Manulife Financial Reports 3Q Net Income Of $1B
PR Newswire Association LLC |
In the third quarter of 2013, MFC generated core earnings of
_______________
5 This is a non-GAAP measure. See "Performance and Non-GAAP Measures" below.
6 See Caution regarding forward-looking statements below.
Highlights for the quarter ended
- Reported net income attributed to shareholders of
$1,034 million compared to a loss of$211 million in the third quarter of 2012.- Earnings benefitted by
$543 million from the favourable impact that the current period's investment activity had on the measurement of our policy liabilities and investment income as well as market-related factors of$94 million . - Partially offsetting these favourable impacts was a charge of
$252 million related to the annual review of actuarial methods and assumptions. In the third quarter of 2012, we reported a charge of$1.0 billion related to the corresponding annual review. - This quarter, we saw a reversal of the second quarter charges related to (1) the short term increase in our Government of
Canada bond holding, as we redeployed these into higher yielding assets and (2) the impact of interest rates on the bond and balanced funds in variable annuity products, as we updated our bond parameters to reflect higher prevailing rates as part of the third quarter actuarial review. - Net income attributed to shareholders for the nine months ended
September 30, 2013 was$1,833 million as compared to$733 million for the first nine months of 2012.
- Earnings benefitted by
- Generated core earnings of
$704 million , an increase of$95 million from the second quarter of 2013 and an increase of$134 million from a year earlier.- The
$95 million increase over the prior quarter reflects more favourable policyholder experience, a$40 million release of tax provisions from closing prior years' tax filings inCanada , and lower net hedging costs, partially offset by lower investment income in the surplus segment. - The
$134 million increase over the prior year reflects improved new business margins on our insurance businesses, higher fee income as a result of the growth of our wealth management businesses, improved policyholder claims experience, higher release of tax provisions from the closure of prior years' tax filings and lower hedging costs. - Core earnings for the nine months ended
September 30, 2013 were$1,932 million as compared to$1,695 million for the first nine months of 2012.
- The
- Achieved strong wealth sales of
$11.3 billion , up 34 per cent from a year earlier. Asia wealth sales increased by 21 per cent with strong double digit growth across most territories. InCanada , strong growth in mutual fund deposits and bank lending volumes contributed to a 32 per cent growth in wealth sales. U.S. Division's wealth sales rose 37 per cent as mutual fund sales nearly doubled but were partially offset by a 43 per cent decline in Retirement Plan Services sales driven in part by lower plan turnover in the market. - Reported a four per cent increase in insurance sales compared to a year ago. Insurance sales in
Asia declined four per cent as the increase in sales in Hong Kong and Other Asia7 were more than offset by lower corporate product sales inJapan . InCanada , althoughIndividual Insurance annualized premium sales were eight per cent lower than the prior year, sales in Group Benefits drove an increase of 27 per cent in total insurance sales compared with third quarter 2012. In the U.S., insurance sales were in line with the prior year and reflected a more favourable product mix. - Generated strong investment-related experience of
$543 million ,$52 million of which was included in core earnings.The experience included$284 million primarily attributable to favourable returns from our timber, agriculture and private equity assets; gains from the redeployment of government securities into higher yielding assets; and continued excellent credit experience. In addition, we reported net gains of$259 million related to planned asset allocation activities that enhanced surplus liquidity and resulted in better asset-liability matching in the respective liability segments. - Ended the quarter with the
Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio for TheManufacturers Life Insurance Company ("MLI") of 229 per cent, up seven points fromJune 30, 2013. This seven point increase was driven in part by lower required capital on segregated funds, as a result of both higher equity markets and changes to the assumptions used in the required capital calculation consistent with the third quarter changes in actuarial assumptions. Third quarter earnings also contributed to the increase. - Generated new business embedded value ("NBEV") of
$278 million , up 56 per cent from a year ago. The increase in NBEV reflects favourable product re-pricing and changes to new business mix in our insurance businesses, higher volumes in our wealth management businesses and improved expenses. - Achieved record funds under management ("FUM") of
$575 billion . - Reported a
$252 million net charge related to our annual actuarial review.- This was largely driven by unfavourable changes to lapse and policyholder behavior assumptions, partly offset by the benefit from the annual update to the parameters used in the stochastic valuation of our segregated fund businesses and other annual updates.
- In the fourth quarter, we will be completing our review of our modeling of future tax cash flows for our U.S. Variable Annuity business and we expect that this could result in a charge to earnings. The amount is dependent upon the potential implementation of changes to the investment objectives of separate accounts that support our Variable Annuity products, which require policyholder approval. Separately, as previously announced, we expect the sale of our
Taiwan insurance business to close in the fourth quarter or early 2014, subject to regulatory approvals. We expect the net impact of all these items, if completed, would be neutral to positive8. - Reported
$148 million net income attributed to shareholders in accordance with U.S. GAAP inclusive of$498 million of lossesrelated to our variable annuity business and macro hedges.
_______________ | |
7 | Other Asia excludes |
8 | See "Caution regarding forward-looking statements" below. |
Financial Highlights
Quarterly Results | YTD Results | |||||||||||
C$ millions, unless otherwise stated, unaudited |
3Q 2013 | 2Q 2013 | (restated)(1) 3Q 2012 |
|
(restated)(1) |
|||||||
Net income (loss) attributed to shareholders | $ | 1,034 | $ | 259 | $ | (211) | $ | 1,833 | $ | 733 | ||
Preferred share dividends | (33) | (32) | (31) | (97) | (83) | |||||||
Common shareholders' net income (loss) | $ | 1,001 | $ | 227 | $ | (242) | $ | 1,736 | $ | 650 | ||
Reconciliation of core earnings to net income (loss) attributed to shareholders: |
| |||||||||||
Core earnings(2) | $ | 704 | $ | 609 | $ | 570 | $ | 1,932 | $ | 1,695 | ||
Investment-related experience in excess of amounts included in core earnings |
491 | (97) | 365 | 491 | 628 | |||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 1,195 | $ | 512 | $ | 935 | $ | 2,423 | $ | 2,323 | ||
Other items to reconcile core earnings to net income attributed to shareholders: |
||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities that are dynamically hedged |
94 | (242) | 34 | (255) | (664) | |||||||
Changes in actuarial methods and assumptions, excluding ultimate reinvestment rate ("URR") |
(252) | (35) | (1,006) | (356) | (994) | |||||||
Other items(3) | (3) | 24 | (174) | 21 | 68 | |||||||
Net income (loss) attributed to shareholders | $ | 1,034 | $ | 259 | $ | (211) | $ | 1,833 | $ | 733 | ||
Basic earnings (loss) per common share (C$) | $ | 0.54 | $ | 0.12 | $ | (0.13) | $ | 0.95 | $ | 0.36 | ||
Diluted earnings (loss) per common share (C$) | $ | 0.54 | $ | 0.12 | $ | (0.13) | $ | 0.94 | $ | 0.36 | ||
Diluted core earnings per common share (C$)(2) | $ | 0.36 | $ | 0.31 | $ | 0.29 | $ | 0.99 | $ | 0.87 | ||
Return on common shareholders' equity ("ROE") (%) | 16.8% | 3.9% | (4.4)% | 10.1% | 4.0% | |||||||
Core ROE (%)(2) | 11.3% | 10.0% | 9.9% | 10.6% | 9.8% | |||||||
Funds under management (C$ billions)(2) | $ | 575 | $ | 567 | $ | 514 | $ | 575 | $ | 514 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
(2) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(3) | For a more detailed description see Section B1 below. |
SALES AND BUSINESS GROWTH
Asia Division
Asia Division third quarter 2013 insurance sales of
-
Japan insurance sales ofUS$95 million decreased by 20 per cent primarily due to the pricing actions discussed above, partly offset by contributions from new product launches. - Hong Kong insurance sales of
US$59 million were up seven per cent driven by growth in our agency force and higher par and critical illness product sales. -
Indonesia insurance sales ofUS$27 million were consistent with last year as the 44 per cent growth in Bank Danamon sales was offset by lower sales from other bank partners. -
Asia Other insurance sales (Asia excludingJapan , Hong Kong andIndonesia ) ofUS$70 million increased 13 per cent driven by strong universal life product sales in Singapore and higher agency sales inVietnam .
Third quarter 2013 wealth sales of
-
Japan wealth sales wereUS$226 million , an increase of 60 per cent, driven by higher sales of theStrategic Income Fund , launched in the fourth quarter of 2012. - Hong Kong wealth sales of
US$243 million , an increase of 46 per cent, continued to benefit from higher Pension sales following the launch of the Mandatory Provident Fund's new Employee Choice Arrangement late last year. -
Indonesia wealth sales ofUS$137 million decreased by 12 per cent due to lower single premium unit-linked product sales from the bank channel, partly offset by higher pension sales. -
Asia Other wealth sales ofUS$659 million were up 14 per cent driven by higher mutual fund sales inTaiwan and the continued success of single premium unit-linked product sales inthe Philippines , partly offset by lower mutual fund sales inChina . Record sales inMalaysia , boosted by the launch of a new bond fund and a new single premium unit-linked product through our expanded bank distribution, also contributed.
