedged | 45 | 38 | (74) | 41 | (67) | (204) | - | (7) | ||||||||||||||||
Impact of major reinsurance transactions, in-force product changes | - | - | 137 | 122 | - | - | - | - | ||||||||||||||||
Direct impact of equity markets and interest rates | 4 | 91 | 74 | (134) | 99 | (100) | (36) | 49 | ||||||||||||||||
Net income (loss) attributed to shareholders | $ | 251 | $ | 378 | $ | 223 | $ | 317 | $ | 246 | $ | (92) | $ | 264 | $ | 509 |
U.S. Division
Quarterly Results | ||||||||||||||||||||||||
C$ millions, unaudited | 2012 | 2011 | ||||||||||||||||||||||
For the quarter | 4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | ||||||||||||||||
U.S. Division core earnings | $ | 293 | $ | 288 | $ | 247 | $ | 257 | $ | 189 | $ | 260 | $ | 266 | $ | 290 | ||||||||
Investment related gains in excess of core investment gains | 365 | 346 | 154 | 153 | 158 | 215 | 259 | 225 | ||||||||||||||||
Core earnings plus investment related gains in excess of core investment gains | $ | 658 | $ | 634 | $ | 401 | $ | 410 | $ | 347 | $ | 475 | $ | 525 | $ | 515 | ||||||||
Other items to reconcile core earnings to net income (loss) attributed to shareholders | ||||||||||||||||||||||||
Income (charges) on variable annuity guarantee liabilities that are dynamically hedged | 46 | 73 | (177) | 179 | (110) | (693) | (41) | - | ||||||||||||||||
Impact of major reinsurance transactions | - | 26 | (25) | - | - | - | - | - | ||||||||||||||||
Direct impact of equity markets and interest rates | (150) | (297) | (22) | (15) | 268 | (810) | (55) | 200 | ||||||||||||||||
Tax items | 170 | - | - | - | - | - | - | - | ||||||||||||||||
Net income (loss) attributed to shareholders | $ | 724 | $ | 436 | $ | 177 | $ | 574 | $ | 505 | $ | (1,028) | $ | 429 | $ | 715 |
Corporate and Other
Quarterly Results | ||||||||||||||||||||||||
C$ millions, unaudited | 2012 | 2011 | ||||||||||||||||||||||
For the quarter | 4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | ||||||||||||||||
Corporate & Other core losses (excluding expected cost of macro hedges and core investment gains) |
$ | (79) | $ | (117) | $ | (83) | $ | (128) | $ | (124) | (58) | $ | (8) | $ | (225) | |||||||||
Expected cost of macro hedges | (140) | (124) | (118) | (107) | (97) | (107) | (104) | (100) | ||||||||||||||||
Core investment gains | 50 | 50 | 50 | 50 | 50 | 50 | 50 | 50 | ||||||||||||||||
Total core losses | $ | (169) | $ | (191) | $ | (151) | $ | (185) | $ | (171) | $ | (115) | $ | (62) | $ | (275) | ||||||||
Investment related losses in excess of core investment gains | (49) | (15) | (16) | (46) | (16) | (58) | (10) | (31) | ||||||||||||||||
Core losses plus investment related losses in excess of core investment gains | $ | (218) | $ | (206) | $ | (167) | $ | (231) | $ | (187) | $ | (173) | $ | (72) | $ | (306) | ||||||||
Other items to reconcile core earnings to net income (loss) attributed to shareholders | ||||||||||||||||||||||||
Direct impact of equity markets and interest rates | (332) | (120) | (168) | (595) | (255) | 1,076 | (127) | (214) | ||||||||||||||||
Change in actuarial methods and assumptions, excluding URR | (87) | (1,006) | - | 12 | 2 | (651) | (32) | (70) | ||||||||||||||||
Goodwill impairment charge | - | (200) | - | - | (665) | - | - | - | ||||||||||||||||
Gain (loss) on sale of Life Retrocession Business | - | - | (50) | - | - | 303 | - | - | ||||||||||||||||
Tax items and restructuring charge related to organizational design | 37 | - | - | 18 | - | - | - | - | ||||||||||||||||
Net income (loss) attributed to shareholders | $ | (600) | $ | (1,532) | $ | (385) | $ | (796) | $ | (1,105) | $ | 555 | $ | (231) | $ | (590) |
Net income in accordance with U.S. GAAP is a non-GAAP profitability measure. It shows what the net income would have been if the Company had applied U.S. GAAP as its primary financial reporting basis. We consider this to be a relevant profitability measure given our large U.S. domiciled investor base and for comparability to our U.S. peers who report under U.S. GAAP.
