Manulife Financial Reports 3Q14 Net Income Of $1.1 Billion
C$ unless otherwise stated
TSX/
SEHK:945
Substantive progress made on growth strategies in the third quarter of 2014:
- Developing our Asian opportunity to the fullest - Achieved record insurance sales on a constant currency basis, with double digit growth in
Hong Kong ,Indonesia and our Asia Other businesses as well as continued success inJapan ; continued to build momentum in wealth sales reflecting successful product launches and marketing campaigns; delivered strong growth in core earnings, driven by higher sales volumes and favourable policyholder experience. - Growing our wealth and asset management businesses around the world - Achieved our 24th consecutive quarter of record funds under management, driven by solid net flows in our asset management and group retirement businesses; delivered continued robust mutual fund sales around the world; Manulife Asset Management achieved record assets under management for external clients.
- Building on our balanced Canadian business - Announced our agreement to acquire the Canadian operations of Standard Life plc; achieved solid sales and record funds under management in our mutual fund and group retirement businesses; competitive pressures continued to challenge both large case sales in Group Benefits and growth in
Manulife Bank ; continued to build momentum inRetail Insurance sales, driven by the success of our recently launched simplified universal life product - Continuing to drive sustainable earnings and opportunistic growth in the U.S. - Strong mutual fund net flows contributed to record assets under management for John Hancock Investments; continued to face a challenging competitive environment in Retirement Plan Services; delivered improved momentum in life insurance sales, driven by recent product initiatives, despite slow industry sales.
"We continued to generate excellent investment-related experience reflecting our high quality asset portfolio, disciplined approach to extending credit and expertise in managing alternative long-duration assets," added
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1 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
Highlights for the Third Quarter of 2014:
- Reported net income attributed to shareholders of
$1,100 million , up$66 million from 3Q13. Our 3Q14 net income benefited by$370 million from strong investment-related experience as well as positive market-related factors of$70 million , partly offset by a net charge of$69 million related to the annual review of actuarial methods and assumptions. Net income attributed to shareholders for the nine months endedSeptember 30, 2014 was$2,861 million as compared with$1,833 million for the first nine months of 2013. - Generated core earnings of
$755 million in 3Q14, up$51 million from 3Q13, and up$54 million from 2Q14. - The increase compared with 3Q13 was driven by higher fee income on increased assets under management in our wealth businesses, lower net hedging costs and the favourable impact of a higher U.S. dollar, partially offset by the non-recurrence of a favourable tax item.
- The increase compared with 2Q14 was largely due to improved policyholder experience, the impact of higher sales and favourable business mix on new business strain, and higher fee income. Last quarter, core earnings benefited from the release of a legal provision and a number of other items.
- Core earnings for the nine months ended
September 30, 2014 was$2,175 million as compared to$1,932 million for the first nine months of 2013. - Delivered insurance sales2 of
$660 million , up 7% from 3Q13. InAsia ,we achieved record insurance sales on a constant currency basis3, driven by continued momentum in corporate products inJapan , a successful start toHong Kong 's annual sales campaign, and double digit growth inIndonesia and our Asia Other businesses.InCanada , the success of a recently launched simplified universal life product contributed to building sales momentum inRetail Insurance ; however, lower sales in Group Benefits resulted in a decline in total insurance sales. In the U.S., life insurance sales continued to be challenged by slow overall industry sales, but improved over the prior quarter due to traction with recently launched products. - Generated strong wealth sales of
$11.7 billion , in line with 3Q13.Asia wealth sales continued to build momentum, benefiting from successful product launches, marketing campaigns and improved investor sentiment inIndonesia . InCanada , wealth sales declined reflecting normal variability in large case group retirement sales and lower new bank loan volumes (which we include in wealth sales) due to competitive rate pressures in a slowing residential mortgage market. In the U.S., mutual fund sales continued to be strong, but declined relative to the prior year. - Strengthened the
Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio to 248% for TheManufacturers Life Insurance Company ("MLI"), up 5 points fromJune 30, 2014 , reflecting the contribution of third quarter earnings. As a result of strong third quarter earnings and the favourable impact of a stronger U.S. dollar, the Company's financial leverage ratio improved from 28.2% at 2Q14 to 27.1%. - Achieved 24th consecutive quarter of record funds under management5 of
$663 billion . - Announced the proposed acquisition of the Canadian-based operations of Standard Life plc. This transaction, which is subject to regulatory approval, will accelerate our growth strategy for our Canadian business, in particular our wealth and asset management businesses. In addition, the transaction builds our capability to serve customers in all of
Canada , and elsewhere in the world, fromQuebec . - Generated strong investment-related experience of
$370 million ,$50 million of which was included in core earnings. The investment-related experience gains were largely due to fair value gains on alternative long-duration assets ("ALDA") and the impact of further investments made in higher yielding ALDA on the measurement of our policy liabilities. - Starting in 2015, we intend to increase the amount of investment-related experience gains included in core earnings to a maximum of
$400 million per annum from$200 million per annum, reflecting our recent strong experience and future outlook.4 - Strengthened reserves following the annual actuarial review, resulting in a
$69 million net charge to net income. Unfavourable changes to lapse assumptions and updates to the calibration criteria for fixed income funds used in the valuation of segregated fund guarantees were partially offset by benefits from updates to mortality assumptions and other annual updates. - Generated new business embedded value ("NBEV")5 of
$298 million , up 7% from 3Q13. The increase in NBEV reflects higher sales volumes inAsia , partially offset by the impact of lower interest rates on our insurance businesses. - Reported
$823 million of net income attributed to shareholders in accordance with U.S. GAAP5. As outlined in section A4 below, starting in 4Q14, we are discontinuing use of this U.S. GAAP measure
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2 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
3 | Growth (declines) in sales, premiums and deposits and funds under management are stated on a constant currency basis. Constant currency basis is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
4 | See section A4 "Future changes to non-GAAP measures" below. |
5 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
Financial Highlights
Quarterly Results | YTD Results | ||||||||||||||||||||||||
(C$ millions, unless otherwise stated, unaudited) | 3Q 2014 | 2Q 2014 | 3Q 2013 | 2014 | 2013 | ||||||||||||||||||||
Net income attributed to shareholders | $ | 1,100 | $ | 943 | $ | 1,034 | $ | 2,861 | $ | 1,833 | |||||||||||||||
Preferred share dividends | (28) | (36) | (33) | (98) | (97) | ||||||||||||||||||||
Common shareholders' net income | $ | 1,072 | $ | 907 | $ | 1,001 | $ | 2,763 | $ | 1,736 | |||||||||||||||
Reconciliation of core earnings to net income attributed to shareholders: |
|||||||||||||||||||||||||
Core earnings(1) | $ | 755 | $ | 701 | $ | 704 | $ | 2,175 | $ | 1,932 | |||||||||||||||
Investment-related experience in excess of amounts included in core earnings |
320 | 217 | 491 | 762 | 491 | ||||||||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 1,075 | $ | 918 | $ | 1,195 | $ | 2,937 | $ | 2,423 | |||||||||||||||
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 |
70 | 55 | 94 | 35 | (255) | ||||||||||||||||||||
Changes in actuarial methods and assumptions | (69) | (30) | (252) | (139) | (356) | ||||||||||||||||||||
Other items | 24 | - | (3) | 28 | 21 | ||||||||||||||||||||
Net income attributed to shareholders | $ | 1,100 | $ | 943 | $ | 1,034 | $ | 2,861 | $ | 1,833 | |||||||||||||||
Basic earnings per common share (C$) | $ | 0.58 | $ | 0.49 | $ | 0.54 | $ | 1.49 | $ | 0.95 | |||||||||||||||
Diluted earnings per common share (C$) | $ | 0.57 | $ | 0.49 | $ | 0.54 | $ | 1.48 | $ | 0.94 | |||||||||||||||
Diluted core earnings per common share (C$)(1) | $ | 0.39 | $ | 0.36 | $ | 0.36 | $ | 1.11 | $ | 0.99 | |||||||||||||||
Return on common shareholders' equity ("ROE") (%) | 14.8% | 13.1% | 16.8% | 13.3% | 10.1% | ||||||||||||||||||||
Core ROE (%)(1) | 10.1% | 9.6% | 11.3% | 10.0% | 10.6% | ||||||||||||||||||||
Funds under management (C$ billions)(1) | $ | 663 | $ | 637 | $ | 575 | $ | 663 | $ | 575 |
(1) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
SALES AND BUSINESS GROWTH
Asia Division
Asia Division 3Q14 insurance sales of
Japan insurance sales ofUS$165 million increased 83% driven by the continued momentum of corporate product sales and the launch of new retail products.Hong Kong insurance sales ofUS$81 million increased 37% driven by several product launches in the latter part of 2Q14 and a series of sales campaigns.Indonesia insurance sales ofUS$28 million increased 14% driven by strong growth in our bancassurance channel and a series of sales campaigns.- Asia Other (excludes
Japan ,Hong Kong andIndonesia ) insurance sales ofUS$78 million increased 16%. We delivered double digit growth in all markets, except forSingapore , where sales were at a level similar to 3Q13 but showed significant growth over 2Q14.