Asia Division continues to execute on our longer-term growth strategy by expanding agency and bank channel distribution capacity. Contracted agents stood at approximately 54,600 as at
_______________ | |
9 | See "Caution regarding forward-looking statements" below. |
10 | This is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
Canadian Division
Individual wealth management sales of
- Manulife Mutual Funds gross deposits of
$1.5 billion in the third quarter were more than 70 per cent higher than in the third quarter of 2012. We continue to leverage our global asset management expertise, driving strong fund performance across a diverse global platform. AtSeptember 30, 2013 , Manulife Mutual Funds offered 19 Four- or Five-Star Morningstar 11 rated mutual funds. Record year-to-date net sales,in combination with favourable market performance, drove assets under management to a record$25.3 billion , up 29 per cent fromSeptember 30, 2012 , double the industry growth rate12. - Manulife Bank's net lending assets were a record
$18.5 billion , an increase of nine per cent from the third quarter of 2012, which outpaced industry growth13 and reflects good retention and strong new lending volumes. Third quarter new loan production of$1.3 billion increased 14 per cent from the third quarter of 2012. - Variable annuity sales were
$313 million , 32 per cent lower than the third quarter of 2012, reflecting the evolution of our product strategy. During the quarter, we launched Manulife RetirementPlus, an innovative, flexible retirement savings and income solution which customers can personalize to meet their retirement needs. Fixed product sales were$108 million in the third quarter, up significantly from third quarter 2012, reflecting more competitive rate positioning.
In our Group businesses, Group Benefits sales were
_______________ | |
11 | 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. |
12 | Based on publicly available information from Investor Economics and the |
13 | As per |
14 | Based on quarterly LIMRA industry sales reports as at |
U.S. Division
Wealth Management third quarter 2013 sales were
- John Hancock Investments ("JH Investments") third quarter 2013 sales of
US$5.8 billion increased 87 per cent compared with our third quarter 2012 results, and included increases across all distribution channels. Sales were driven by a strong product lineup which leverages our manager-of-managers investment model, strong distribution partnerships, improved productivity of the sales force, and a shift in investor money back to equity funds. AtSeptember 30, 2013 , JH Investments offered 26 Four- or Five-Star Morningstar rated equity and fixed income mutual funds. JH Investments redemption rates remained below the industry average, contributing to its eighth consecutive quarter of positive net sales15. These sales and retention results propelled funds under management as atSeptember 30, 2013 to a record high ofUS$56 billion , a 38 per cent increase fromSeptember 30, 2012 . - John Hancock Retirement Plan Services third quarter sales were
US$870 million , a decrease of 43 per cent compared with third quarter 2012 results, driven in part by lower plan turnover in the market. Funds under management grew to a recordUS$79 billion as atSeptember 30, 2013 , a 12 per cent increase fromSeptember 30, 2012 . Our recently launched "Enterprise" product (a mutual fund offering geared toward the mid-market) continues to gain traction. Enterprise sales commitments now total approximatelyUS$100 million . - The John Hancock Lifestyle and Target Date funds had assets under management of
US$86.7 billion as atSeptember 30, 2013 , an eight per cent increase overSeptember 30, 2012 , and we were the fourth largest manager of assets in the U.S. for Lifestyle and Target Date funds offered through retail mutual funds and variable insurance products as of September 30, 201316. In the third quarter of 2013, new deposits includedUS$484 million of JH Investments sales andUS$2.0 billion of deposits from our 401(k) products.
-
John Hancock Life ("JH Life")sales ofUS$139 million were relatively flat compared with the third quarter of 2012. The business generated strong sales of the Protection universal life ("UL") and Indexed UL products, driven by growing market acceptance of these products as alternatives to No-Lapse Guarantee. This offset lower sales compared to the prior year ofCorporate Owned Life Insurance which can vary significantly by quarter. JH Life also launched a new Survivorship Indexed Universal Life product in the third quarter, which complements its single life offering, Protection Indexed Universal Life, by offering survivorship protection. - John Hancock Long-Term Care sales of
US$15 million in the third quarter of 2013 grew 15 per cent compared with the same period in 2012, as a key competitor pulled back in the market.
_______________ | |
15 | Source: Strategic Insight SIMFUND. Net sales (net new flows) is calculated using retail long-term open end mutual funds for managers in the Intermediary-Sold channel. Figures exclude money market and 529 share classes. |
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 Manulife Asset Management ("MAM") were
AWARDS & RECOGNITION
In Hong Kong, in the Reader's Digest Trusted Brand Awards,
In Hong Kong,
In
In the U.S., John Hancock Retirement Plan Services was ranked first in five categories, according to Plan Advisor magazine's annual survey, including best overall service, micro plans, among other categories.
Notes:
The conference call will also be webcast through
The Third Quarter 2013 Statistical Information Package is also available on the
Media inquiries: [email protected] |
Investor Relations: [email protected] |
Investor Relations: [email protected] |
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 2012 Annual Report, and the "Risk Management" note to the consolidated financial statements in our most recent annual and interim reports.
In this MD&A, the terms "Company", "Manulife Financial" and "we" mean
Contents | ||||||
A | OVERVIEW | D | RISK MANAGEMENT AND RISK FACTORS UPDATE | |||
1. | Third quarter highlights | 1. | Regulatory, actuarial and accounting risks | |||
2. | Other items of note | 2. | Variable annuity and segregated fund guarantees | |||
3. | Caution related to sensitivities | |||||
B | FINANCIAL HIGHLIGHTS | 4. | Publicly traded equity performance risk | |||
1. | Third quarter earnings analysis | | 5. | Interest rate and spread risk | ||
2. | Premiums and deposits | |||||
3. | Funds under management | E | ACCOUNTING MATTERS AND CONTROLS | |||
4. | Capital | 1. | Critical accounting and actuarial policies | |||
5. | U.S. GAAP results | 2. | Actuarial methods and assumptions | |||
3. | Sensitivity of policy liabilities to updates to assumptions | |||||
C | PERFORMANCE BY DIVISION | 4. | 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 Third quarter highlights
Net income attributed to shareholders was
Third quarter 2013 earnings included core earnings of
The third quarter of 2012 results included
Net income attributed to shareholders for the nine months ended
Core earnings increased
Total investment-related experiencewas
Market-related factors of
The annual review of actuarial methods and assumptions was completed in the third quarter, resulting in a total net charge of
- a
$530 million charge related to lapse and policyholder behavior assumption changes. This included updates toJohn Hancock Insurance premium persistency assumptions for universal life and variable universal life products as well as lapse and policyholder behavior assumptions across insurance and variable annuity businesses, primarily inCanada and inJapan . - a
$12 million charge due to the John Hancock Long-Term Care ("JH LTC") triennial review. The net amount includes charges related to updated mortality and morbidity assumptions, offset by the updated assumptions related to the previously filed in-force rate increases as a result of the 2010 review, refinements to the future tax reserve methodology and more favourable lapse assumptions. As a result of the mortality and morbidity experience review, additional in-force rate increases will be filed for and the estimated benefit of these are included in the net charge.
This was partly offset by:
- a
$203 million increase in earnings from the annual update to the market based parameters used in the stochastic valuation of our segregated fund business, mostly related to the impacts of foreign exchange and bond fund parameter updates. The bond fund parameters review includes updates to interest rates and volatility assumptions. The impact of interest rate movements between the last review effectiveMarch 31, 2012 andMarch 31, 2013 led to a charge, which was more than offset by the impact of the increase in interest rates in the second quarter of 2013. Effective in the third quarter 2013, bond fund parameters are updated quarterly, and the impact is reported in the direct impact of equity markets and interest rates. - an
$87 million net increase in earnings from other changes to actuarial methods and assumptions which includes the favourable impact of refinements related to the projection of asset and liability cash flows, partially offset by updates to mortality and morbidity assumptions on business other than JH LTC.
Insurance sales17 of
Wealth sales were
_______________ | |
17 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
18 | Growth (declines) in sales, premiums and deposits and funds under management are stated on a constant currency basis. Constant currency basis is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
A2 Other items of note
We noted in our second quarter report that we expected that the impact of a number of positive one-time items in the second half of the year, when offset with the third quarter review of actuarial assumptions, would result in an amount that would not be substantial in either direction.