Total equity in accordance with U.S. GAAP is a non-GAAP measure. It shows what the total equity would have been if the Company had applied U.S. GAAP as its primary financial reporting basis. We consider this to be a relevant measure given our large U.S. domiciled investor base and for comparability to our U.S. peers who report under U.S. GAAP.
Core return on common shareholders' equity ("Core ROE") is a non-GAAP profitability measure that presents core earnings available to common shareholders as a percentage of the capital deployed to earn the core earnings. The Company calculates core return on common shareholders' equity using average common shareholders' equity.
Core earnings per share is core earnings available to common shareholders expressed per weighted average common share outstanding.
The Company also uses financial performance measures that are prepared on a constant currency basis, which exclude the impact of currency fluctuations and which are non-GAAP measures. Quarterly amounts stated on a constant currency basis in this report are calculated, as appropriate, using the income statement and balance sheet exchange rates effective for the fourth quarter of 2012.
Premiums and deposits is a non-GAAP measure of top line growth. The Company calculates premiums and deposits as the aggregate of (i) general fund premiums, net of reinsurance, reported as premiums on the Consolidated Statement of Income, (ii) adding back the premiums ceded related to FDA coinsurance, (iii) premium equivalents for administration only group benefit contracts, (iv) premiums in the Canadian Group Benefits reinsurance ceded agreement, (v) segregated fund deposits, excluding seed money, (vi) mutual fund deposits, (vii) deposits into institutional advisory accounts, and (viii) other deposits in other managed funds.
Premiums and deposits | Quarterly Results | Full Year Results | ||||||||||||
C$ millions | 4Q 2012 | 3Q 2012 | 4Q 2011 | 2012 | 2011 | |||||||||
Net premium income | $ | 5,012 | $ | 2,187 | $ | 4,540 | $ | 10,734 | $ | 17,504 | ||||
Deposits from policyholders | 5,537 | 5,539 | 5,575 | 22,993 | 21,689 | |||||||||
Premiums and deposits per financial statements | $ | 10,549 | $ | 7,726 | $ | 10,115 | $ | 33,727 | $ | 39,193 | ||||
Add back premiums ceded relating to FDA coinsurance | 2 | 1,799 | - | 7,229 | - | |||||||||
Investment contract deposits | 59 | 40 | 126 | 212 | 289 | |||||||||
Mutual fund deposits | 6,117 | 4,335 | 3,309 | 18,843 | 16,640 | |||||||||
Institutional advisory account deposits | 5,376 | 1,106 | 627 | 7,744 | 2,807 | |||||||||
ASO premium equivalents | 706 | 673 | 666 | 2,819 | 2,679 | |||||||||
Group benefits ceded premiums | 1,180 | 967 | 941 | 4,430 | 3,754 | |||||||||
Other fund deposits | 139 | 100 | 133 | 497 | 699 | |||||||||
Total premiums and deposits | $ | 24,128 | $ | 16,746 | $ | 15,917 | $ | 75,501 | $ | 66,061 | ||||
Currency impact | - | (61) | (372) | (454) | 53 | |||||||||
Constant currency premiums and deposits | $ | 24,128 | $ | 16,685 | $ | 15,545 | $ | 75,047 | $ | 66,114 |
Funds under management is a non-GAAP measure of the size of the Company. It represents the total of the invested asset base that the Company and its customers invest in.