Asia Division 3Q14 wealth sales of
Japan wealth sales ofUS$516 million increased 140% as a result of the successful launch of a floating rate loan fund and the launch of a new single premium product.Hong Kong wealth sales ofUS$366 million increased 50% driven by successful marketing campaigns in the pension and mutual fund businesses.Indonesia wealth sales ofUS$239 million increased 93% reflecting the favourable impact of improved market sentiment on mutual fund sales.- Asia Other wealth sales of
US$1.0 billion increased 57% driven by the increase in mutual fund sales inChina ,Taiwan andThailand .
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6 | 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. |
Canadian Division
Wealth sales in 3Q14 were
- Mutual Funds' assets under management were a record
$31.8 billion atSeptember 30, 2014 , increasing 26% year-over-year and outpacing industry growth7. Gross mutual fund deposits8,9 of$1.3 billion in 3Q14 were down 10% as investor preference shifted toward equities where we continue to build our presence. In the quarter we added two global equity mandates to complement our growing suite of equity funds. Increased market volatility in September also put strain on sales. - Segregated Fund Products10sales were
$353 million in 3Q14, an increase of 13% reflecting steady growth in our repositioned new business portfolio. Fixed Products sales of$72 million in 3Q14 were down 33% reflecting our deliberate rate positioning in this market.
- Group Retirement Solutions sales of
$188 million in 3Q14 were 31% lower, reflecting normal variability in the large case group retirement market. Year-to-date, sales of$1.1 billion were 10% higher than the same period of 2013, reflecting continued success in the defined contribution plan market. Manulife Bank new lending volumes continue to reflect the impact of intense rate competition driven by the slowdown in the residential mortgage market. New loan volumes for 3Q14 were$927 million , 27% below 3Q13 levels and 3% higher than 2Q14. Net lending assets increased by 4% to$19.4 billion as atSeptember 30, 2014 .
Insurance sales in 3Q14 of
- Retail Markets' insurance sales of
$41 million increased 11%, reflecting the success of our new Manulife UL product, a universal life solution for Canadians looking for simplified investment options combined with long-term insurance protection. - Institutional Markets' insurance sales of
$102 million decreased 32%, reflecting competitive pressures which challenged large case sales in Group Benefits. In the small and mid-sized market, Group Benefits' sales increased 15%.
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7 | Based on publicly available information from Investor Economics and the |
8 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
9 | Gross mutual fund deposits in 3Q14 included deposits from segregated fund products of |
10 | Segregated fund products include guarantees. These products are also referred to as variable annuities. |
U.S. Division
Wealth Management sales in 3Q14 of
- JH Investments 3Q14 sales of
US$5.4 billion decreased 8% primarily due to higher mandates from large wirehouse firms in 2013, the impact of the closure to new sales of a top selling fund at the beginning of 2014 and tempered industry sales. On a year-to-date basis, sales continue to outpace the industry in the intermediary channel with an increase of 7% compared to 0.9% for the industry12. Our year-to-date results also continue to outpace the industry on organic growth (net new flows / beginning assets) with a 16% year-to-date growth rate compared to a 2% industry growth rate.12 - JH RPS 3Q14 sales of
US$886 million increased 2%. While sales are challenged by a very competitive environment, we are beginning to see momentum and an increased sales pipeline from initiatives launched earlier this year. This includes the Signature 2.0 product within our core market of plans underUS$10 million in assets under management, as well as increased distribution capabilities and pricing actions for plans with assets overUS$10 million .
Overall U.S. Insurance sales in 3Q14 of
- John Hancock Life ("JH Life") 3Q14 sales of
US$112 million were 19% lower as overall industry sales were challenged in the estate planning market. Compared with 2Q14, sales increased by 10% driven by changes to our Protection Universal Life ("UL") product and accumulation and indexed UL products. - John Hancock Long-Term Care 3Q14sales of
US$12 million decreased, as expected, due to recent price increases. Sales were down byUS$3 million from 3Q13 andUS$1 million from 2Q14.
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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 | Source: Strategic Insight: ICI Confidential. Direct Sold mutual funds, fund-of-funds and ETF's are excluded. Organic sales growth rate is calculated as: net new flows divided by beginning period assets. Industry data through |
Investment Division
At
CORPORATE ITEMS
In a separate news release today, MFC announced that the Board of Directors approved a quarterly dividend of
The Board of Directors also approved, in respect of MFC's
AWARDS & RECOGNITION
In the U.S.,
In
In
In
Notes:
The conference call will also be webcast through
The Third Quarter 2014 Statistical Information Package will also be available on the
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") is current as of
For further information relating to our risk management practices and risk factors affecting the Company, see "Risk Factors" in our most recent Annual Information Form, "Risk Management and Risk Factors" and "Critical Accounting and Actuarial Policies" in the MD&A in our 2013 Annual Report, and the "Risk Management" note to the Consolidated Financial Statements in our 2013 Annual Report.
In this MD&A, the terms "Company", "Manulife Financial", "Manulife" and "we" mean
Contents | ||||||||
A | OVERVIEW | D | RISK MANAGEMENT AND RISK FACTORS UPDATE | |||||
1. | Q3 highlights | 1. | Variable annuity and segregated fund guarantees | |||||
2. | Standard Life transaction | 2. | Caution related to sensitivities | |||||
3. | Q4 items | 3. | Publicly traded equity performance risk | |||||
4. | Future changes to non-GAAP measures | 4. | Interest rate and spread risk | |||||
B | FINANCIAL HIGHLIGHTS | E | ACCOUNTING MATTERS AND CONTROLS | |||||
1. | Q3 and year-to-date earnings analysis | 1. | Critical accounting and actuarial policies | |||||
2. | Premiums and deposits | 2. | Actuarial methods and assumptions | |||||
3. | Funds under management | 3. | Sensitivity of policy liabilities to updates to assumptions | |||||
4. | Capital | 4. | Accounting and reporting changes | |||||
5. | Impact of fair value accounting | 5. | U.S. GAAP results | |||||
C | PERFORMANCE BY DIVISION | F | OTHER | |||||
1. | 1. | Performance and Non-GAAP Measures | ||||||
2. | Canadian | 2. | Key planning assumptions and uncertainties | |||||
3. | U.S. | 3. | Caution regarding forward-looking statements | |||||
4. | Corporate and Other |
A OVERVIEW
A1 Q3 highlights
Manulife reported 3Q14 net income attributed to shareholders of
Results included investment-related experience gains of
The
Net income attributed to shareholders for the 9 months ended
Insurance sales14 were
Wealth sales were
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13 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
14 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
15 | 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 Agreement regarding acquisition of Canadian-based operations of Standard Life plc
On
The transaction was approved by the shareholders of Standard Life plc on
The acquisition will be funded in part by the issuance of common shares. On
This transaction significantly builds the Company's capability to serve customers in all of
Transaction highlights19:
- Excluding transition and integration costs, after the first year we expect the transaction to be accretive by approximately
3 cents to earnings per common share ("EPS") per year over each of the next 3 years. It will also increase our earnings capacity beyond our 2016 core earnings objective of$4 billion . - The transaction, and the financing, maintain our strong capital position and financial flexibility, and in no way inhibit our ability to pay dividends. In fact, it will enhance our ability to increase dividends in the future.
- We believe the transaction will improve core earnings, however the transition costs reported in core earnings will create a modest, temporary headwind on our core return on common shareholders' equity ("Core ROE") objective of 13%.
- Excluding transition and integration costs, the transaction is expected to be marginally accretive to EPS in the 1st year.
- Increases earnings contributions from less capital intensive, fee-based businesses.
- Integration costs totaling
$150 million post-tax expected to be incurred in the first three years and we expect revenue synergies which will build over time. - Annual cost savings of
$100 million post-tax expected to be largely achieved by the 3rd year. - Targeting MCCSR ratio in the range of 235% to 240% at close.
- Targeting financial leverage ratio of approximately 28% at close.
- We continue to target a 25% financial leverage ratio over the long-term.
- Does not significantly impact our interest rate or equity market risk profile.
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16 | Source: |
17 | Source: |
18 | Source: |
19 | See "Caution regarding forward-looking statements" and "Performance and Non-GAAP Measures" below. |
A3 Q4 items
In the fourth quarter, the Canadian Actuarial Standards Board's ("ASB") revisions to the Canadian Actuarial Standards of Practice, issued in
A4 Future changes to non-GAAP measures
Core earnings is a non-GAAP measure which we use to better understand the long-term earnings capacity and valuation of the business. It excludes the direct impact of changes in equity markets and interest rates as well as a number of other items that are considered material and exceptional in nature. Since we introduced this measure in 2012, we have included up to
Net income attributed to shareholders in accordance with U.S. GAAPand Total equity in accordance with U.S. GAAP - This is the last quarter we will be disclosing U.S. GAAP measures. In the past, we elected to report consolidated U.S. GAAP information because of our large U.S. domiciled investor base and for comparison purposes with our U.S. peers. In the aftermath of the financial crisis, presenting U.S. GAAP measures highlighted the significant impact of fair value accounting on our financial statements under International Financial Reporting Standards ("IFRS"). In 2012, we introduced a core earnings metric which also highlights such impact. This metric has gained acceptance with our stakeholders and, therefore, we will discontinue the use of consolidated U.S. GAAP information starting in 4Q14.