In the third quarter, the
In the fourth quarter, we will be completing our review of our modeling of future tax cash flows for our U.S. Variable Annuity business and we expect that this could result in a charge to earnings. The amount is dependent upon the potential implementation of changes to the investment objectives of separate accounts that support our Variable Annuity products, which require policyholder approval. Separately, as previously announced, we expect the sale of our
_______________ | |
19 | See "Caution regarding forward-looking statements" below. |
B FINANCIAL HIGHLIGHTS
Quarterly Results | YTD Results | ||||||||||||
C$ millions, unless otherwise stated unaudited |
3Q 2013 | 2Q 2013 | (restated)(1) 3Q 2012 |
2013 | (restated)(1) 2012 |
||||||||
Net income (loss) attributed to shareholders | $ | 1,034 | $ | 259 | $ | (211) | $ | 1,833 | $ | 733 | |||
Preferred share dividends | (33) | (32) | (31) | (97) | (83) | ||||||||
Common shareholders' net income (loss) | $ | 1,001 | $ | 227 | $ | (242) | $ | 1,736 | $ | 650 | |||
Reconciliation of core earnings to net income (loss) attributed to shareholders: |
|||||||||||||
Core earnings(2) | $ | 704 | $ | 609 | $ | 570 | $ | 1,932 | $ | 1,695 | |||
Investment-related experience in excess of amounts included in core earnings |
491 | (97) | 365 | 491 | 628 | ||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 1,195 | $ | 512 | $ | 935 | $ | 2,423 | $ | 2,323 | |||
Other items to reconcile core earnings to net income attributed to shareholders: |
|||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities that are dynamically hedged |
94 | (242) | 34 | (255) | (664) | ||||||||
Changes in actuarial methods and assumptions, excluding URR |
(252) | (35) | (1,006) | (356) | (994) | ||||||||
Other items(3) | (3) | 24 | (174) | 21 | 68 | ||||||||
Net income (loss) attributed to shareholders | $ | 1,034 | $ | 259 | $ | (211) | $ | 1,833 | $ | 733 | |||
Basic earnings (loss) per common share (C$) | $ | 0.54 | $ | 0.12 | $ | (0.13) | $ | 0.95 | $ | 0.36 | |||
Diluted earnings (loss) per common share (C$) | $ | 0.54 | $ | 0.12 | $ | (0.13) | $ | 0.94 | $ | 0.36 | |||
Diluted core earnings per common share(C$)(2) | $ | 0.36 | $ | 0.31 | $ | 0.29 | $ | 0.99 | $ | 0.87 | |||
Return on common shareholders' equity ("ROE") (%) | 16.8% | 3.9% | (4.4)% | 10.1% | 4.0% | ||||||||
Core ROE (%)(2) | 11.3% | 10.0% | 9.9% | 10.6% | 9.8% | ||||||||
U.S. GAAP net income (loss) attributed to shareholders(2) | $ | 148 | $ | (692) | $ | 481 | $ | (889) | $ | 2,320 | |||
Sales(2) | |||||||||||||
Insurance products | $ | 605 | $ | 929 | $ | 596 | $ | 2,153 | $ | 2,420 | |||
Wealth products | $ | 11,299 | $ | 13,718 | $ | 8,229 | $ | 37,440 | $ | 25,501 | |||
Premiums and deposits(2) | |||||||||||||
Insurance products | $ | 6,057 | $ | 6,321 | $ | 5,597 | $ | 18,380 | $ | 17,592 | |||
Wealth products | $ | 14,645 | $ | 17,358 | $ | 11,149 | $ | 48,334 | $ | 33,781 | |||
Funds under management(C$ billions)(2) | $ | 575 | $ | 567 | $ | 514 | $ | 575 | $ | 514 | |||
Capital(C$ billions)(2) | $ | 31.1 | $ | 30.8 | $ | 28.0 | $ | 31.1 | $ | 28.0 | |||
MLI's MCCSR ratio | 229% | 222% | 204% | 229% | 204% |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
(2) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(3) | For a more detailed description see Section B1 below. |
B1 Third quarter earnings analysis
The table below reconciles the third quarter 2013 core earnings of
C$ millions, unaudited | 3Q 2013 | 2Q 2013 | (restated)(1) 3Q 2012 |
|||||||||
Core earnings (losses)(2) | ||||||||||||
Asia Division | $ | 242 | $ | 226 | $ | 230 | ||||||
Canadian Division | 268 | 225 | 229 | |||||||||
U.S. Division | 361 | 343 | 288 | |||||||||
Corporate and Other (excluding expected cost of macro hedges and core investment gains) |
(135) | (105) | (103) | |||||||||
Expected cost of macro hedges(3) | (84) | (128) | (124) | |||||||||
Investment-related experience in core earnings(4) | 52 | 48 | 50 | |||||||||
Core earnings | $ | 704 | $ | 609 | $ | 570 | ||||||
Investment-related experience in excess of amounts included in core earnings(4) |
491 | (97) | 365 | |||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 1,195 | $ | 512 | $ | 935 | ||||||
(Charges) gains on direct impact of equity markets and interest rates and variable annuity guarantee liabilities that are dynamically hedged (see table below)(5) |
94 | (242) | 34 | |||||||||
(Charges) gains from changes in actuarial methods and assumptions, excluding URR |
(252) | | (35) | (1,006) | ||||||||
Impact of the enactment of tax rate changes in |
(3) | 50 | - | |||||||||
Restructuring charge related to organizational design(7) | - | (26) | - | |||||||||
Goodwill impairment charge | - | - | (200) | |||||||||
Favourable impact of major reinsurance transactions | - | - | 26 | |||||||||
Net income (loss) attributed to shareholders | $ | 1,034 | $ | 259 | $ | (211) |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
(2) | Core earnings is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(3) | The third quarter 2013 net loss from macro equity hedges was |
(4) | As outlined under Critical Accounting and Actuarial Policies, net insurance contract liabilities under IFRS for Canadian insurers are determined using the Canadian Asset Liability Method ("CALM"). Under CALM, the measurement of policy liabilities includes estimates regarding future expected investment income on assets supporting the policies. Experience gains and losses are reported when current period activity differs from what was assumed in the policy liabilities at the beginning of the period. These gains and losses can relate to both the investment returns earned in the period, as well as to the change in our policy liabilities driven by the impact of current period investing activities on future expected investment income assumptions. |
(5) | The direct impact of equity markets and interest rates is relative to our policy liability valuation assumptions and includes changes to interest rate assumptions, including a quarterly URR update for |
(6) | Primarily reflects the impact on our deferred tax asset position of Canadian provincial tax rate changes. |
(7) | The restructuring charge is related to additional severance, pension and consulting costs for the Company's Organizational Design project, which was completed in Q2 2013. |
The gain (charge) related to the direct impact of equity markets and interest rates and variable annuity guarantee liabilities that are dynamically hedged in the table above is attributable to:
C$ millions, unaudited | 3Q 2013 | 2Q 2013 | 3Q 2012 | ||||||||||||
Variable annuity guarantee liabilities that are dynamically hedged(1) | $ | 160 | $ | 30 | $ | 122 | |||||||||
Variable annuity guarantee liabilities that are not dynamically hedged | 306 | 75 | 298 | ||||||||||||
General fund equity investments supporting policy liabilities and on fee income(2) | 85 | (70) | 55 | ||||||||||||
Macro equity hedges relative to expected costs(3) | (245) | (231) | (86) | ||||||||||||
Direct impact of equity markets and variable annuity guarantees that are dynamically hedged(4) |
$ | 306 | $ | (196) | $ | 389 | |||||||||
Fixed income reinvestment rates assumed in the valuation of policy liabilities(5) | (77) | 151 | (330) | ||||||||||||
Sale of AFS bonds and derivative positions in the Corporate and Other segment | (72) | (127) | (25) | ||||||||||||
Charges due to lower fixed income URR assumptions used in the valuation of policy liabilities(6) |
(63) | (70) | - | ||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantees that are dynamically hedged |
$ | 94 | $ | (242) | $ | 34 | |||||||||
Direct impact of equity markets and interest rates | $ | (66) | $ | (272) | $ | (88) |
(1) | 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 third quarter of 2013 was mostly because our equity fund results outperformed indices and there was a gain on the release of provision for adverse deviation associated with more favourable equity markets. See the Risk Management section of the MD&A in our 2012 Annual Report. |
(2) | The impact on general fund equity investments supporting policy liabilities and on fee income includes the capitalized impact on fees for variable universal life policies. |
(3) | As described in the previous chart, we incurred a charge of |
(4) | In the third quarter of 2013, gross equity exposure gains of |
(5) | The charge in the third quarter of 2013 for fixed income reinvestment assumptions was driven by the increase in Canadian swap spreads and the decrease in U.S. corporate spreads. |
(6) | Beginning with the first quarter of 2013, the URR impact is calculated on a quarterly basis, whereas in 2012 it was calculated on an annual basis in the second quarter. |
B2 Premiums and deposits20
Premiums and deposits for insurance products were
B3 Funds under management20
Funds under management as at
B4 Capital20
MFC's total capitalas at
_______________ | |
20 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
B5 U.S. GAAP results
Net income attributed to shareholders in accordance with U.S. GAAP for the third quarter of 2013 was
As we are no longer reconciling our financial results under IFRS and U.S. GAAP within our consolidated financial statements, net income attributed to shareholders in accordance with U.S. GAAP is considered a non-GAAP financial measure. The reconciliation of the major differences between net income attributed to shareholders in accordance with IFRS and the net income attributed to shareholders in accordance with U.S. GAAP for the third quarter of 2013 follows, with major differences expanded upon below:
C$ millions, unaudited | ||||||||||
For the quarters ended |
2013 | (restated)(1) 2012 |
||||||||
Net income (loss) attributed to shareholders in accordance with IFRS |
$ | 1,034 | $ | (211) | ||||||
Key earnings differences: | ||||||||||
Variable annuity guarantee liabilities | $ | (635) | $ | (323) | ||||||
Impact of mark-to-market accounting and investing activities on investment income and policy liabilities |
(394) | 258 | ||||||||
New business differences including acquisition costs | (210) | (151) | ||||||||
Changes in actuarial methods and assumptions, excluding URR | 175 | 431 | ||||||||
Goodwill impairment charge | - | 200 | ||||||||
Other differences | 178 | 277 | ||||||||
Total earnings differences | $ | (886) | $ | 692 | ||||||
Net income attributed to shareholders in accordance with U.S. GAAP |
$ | 148 | $ | 481 |
(1) | The 2012 IFRS results were restated to reflect the retrospective application of new IFRS accounting standards effective |
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 hedge 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 third quarter of 2013, we reported a net charge 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 third quarter 2013 IFRS impacts of fixed income reinvestment assumptions, general fund equity investments, fixed income and alternative long-duration asset investing totaled a net gain of
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.