Funds under management | |||||||||
(C$ millions) As at | |||||||||
Total invested assets | $ | 229,928 | $ | 224,761 | $ | 226,520 | |||
Segregated funds net assets | 207,985 | 205,685 | 195,933 | ||||||
Funds under management per financial statements | $ | 437,913 | $ | 430,446 | $ | 422,453 | |||
Mutual funds | 59,979 | 55,705 | 49,399 | ||||||
Institutional advisory accounts (excluding segregated funds) | 26,692 | 21,597 | 21,652 | ||||||
Other funds | 7,358 | 6,849 | 6,148 | ||||||
Total fund under management | $ | 531,942 | $ | 514,597 | $ | 499,652 | |||
Currency impact | - | 1,563 | (10,991) | ||||||
Constant currency funds under management | $ | 531,942 | $ | 516,160 | $ | 488,661 |
Capital The definition we use for capital, a non-GAAP measure, serves as a foundation of our capital management activities at the MFC level. For regulatory reporting purposes, the numbers are further adjusted for various additions or deductions to capital as mandated by the guidelines used by OSFI. Capital is calculated as the sum of (i) total equity excluding AOCI on cash flow hedges and (ii) liabilities for preferred shares and capital instruments.
Capital | |||||||||
(C$ millions) As at | |||||||||
Total equity | $ | 26,096 | $ | 24,961 | $ | 24,879 | |||
Add AOCI loss on cash flow hedges | 50 | 58 | 91 | ||||||
Add liabilities for preferred shares and capital instruments | 3,501 | 3,495 | 4,012 | ||||||
Total capital | $ | 29,647 | $ | 28,514 | $ | 28,982 |
Embedded value is a measure of shareholders' value embedded in the current balance sheet of the Company, excluding any value associated with future new business.
New business embedded value ("NBEV") is the change in shareholders' economic value as a result of sales in the reporting period. NBEV is calculated as the present value of expected future earnings, after the cost of capital, on actual new business sold in the period using future mortality, morbidity, policyholder behaviour, expense and investment assumptions that are consistent with the assumptions used in the valuation of our policy liabilities.
The principal economic assumptions used in the NBEV calculations in the fourth quarter were as follows:
Canada | U.S. | Hong Kong | Japan | |
MCCSR ratio | 150% | 150% | 150% | 150% |
Discount rate | 8.50% | 8.50% | 9.25% | 6.25% |
Jurisdictional income tax rate | 26% | 35% | 16.5% | 33% |
Foreign exchange rate | n/a | 0.983671 | 0.126912 | 0.012138 |
Yield on surplus assets | 4.50% | 4.50% | 4.50% | 2.00% |
Sales are measured according to product type:
For total individual insurance, sales include 100 per cent of new annualized premiums and 10 per cent of both excess and single premiums. For individual insurance, new annualized premiums reflect the annualized premium expected in the first year of a policy that requires premium payments for more than one year. Sales are reported gross before the impact of reinsurance. Single premium is the lump sum premium from the sale of a single premium product, e.g. travel insurance.
For group insurance, sales include new annualized premiums and administrative services only premium equivalents on new cases, as well as the addition of new coverages and amendments to contracts, excluding rate increases.
For individual wealth management contracts, all new deposits are reported as sales. This includes individual annuities, both fixed and variable; mutual funds; college savings 529 plans; and authorized bank loans and mortgages.
For group pensions/retirement savings, sales of new regular premiums and deposits reflect an estimate of expected deposits in the first year of the plan with the Company. Single premium sales reflect the assets transferred from the previous plan provider. Sales include the impact of the addition of a new division or of a new product to an existing client. Total sales include both new regular and single premiums and deposits.
F2 Key Planning Assumptions and Uncertainties
Manulife's 2016 management objectives do not constitute guidance and are based on certain key planning assumptions, including: current accounting and regulatory capital standards; no acquisitions; equity market and interest rate assumptions consistent with our long term assumptions, and favourable investment experience included in core earnings25.