B FINANCIAL HIGHLIGHTS
Quarterly Results | YTD Results | |||||||||||||||||||||||
(C$ millions, unless otherwise stated, unaudited) | 3Q 2014 | 2Q 2014 | 3Q 2013 | 2014 | 2013 | |||||||||||||||||||
Net income attributed to shareholders | $ | 1,100 | $ | 943 | $ | 1,034 | $ | 2,861 | $ | 1,833 | ||||||||||||||
Preferred share dividends | (28) | (36) | (33) | (98) | (97) | |||||||||||||||||||
Common shareholders' net income | 1,072 | 907 | $ | 1,001 | 2,763 | $ | 1,736 | |||||||||||||||||
Reconciliation of core earnings to net income attributed to shareholders: |
||||||||||||||||||||||||
Core earnings(1) | $ | 755 | $ | 701 | $ | 704 | $ | 2,175 | $ | 1,932 | ||||||||||||||
Investment-related experience in excess of amounts included in core earnings |
320 | 217 | 491 | 762 | 491 | |||||||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 1,075 | $ | 918 | $ | 1,195 | $ | 2,937 | $ | 2,423 | ||||||||||||||
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 |
</td> | 70 | 55 | 94 | 35 | (255) | ||||||||||||||||||
Changes in actuarial methods and assumptions | (69) | (30) | (252) | (139) | (356) | |||||||||||||||||||
Other items(see section B1) | 24 | - | (3) | 28 | 21 | |||||||||||||||||||
Net income attributed to shareholders | $ | 1,100 | $ | 943 | $ | 1,034 | $ | 2,861 | $ | 1,833 | ||||||||||||||
Basic earnings per common share (C$) | $ | 0.58 | $ | 0.49 | $ | 0.54 | $ | 1.49 | $ | 0.95 | ||||||||||||||
Diluted earnings per common share (C$) | $ | 0.57 | $ | 0.49 | $ | 0.54 | $ | 1.48 | $ | 0.94 | ||||||||||||||
Diluted core earnings per common share(C$)(1) | $ | 0.39 | $ | 0.36 | $ | 0.36 | $ | 1.11 | $ | 0.99 | ||||||||||||||
Return on common shareholders' equity ("ROE") (%) | 14.8% | 13.1% | 16.8% | 13.3% | 10.1% | |||||||||||||||||||
Core ROE (%)(1) | 10.1% | 9.6% | 11.3% | 10.0% | 10.6% | |||||||||||||||||||
U.S. GAAP net income (loss) attributed to shareholders(1) | $ | 823 | $ | 906 | $ | 148 | $ | 3,890 | $ | (889) | ||||||||||||||
Sales(1) | ||||||||||||||||||||||||
Insurance products(2) | $ | 660 | $ | 587 | $ | 601 | $ | 1,784 | $ | 2,140 | ||||||||||||||
Wealth products | $ | 11,742 | $ | 13,322 | $ | 11,299 | $ | 38,842 | $ | 37,440 | ||||||||||||||
Premiums and deposits(1) | ||||||||||||||||||||||||
Insurance products | $ | 6,455 | $ | 6,007 | $ | 6,057 | $ | 18,366 | $ | 18,380 | ||||||||||||||
Wealth products | $ | 15,632 | $ | 18,959 | $ | 14,645 | $ | 54,123 | $ | 48,334 | ||||||||||||||
Funds under management(C$ billions)(1) | $ | 663 | $ | 637 | $ | 575 | $ | 663 | $ | 575 | ||||||||||||||
Capital(C$ billions)(1) | $ | 37.7 | $ | 35.8 | $ | 31.1 | $ | 37.7 | $ | 31.1 | ||||||||||||||
MLI's MCCSR ratio | 248% | 243% | 229% | 248% | 229% |
(1) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(2) | Insurance sales have been adjusted to exclude |
B1 Q3 and year-to-date earnings analysis
The table below reconciles core earnings to reported net income attributed to shareholders for 3Q14 and year-to-date.
Quarterly Results | YTD Results | ||||||||||||||||||||||
(C$ millions, unaudited) | 3Q 2014 | 2Q 2014 | 3Q 2013 | 2014 | 2013 | ||||||||||||||||||
Core earnings(1) | |||||||||||||||||||||||
Asia Division(2) | $ | 273 | $ | 231 | $ | 242 | $ | 748 | $ | 694 | |||||||||||||
Canadian Division(2) | 243 | 232 | 268 | 703 | 672 | ||||||||||||||||||
U.S. Division(2) | 342 | 329 | 361 | 1,045 | 1,144 | ||||||||||||||||||
Corporate and Other (excluding expected cost of macro hedges and core investment gains) |
(107) | (92) | (135) | (334) | (368) | ||||||||||||||||||
Expected cost of macro hedges(2) | (46) | (49) | (84) | (137) | (360) | ||||||||||||||||||
Investment-related experience in core earnings(3) | 50 | 50 | 52 | 150 | 150 | ||||||||||||||||||
Core earnings | $ | 755 | $ | 701 | $ | 704 | $ | 2,175 | $ | 1,932 | |||||||||||||
Investment-related experience in excess of amounts included in core earnings(3) |
320 | 217 | 491 | 762 | 491 | ||||||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 1,075 | $ | 918 | $ | 1,195 | $ | 2,937 | $ | 2,423 | |||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities (see table below)(3),(4) |
70 | 55 | 94 | 35 | (255) | ||||||||||||||||||
Changes in actuarial methods and assumptions | (69) | (30) | (252) | (139) | (356) | ||||||||||||||||||
Other items | 24 | - | (3) | 28 | 21 | ||||||||||||||||||
Net income attributed to shareholders | $ | 1,100 | $ | 943 | $ | 1,034 | $ | 2,861 | $ | 1,833 |
(1) | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. |
(2) | The expected cost of the macro equity hedges is relative to our long-term valuation assumptions. Of the in expected macro hedging costs compared with 3Q13, approximately half was offset by an increase in dynamic hedging costs, primarily in equity markets and interest rates. |
(3) | 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. The direct impact of markets is separately reported. |
(4) | The direct impact of equity markets and interest rates is relative to our policy liability valuation assumptions and includes changes to interest rate assumptions, including a quarterly ultimate reinvestment rate ("URR") update for for gains and losses on the sale of available-for-sale ("AFS") bonds and derivative positions in the surplus segment. See table below for components of this item. |
The quarterly gain (charge) related to the direct impact of equity markets and interest rates and variable annuity guarantee liabilities in the table above is attributable to:
(C$ millions, unaudited) | 3Q 2014 | 2Q 2014 | 3Q 2013 | ||||||||||
Direct impact of equity markets and variable annuity guarantee liabilities(1) | $ | (35) | $ | 66 | $ | 306 | |||||||
Fixed income reinvestment rates assumed in the valuation of policy liabilities(2) | 165 | 22 | (77) | ||||||||||
Sale of AFS bonds and derivative positions in the Corporate and Other segment | (15) | (8) | (72) | ||||||||||
Charges due to lower fixed income URR assumptions used in the valuation of policy liabilities |
(45) | (25) | (63) | ||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities |
$ | 70 | $ | 55 | $ | 94 | |||||||
Direct impact of equity markets and interest rates | $ | 119 | $ | 6 | $ | (66) |
(1) | In 3Q14, gross equity exposure losses of |
(2) | In 3Q14, the spreads in the U.S. |
B2 Premiums and deposits20
Premiums and deposits for insurance products were
Premiums and deposits for wealth products were
B3 Funds under management20
Funds under management as at
B4 Capital20
MFC's total capitalas at
B5 Impact of fair value accounting
Fair value accounting policies affect the measurement of both our assets and our liabilities. The impact on the measurement of both assets and liabilities of investment activities and market movements are reported as experience gains (losses) on investments, the direct impact of equity markets and interest rates and variable annuity guarantee liabilities, each of which impacts net income (see section A1 above for discussion of third quarter experience).