Changes in actuarial methods and assumptions
The charge recognized under IFRS from changes in actuarial methods and assumptions of
Total equity in accordance with U.S. GAAP21 as at
A reconciliation of the major differences in total equity is as follows:
C$ millions, unaudited As at |
2013 |
(restated)(1) December 31, 2012 |
|||||||
Total equity in accordance with IFRS | $ | 26,881 | $ | 25,159 | |||||
Differences in shareholders' retained earnings and participating policyholders' equity | 7,050 | 9,715 | |||||||
Differences in accumulated other comprehensive income attributed to: | |||||||||
(i) Pension and other post-employment plans | (22) | (47) | |||||||
(ii) AFS securities and other | 2,549 | 5,670 | |||||||
(iii) Cash flow hedges | 1,509 | 2,575 | |||||||
(iv) Translation of net foreign operations(2) | (1,230) | (1,457) | |||||||
Differences in share capital, contributed surplus and non-controlling interests | 188 | 240 | |||||||
Total equity in accordance with U.S. GAAP | $ | 36,925 | $ | 41,855 |
(1) | The 2012 IFRS amounts were restated to reflect the retrospective application of new IFRS accounting standards effective |
(2) | Reflects the net difference in the currency translation account after the reset to zero through retained earnings upon adoption of IFRS at |
_______________ | |
21 | This term 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 | YTD results | |||||||||||||||||||||||
Canadian dollars | 3Q 2013 | 2Q 2013 | 3Q 2012 | 3Q 2013 | 3Q 2012 | ||||||||||||||||||||
Net income attributed to shareholders(1) | $ | 480 | $ | 386 | $ | 491 | $ | 1,794 | $ | 1,287 | |||||||||||||||
Core earnings(1) | 242 | 226 | 230 | 694 | 783 | ||||||||||||||||||||
Premiums and deposits | 3,218 | 5,138 | 2,944 | | 12,824 | 9,058 | |||||||||||||||||||
Funds under management (billions) | 80.1 | 79.3 | 76.2 | 80.1 | 76.2 | ||||||||||||||||||||
U.S. dollars | |||||||||||||||||||||||||
Net income attributed to shareholders | $ | 463 | $ | 378 | $ | 492 | $ | 1,761 | $ | 1,290 | |||||||||||||||
Core earnings | 233 | 220 | 231 | </td> | 677 | 781 | |||||||||||||||||||
Premiums and deposits | 3,099 | 5,024 | 2,958 | 12,553 | 9,036 | ||||||||||||||||||||
Funds under management (billions) | 77.9 | 75.4 | 77.5 | 77.9 | 77.5 |
(1) | See "Performance and Non-GAAP Measures" for a reconciliation between IFRS net income attributed to shareholders and core earnings. |
Asia Division's net income attributed to shareholders was
Year-to-date net income attributed to shareholders was
Premiums and deposits for the third quarter of 2013 were
Funds under management as at
C2 Canadian Division
($ millions unless otherwise stated) | Quarterly results | YTD results | |||||||||||||||||||||||
Canadian dollars | 3Q 2013 | 2Q 2013 | 3Q 2012 | 3Q 2013 | 3Q 2012 | ||||||||||||||||||||
Net income attributed to shareholders(1) | $ | 414 | $ | 103 | $ | 378 | $ | 455 | $ | 918 | |||||||||||||||
Core earnings(1) | 268 | 225 | 229 | 672 | 602 | ||||||||||||||||||||
Premiums and deposits | 4,901 | 5,661 | 4,160 | 15,897 | 13,451 | ||||||||||||||||||||
Funds under management (billions) | 138.8 | 135.8 | 131.1 | 138.8 | 131.1 |
(1) | See "Performance and Non-GAAP Measures" for a reconciliation between IFRS net income attributed to shareholders and core earnings. |
Canadian Division's net income attributed to shareholders was
Year-to-date net income attributed to shareholders was
Premiums and deposits in the third quarter of 2013 were
Funds under management of
C3 U.S. Division
($ millions unless otherwise stated) | Quarterly results | YTD results | |||||||||||||||||||||||
Canadian dollars | 3Q 2013 | 2Q 2013 | (restated)(1) 3Q 2012 |
3Q 2013 | (restated)(1) 3Q 2012</td> | ||||||||||||||||||||
Net income attributed to shareholders(2) | $ | 928 | $ | 429 | $ | 438 | $ | 2,083 | $ | 1,193 | |||||||||||||||
Core earnings(2) | 361 | 343 | 288 | 1,144 | 792 | ||||||||||||||||||||
Premiums and deposits | 11,473 | 11,713 | 8,510 | 34,911 | 26,283 | ||||||||||||||||||||
Funds under management (billions) | 319.9 | 315.7 | 287.2 | 319.9</b> | 287.2 | ||||||||||||||||||||
U.S. dollars | |||||||||||||||||||||||||
Net income attributed to shareholders | $ | 894 | $ | 419 | $ | 441 | $ | 2,033 | $ | 1,193 | |||||||||||||||
Core earnings | 348 | 336 | | 289 | 1,120 | 791 | |||||||||||||||||||
Premiums and deposits | 11,046 | 11,450 | 8,552 | 34,125 | 26,224 | ||||||||||||||||||||
Funds under management (billions) | 311.0 | 300.3 | 292.0 | 311.0 | $ | 292.0 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
(2) | See "Performance and Non-GAAP Measures" for a reconciliation between IFRS net income attributed to shareholders and core earnings. |
U.S. Division's net income attributed to shareholders was
Contributing to the increase in core earnings were higher insurance new business margins as a result of product actions, price increases and business mix; lower amortization of Variable Annuity deferred acquisition costs; improved policyholder experience in our Life business; and higher fee income from higher average assets under management. This was partially offset by costs associated with the hedging of additional in-force variable annuity guaranteed value. Items reconciling core earnings to net income attributed to shareholders in the third quarter of 2013 included favourable market and investment-related experience of
Year-to-date net income attributed to shareholders was
Premiums and deposits for the third quarter of 2013 were
Funds under management</b> as at
C4 Corporate and Other
($ millions, unless otherwise stated) | Quarterly Results | YTD results | ||||||||||||||||||||||||
Canadian dollars | 3Q 2013 | 2Q 2013 | (restated)(1) 3Q 2012 |
3Q 2013 | (restated)(1) 3Q 2012 |
|||||||||||||||||||||
Net loss attributed to shareholders(2) | $ | (788) | $ | (659) | $ | (1,518) | $ | (2,499) | $ | (2,665) | ||||||||||||||||
Core losses (excluding macro hedges and core investment gains)(2) |
$ | (135) | $ | (105) | $ | (103) | $ | (368) | $ | (283) | ||||||||||||||||
Expected cost of macro hedges | (84) | (128) | (124) | (360) | (349) | |||||||||||||||||||||
Investment gains included in core earnings | 52 | 48 | 50 | 150 | 150 | |||||||||||||||||||||
Total core losses | $ | (167) | $ | (185) | $ | (177) | $ | (578) | $ | (482) | ||||||||||||||||
Premiums and deposits | $ | 1,110 | $ | 1,167 | $ | 1,132 | $ | 3,082 | $ | 2,581 | ||||||||||||||||
Funds under management (billions) | 35.8 | 36.2 | 19.3 | 35.8 | 19.3 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
(2) | See "Performance and Non-GAAP Measures" for a reconciliation between IFRS net income attributed to shareholders and core earnings. |
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 third quarter of 2013 included: a
Core losses were
Premiums and deposits for the third quarter of 2013 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 2012 Annual Report.
D1 Regulatory, actuarial and accounting risks
As previously disclosed, changes to U.S. statutory accounting practices concerning actuarial reserving standards for certain universal life products pursuant to Actuarial Guideline 38 ("AG38") were effective as of
As we disclosed previously, the
The comment periods on the exposure drafts ended on
D2 Variable annuity and segregated fund guarantees
As outlined in the MD&A in our 2012 Annual Report, guarantees on variable products and segregated funds may include one or more of death, maturity, income and withdrawal guarantees. Variable annuity and segregated fund guarantees are contingent and only payable upon the occurrence of the relevant event, if fund values at that time are below guaranteed values. Depending on future equity market levels, liabilities on current in-force business would be due primarily in the period from 2015 to 2038.
We seek to mitigate a portion of the risks embedded in our retained (i.e. net of reinsurance) variable annuity and segregated fund guarantee business through the combination of our dynamic and macro hedging strategies (see Section D4).
The table below shows selected information regarding the Company's variable annuity and segregated fund guarantees gross and net of reinsurance.