_____________________ | ||
25 | Interest rate assumptions based on forward curve as of |
F3 Caution regarding forward-looking statements
From time to time, MFC makes written and/or oral forward-looking statements, including in this document. In addition, our representatives may make forward-looking statements orally to analysts, investors, the media and others. All such statements are made pursuant to the "safe harbour" provisions of Canadian provincial securities laws and the U.S. Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document include, but are not limited to, statements with respect to our 2016 management objectives for core earnings and core ROE, potential future charges related to URR assumptions if current low interest rates persist, changes in MLI's MCCSR ratio and additional risks regarding entities within the MFC group that are interconnected which may make separation difficult. The forward-looking statements in this document also relate to, among other things, our objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and can generally be identified by the use of words such as "may", "will", "could", "should", "would", "likely", "suspect", "outlook", "expect", "intend", "estimate", "anticipate", "believe", "plan", "forecast", "objective", "seek", "aim", "continue", "goal", "restore", "embark" and "endeavour" (or the negative thereof) and words and expressions of similar import, and include statements concerning possible or assumed future results. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and undue reliance should not be placed on such statements and they should not be interpreted as confirming market or analysts' expectations in any way. Certain material factors or assumptions are applied in making forward-looking statements, including in the case of our 2016 management objectives for core earnings and core ROE, the assumptions described under "Key Planning Assumptions and Uncertainties" in our 2011 Annual Report and in this document and actual results may differ materially from those expressed or implied in such statements. Important factors that could cause actual results to differ materially from expectations include but are not limited to: the factors identified in "Key Planning Assumptions and Uncertainties" in our 2011 Annual Report and in this document and under "Risk Management and Risk Factors Update" in this document; general business and economic conditions (including but not limited to the performance, volatility and correlation of equity markets, interest rates, credit and swap spreads, currency rates, investment losses and defaults, market liquidity and creditworthiness of guarantors, reinsurers and counterparties); changes in laws and regulations; changes in accounting standards; our ability to execute strategic plans and changes to strategic plans; downgrades in our financial strength or credit ratings; our ability to maintain our reputation; impairments of goodwill or intangible assets or the establishment of provisions against future tax assets; the accuracy of estimates relating to morbidity, mortality and policyholder behaviour; the accuracy of other estimates used in applying accounting policies and actuarial methods; our ability to implement effective hedging strategies and unforeseen consequences arising from such strategies; our ability to source appropriate assets to back our long dated liabilities; level of competition and consolidation; our ability to market and distribute products through current and future distribution channels; unforeseen liabilities or asset impairments arising from acquisitions and dispositions of businesses; the realization of losses arising from the sale of investments classified as available-for-sale; our liquidity, including the availability of financing to satisfy existing financial liabilities on expected maturity dates when required; obligations to pledge additional collateral; the availability of letters of credit to provide capital management flexibility; accuracy of information received from counterparties and the ability of counterparties to meet their obligations; the availability, affordability and adequacy of reinsurance; legal and regulatory proceedings, including tax audits, tax litigation or similar proceedings; our ability to adapt products and services to the changing market; our ability to attract and retain key executives, employees and agents; the appropriate use and interpretation of complex models or deficiencies in models used; political, legal, operational and other risks associated with our non-North American operations; acquisitions and our ability to complete acquisitions including the availability of equity and debt financing for this purpose; the disruption of or changes to key elements of the Company's or public infrastructure systems; environmental concerns; and our ability to protect our intellectual property and exposure to claims of infringement. Additional information about material factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in the body of this document as well as under "Risk Factors" in our most recent Annual Information Form, under "Risk Management", "Risk Management and Risk Factors" and "Critical Accounting and Actuarial Policies" in the Management's Discussion and Analysis in our most recent annual report, under "Risk Management and Risk Factors Update" and "Critical Accounting and Actuarial Policies" in the Management's Discussion and Analysis in our most recent interim report, in the "Risk Management" note to consolidated financial statements in our most recent annual and interim reports and elsewhere in our filings with Canadian and U.S. securities regulators. The forward-looking statements in this documents are, unless otherwise indicated, stated as of the date hereof and are presented for the purpose of assisting investors and others in understanding our financial position and results of operations as well as our objectives and strategic priorities, and may not be appropriate for other purposes. We do not undertake to update any forward-looking statements, except as required by law.