Net realized and unrealized gains reported in investment income were
As outlined in the "Critical Accounting and Actuarial Policies" in the MD&A in the 2013 Annual Report, net insurance contract liabilities under IFRS are determined using CALM, as required by the
______________________ | |
20 | This item 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 2014 | 2Q 2014 | 3Q 2013 | 3Q 2014 | 3Q 2013 | ||||||||||||||||||
Net income attributed to shareholders | $ | 332 | $ | 337 | $ | 480 | $ | 911 | $ | 1,794 | |||||||||||||
Core earnings(1) | 273 | 231 | 242 | 748 | 694 | ||||||||||||||||||
Premiums and deposits | 4,691 | 4,150 | 3,218 | 12,641 | 12,824 | ||||||||||||||||||
Funds under management (billions) | 84.5 | 81.4 | 80.1 | 84.5 | 80.1 | ||||||||||||||||||
U.S. dollars | |||||||||||||||||||||||
Net income attributed to shareholders | $ | 305 | $ | 308 | $ | 463 | $ | 832 | $ | 1,761 | |||||||||||||
Core earnings | 251 | 212 | 233 | 684 | 677 | ||||||||||||||||||
Premiums and deposits | </td> | 4,308 | 3,806 | 3,099 | 11,558 | 12,553 | |||||||||||||||||
Funds under management (billions) | 75.4 | 76.2 | 77.9 | 75.4 | 77.9 |
(1) | See "Performance and Non-GAAP Measures" for a reconciliation between IFRS net income attributed to shareholders and core earnings. |
Asia Division reported 3Q14 net income attributed to shareholders of
Core earnings increased
Year-to-date net income attributed to shareholders was
Premiums and deposits in 3Q14 were
Funds under management as at
C2 Canadian Division
($ millions, unless otherwise stated) | Quarterly Results | YTD Results | |||||||||||||||||||||
Canadian dollars | 3Q 2014 | 2Q 2014 | 3Q 2013 | 3Q 2014 | 3Q 2013 | ||||||||||||||||||
Net income (loss) attributed to shareholders | $ | 286 | $ | 267 | $ | 414 | $ | 930 | $ | 455 | |||||||||||||
Core earnings(1) | 243 | 232 | 268 | 703 | 672 | ||||||||||||||||||
Premiums and deposits | 5,073 | 5,069 | 4,901 | 16,192 | 15,897 | ||||||||||||||||||
Funds under management (billions) | 156.0 | 153.4 | 138.8 | 156.0 | 138.8 |
(1) | See "Performance and Non-GAAP Measures" for a reconciliation between IFRS net income attributed to shareholders and core earnings. |
Canadian Division reported 3Q14 net income attributed to shareholders of
Year-to-date net income attributed to shareholders was
Premiums and deposits in 3Q14 were
Funds under management were a record
C3 U.S. Division
($ millions, unless otherwise stated) | Quarterly Results | YTD Results | |||||||||||||||||||||
Canadian dollars | 3Q 2014 | 2Q 2014 | 3Q 2013 | 3Q 2014 | 3Q 2013 | ||||||||||||||||||
Net income attributed to shareholders | $ | 679 | $ | 559 | $ | 928 | $ | 1,641 | $ | 2,083 | |||||||||||||
Core earnings(1) | 342 | 329 | 361 | 1,045 | 1,144 | ||||||||||||||||||
Premiums and deposits | 11,342 | 12,947 | 11,473 | 37,688 | 34,911 | ||||||||||||||||||
Funds under management (billions) | 376.9 | 360.5 | 319.9 | 376.9 | 319.9 | ||||||||||||||||||
U.S. dollars | |||||||||||||||||||||||
Net income attributed to shareholders | $ | 623 | $ | 513 | $ | 894 | $ | 1,502 | $ | 2,033 | |||||||||||||
Core earnings | 314 | 302 | 348 | 955 | 1,120 | ||||||||||||||||||
Premiums and deposits | 10,415 | 11,873 | 11,046 | 34,434 | 34,125 | ||||||||||||||||||
Funds under management (billions) | 336.3 | 337.7 | 311.0 | 336.3 | 311.0 |
(1) | See "Performance and Non-GAAP Measures" for a reconciliation between IFRS net income attributed to shareholders and core loss. |
U.S. Division reported 3Q14 net income attributed to shareholders of
Year-to-date net income attributed to shareholders was
Premiums and deposits for 3Q14 were
Funds under management as at
C4 Corporate and Other
($ millions, unless otherwise stated) | Quarterly Results | YTD Results | |||||||||||||||||||
Canadian dollars | 3Q 2014 | 2Q 2014 | 3Q 2013 | 3Q 2014 | 3Q 2013 | ||||||||||||||||
Net loss attributed to shareholders | $ | (197) | $ | (220) | $ | (788) | $ | (621) | $ | (2,499) | |||||||||||
Core loss (excl. macro hedges and core investment gains)(1) | $ | (107) | $ | (92) | $ | (135) | $ | (334) | $ | (368) | |||||||||||
Expected cost of macro hedges | (46) | (49) | (84) | (137) | (360) | ||||||||||||||||
Investment-related experience included in core earnings | 50 | 50 | 52 | 150 | </td> | 150 | |||||||||||||||
Total core loss | $ | (103) | $ | (91) | $ | (167) | $ | (321) | $ | (578) | |||||||||||
Premiums and deposits | $ | 981 | $ | 2,800 | $ | 1,110 | $ | 5,968 | $ | 3,082 | |||||||||||
Funds under management (billions) | 45.1 | 42.0 | 35.8 | 45.1 | 35.8 |
(1) | 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 3Q14 not included in core earnings totaled
$69 million net charge for changes in actuarial methods and assumptions (3Q13 -$252 million ),$15 million of realized losses on AFS bonds and interest rate swaps (3Q13 -$72 million ), and$50 million related to the total company offset included in core investment-related experience.- Partially offsetting these items were
$29 million of net experience gains on macro hedges (3Q13 -$245 million net experience losses) and$11 million of other mark-to-market gains.
The core loss declined by
On a year-to-date basis the net loss attributed to shareholders was
Premiums and deposits for 3Q14 of
Funds under management of
D. RISK MANAGEMENT AND RISK FACTORS UPDATE
This section provides an update to our risk management practices and risk factors outlined in the MD&A in our 2013 Annual Report. The shaded text and tables in this section of the MD&A represent our disclosure on market and liquidity risk in accordance with IFRS7, "Financial Instruments - Disclosures". Accordingly, the following shaded text and tables represent an integral part of our unaudited Interim Consolidated Financial Statements.
D1 Variable annuity and segregated fund guarantees
As described in the MD&A in our 2013 Annual Report, guarantees on variable products and segregated funds may include one or more of death, maturity, income and withdrawal guarantees. Variable annuity and segregated fund guarantees are contingent and only payable upon the occurrence of the relevant event, if fund values at that time are below guaranteed values. Depending on future equity market levels, liabilities on current in-force business would be due primarily in the period from 2015 to 2038.
We seek to mitigate a portion of the risks embedded in our retained (i.e. net of reinsurance) variable annuity and segregated fund guarantee business through the combination of our dynamic and macro hedging strategies (see section D3 "Publicly traded equity performance risk" below).
The table below shows selected information regarding the Company's variable annuity and segregated fund guarantees gross and net of reinsurance.
Variable annuity and segregated fund guarantees, net of reinsurance
As at | |||||||||||||||
(C$ millions) | Guarantee value |
Fund value |
Amount at risk(4),(5) |
Guarantee value |
Fund value |
Amount at risk(4),(5) |
|||||||||
Guaranteed minimum income benefit(1) | $ | 5,935 | $ | 4,788 | $ | 1,174 | $ | 6,194 | $ | 5,161 | $ | 1,109 | |||
Guaranteed minimum withdrawal benefit | 65,956 | 63,659 | 4,112 | 66,189 | 63,849 | 4,120 | |||||||||
Guaranteed minimum accumulation benefit | 15,624 | 19,548 | 42 | 16,942 | 20,581 | 94 | |||||||||
Gross living benefits(2) | $ | 87,515 | $ | 87,995 | $ | 5,328 | $ | 89,325 | $ | 89,591 | $ | 5,323 | |||
Gross death benefits(3) | 12,226 | 10,914 | 1,339 | 12,490 | 11,230 | 1,413 | |||||||||
Total gross of reinsurance and hedging | $ | 99,741 | $ | 98,909 | $ | 6,667 | $ | 101,815 | $ | 100,821 | $ | 6,736 | |||
Living benefits reinsured | $ | 5,171 | $ | 4,194 | $ | 994 | $ | 5,422 | $ | 4,544 | $ | 942 | |||
Death benefits reinsured | 3,562 | 3,349 | 559 | 3,601 | 3,465 | 564 | |||||||||
Total reinsured | $ | 8,733 | $ | 7,543 | $ | 1,553 | $ | 9,023 | $ | 8,009 | $ | 1,506 | |||
Total, net of reinsurance | $ | 91,008 | $ | 91,366 | $ | 5,114 | $ | 92,792 | $ | 92,812 | $ | 5,230 |
(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 |
The amount at risk on variable annuity contracts, net of reinsurance, was
The policy liabilities established for variable annuity and segregated fund guarantees were
D2 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 will be as indicated or on MLI's MCCSR ratio will be as indicated.
D3 Publicly traded equity performance risk
As outlined in our 2013 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 48 and 49 of our 2013 Annual Report).
The tables below show the potential impact on net income attributed to shareholders resulting from an immediate 10, 20 and 30 % change in market values of publicly traded equities followed by a return to the expected level of growth assumed in the valuation of policy liabilities. 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.
This estimate assumes that the performance of the dynamic hedging program would not completely offset the gain/loss from the dynamically hedged variable annuity guarantee liabilities. It assumes that the hedge assets are based on the actual position at the period end, and that equity hedges in the dynamic program are rebalanced at 5% intervals. In addition, we assume that the macro hedge assets are rebalanced in line with market changes.
It is also important to note that these estimates are illustrative, and that the 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.
This disclosure has been simplified in 2014 to exclude the impact of assuming that the change in the value of dynamic hedge assets completely offsets the change in dynamically hedged variable annuity guarantees, and now shows the impact of macro and dynamic hedge assets in aggregate.