Variable annuity and segregated fund guarantees, net of reinsurance
As at | |
|
||||||||||
(C$ millions) | Guarantee value |
Fund value |
Amount at risk(4)(5) |
Guarantee value |
Fund value |
Amount at risk(4)(5) |
||||||
Guaranteed minimum income benefit(1) | $ | 6,170 | $ | 4,949 | $ | 1,261 | $ | 6,581 | $ | 4,958 | $ | 1,630 |
64,989 | 61,069 | 5,025 | 65,481 | 58,659 | 7,183 | |||||||
Guaranteed minimum accumulation benefit | 17,785 | 20,607 | 294 | 20,380 | 21,468 | 1,383 | ||||||
Gross living benefits(2) | $ | 88,944 | $ | 86,625 | $ | 6,580 | $ | 92,442 | $ | 85,085 | $ | 10,196 |
Gross death benefits(3) | 12,482 | 10,740 | 1,618 | 13,316 | 10,622 | 2,206 | ||||||
Total gross of reinsurance | $ | 101,426 | $ | 97,365 | $ | 8,198 | $ | 105,758 | $ | 95,707 | $ | 12,402 |
Living benefits reinsured | $ | 5,407 | $ | 4,357 | $ | 1,079 | $ | 5,780 | $ | 4,358 | $ | 1,427 |
Death benefits reinsured | 3,547 | 3,283 | 586 | 3,673 | 3,140 | 709 | ||||||
Total reinsured | $ | 8,954 | $ | 7,640 | $ | 1,665 | $ | 9,453 | $ | 7,498 | $ | 2,136 |
Total, net of reinsurance | $ | 92,472 | $ | 89,725 | $ | 6,533 | $ | 96,305 | $ | 88,209 | $ | 10,266 |
(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. |
(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 amount at risk is defined as the current guaranteed minimum death benefit in excess of the current account balance. For guaranteed minimum income benefit, the amount at risk is defined as the excess of the current annuitization income base over the current account value. For all guarantees, the amount at risk is floored at zero at the single contract level. |
(5) | The amount at risk net of reinsurance at |
As outlined above, the amount at risk on variable annuity contracts, net of reinsurance was
The policy liabilities established for variable annuity and segregated fund guarantees were
D3 Caution related to sensitivities
In this document, we provide sensitivities and risk exposure measures for certain risks. These include sensitivities due to specific changes in market prices and interest rate levels projected using internal models as at a specific date, and are measured relative to a starting level reflecting the Company's assets and liabilities at that date and the actuarial factors, investment activity and investment returns assumed in the determination of policy liabilities. The risk exposures measure the impact of changing one factor at a time and assume that all other factors remain unchanged. Actual results can differ significantly from these estimates for a variety of reasons including the interaction among these factors when more than one changes; changes in actuarial and investment return and future investment activity assumptions; actual experience differing from the assumptions, changes in business mix, effective tax rates and other market factors; and the general limitations of our internal models. For these reasons, the sensitivities should only be viewed as directional estimates of the underlying sensitivities for the respective factors based on the assumptions outlined below. Given the nature of these calculations, we cannot provide assurance that the actual impact on net income attributed to shareholders or on MLI's MCCSR ratio will be as indicated.
D4 Publicly traded equity performance risk
Our stated goal is to have approximately 75 per cent of the underlying earnings sensitivity to equity markets offset by hedges. As at
As outlined in our 2012 Annual Report, our 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 pages 44 and 45 of our 2012 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 after taking into account the impact of the change in markets on the hedge assets. While we cannot reliably estimate the amount of the change in dynamically hedged variable annuity guarantee liabilities that will not be offset by the profit or loss on the dynamic hedge assets, we make certain assumptions for the purposes of estimating the impact on shareholders' net income. The potential impact is shown assuming:
(a) | First that 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) | Then that the change in value of the dynamically hedged variable annuity guarantee liabilities is not completely offset, including the assumption that the provision for adverse deviation is not offset and that the hedge assets are based on the actual position at the period end. In addition, we assume that we increase our macro equity hedges in negative market shock scenarios and reduce macro equity hedges in positive market shock scenarios. |
It is also important to note that these estimates are illustrative, and that the hedging 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 |
||||||||||||
(C$ millions) | -30% | -20% | -10% | 10% | 20% | 30% | ||||||
Underlying sensitivity to net income attributed to shareholders(2) | ||||||||||||
Variable annuity guarantees | $ | (4,470) | $ | (2,660) | $ | (1,130) | $ | 770 | $ | 1,240 | $ | 1,540 |
Asset based fees | (300) | (200) | (100) | 100 | 200 | 300 | ||||||
General fund equity investments(3) | (500) | (330) | (160) | 150 | 310 | 480 | ||||||
Total underlying sensitivity | $ | (5,270) | $ | (3,190) | $ | (1,390) | $ | 1,020 | $ | 1,750 | $ | 2,320 |
Impact of hedge assets | ||||||||||||
Impact of macro hedge assets(4) | $ | 910 | $ | 610 | $ | 300 | $ | (300) | $ | (420) | $ | (500) |
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) | 3,190 | 1,870 | 790 | (540) | (920) | (1,190) | ||||||
Total impact of hedge assets assuming the change in value of the dynamic hedge assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(4) | $ | 4,100 | $ | 2,480 | $ | 1,090 | $ | (840) | $ | (1,340) | $ | (1,690) |
Net impact assuming the change in the value of the hedged assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(5) | $ | (1,170) | $ | (710) | $ | (300) | $ | 180 | $ | 410 | $ | 630 |
Net 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(6) | (690) | (450) | (170) | (10) | (30) | (40) | ||||||
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(6) | $ | (1,860) | $ | (1,160) | $ | (470) | $ | 170 | $ | 380 | $ | 590 |
Percentage of underlying earnings sensitivity 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 | 78% | 78% | 78% | 82% | 77% | 73% | ||||||
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(6) | 65% | 64% | 66% | 83% | 78% | 75% |
(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) | Includes the impact of rebalancing equity hedges in the macro hedging program. |
(5) | Variable Annuity Guarantee Liability includes the best estimate liabilities and associated provisions for adverse deviation. |
(6) | Represents the impact of re-balancing equity hedges for dynamically hedged variable annuity guarantee liabilities at five per cent 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. fund tracking, realized volatility and equity, interest rate correlations different from expected among other factors. |
Potential impact on net income attributed to shareholders arising from changes to public equity returns(1)
As at |
||||||||||||||
(C$ millions) | -30% | -20% | -10% | 10% | 20% | 30% | ||||||||
Underlying sensitivity to net income attributed to shareholders(2) | restated(4) | restated(4) | ||||||||||||
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(4) | $ | 2,010 | $ | 1,340 | $ | 670 | $ | (670) | $ | (1,160) | $ | (1,580) | ||
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) | (1,010) | (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) | $ | (2,170) | $ | (2,880) | ||
Net impact assuming the change in the value of the hedged assets completely offsets the change in the dynamically hedged variable annuity guarantee liabilities(5) | $ | (1,210) | $ | (720) | $ | (310) | $ | 200 | $ | 460 | $ | 670 | ||
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(6) | (710) | (470) | (190) | (10) | (40) | (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(6) | $ | (1,920) | $ | (1,190) | $ | (500) | $ | 190 | $ | 420 | $ | 600 | ||
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% | 83% | 81% | ||||||||
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(6) | 69% | 70% | 72% | 87% | 84% | 83% |
(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) | The numbers above were restated to reflect the fact that in the first quarter of 2013, we refined our assumptions with respect to the amount of macro hedge offsets in the above calculation. We now assume that we reduce equity hedges in our macro hedging program under positive market shock scenarios. |
(5) | Variable Annuity Guarantee Liability includes the best estimate liabilities and associated provisions for adverse deviation. |
(6) | Represents the impact of re-balancing equity hedges for dynamically hedged variable annuity guarantee liabilities at five per cent 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. fund tracking, realized volatility and equity, interest rate correlations different from expected among other factors. |
Potential impact on MLI's MCCSR ratio arising from public equity returns different from the expected return for policy liability valuation(1),(2)
Impact on MLI MCCSR ratio | |||||||||||||||||||||||||||||||||||||||||||||
Percentage points | -30% | -20% | -10% | +10% | +20% | +30% | |||||||||||||||||||||||||||||||||||||||
|
(17) | (11) | (4) | 16 | 31 | 36 | |||||||||||||||||||||||||||||||||||||||
|
(17) | (11) | (5) | 1 | 3 | 9 |
(1) | See "Caution related to sensitivities" above. In addition, estimates exclude changes to the net actuarial gains/losses with respect to the Company's pension obligations as a result of changes in equity markets, as the impact on the quoted sensitivities is not considered to be material. |
(2) | The potential impact is shown assuming that the change in value of the hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities. The estimated amount that would not be completely offset relates to our practices of not hedging the provisions for adverse deviation and of rebalancing equity hedges for dynamically hedged variable annuity liabilities at five per cent intervals. |
The change in the capital ratio sensitivities on positive equity shocks is due to the required capital on segregated fund guarantees reaching the level at which any additional gains can be immediately reflected and no longer need to be brought in on a smoothed basis.
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 | 2013 | 2013 | 2012 | |||
For variable annuity guarantee dynamic hedging strategy | $ | 7,900 | $ | 7,600 | $ | 9,500 |
For macro equity risk hedging strategy | 3,400 | 6,600 | 7,800 | |||
Total | $ | 11,300 | $ | 14,200 | $ | 17,300 |
During the quarter, the derivative notional value in our dynamic hedging program increased by
The equity futures notional required for the macro hedging program decreased by
D5 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. As the sensitivity to a 100 basis point decline in interest rates includes the impact of a change in prescribed reinvestment scenarios where applicable, the impact of changes to interest rates for less than, or more than, the amounts indicated are unlikely to be linear. For variable annuity guarantee liabilities that are dynamically hedged, it is assumed that interest rate hedges are rebalanced at 20 basis point intervals.