Consolidated Statements of Income (Loss)
(Canadian $ in millions except per share information, unaudited) | For the three months ended | For the years ended | |||||||||||
2012 | 2011 | 2012 | 2011 | ||||||||||
Net premium income 1 | $ | 5,012 | $ | 4,540 | $ | 10,734 | $ | 17,504 | |||||
Investment income | |||||||||||||
Investment income | 2,095 | 2,034 | 8,792 | 10,367 | |||||||||
Realized/ unrealized gains (losses) on assets supporting insurance and investment contract liabilities 2 | (1,600) | 1,360 | 3,050 | 15,870 | |||||||||
Other revenue | 1,690 | 1,765 | 7,356 | 7,242 | |||||||||
Total revenue | $ | 7,197 | $ | 9,699 | $ | 29,932 | $ | 50,983 | |||||
Contract benefits and expenses | |||||||||||||
To contractholders and beneficiaries | |||||||||||||
Death, disability and other claims | $ | 2,282 | $ | 2,224 | $ | 9,527 | $ | 9,213 | |||||
Maturity and surrender benefits | 1,472 | 1,375 | 5,058 | 5,403 | |||||||||
Annuity payments | 838 | 802 | 3,244 | 3,164 | |||||||||
Policyholder dividends and experience rating refunds | 257 | 302 | 1,092 | 1,080 | |||||||||
Net transfers from segregated funds | (185) | (130) | (718) | (299) | |||||||||
Change in insurance contract liabilities 2 | 39 | 4,364 | 13,442 | 27,934 | |||||||||
Change in investment contract liabilities | 26 | 35 | 87 | 64 | |||||||||
Ceded benefits and expenses | (1,526) | (1,325) | (5,924) | (4,918) | |||||||||
Change in reinsurance assets 1 | 154 | (1,486) | (8,065) | (1,852) | |||||||||
Net benefits and claims | $ | 3,357 | $ | 6,161 | $ | 17,743 | $ | 39,789 | |||||
General expenses | 1,277 | 1,134 | 4,531 | 4,061 | |||||||||
Investment expenses | 297 | 273 | 1,091 | 1,001 | |||||||||
Commissions | 1,012 | 987 | 3,932 | 3,813 | |||||||||
Interest expense 3 | 119 | 288 | 967 | 1,249 | |||||||||
Net premium taxes | 78 | 72 | 299 | 257 | |||||||||
Goodwill impairment | - | 665 | 200 | 665 | |||||||||
Total contract benefits and expenses | $ | 6,140 | $ | 9,580 | $ | 28,763 | $ | 50,835 | |||||
Income before income taxes | $ | 1,057 | $ | 119 | $ | 1,169 | $ | 148 | |||||
Income tax recovery (expense) | 22 | (174) | 523 | 97 | |||||||||
Net income (loss) | $ | 1,079 | $ | (55) | $ | 1,692 | $ | 245 | |||||
Less: Net income attributed to non-controlling interest in subsidiaries | 2 | 14 | 59 | 27 | |||||||||
Net income (loss) attributed to participating policyholders | 20 | - | (103) | 89 | |||||||||
Net income (loss) attributed to shareholders | $ | 1,057 | $ | (69) | $ | 1,736 | $ | 129 | |||||
Preferred share dividends | (29) | (21) | (112) | (85) | |||||||||
Common shareholders' net income (loss) | $ | 1,028 | $ | (90) | $ | 1,624 | $ | 44 | |||||
Basic earnings (loss) per common share | $ | 0.56 | $ | (0.05) | $ | 0.90 | $ | 0.02 | |||||
Diluted earnings (loss) per common share | $ | 0.56 | $ | (0.05) | $ | 0.88 | $ | 0.02 |
1 On |
|||||||||||||