Potential impact on net income attributed to shareholders arising from changes to public equities (1)
As at |
|||||||||||||||||
(C$ millions) | -30% | -20% | -10% | 10% | 20% | 30% | |||||||||||
Underlying sensitivity to net income attributed to shareholders(2) | |||||||||||||||||
Variable annuity guarantees | $ | (4,620) | $ | (2,660) | $ | (1,110) | $ | 730 | $ | 1,200 | $ | 1,490 | |||||
Asset based fees | (350) | (230) | (120) | 120 | 230 | 350 | |||||||||||
General fund equity investments(3) | (570) | (380) | (180) | 180 | 370 | 570 | |||||||||||
Total underlying sensitivity before hedging | $ | (5,540) | $ | (3,270) | $ | (1,410) | $ | 1,030 | $ | 1,800 | $ | 2,410 | |||||
Impact of macro and dynamic hedge assets(4) | $ | 3,750 | $ | 2,130 | $ | 930 | $ | (800) | $ | (1,380) | $ | (1,830) | |||||
Net potential impact on net income after impact of hedging | $ | (1,790) | $ | (1,140) | $ | (480) | $ | 230 | $ | 420 | $ | 580 | |||||
As at |
|||||||||||||||||
(C$ millions) | -30% | -20% | -10% | 10% | 30% | ||||||||||||
Underlying sensitivity to net income attributed to shareholders(2) | |||||||||||||||||
Variable annuity guarantees | $ | (4,120) | $ | (2,310) | $ | (960) | $ | 610 | $ | 1,060 | $ | 1,380 | |||||
Asset based fees | (310) | (210) | (110) | 110 | 210 | 310 | |||||||||||
General fund equity investments(3) | (420) | (280) | (130) | 140 | 280 | 430 | |||||||||||
Total underlying sensitivity before hedging | $ | (4,850) | $ | (2,800) | $ | (1,200) | $ | 860 | $ | 1,550 | $ | 2,120 | |||||
Impact of macro and dynamic hedge assets(4) | $ | 3,510 | $ | 1,880 | $ | 770 | $ | (680) | $ | (1,160) | $ | (1,510) | |||||
Net potential impact on net income after impact of hedging | $ | ( 1,340) | $ | (920) | $ | (430) | $ | 180 | $ | 390 | $ | 610 |
(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 and dynamic hedging program. The impact of dynamic hedge rebalancing represents the impact of rebalancing equity hedges for dynamically hedged variable annuity guarantee best estimate liabilities at 5% intervals, but does not include any impact in respect of other sources of hedge ineffectiveness e.g. fund tracking, realized volatility and equity, interest rate correlations different from expected, among other factors. |
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% |
(23) | (12) | (4) | 2 | 15 | 17 | |
(14) | (8) | (4) | 13 | 25 | 25 |
(1) | See "Caution related to sensitivities" above. In addition, estimates exclude changes to the net actuarial gains/losses with respect to the Company's pension obligations as a result of changes in equity markets, as the impact on the quoted sensitivities is not considered to be material. |
(2) | The potential impact is shown assuming that the change in value of the hedge assets does not completely offset the change in the dynamically hedged variable annuity guarantee liabilities. The estimated amount that would not be completely offset relates to our practices of not hedging the provisions for adverse deviation and of rebalancing equity hedges for dynamically hedged variable annuity liabilities at 5% intervals. |
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) | 2014 | 2013 | |||||
For variable annuity guarantee dynamic hedging strategy | $ | 9,600 | $ | 7,500 | |||
For macro equity risk hedging strategy | 3,000 | 2,000 | |||||
Total | $ | 12,600 | $ | 9,500 |
D4 Interest rate and spread risk
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 change in interest rates includes any associated change in the applicable prescribed reinvestment scenario, the impact of changes to interest rates for less than, or more than, the amounts indicated are unlikely to be linear. Furthermore, the reinvestment scenario changes tend to amplify the negative effects of a decrease in interest rates, and dampen the positive effects of an increase in interest rates. 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 1% 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 | $ | (700) | $ | 300 | $ | (400) | $ | - | |
From fair value changes in AFS fixed income assets held in surplus, if realized | 700 | (600) | 600 | (600) | |||||
MLI's MCCSR ratio (Percentage points) | |||||||||
Before impact of change in market value of AFS fixed income assets held in the surplus segment(5) | (16) | 13 | (13) | 18 | |||||
From fair value changes in AFS fixed income assets held in surplus, if realized | 4 | (5) | 4 | (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. |
(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 fair value changes in AFS fixed income assets 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 10 of the 16 point impact of a 100 bp decline in interest rates on MLI's MCCSR ratio this quarter. |
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)
As at | ||||||||
(C$ millions) | September 30, 2014 |
2013 |
||||||
Corporate spreads(4) | ||||||||
Increase 50 basis points | $ | 500 | $ | 400 | ||||
Decrease 50 basis points | (500) | (400) | ||||||
Swap spreads | ||||||||
Increase 20 basis points | $ | (500) | $ | (400) | ||||
Decrease 20 basis points | 500 | 400 |
(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 not significant at
Alternative Long-Duration Asset ("ALDA") Performance Risk
The following table shows the potential impact on net income attributed to shareholders resulting from changes in market values of ALDA that differ from the expected levels assumed in the valuation of policy liabilities.
Potential impact on net income attributed to shareholders arising from changes in ALDA returns(1),(2),(3),(4)
As at | ||||||||||
(C$ millions) | -10% | 10% | -10% | 10% | ||||||
Real estate, agriculture and timber assets | $ | (1,200) | $ | 1,200 | $ | (1,000) | $ | 1,000 | ||
Private equities and other alternative long-duration assets | (1,100) | 1,100 | (900) | 800 | ||||||
Alternative long-duration assets | $ | (2,300) | $ | 2,300 | $ | (1,900) | $ | 1,800 |
(1) | See "Caution Related to Sensitivities" above. |
(2) | This impact is calculated as at a point-in-time impact and does not include: (i) any potential impact on ALDA, weightings; (ii) any gains or losses on ALDA held in the Corporate and Other segment; or (iii) any gains or losses on ALDA held in |
(3) | The participating policy funds are largely self-supporting and generate no material impact on net income attributed to shareholders as a result of changes in alternative long-duration asset returns. |
(4) | Net income impact does not consider any impact of the market correction on assumed future return assumptions. |
The increased sensitivity from
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
A comprehensive review of actuarial methods and assumptions is performed annually. The review is designed to reduce the Company's exposure to uncertainty by ensuring assumptions for both asset-related and liability-related risks remain appropriate. This is accomplished by monitoring experience and selecting assumptions which represent a current best estimate view of expected future experience, and margins that are appropriate for the risks assumed. While the assumptions selected represent the Company's current best estimates and assessment of risk, the ongoing monitoring of experience and changes in the economic environment are likely to result in future changes to the valuation assumptions, which could be material.
The quantification of the impact of the 2014 comprehensive review of valuation methods and assumptions is as of
In the third quarter of 2014, the completion of the annual review of actuarial methods and assumptions resulted in an increase in insurance and investment contract liabilities of
For the quarter ended |
Change in net insurance and investment contract liabilities |
Change in net income attributed to shareholders |
|||||
Assumption (C$ millions) |
Increase (decrease) |
Increase (decrease) | |||||
Mortality and morbidity updates | $ | (113) | $ | 99 | |||
Lapses and policyholder behaviour | 425 | (329) | |||||
Updates to actuarial standards | |||||||
Segregated fund bond calibration | 217 | (157) | |||||
Other updates | (467) | 318 | |||||
Net impact | $ | 62 | $ | (69) |
Updates to mortality and morbidity
Mortality assumptions were updated across several business units to reflect recent experience. Updates to our
Updates to lapses and policyholder behaviour
Lapse rates for several of our
Other updates to lapse and policyholder behaviour assumptions were made across several business units including
Updates to actuarial standards
Updates to actuarial standards related to bond parameter calibration for stochastic models used to value segregated fund liabilities resulted in a
Other updates
The Company performed an in depth review of the modelling of future tax cash flows for its U.S. insurance business and this review resulted in improvements to the modeling resulting in an increase in net income attributed to shareholders of
The Company made a number of model refinements related to the projection of both asset and liability cash flows across several business units which led to a
E3 Sensitivity of policy liabilities to updates and 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 business and geographic market 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. The estimated potential impact on net income for the next 5 years and the following 5 years from changes in the fixed income URR driven by changes in risk free rates is not shown here. After the implementation of the revised actuarial standards of practice relating to reinvestment assumptions in 4Q14, we do not anticipate that there will be any further impact on net income due to changes in fixed income URR21.