The income impact does not allow for any future potential changes to the URR assumptions or other potential impacts of lower interest rate levels, for example, increased strain on the sale of new business or lower interest earned on our surplus assets. 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 | ||||||
Net income attributed to shareholders (C$ millions) | |||||||||
Excluding change in market value of AFS fixed income assets held in the surplus segment | $ | (600) | $ | 300 | $ | (400) | $ | 200 | |
From fair value changes in AFS assets held in surplus, if realized | 700 | (600) | 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) | (14) | 24 | (16) | 10 | |||||
From fair value changes in AFS assets held in surplus, if realized | 5 | (5) | 5 | (5) |
(1) | See "Caution related to sensitivities" above. In addition, estimates exclude changes to the net actuarial gains/losses with respect to the Company's pension obligations as a result of changes in interest rates, as the impact on the quoted sensitivities is not considered to be material. |
(2) | Includes guaranteed insurance and annuity products, including variable annuity contracts as well as adjustable benefit products where benefits are generally adjusted as interest rates and investment returns change, a portion of which have minimum credited rate guarantees. For adjustable benefit products subject to minimum rate guarantees, the sensitivities are based on the assumption that credited rates will be floored at the minimum. |
(3) | The amount of gain or loss that can be realized on AFS fixed income assets held in the 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 the change in earnings on available capital as well as the change in required capital that results from a change in interest rates. The potential increase in required capital accounted for 9 of the 14 point 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 |
2013 |
2012 |
|||
Corporate spreads(4) | |||||
Increase 50 basis points | $ | 400 | $ | 500 | |
Decrease 50 basis points | (500) | (1,000) | |||
Swap spreads | |||||
Increase 20 basis points | $ | (600) | $ | (600) | |
Decrease 20 basis points | 500 | 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 participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in corporate and swap spreads. |
(3) | Sensitivities are based on projected asset and liability cash flows 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. |
As the sensitivity to a 50 basis point decline in corporate spreads includes the impact of a change in prescribed reinvestment scenarios where applicable, the impact of changes to corporate spreads for less than, or more than, the amounts indicated are unlikely to be linear. The potential earnings impact of a 50 basis point decline in corporate spreads related to the impact of the scenario change was nil at
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
E2 Actuarial methods and assumptions
Impact of third quarter 2013 updates to assumptions
The comprehensive review of valuation methods and assumptions is performed annually and is designed to minimize our exposure to uncertainty by managing both asset-related and liability-related risks. This is accomplished by monitoring experience and selecting assumptions which represent a best estimate view of future experience and margins that are appropriate for the risks assumed. While the assumptions selected represent the Company's current best estimates and assessment of risk, the ongoing monitoring of experience and the economic environment is likely to result in future changes to the valuation assumptions, which could be material.
The quantification of the impact of the 2013 review of the actuarial methods and assumptions underlying policy liabilities is as of
The 2013 review of actuarial methods and assumptions that was carried out in the third quarter resulted in an increase in policy liabilities of
C$ millions | To | To Net Income | ||||
Assumption | Policy Liabilities | Attributed to Shareholders | ||||
Lapses and Policyholder Behaviour | ||||||
U.S. insurance premium persistency update | $ | 320 | $ | (208) | ||
Insurance lapse updates | 483 | (242) | ||||
Variable annuity lapse updates | 101 | (80) | ||||
U.S. Long Term Care Triennial Review | 18 | (12) | ||||
Segregated Fund Parameter Update | (220) | 203 | ||||
Other Annual Updates | (142) | 87 | ||||
Net impact | $ | 560 | $ | (252) |
Lapses and Policyholder Behaviour
Premium persistency assumptions were adjusted in the U.S. for universal life and variable universal life products to reflect recent experience which led to a
Lapse rates across several insurance business units were updated to reflect recent policyholder lapse experience. This included a review of the lapse experience for the Canadian individual insurance whole life and term products and certain whole life insurance products in
Lapse rate assumptions were updated for a number of Variable Annuity contracts to reflect updated experience results, including reducing base lapse rates in
U.S. Long Term Care Triennial Review
Expected claims costs increased primarily due to lower mortality, higher incidence rates, and claims periods longer than expected in policy liabilities. This increase in expected cost was offset by a number of items, including (i) the expected future premium increases resulting from this year's review, (ii) reflecting actual experience on previously filed for rate increases as the actual approval rate is higher than what was reflected in our policy liabilities, (iii) method and modeling refinements largely related to the modeling of future tax cash flows, and (iv) updated lapse assumptions.
The expected future premium increases assumed in the policy liabilities resulted in a benefit to earnings of
Segregated Fund Parameters Update
Certain parameters used in the stochastic valuation of our segregated fund valuation were updated and resulted in a
Other Annual Updates
We made a number of model refinements related to the projection of both asset and liability cashflows which led to a
Mortality and Morbidity charges of
The net impact of all other updates was a
We will be completing our review of our modeling of future tax cash flows for our U.S. Variable Annuity business in the fourth quarter which we expect to result in a strengthening of policy liabilities22.
_______________________________
22 | See "Caution regarding forward-looking statements" below. |
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 policy 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.
Potential impact on accumulated 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)
C$ millions As at |
|
|
|||||||
For the periods | Q4 2013 - Q3 2018 |
Q4 2018 - Q3 2023 |
2013 - 2017 |
2018- 2022 |
|||||
Risk free rates remain at |
$ | (700) | $ | - | $ | (1,600) | $ | (300) | |
Risk free rates rise 50 bp immediately from their |
$ | (200) | $ | 200 | $ | (900) | $ | - | |
Risk free rates fall 50 bp immediately from their |
$ | (1,000) | $ | (200) | $ | (2,200) | $ | (500) |
(1) | Current URRs in |
Under Canadian IFRS, we must test a number of prescribed interest rate scenarios. The scenario that produces the largest policy liabilities is used and is called the booking scenario. The resulting interest scenario for most of our business is a gradual grading of market interest rates from current market levels to assumed ultimate reinvestment rates over 20 years.
The sensitivity of net income attributed to shareholders to further updates to the ultimate reinvestment rates at
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 | |||||
100 basis point change in future annual returns for public equities(1)(2) | $ | 500 | $ | (600) | $ | 800 | $ | (900) | |
100 basis point change in future annual returns for alternative long-duration assets(3) | 3,800 | (3,600) | 3,900 | (4,000) | |||||
100 basis point change in equity volatility assumption for stochastic segregated fund modeling(4) | (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) | For future annual returns on public equity, the decrease of |
(3) | Alternative long-duration assets include commercial real estate, timber and agricultural real estate, oil and gas, and private equities. The decrease of |
(4) | 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 |
E4 Accounting and reporting changes
(a) Impact of standards applied retrospectively in 2013
Effective
(b) Future accounting and reporting changes beginning in 2014 or later
There are a number of accounting and reporting changes issued by the IASB that will impact the Company beginning in 2014 or later. These changes are outlined in our second quarter 2013 report to shareholders.
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. A financial measure is considered a non-GAAP measure for Canadian securities law purposes if it is presented other than in accordance with generally accepted accounting principles used for the Company's audited financial statements. Non-GAAP measures include: Core Earnings; Net Income Attributed to Shareholders in Accordance with U.S. GAAP; Total Equity in Accordance with U.S. GAAP; Core ROE; Diluted Core Earnings Per Common Share; Constant Currency Basis; Premiums and Deposits; Funds under Management; Capital; New Business Embedded Value; Sales and Total Annualized Insurance and Wealth Premium Equivalent Basis Sales. Non-GAAP financial measures are not defined terms under GAAP and, therefore, with the exception of Net Income Attributed to Shareholders 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 favourable investment-related experience reported in a single year which is 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:
- Gains (charges) on variable annuity guarantee liabilities not dynamically hedged.
- Gains (charges) on general fund equity investments supporting policy liabilities and on fee income.
- Gains (charges) on macro equity hedges relative to expected costs. The expected cost of macro hedges is calculated using the equity assumptions used in the valuation of 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 favourable investment-related experience in excess of
$200 million per annum or net unfavourable investment-related experience on a year-to-date basis. Investment-related experience relates to fixed income trading, alternative long-duration asset returns, credit experience and asset mix changes. This favourable and unfavourable investment-related experience is a combination of reported investment experience as well as the impact of investing activities on the measurement of our policy liabilities. The maximum of$200 million per annum to be reported in core earnings compares with an average of over$80 million per quarter of favourable investment-related experience reported since first quarter 2007. - Mark-to-market gains or losses on assets held in the Corporate and Other segment other than gains on AFS equities and seed money investments in new segregated or mutual funds.
- Changes in actuarial methods and assumptions, excluding URR.
- The impact on the measurement of policy liabilities of changes in product features or new reinsurance transactions, if material.
- Goodwill impairment charges.
- Gains or losses on disposition of a business.
- Material one-time only adjustments, including highly unusual/extraordinary and material legal settlements or other items that are material and exceptional in nature.
- Tax on the above items.
- Impact of enacted or substantially enacted income tax rate changes.
The following table summarizes for the past eight quarters core earnings and net income (loss) attributed to shareholders.