2 The volatility in realized/unrealized gains on assets supporting insurance and investment contract liabilities relates primarily to the impact of interest rates changes on bond and fixed income derivative positions as well as interest rate swaps supporting the dynamic hedge program. These items are mostly offset by changes in the measurement of our policy obligations. For fixed income assets supporting insurance and investment contracts, equities supporting pass through products and derivatives related to variable annuity hedging programs, the impact of realized/ unrealized gains on the assets is largely offset in the change in insurance and investment contract liabilities. | |||||||||||||
3 Q4 2012 includes the release of interest provision related to tax contigency. |
Consolidated Statements of Financial Position
(Canadian $ in millions, unaudited) | |||||||
As at |
|||||||
Assets | 2012 | 2011 | |||||
Invested assets | |||||||
Cash and short-term securities | $ | 13,484 | $ | 12,813 | |||
Securities | |||||||
Bonds | 119,281 | 120,487 | |||||
Stocks | 11,995 | 10,243 | |||||
Loans | |||||||
Mortgages | 35,082 | 35,023 | |||||
Private placements | 20,275 | 20,294 | |||||
Policy loans | 6,793 | 6,827 | |||||
Bank loans | 2,142 | 2,288 | |||||
Real estate | 8,513 | 7,466 | |||||
Other invested assets | 12,363 | 11,079 | |||||
Total invested assets | $ | 229,928 | $ | 226,520 | |||
Other assets | |||||||
Accrued investment income | $ | 1,802 | $ | 1,802 | |||
Outstanding premiums | 1,009 | 781 | |||||
Derivatives | 14,707 | 15,472 | |||||
Goodwill and intangible assets | 5,113 | 5,442 | |||||
Reinsurance assets | 18,681 | 10,728 | |||||
Deferred tax asset | 3,148 | 1,757 | |||||
Miscellaneous | 3,683 | 3,542 | |||||
Total other assets | $ | 48,143 | $ | 39,524 | |||
Segregated funds net assets | $ | 207,985 | $ | 195,933 | |||
Total assets | $ | 486,056 | $ | 461,977 | |||
Liabilities and Equity | |||||||
Policy liabilities | |||||||
Insurance contract liabilities | $ | 199,588 | $ | 190,366 | |||
Investment contract liabilities | 2,424 | 2,540 | |||||
Bank deposits | 18,857 | 18,010 | |||||
Deferred tax liability | 694 | 766 | |||||
Derivatives | 7,206 | 7,627 | |||||
Other liabilities | 14,253 | 12,341 | |||||
$ | 243,022 | $ | 231,650 | ||||
Long-term debt | 5,452 | 5,503 | |||||
Liabilities for preferred shares and capital instruments | 3,501 | 4,012 | |||||
Segregated funds net liabilities | 207,985 | 195,933 | |||||
Total liabilities | $ | 459,960 | $ | 437,098 | |||
Equity | |||||||
Issued share capital | |||||||
Preferred shares | $ | 2,497 | $ | 1,813 | |||
Common shares | 19,886 | 19,560 | |||||
Contributed surplus | 257 | 245 | |||||
Shareholders' retained earnings | 3,178 | 2,501 | |||||
Shareholders' accumulated other comprehensive income (loss) | (369) | 96 | |||||
Total shareholders' equity | $ | 25,449 | $ | 24,215 | |||
Participating policyholders' equity | 146 | 249 | |||||
Non-controlling interest in subsidiaries | 501 | 415 | |||||
Total equity | $ | 26,096 | $ | 24,879 | |||
Total liabilities and equity | $ | 486,056 | $ | 461,977 |
SOURCE
Wordcount: | 28537 |
UNITEDHEALTH GROUP INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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