__________________________ | |
21 | See "Caution related to forward-looking statements" below. |
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
As at | Increase (decrease) in after-tax income | ||||||||
(C$ millions) | |||||||||
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) | $ | 400 | $ | (400) | $ | 400 | $ | (400) | |
100 basis point change in future annual returns for alternative long-duration assets(2) | 4,700 | (4,500) | 3,800 | (3,700) | |||||
100 basis point change in equity volatility assumption for stochastic segregated fund modelling(3) | (200) | 200 | (200) | 200 |
(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 a |
(2) | ALDA include commercial real estate, timber and agricultural real estate, oil and gas, and private equities. The increase of |
(3) | Volatility assumptions for public equities are based on long-term historic observed experience and compliance with actuarial standards. The resulting volatility assumptions are 17.15% per annum in |
E4 Accounting and reporting changes
Topic | Effective Date |
Recognition / Measurement / Presentation |
Impact / Expected Impact |
||||
Future Accounting Changes | |||||||
Annual Improvements 2012-2014 cycle | Measurement and Presentation |
Not significant | |||||
IFRS 10 "Consolidated Financial Statements" and | |||||||
IAS 28 "Investments in Associates and Joint Ventures" | Recognition | Not significant |
E5 U.S. GAAP results
Net income attributed to shareholders in accordance with U.S. GAAP22 for 3Q14 was
For the quarters ended |
Quarterly Results | |||||
(C$ millions, unaudited) | 2014 | 2013 | ||||
Net income attributed to shareholders in accordance with IFRS | $ | 1,100 | $ | 1,034 | ||
Key earnings differences: | ||||||
Variable annuity guarantee liabilities and related dynamic hedges(1) | $ | 221 | $ | (635) | ||
Impact of mark-to-market accounting and investing activities on investment income and policy liabilities(2) | (10) | (394) | ||||
New business differences including acquisition costs(3) | (223) | (210) | ||||
Changes in actuarial methods and assumptions(4) | (335) | 175 | ||||
Other differences | 70 | 178 | ||||
Total earnings difference | $ | (277) | $ | (886) </td> | ||
Net income attributed to shareholders in accordance with U.S. GAAP | $ | 823 | $ | 148 |
(1) | 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 3Q14, we reported a net gain of |
(2) | 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 3Q14 IFRS impacts of fixed income reinvestment assumptions, general fund equity investments, fixed income and alternative long-duration asset investing totaled a net gain of |
(3) | 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. |
(4) | The charge recognized under IFRS from changes in actuarial methods and assumptions of |
________________________________ | |
22 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. See also section A4 "Future changes to non-GAAP measures" above. |
Total equity in accordance with U.S. GAAP23 as at
______________________________ | |
23 | This item is a non-GAAP measure. See "Performance and Non-GAAP Measures" below. See also section A4 "Future changes to non-GAAP measures" above. |
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 (Loss); 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; Earnings Per Share ("EPS") excluding Transition and Integration Costs; Assets under Management ("AUM"); Assets under Administration ("AUA"); Premiums and Deposits; Funds under Management; Capital; New Business Embedded Value; and 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 (loss) 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 disclosed24.
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 insurance and investment contract 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 and variable annuity guarantee liabilities, consisting of:
- The earnings impact of the difference between the net increase (decrease) in variable annuity liabilities that are dynamically hedged and the performance of the related hedge assets. Our variable annuity dynamic hedging strategy is not designed to completely offset the sensitivity of insurance and investment contract liabilities to all risks or measurements associated with the guarantees embedded in these products for a number of reasons, including: provisions for adverse deviation, fund performance, the portion of the interest rate risk that is not dynamically hedged, realized equity and interest rate volatilities and changes to policyholder behaviour.
- Gains (charges) on variable annuity guarantee liabilities that are not dynamically hedged.
- Gains (charges) on general fund equity investments supporting insurance and investment contract 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 insurance and investment contract liabilities.
- Gains (charges) on higher (lower) fixed income reinvestment rates assumed in the valuation of insurance and investment contract 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.
- 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 insurance and investment contract liabilities. The maximum of$200 million per annum to be reported in core earnings compares with an average of over$80 million per quarter of favourable investment-related experience reported since 1Q07. - Mark-to-market gains or losses on assets held in the Corporate and Other segment other than gains on AFS equities and seed money investments in new segregated or mutual funds.
- Changes in actuarial methods and assumptions.
- The impact on the measurement of insurance and investment contract liabilities of changes in product features or new reinsurance transactions, if material.
- Goodwill impairment charges.
- Gains or losses on disposition of a business.
- Material one-time only adjustments, including highly unusual/extraordinary and material legal settlements or other items that are material and exceptional in nature.
- Tax on the above items.
- Impact of enacted or substantially enacted income tax rate changes.
_____________________________ | |
24 | See section A4 "Future changes to non-GAAP measures" above. |
The following table summarizes for the past eight quarters core earnings and net income (loss) attributed to shareholders.
Quarterly Results | ||||||||||||||||||||||||||
(C$ millions, unaudited) | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | ||||||||||||||||||
2014 | 2014 | 2014 | 2013 | 2013 | 2013 | 2013 | 2012(1) | |||||||||||||||||||
Core earnings (loss) | ||||||||||||||||||||||||||
Asia Division | $ | 273 | $ | 231 | $ | 244 | $ | 227 | $ | 242 | $ | 226 | $ | 226 | $ | 180 | ||||||||||
Canadian Division | 243 | 232 | 228 | 233 | 268 | 225 | 179 | 233 | ||||||||||||||||||
U.S. Division | 342 | 329 | 374 | 366 | 361 | 343 | 440 | 293 | ||||||||||||||||||
Corporate and Other (excluding expected cost of macro hedges and core investment gains) |
(107) | (92) | (135) | (138) | (135) | (105) | (128) | (62) | ||||||||||||||||||
Expected cost of macro hedges | (46) | (49) | (42) | (53) | (84) | (128) | (148) | (140) | ||||||||||||||||||
Investment-related experience included in core earnings |
50 | 50 | 50 | 50 | 52 | 48 | 50 | 50 | ||||||||||||||||||
Total core earnings | $ | 755 | $ | 701 | $ | 719 | $ | 685 | $ | 704 | $ | 609 | $ | 619 | $ | 554 | ||||||||||
Investment-related experience in excess of amounts included in core earnings |
320 | 217 | 225 | 215 | 491 | (97) | 97 | 321 | ||||||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 1,075 | $ | 918 | $ | 944 | $ | 900 | $ | 1,195 | $ | 512 | $ | 716 | $ | 875 | ||||||||||
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 (details below) |
70 | 55 | (90) | (81) | 94 | (242) | (107) | 82 | ||||||||||||||||||
Impact of in-force product changes and recapture of reinsurance treaties |
24 | - | - | 261 | - | - | - | - | ||||||||||||||||||
Change in actuarial methods and assumptions | (69) | (30) | (40) | (133) | (252) | (35) | (69) | (87) | ||||||||||||||||||
Disposition of |
- | - | - | 350 | - | - | - | - | ||||||||||||||||||
Tax items and restructuring charge related to organizational design |
- | - | 4 | - | (3) | 24 | - | 207 | ||||||||||||||||||
Net income attributed to shareholders | $ | 1,100 | $ | 943 | $ | 818 | $ | 1,297 | $ | 1,034 | $ | 259 | $ | 540 | $ | 1,077 | ||||||||||
Other market-related factors | ||||||||||||||||||||||||||
Direct impact of equity markets and variable annuity guarantee liabilities |
$ | (35) | $ | 66 | $ | (71) | $ | 105 | $ | 306 | $ | (196) | $ | 243 | $ | 412 | ||||||||||
Gains (charges) on higher (lower) fixed income reinvestment rates assumed in the valuation of policy liabilities |
165 | 22 | 9 | (105) | (77) | 151 | (245) | (290) | ||||||||||||||||||
Gains (charges) on sale of AFS bonds and derivative positions in the Corporate segment |
(15) | (8) | (3) | (55) | (72) | (127) | (8) | (40) | ||||||||||||||||||
Charges due to lower fixed income URR assumptions used in the valuation of policy liabilities |
(45) | (25) | (25) | (26) | (63) | (70) | (97) | - | ||||||||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities |
$ | 70 | $ | 55 | $ | (90) | $ | (81) | $ | 94 | $ | (242) | $ | (107) | $ | 82 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective For a detailed description of the change see note 2 to our 2013 Annual Consolidated Financial Statements. |
Asia Division | |||||||||||||||||||||||||
Quarterly Results | |||||||||||||||||||||||||
(C$ millions, unaudited) | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | |||||||||||||||||
2014 | 2014 | 2014 | 2013 | 2013 | 2013 | 2013 | 2012 | ||||||||||||||||||
Asia Division core earnings | $ | 273 | $ | 231 | $ | 244 | $ | 227 | $ | 242 | $ | 226 | $ | 226 | $ | 180 | |||||||||
Investment-related experience in excess of amounts included in core earnings |
27 | 18 | 19 | (5) | (4) | (18) | 43 | 33 | |||||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 300 | $ | 249 | $ | 263 | $ | 222 | $ | 238 | $ | 208 | $ | 269 | $ | 213 | |||||||||