Quarterly Results | |||||||||||||||||||
C$ millions, unaudited | 2013 | 2012 (restated)(1) | 2011 | ||||||||||||||||
3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | ||||||||||||
Core earnings (losses) | |||||||||||||||||||
Asia Division | $ | 242 | $ | 226 | $ | 226 | $ | 180 | $ | 230 | $ | 286 | $ | 267 | $ | 213 | |||
Canadian Division | 268 | 225 | 179 | 233 | 229 | 201 | 172 | 142 | |||||||||||
U.S. Division | 361 | 343 | 440 | 293 | 288 | 247 | 257 | 189 | |||||||||||
Corporate and Other (excluding expected cost of macro hedges and core investment gains) | (135) | (105) | (128) | (62) | (103) | (67) | (113) | (124) | |||||||||||
Expected cost of macro hedges | (84) | (128) | (148) | (140) | (124) | (118) | (107) | (97) | |||||||||||
Investment-related experience included in core earnings | 52 | 48 | 50 | 50 | 50 | 50 | 50 | 50 | |||||||||||
Total core earnings | $ | 704 | $ | 609 | $ | 619 | $ | 554 | $ | 570 | $ | 599 | $ | 526 | $ | 373 | |||
Investment-related experience in excess of amounts included in core earnings | 491 | (97) | 97 | 321 | 365 | 54 | 209 | 261 | |||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings | $ | 1,195 | $ | 512 | $ | 716 | $ | 875 | $ | 935 | $ | 653 | $ | 735 | $ | 634 | |||
Other items to reconcile core earnings to net income (loss) attributed to shareholders | |||||||||||||||||||
Gains (charges) on variable annuity guarantee liabilities that are dynamically hedged | 160 | 30 | 101 | 100 | 122 | (269) | 223 | (193) | |||||||||||
Direct impact of equity markets and interest rates (see table below) | (66) | (272) | (208) | (18) | (88) | (727) | 75 | 153 | |||||||||||
Impact of major reinsurance transactions, in-force product changes | - | - | - | - | 26 | 112 | 122 | - | |||||||||||
Change in actuarial methods and assumptions, excluding URR | (252) | (35) | (69) | (87) | (1,006) | - | 12 | 2 | |||||||||||
Goodwill impairment charge | - | - | - | - | (200) | - | - | (665) | |||||||||||
Gain (loss) on sale of Life Retrocession Business | - | - | - | - | - | (50) | - | - | |||||||||||
Tax items and restructuring charge related to organizational design | (3) | 24 | - | 207 | - | - | 58 | - | |||||||||||
Net income (loss) attributed to shareholders | $ | 1,034 | $ | 259 | $ | 540 | $ | 1,077 | $ | (211) | $ | (281) | $ | 1,225 | $ | (69) | |||
Direct impact of equity markets and interest rates: | |||||||||||||||||||
Gains (charges) on variable annuity liabilities that are not dynamically hedged | $ | 306 | $ | 75 | $ | 757 | $ | 556 | $ | 298 | $ | (758) | $ | 982 | $ | 234 | |||
Gains (charges) on general fund equity investments supporting policy liabilities and on fee income | 85 | (70) | 115 | 48 | 55 | (116) | 121 | 56 | |||||||||||
Gains (charges) on macro equity hedges relative to expected costs | (245) | (231) | (730) | (292) | (86) | 423 | (556) | (250) | |||||||||||
Gains (charges) on higher (lower) fixed income reinvestment rates assumed in the valuation of policy liabilities | (77) | 151 | (245) | (290) | (330) | 305 | (425) | 122 | |||||||||||
Gains (charges) on sale of AFS bonds and derivative positions in the Corporate segment | (72) | (127) | (8) | (40) | (25) | 96 | (47) | (9) | |||||||||||
Charges due to lower fixed income URR assumptions used in the valuation of policy liabilities | (63) | (70) | (97) | - | - | (677) | - | - | |||||||||||
Direct impact of equity markets and interest rates | $ | (66) | $ | (272) | $ | (208) | $ | (18) | $ | (88) | $ | (727) | $ | 75 | $ | 153 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
Asia Division
Quarterly Results | ||||||||||||||||||||||||
C$ millions, unaudited | 2013 | 2012 | 2011 | |||||||||||||||||||||
2Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | |||||||||||||||||
Asia Division core earnings | $ | 242 | $ | 226 | $ | 226 | $ | 180 | $ | 230 | $ | 286 | $ | 267 | $ | 213 | ||||||||
Investment-related experience in excess of amounts included in core earnings |
(4) | (18) | 43 | </td> | 33 | 12 | 28 | (18) | 47 | |||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 238 | $ | 208 | $ | 269 | $ | 213 | $ | 242 | $ | 314 | $ | 249 | $ | 260 | ||||||||
Other items to reconcile core earnings to net income (loss) attributed to shareholders |
||||||||||||||||||||||||
Gains (charges) on variable annuity guarantee liabilities that are dynamically hedged |
15 | (2) | (2) | 9 | 11 | (18) | 3 | (16) | ||||||||||||||||
Direct impact of equity markets and interest rates | 227 | 180 | 661 | 460 | 238 | (611) | 819 | 41 | ||||||||||||||||
Tax items | - | - | - | - | - | - | 40 | - | ||||||||||||||||
Net income (loss) attributed to shareholders | $ | 480 | $ | 386 | $ | 928 | $ | 682 | $ | 491 | $ | (315) | $ | 1,111 | $ | 285 |
Canadian Division
Quarterly Results | |||||||||||||||||||
C$ millions, unaudited | 2013 | 2012 | 2011 | ||||||||||||||||
3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | ||||||||||||
Canadian Division core earnings | $ | 268 | $ | 225 | $ | 179 | $ | 233 | $ | 229 | $ | 201 | $ | 172 | $ | 142 | |||
Investment-related experience in excess of amounts included in core earnings |
135 | (88) | (187) | (31) | 20 | (115) | 116 | 72 | |||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 403 | $ | 137 | $ | (8) | $ | 202 | $ | 249 | $ | 86 | $ | 288 | $ | 214 | |||
Other items to reconcile core earnings to net income (loss) attributed to shareholders |
|||||||||||||||||||
Gains (charges) on variable annuity guarantee liabilities that are dynamically hedged |
58 | (1) | 38 | 45 | 38 | (74) | 41 | (67) | |||||||||||
Direct impact of equity markets and interest rates | (44) | (33) | (92) | 4 | 91 | 74 | (134) | 99 | |||||||||||
Reinsurance recapture, segregated fund product changes and impact of tax related changes |
(3) | - | - | - | - | 137 | 122 | - | |||||||||||
Net income (loss) attributed to shareholders | $ | 414 | $ | 103 | $ | (62) | $ | 251 | $ | 378 | $ | 223 | $ | 317 | $ | 246 |
U.S. Division
Quarterly Results | |||||||||||||||||||
C$ millions, unaudited | 2013 | 2012 (restated)(1) | 2011 | ||||||||||||||||
3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | ||||||||||||
U.S. Division core earnings | $ | 361 | $ | 343 | $ | 440 | $ | 293 | $ | 288 | $ | 247 | $ | 257 | $ | 189 | |||
Investment-related experience in excess of amounts included in core earnings |
404 | 65 | 263 | 367 | 348 | 156 | 155 | 158 | |||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 765 | $ | 408 | $ | 703 | $ | 660 | $ | 636 | $ | 403 | $ | 412 | $ | 347 | |||
Other items to reconcile core earnings to net income (loss) attributed to shareholders |
|||||||||||||||||||
Gains (charges) on variable annuity guarantee liabilities that are dynamically hedged |
87 | 33 | 65 | 46 | 73 | (177) | 179 | (110) | |||||||||||
Direct impact of equity markets and interest rates | 76 | (12) | (42) | (150) | (297) | (22) | (15) | 268 | |||||||||||
Impact of major reinsurance transactions | - | - | - | - | 26 | (25) | - | - | |||||||||||
Tax items | - | - | - | 170 | - | - | - | - | |||||||||||
Net income (loss) attributed to shareholders | $ | 928 | $ | 429 | $ | 726 | $ | 726 | $ | 438 | $ | 179 | $ | 576 | $ | 505 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
Corporate and Other
Quarterly Results | |||||||||||||||||||
C$ millions, unaudited | 2013 | 2012 (restated)(1) | 2011 | ||||||||||||||||
3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | ||||||||||||
Corporate and Other core losses (excluding expected cost of macro hedges and core investment gains) |
$ | (135) | $ | (105) | $ | (128) | $ | (62) | $ | (103) | $ | (67) | $ | (113) | $ | (124) | |||
Expected cost of macro hedges | (84) | (128) | (148) | (140) | (124) | (118) | (107) | (97) | |||||||||||
Investment-related experience included in core earnings | 52 | 48 | 50 | 50 | 50 | 50 | 50 | 50 | |||||||||||
Total core losses | $ | (167) | $ | (185) | $ | (226) | $ | (152) | $ | (177) | $ | (135) | $ | (170) | $ | (171) | |||
Investment-related experience in excess of amounts included in core earnings |
(44) | (56) | (22) | (48) | (15) | (15) | (44) | (16) | |||||||||||
Core losses plus investment-related experience in excess of amounts included in core earnings |
$ | (211) | $ | (241) | $ | (248) | $ | (200) | $ | (192) | $ | (150) | $ | (214) | $ | (187) | |||
Other items to reconcile core earnings to net income (loss) attributed to shareholders |
|||||||||||||||||||
Direct impact of equity markets and interest rates | (325) | (407) | (735) | (332) | (120) | (168) | (595) | (255) | |||||||||||
Changes in actuarial methods and assumptions, excluding URR | (252) | (35) | (69) | (87) | (1,006) | - | 12 | 2 | |||||||||||
Goodwill impairment charge | - | - | - | - | (200) | - | - | (665) | |||||||||||
Gain (loss) on sale of Life Retrocession Business | - | - | - | - | - | (50) | - | - | |||||||||||
Tax items and restructuring charge related to organizational design | - | 24 | - | 37 | - | - | 18 | - | |||||||||||
Net loss attributed to shareholders | $ | (788) | $ | (659) | $ | (1,052) | $ | (582) | $ | (1,518) | $ | (368) | $ | (779) | $ | (1,105) |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
Net income (loss) attributed to shareholders 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 ROE using average common shareholders' equity.
Diluted core earnings per common share is core earnings available to common shareholders expressed per diluted weighted average common share outstanding.
The Company also uses financial performance measures that are prepared on a constant 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 third quarter of 2013.