Other items to reconcile core earnings to net income attributable to shareholders |
|||||||||||||||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities |
32 | 88 | (25) | 85 | 242 | 178 | 659 | 469 | |||||||||||||||||
Recapture of reinsurance treaty and tax items | - | - | - | 68 | - | - | - | - | |||||||||||||||||
Disposition of |
- | - | - | 350 | - | - | - | - | |||||||||||||||||
Tax items | - | - | 4 | - | - | - | - | - | |||||||||||||||||
Net income attributed to shareholders | $ | 332 | $ | 337 | $ | 242 | $ | 725 | $ | 480 | $ | 386 | $ | 928 | $ | 682 | |||||||||
Canadian Division | |||||||||||||||||||||||||
Quarterly Results | |||||||||||||||||||||||||
(C$ millions, unaudited) | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | |||||||||||||||||
2014 | 2014 | 2014 | 2013 | 2013 | 2013 | 2013 | 2012 | ||||||||||||||||||
Canadian Division core earnings | $ | 243 | $ | 232 | $ | 228 | $ | 233 | $ | 268 | $ | 225 | $ | 179 | $ | 233 | |||||||||
Investment-related experience in excess of amounts included in core earnings |
19 | 46 | 135 | 106 | 135 | (88) | (187) | (31) | |||||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 262 | $ | 278 | $ | 363 | $ | 339 | $ | 403 | $ | 137 | $ | (8) | $ | 202 | |||||||||
Other items to reconcile core earnings to net income (loss) attributable to shareholders |
|||||||||||||||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities |
- | (11) | 14 | 34 | 14 | (34) | (54) | 49 | |||||||||||||||||
Recapture of reinsurance treaty and tax items | 24 | - | - | - | (3) | - | - | - | |||||||||||||||||
Net income (loss) attributed to shareholders | $ | 286 | $ | 267 | $ | 377 | $ | 373 | $ | 414 | $ | 103 | $ | (62) | $ | 251 | |||||||||
U.S. Division | |||||||||||||||||||||||||
Quarterly Results | |||||||||||||||||||||||||
(C$ millions, unaudited) | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | |||||||||||||||||
2014 | 2014 | 2014 | 2013 | 2013 | 2013 | 2013 | 2012(1) | ||||||||||||||||||
U.S. Division core earnings | $ | 342 | $ | 329 | $ | 374 | $ | 366 | $ | 361 | $ | 343 | $ | 440 | $ | 293 | |||||||||
Investment-related experience in excess of amounts included in core earnings |
319 | 206 | 111 | 161 | 404 | 65 | 263 | 367 | |||||||||||||||||
Core earnings plus investment-related experience in excess of amounts included in core earnings |
$ | 661 | $ | 535 | $ | 485 | $ | 527 | $ | 765 | $ | 408 | $ | 703 | $ | 660 | |||||||||
Other items to reconcile core earnings to net income (loss) attributable to shareholders |
|||||||||||||||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities |
18 | 24 | (82) | 105 | 163 | 21 | 23 | (104) | |||||||||||||||||
Impact of in-force product changes and recapture of reinsurance treaties |
- | - | - | 193 | - | - | - | - | |||||||||||||||||
Tax items | - | - | - | - | - | - | - | 170 | |||||||||||||||||
Net income attributed to shareholders | $ | 679 | $ | 559 | $ | 403 | $ | 825 | $ | 928 | $ | 429 | $ | 726 | $ | 726 |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective For a detailed description of the change see note 2 to our 2013 Annual Consolidated Financial Statements. |
Corporate and Other | |||||||||||||||||||||||||
Quarterly Results | |||||||||||||||||||||||||
(C$ millions, unaudited) | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | 4Q | |||||||||||||||||
2014 | 2014 | 2014 | 2013 | 2013 | 2013 | 2013 | 2012(1) | ||||||||||||||||||
Corporate and Other core loss (excluding expected cost of macro hedges and core investment gains) |
$ | (107) | $ | (92) | $ | (135) | $ | (138) | $ | (135) | $ | (105) | $ | (128) | $ | (62) | |||||||||
Expected cost of macro hedges | (46) | (49) | (42) | (53) | (84) | (128) | (148) | (140) | |||||||||||||||||
Investment-related experience included in core earnings | 50 | 50 | 50 | 50 | 52 | 48 | 50 | 50 | |||||||||||||||||
Total core loss | $ | (103) | $ | (91) | $ | (127) | $ | (141) | $ | (167) | $ | (185) | $ | (226) | $ | (152) | |||||||||
Investment-related experience in excess of amounts included in core earnings |
(45) | (53) | (40) | (47) | (44) | (56) | (22) | (48) | |||||||||||||||||
Core loss plus investment-related experience in excess of amounts included in core earnings |
$ | (148) | $ | (144) | $ | (167) | $ | (188) | $ | (211) | $ | (241) | $ | (248) | $ | (200) | |||||||||
Other items to reconcile core earnings (losses) to net income (loss) attributed to shareholders |
|||||||||||||||||||||||||
Direct impact of equity markets and interest rates and variable annuity guarantee liabilities |
20 | (46) | 3 | (305) | (325) | (407) | (735) | (332) | |||||||||||||||||
Changes in actuarial methods and assumptions | (69) | (30) | (40) | (133) | (252) | (35) | (69) | (87) | |||||||||||||||||
Tax items and restructuring charge related to organizational design |
- | - | - | - | - | 24 | - | 37 | |||||||||||||||||
Net loss attributed to shareholders | $ | (197) | $ | (220) | $ | (204) | $ | (626) | $ | (788) | $ | (659) | $ | (1,052) | $ | (582) |
(1) | The 2012 results were restated to reflect the retrospective application of new IFRS accounting standards effective For a detailed description of the change see note 2 to our 2013 Annual Consolidated Financial Statements. |
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 considered 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 considered 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 (from local currency to Canadian dollars at a total company level and from local currency to U.S. dollars in Asia) 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 2014.
Earnings Per Share ("EPS") excluding Transition and Integration Costs is a non-GAAP measure of the Company's profitability. It shows what the earnings per common share would be excluding transition and integration costs which are one-time costs.
Assets under management ("AUM") is a non-GAAP measure of the size of the Company's Canadian mutual fund business. It represents the assets managed by the Company, on behalf of mutual fund clients, on a discretionary basis for which the Company earns investment management fees.
Assets under administration ("AUA") is a non-GAAP measure of the size of the Company's Canadian group pension business. It represents the asset base on which the Company provides administrative services such as recordkeeping, custodial and customer reporting services.
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 Statements of Income, (ii) segregated fund deposits, excluding seed money, ("deposits from policyholders"), (iii) investment contract deposits, (iv) mutual fund deposits, (v) deposits into institutional advisory accounts, (vi) premium equivalents for "administration services only" group benefits contracts ("ASO premium equivalents"), (vii) premiums in the Canadian Group Benefits reinsurance ceded agreement, and (viii) other deposits in other managed funds.
Premiums and deposits | Quarterly Results | |||||||||||
(C$ millions) | 3Q 2014 | 2Q 2014 | 3Q 2013 | |||||||||
Net premium income | $ | 4,641 | $ | 4,232 | $ | 4,369 | ||||||
Deposits from policyholders | 5,509 | 5,587 | 5,321 | |||||||||
Premiums and deposits per financial statements | $ | 10,150 | $ | 9,819 | $ | 9,690 | ||||||
Investment contract deposits | 15 | 9 | 9 | |||||||||
Mutual fund deposits | 8,982 | 10,524 | 8,111 | |||||||||
Institutional advisory account deposits | 962 | 2,743 | 1,089 | |||||||||
ASO premium equivalents | 736 | 775 | 723 | |||||||||
Group Benefits ceded premiums | 1,132 | 991 | 981 | |||||||||
Other fund deposits | 110 | 105 | 99 | |||||||||
Total premiums and deposits | $ | 22,087 | $ | 24,966 | $ | 20,702 | ||||||
Currency impact | - | (38) | 709 | |||||||||
Constant currency premiums and deposits | $ | 22,087 | $ | 24,928 | $ | 21,411 |
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 | ||||||||||||||
As at | Quarterly Results | |||||||||||||
(C$ millions) | 2014 |
2014 |
2013 |
|||||||||||
Total invested assets | $ | 257,842 | $ | 244,129 | $ | 229,221 | ||||||||
Segregated funds net assets | 250,406 | 247,186 | 226,975 | |||||||||||
Funds under management per financial statements | $ | 508,248 | $ | 491,315 | $ | 456,196 | ||||||||
Mutual funds | 111,600 | 105,147 | 81,049 | |||||||||||
Institutional advisory accounts (excluding segregated funds) | 36,498 | 35,210 | 28,686 | |||||||||||
Other funds | 6,185 | 5,588 | 8,721 | |||||||||||
Total funds under management | $ | 662,531 | $ | 637,260 | $ | 574,652 | ||||||||
Currency impact | - | 19,987 | 33,287 | |||||||||||
Constant currency funds under management | $ | 662,531 | $ | 657,247 | $ | 607,939 |
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 | ||||||||||||||||
As at | Quarterly Results | |||||||||||||||
(C$ millions) | 2014 |
2014 |
2013 |
|||||||||||||
Total equity | $ | 32,596 | $ | 30,780 | $ | 26,881 | ||||||||||
Add AOCI loss on cash flow hedges | 159 | 136 | 115 | |||||||||||||
Add liabilities for preferred shares and capital instruments | 4,909 | 4,884 | 4,119 | |||||||||||||
Total capital | $ | 37,664 | $ | 35,800 | $ | 31,115 |
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 3Q14 were as follows:
Canada | U.S. | Hong Kong | Japan | ||||||||||
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% | 30.78% | |||||||||
Foreign exchange rate | n/a | 1.088969 | 0.140491 | 0.010471 | |||||||||
Yield on surplus assets | 4.50% | 4.50% | 4.50% | 2.00% |
Sales are measured according to product type:
For individual insurance, sales include 100% of new annualized premiums and 10% of both excess and single premiums. For individual insurance, new annualized premiums reflect the annualized premium expected in the first year of a policy that requires premium payments for more than one year. Single premium is the lump sum premium from the sale of a single premium product, e.g. travel insurance. Sales are reported gross before the impact of reinsurance.
For group insurance, sales include new annualized premiums and administrative services only premium equivalents on new cases, as well as the addition of new coverages and amendments to contracts, excluding rate increases.
For individual wealth management contracts, all new deposits are reported as sales. This includes individual annuities, both fixed and variable; mutual funds; and, college savings 529 plans. Sales also include bank loans and mortgages authorized in the period. 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 are not reported as 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. Total sales include both new regular and single premiums and deposits. Sales include the impact of the addition of a new division or of a new product to an existing client.
F2 Key planning assumptions and uncertainties
Manulife's 2016 management objectives25 do not constitute guidance and are based on certain key planning assumptions, including: current accounting and regulatory capital standards; no acquisitions; equity market and interest rate assumptions consistent with our long-term assumptions, and favourable investment-related experience included in core earnings.
____________________________ | |
25 | See "Caution regarding forward-looking statements" below. |
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 the anticipated benefits and costs of the acquisition of the Canadian-based operations of
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 that: the acquisition financing is completed as outlined in this document; that the acquisition will be completed in the first quarter of 2015; estimates for 2015 and 2016 EPS; estimated after-tax cost savings, including estimated savings as a result of synergies from areas such as information technology, real estate and personnel costs; estimated integration costs; revenue synergies increasing over time; and, in the case of MFC's 2016 management objectives for core earnings and core ROE, the assumptions described under "Key Planning Assumptions and Uncertainties" in our 2013 Annual Report and in this document, and actual results may differ materially from those expressed or implied in such statements.
Important factors that could cause actual results to differ materially from expectations include but are not limited to: the factors identified in "Key Planning Assumptions and Uncertainties" in our 2013 Annual Report and in this document; general business and economic conditions (including but not limited to the performance, volatility and correlation of equity markets, interest rates, credit and swap spreads, currency rates, investment losses and defaults, market liquidity and creditworthiness of guarantors, reinsurers and counterparties); changes in laws and regulations; changes in accounting standards; our ability to execute strategic plans and changes to strategic plans; downgrades in our or
Additional information about material risk factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in the body of this document as well as under "Risk Factors" in our most recent Annual Information Form, under "Risk Management", "Risk Management and Risk Factors" and "Critical Accounting and Actuarial Policies" in the Management's Discussion and Analysis in our most recent annual report, under "Risk Management and Risk Factors Update" and "Critical Accounting and Actuarial Policies" in the Management's Discussion and Analysis in our most recent interim report, in the "Risk Management" note to consolidated financial statements in our most recent annual and interim reports and elsewhere in our filings with Canadian and U.S. securities regulators.
There can be no assurance that the proposed acquisition of the Canadian-based operations of
The forward-looking statements in this document are, unless otherwise indicated, stated as of the date hereof and are presented for the purpose of assisting investors and others in understanding our financial position and results of operations, our future operations if the acquisition is completed, as well as our objectives and strategic priorities, and may not be appropriate for other purposes. We do not undertake to update any forward-looking statements, except as required by law.
The pro forma financial information set forth in this document should not be considered to be what the actual financial position or other results of operations would have necessarily been had MFC,
Consolidated Statements of Income | |||||||||||
For the three months ended |
|||||||||||
(Canadian $ in millions except per share amounts, unaudited) | 2014 | 2013 | |||||||||
Net premiums | $ | 4,641 | $ | 4,369 | |||||||
Investment income | |||||||||||
Investment income | 2,618 | 2,483 | |||||||||
Realized and unrealized gains (losses) on assets supporting insurance and investment contract liabilities and on the macro hedge program(1) |
1,561 | (2,513) | |||||||||
Other revenue | 2,215 | 1,966 | |||||||||
Total revenue | $ | 11,035 | $ | 6,305 | |||||||
Contract benefits and expenses | |||||||||||
To contract holders and beneficiaries | |||||||||||
Gross claims and benefits | $ | 5,111 | $ | 4,604 | |||||||
Change in insurance contract liabilities | 2,875 | (898) | |||||||||
Change in investment contract liabilities | 40 | 52 | |||||||||
Benefits and expenses ceded to reinsurers | (1,668) | (1,660) | |||||||||
Change in reinsurance assets | 369 | 383 | |||||||||
Net benefits and claims | $ | 6,727 | $ | 2,481 | |||||||
General expenses | 1,184 | 1,097 | |||||||||
Investment expenses | 304 | 288 | |||||||||
Commissions | 1,065 | 983 | |||||||||
Interest expense | 284 | 265 | |||||||||
Net premium taxes | 79 | 73 | |||||||||
Total contract benefits and expenses | $ | 9,643 | $ | 5,187 | |||||||
Income before income taxes | $ | 1,392 | $ | 1,118 | |||||||
Income tax (expense) recovery | (287) | (172) | |||||||||
Net income | $ | 1,105 | $ | 946 | |||||||
Net income (loss) attributed to: | |||||||||||
Non-controlling interests | $ | 9 | $ | 20 | |||||||
Participating policyholders | (4) | (108) | |||||||||
Shareholders | 1,100 | 1,034 | |||||||||
$ | 1,105 | $ | 946 | ||||||||
Net income attributed to shareholders | $ | 1,100 | $ | 1,034 | |||||||
Preferred share dividends | (28) | (33) | |||||||||
Common shareholders' net income | $ | 1,072 | $ | 1,001 | |||||||
Earnings per share: | |||||||||||
Basic earnings per common share | $ | 0.58 | $ | 0.54 | |||||||
Diluted earnings per common share | 0.57 | 0.54 |
(1) | 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. See Section B5 above. |
Consolidated Statements of Financial Position | ||||||||||||
As at | ||||||||||||
(Canadian $ in millions, unaudited) | 2014 |
2013 |
||||||||||
Assets | ||||||||||||
Cash and short-term securities | $ | 17,971 | $ | 13,630 | ||||||||
Debt securities | 129,586 | 114,957 | ||||||||||
Public equities | 14,074 | 13,075 | ||||||||||
Mortgages | 38,638 | 37,558 | ||||||||||
Private placements | 22,100 | 21,015 | ||||||||||
Policy loans | 7,720 | 7,370 | ||||||||||
Loans to bank clients | 1,786 | 1,901 | ||||||||||
Real estate | 10,204 | 9,708 | ||||||||||
Other invested assets | 15,763 | 13,495 | ||||||||||
Total invested assets | $ | 257,842 | $ | 232,709 | ||||||||
Other assets | ||||||||||||
Accrued investment income | $ | 1,901 | $ </td> | 1,813 | ||||||||
Outstanding premiums | 749 | 734 | ||||||||||
Derivatives | 13,385 | 9,673 | ||||||||||
Reinsurance assets | 18,052 | 17,443 | ||||||||||
Deferred tax assets | 3,188 | 2,763 | ||||||||||
Goodwill and intangible assets | 5,393 | 5,298 | ||||||||||
Miscellaneous | 4,408 | 3,324 | ||||||||||
Total other assets | $ | 47,076 | $ | 41,048 | ||||||||
Segregated funds net assets | $ | 250,406 | $ | 239,871 | ||||||||
Total assets | $ | 555,324 | $ | 513,628 | ||||||||
Liabilities and Equity | ||||||||||||
Liabilities | ||||||||||||
Insurance contract liabilities | $ | 216,683 | $ | 193,242 | ||||||||
Investment contract liabilities | 2,568 | 2,524 | ||||||||||
Deposits from bank clients | 19,781 | 19,869 | ||||||||||
Derivatives | 8,367 | 8,929 | ||||||||||
Deferred tax liabilities | 1,343 | 617 | ||||||||||
Other liabilities | 12,614 | 10,383 | ||||||||||
$ | 261,356 | $ | 235,564 | |||||||||
Long-term debt | 3,843 | 4,775 | ||||||||||
Liabilities for preferred shares and capital instruments | 4,909 | 4,385 | ||||||||||
Liabilities for subscription receipts | 2,214 | - | ||||||||||
Segregated funds net liabilities | 250,406 | 239,871 | ||||||||||
Total liabilities | $ | 522,728 | $ | 484,595 | ||||||||
Equity | ||||||||||||
Preferred shares | $ | 2,447 | $ | 2,693 | ||||||||
Common shares | 20,548 | 20,234 | ||||||||||
Contributed surplus | 266 | 256 | ||||||||||
Shareholders' retained earnings | 7,301 | 5,294 | ||||||||||
Shareholders' accumulated other comprehensive income (loss) on: | ||||||||||||
Pension and other post-employment plans | (462) | (452) | ||||||||||
Available-for-sale securities | 619 | 324 | ||||||||||
Cash flow hedges | (159) | (84) | ||||||||||
Translation of foreign operations | 1,481 | 258 | ||||||||||
Total shareholders' equity | $ | 32,041 | $ | 28,523 | ||||||||
Participating policyholders' equity | 96 | 134 | ||||||||||
Non-controlling interests | 459 | 376 | ||||||||||
Total equity | $ | 32,596 | $ | 29,033 | ||||||||
Total liabilities and equity | $ | 555,324 | $ | 513,628 |
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