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) segregated fund deposits, excluding seed money, ("deposits from policyholders"), (iii) adding back the premiums ceded related to
Premiums and deposits | Quarterly results | |||||
C$ millions | 3Q 2013 | 2Q 2013 | 3Q 2012 | |||
Net premium income | $ | 4,429 | $ | 4,359 | $ | 2,187 |
Deposits from policyholders | 5,261 | 5,333 | 5,539 | |||
Premiums and deposits per financial statements | $ | 9,690 | $ | 9,692 | $ | 7,726 |
Add back premiums ceded relating to |
- | - | 1,799 | |||
Investment contract deposits | 9 | 16 | 40 | |||
Mutual fund deposits | 8,111 | 10,545 | 4,335 | |||
Institutional advisory account deposits | 1,089 | 1,146 | 1,106 | |||
ASO premium equivalents | 723 | 756 | 673 | |||
Group benefits ceded premiums | 981 | 1,427 | 967 | |||
Other fund deposits | 99 | 97 | 100 | |||
Total premiums and deposits | $ | 20,702 | $ | 23,679 | $ | 16,746 |
Currency impact | - | 206 | 350 | |||
Constant currency premiums and deposits | $ | 20,702 | $ | 23,885 | $ | 17,096 |
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 | Quarterly results | |||||
(C$ millions) As at |
3Q 2013 | 2Q 2013 | (restated)(1) 3Q 2012 |
|||
Total invested assets | $ | 230,336 | $</td> | 231,935 | $ | 223,932 |
Segregated funds net assets | 225,842 | 221,952 | 205,685 | |||
Funds under management per financial statements | $ | 456,178 | $ | 453,887 | $ | 429,617 |
Mutual funds | 81,049 | 76,634 | 55,705 | |||
Institutional advisory accounts (excluding segregated funds) | 28,686 | 28,416 | 21,597 | |||
Other funds | 8,721 | 8,025 | 6,849 | |||
Total funds under management | $ | 574,634 | $ | 566,962 | $ | 513,768 |
Currency impact | - | (9,469) | 10,465 | |||
Constant currency funds under management | $ | 574,634 | $ | 557,493 | $ | 524,233 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
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 | Quarterly results | |||||
(C$ millions) As at |
3Q 2013 | 2Q 2013 | (restated)(1) 3Q 2012 |
|||
Total equity | $ | 26,881 | $ | 26,544 | $ | 23,917 |
Add AOCI loss on cash flow hedges | 115 | 131 | 200 | |||
Add liabilities for preferred shares and capital instruments | 4,119 | 4,130 | 3,897 | |||
Total capital | $ | 31,115 | $ | 30,805 | $ | 28,014 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective |
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 third quarter were as follows:
|
U.S. | Hong Kong | |
|
MCCSR ratio | 150% | 150% | 150% | 150% |
Discount rate | 8.25% | 8.50% | 9.00% | 6.25% |
Jurisdictional income tax rate | 26.5% | 35% | 16.5% | 31% |
Foreign exchange rate | n/a | 1.038568 | 0.133912 | 0.010501 |
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. As we have discontinued sales of new VA contracts in the U.S., beginning in the first quarter of 2013, subsequent deposits into existing U.S. VA contracts will not be considered sales.
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.
Total Annualized Insurance and Wealth Premium Equivalent ("APE") Basis Sales are sales that comprise 100 per cent of regular premium/deposit sales and 10 per cent of single premium/deposit sales for both insurance and wealth management products.
F2 Key planning assumptions and uncertainties
_____________________________
23 | 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, insurance sales momentum in Hong Kong and
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 2012 Annual Report and in this document, and actual results may differ materially from those expressed or implied in such statements. As outlined above, the amount of the fourth quarter charge related to modeling of future tax cash flows for our U.S. Variable annuity business is dependent upon the potential implementation of changes to the investment objectives of separate accounts that support our Variable Annuity products, which require policyholder approval. The sale of our
Consolidated Statements of Income
(Canadian $ in millions except per share information, unaudited) | For the three months ended | ||||||
|
|||||||
(restated)(1) | |||||||
2013 | 2012 | ||||||
Revenue | |||||||
Net premium income prior to |
$ | 4,429 | $ | 3,986 | |||
Premiums ceded relating to |
- | (1,799) | |||||
Investment income | |||||||
Investment income | 2,103 | 2,174 | |||||
Realized/unrealized gains (losses) on assets supporting insurance and investment contract liabilities(3) | (2,227) | 1,421 | |||||
Other revenue | 1,983 | 1,817 | |||||
Total revenue | $ | 6,288 | $ | 7,599 | |||
Contract benefits and expenses | |||||||
To contractholders and beneficiaries | |||||||
Death, disability and other claims | $ | 2,525 | $ | 2,370 | |||
Maturity and surrender benefits | 1,130 | 1,179 | |||||
Annuity payments | 850 | 803 | |||||
Policyholder dividends and experience rating refunds | 321 | 275 | |||||
Net transfers from segregated funds | (181) | (146) | |||||
Change in insurance contract liabilities (3) | (973) | 5,042 | |||||
Change in investment contract liabilities | 52 | 3 | |||||
Ceded benefits and expenses | (1,660) | (1,491) | |||||
Change in reinsurance assets | 383 | (2,560) | |||||
Net benefits and claims | $ | 2,447 | $ | 5,475 | |||
General expenses | 1,097 | 1,065 | |||||
Investment expenses | 305 | 284 | |||||
Commissions | 983 | 944 | |||||
Interest expense | 265 | 239 | |||||
Net premium taxes | 73 | 71 | |||||
Goodwill impairment | - | 200 | |||||
Total contract benefits and expenses | $ | 5,170 | $ | 8,278 | |||
Income (loss) before income taxes | $ | 1,118 | $ | (679) | |||
Income tax (expense) recovery | (172) | 360 | |||||
Net income (loss) | $ | 946 | $ | (319) | |||
Less: | Net income (loss) attributed to non-controlling interests | 20 | (1) | ||||
Net loss attributed to participating policyholders | (108) | (107) | |||||
Net income (loss) attributed to shareholders | $ | 1,034 | $ | (211) | |||
Preferred share dividends | (33) | (31) | |||||
Common shareholders' net income (loss) | $ | 1,001 | $ | (242) | |||
Basic earnings (loss) per common share | $ | 0.54 | $ | (0.13) | |||
Diluted earnings (loss) per common share | $ | 0.54 | $ | (0.13) |
(1) | The 2012 results have been restated to reflect the retrospective application of new IFRS accounting standards effective |
(2) | In 2012, the Company entered into a coinsurance agreement, effective |
(3) | The realized and unrealized gains (losses) on assets supporting insurance and investment contract liabilities 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 (losses) on the assets is largely offset in the change in insurance and investment contract liabilities. The realized/unrealized gains (losses) on assets supporting insurance and investment contract liabilities related primarily to the impact of interest rate changes on bond and fixed income derivative positions as well as interest rate swaps supporting the dynamic hedge program. |
Consolidated Statements of Financial Position
(Canadian $ in millions, unaudited) | |||||||
(restated)1 | |||||||
As at | |
|
|||||
Assets | 2013 | 2012 | |||||
Invested assets | |||||||
Cash and short-term securities | $ | 14,691 | $ | 13,480 | |||
Securities | |||||||
Bonds | 115,218 | 119,281 | |||||
Equities | 13,098 | 11,995 | |||||
Loans | |||||||
Mortgages | 36,547 | 35,082 | |||||
Private placements | 20,095 | 20,275 | |||||
Policy loans | 7,094 | 6,793 | |||||
Bank loans | 1,972 | 2,142 | |||||
Real estate | 8,811 | 8,513 | |||||
Other invested assets | 12,810 | 11,561 | |||||
Total invested assets | $ | 230,336 | $ | 229,122 | |||
Other assets | |||||||
Accrued investment income | $ | 1,816 | $ | 1,794 | |||
Outstanding premiums | | 699 | 1,009 | ||||
Derivatives | 9,783 | 14,707 | |||||
Goodwill and intangible assets | 5,199 | 5,113 | |||||
Reinsurance assets | 17,475 | 18,681 | |||||
Deferred tax asset | 3,833 | 3,445 | |||||
Miscellaneous | 3,234 | 3,127 | |||||
Total other assets | $ | 42,039 | $ | 47,876 | |||
Segregated funds net assets | $ | 225,842 | $ | 207,985 | |||
Total assets | $ | 498,217 | $ | 484,983 | |||
Liabilities and Equity | |||||||
Policy liabilities | |||||||
Insurance contract liabilities | $ | 193,262 | $ | 199,588 | |||
Investment contract liabilities | 2,437 | 2,420 | |||||
Bank deposits | 19,315 | 18,857 | |||||
Deferred tax liability | 630 | 603 | |||||
Derivatives | 7,869 | 7,500 | |||||
Other liabilities | 13,126 | 13,922 | |||||
$ | 236,639 | $ | 242,890 | ||||
Long-term debt | 4,736 | 5,046 | |||||
Liabilities for preferred shares and capital instruments | 4,119 | 3,903 | |||||
Segregated funds net liabilities | 225,842 | 207,985 | |||||
Total liabilities | $ | 471,336 | $ | 459,824 | |||
Equity | |||||||
Issued share capital | |||||||
Preferred shares | $ | 2,693 | $ | 2,497 | |||
Common shares | 20,138</b> | 19,886 | |||||
Contributed surplus | 269 | 257 | |||||
Shareholders' retained earnings | 4,272 | 3,256 | |||||
Shareholders' accumulated other comprehensive income (loss) | (903) | (1,184) | |||||
Total shareholders' equity | $ | 26,469 | $ | 24,712 | |||
Participating policyholders' equity | 86 | 146 | |||||
Non-controlling interests | 326 | 301 | |||||
Total equity | $ | 26,881 | $ | 25,159 | |||
Total liabilities and equity | $ | 498,217 | $ | 484,983 |
(1) | The |
SOURCE
Wordcount: | 25168 |
Expatriates at Risk of Retirement Debt
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News